D'Leon Inc. Part I

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Integrated Case

3-16
D¡¦Leon Inc., Part I
Financial Statements and Taxes

Donna Jamison, a 2000 graduate of the University of Florida with 4 years of banking experience, was recently brought in as assistant to the chairman of the board of D¡¦Leon Inc., a small food producer that operates in north Florida and whose specialty is high-quality pecan and other nut products sold in the snack-foods market. D¡¦Leon¡¦s president, Al Watkins, decided in 2004 to undertake a major expansion and to ¡§go national¡¨ in competition with Frito-Lay, Eagle, and other major snack-food companies. Watkins felt that D¡¦Leon¡¦s products were of a higher quality than the competition¡¦s; that this quality differential would enable it to charge a premium price; and that the end result would be greatly increased sales, profits, and stock price. The company doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. D¡¦Leon¡¦s results were not satisfactory, to put it mildly. Its board of directors, which consisted of its president and vice-president plus its major stockholders (who were all local business people), was most upset when directors learned how the expansion was going. Suppliers were being paid late and were unhappy, and the bank was complaining about the deteriorating situation and threatening to cut off credit. As a result, Watkins was informed that changes would have to be made, and quickly, or he would be fired. Also, at the board¡¦s insistence Donna Jamison was brought in and given the job of assistant to Fred Campo, a retired banker who was D¡¦Leon¡¦s chairman and largest stockholder. Campo agreed to give up a few of his golfing days and to help nurse the company back to health, with Jamison¡¦s help. Jamison began by gathering the financial statements and other data given in Tables IC 3-1, IC 3-2, IC 3-3, and IC 3-4. Assume that you are Jamison¡¦s assistant, and you must help her answer the following questions for Campo. (Note: We will continue with this case in Chapter 4, and you will feel more comfortable with the analysis there, but answering these questions will help prepare you for Chapter 4. Provide clear explanations, not just yes or no answers!)

Table IC 3-1. Balance Sheets
20052004
Assets
Cash$7,282$57,600
Accounts receivable632,160351,200
Inventories1,287,360715,200
Total current assets$1,926,802$1,124,000
Gross fixed assets1,202,950491,000
Less accumulated depreciation263,160146,200
Net fixed assets$939,790$344,800
Total assets$2,866,592$1,468,800

Liabilities and Equity
Accounts payable$524,160$145,600
Notes payable636,808200,000
Accruals489,600136,000
Total current liabilities$1,650,568$481,600
Long-term debt723,432323,432
Common stock (100,000 shares)460,000460,000
Retained earnings32,592203,768
Total equity$492,592$663,768
Total liabilities and equity$2,866,592$1,468,800

Table IC 3-2. Income Statements
20052004
Sales$6,034,000$3,432,000
Cost of goods sold5,528,0002,864,000
Other expenses519,988358,672
Total operating costs excluding
depreciation and amortization$6,047,988$3,222,672
EBITDA($13,988)$209,328
Depreciation and amortization116,96018,900
EBIT($130,948)$190,428
Interest expense136,01243,828
EBT($266,960)$146,600
Taxes (40%)(106,784)a58,640
Net income($160,176)$87,960

EPS($1.602)$0.880
DPS$0.110$0.220
Book value per share$4.926$6.638
Stock price$2.25$8.50
Shares outstanding100,000100,000
Tax rate40.00%40.00%
Lease payments40,00040,000
Sinking fund payments00

Note:
a The firm had sufficient taxable income in 2003 and 2004 to obtain its full tax refund in 2005.

Table IC 3-3. Statement of Retained Earnings, 2005
Balance of retained earnings, 12/31/04$203,768
Add: Net income, 2005(160,176)
Less: Dividends paid...
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