The group decided to look into the Regina Company case using the perspective of a financial analyst who will report to the Electrolux management and board. This decision was due to the following reasons:
1.Any further audit from the side of Regina, Electrolux or the SEC will only yield a similar result as the last audit thus being redundant and utterly useless
2.Looking at the case in the perspective of a member of the board of Regina will prove to be useless in evaluating the case since we will have no more say on anything that will happen in the company under the new owners.
3.The only perspective left is someone that will look at what happened in Regina Company, evaluate the events and the effects what happened and create recommendations on how to improve the company from within.
The Regina Company is a manufacturing company specializing in electric vacuum cleaners and electric floor care products which started operating in 1910. It was then acquired by the General Signal Corporation but later elected to sell it off to some senior managers when they decided that manufacturing Regina’s products is not part of their long-range strategy. The company is originally set to be sold at $31 million but due to the leveraged buyout scheme, the buyers ended up buying the company whose worth $98 million in assets and annual sales volumes. Of the new owners, Donald Sheelen, the former marketing head and now newly named CEO of Regina Company, ended up owning 54% of the firm with an investment of only $750,000. Duly financed by bank borrowings and a promissory note to General Signal, Regina started its independent operations with a debt-to-asset ratio of 96%.
For 18 months since acquisition, the company was financed by Sheelen and his associates, at the same time without any major changes implemented, the business recorded $67 million and $1.1 million worth of net income but in order to achieve this the company invested heavily in improving their market presence causing their advertising expense to increase from 10.9 to 13.6% of cost of sales at the same time, they made preparations to expand their product lines.
The company made its initial public offering in November 1985 wherein the managed to sell their shares for a total of $18.5 million. $11 million of these proceeds went directly to the original investors and the remainder was used to settle a portion of their outstanding debt for the acquisition of the Regina Company. They managed to bring down their debt-to-asset ratio to 75% while still maintaining control of 62% of the company.
Sales trend continued to go up on the years 1986 to 1987 recording sales of $128 million and net income of $7.1 million. This improvement was partly due to the introduction of their new upright vacuum cleaner and the Homespa personal whirlpool which bears high margins compared to their existing lines.
Year 1988 marked the company’s peak in sales wherein they achieved sales of $181 million and net income of almost $11 million. The company credits this growth to their improved product mix and the introduction of new product lines especially their disposable parts and accessories which contributed 10% to their sales and 20% of their profits. In the report given by the CEO to the shareholders, he expressed his optimism to the company’s future citing that their goal of becoming US’s number one floor care manufacturing company is at hand and that even though the future might be uncertain, he feels the company can achieve what it aims for. This was reinforced by a positive review given by Value Line magazine reporting that Regina’s profits will continue to grow another 30% for the next year.
After the company released its 1988 income statements, the company then requested these documents withdrawn, claiming that the statements were materially incorrect; consequently, Sheelen resigned his position...