OVERVIEW:
The case is about the company which was specialized in the spices, foods, coffees and teas. The idea of Pacific Spices was originated in the early 1980s, when Judith Findra founded the company that dealt in the food business in Monterey Peninsula of California. Judith Findra was more particularly concern about the Indian and Asian Cooking industry. In the short span of 10 years, the company became well-known brand, and also dominated in the food industry. Till the 25th anniversary, the company’s reputation in the industry in term of revenues, gross profits, net profits and shipped orders shielded all 50 states, with more than 90% of sales were made to high-end grocery stores and the remaining sales were made through E-Commerce transactions. Although, the food industry was enjoying great growth due to the increased concern about fatness and diet and the customers were more concern about reducing the fats in their diets while maintaining the same flavor.
The core responsibility and the basis of the business of the Pacific Spices company was to deliver the highest quality and freshest spices, for that purpose, the company had made its research lab for continuous searches on herbs and spices worldwide for the development of new flavors. On the financial side, the company was extensively relying on the debt facility and on its internal source of finance, i.e. retained earnings to finance its growth, but soon after the financial crises in late-2008 increased the pressure on the company’s bank and other financial institutions to eliminate the interest bearing debts and equity multiplier as soon as possible. The bank of the company has also warned the company that in case the company unable to comply with the requirements then it would be difficult for banks to offer the loan or even renew the contract. The report contains details about the financial constraints imposed by the bank on the company and an evaluation of the available possible opportunities which may address these issues.
Problem Statement
The management of the Pacific Spices was anxious about the financing strategy of future growth of the company, and the management was also disturbed about the funding limitations imposed by the bank. The bank of the company has agreed to lend around 81% of the company’s receivables balance and fortunately the company was operating at this limit because of its robust growth in sales and assets. The bank had also imposed a limit on notes in the loan agreement, but because if the quality of the receivables, the bank was relaxed with the amount borrowed.
But on the other hand, the credit committee of the bank were not as much relaxed with the amount of interest-bearing debt on the Pacific’s balance sheet. When the financial crisis started in the beginning of the year 2008, the banks were under pressure and oversight from regulators to limit exposure to potential loan losses.
Question No. 1: Based on Pacific Grove's forecasted financial statements, are its profitable operations sufficient to quickly bring it into compliance with the bank's requirements?
Answer:
The banks were more concerned about the repayment of their debts after the financial crises in late-2008, so they exerted increased pressure on their clients to comply with the bank’s requirements, so that it confirms the recovery of the funds borrowed to their clients. Total debts as a % of total assets and equity multiplier of the company for the current period represents 62% and 2.15 times respectively, and the bank requires to decrease its debt to total assets to 55% and equity multiplier to 2.7 times.
If we talk about the analysis on the Equity Multiplier, and on the basis of the forecasted results calculated by the management, and as shown in appendices, that equity multiplier will become 3.30 for the 1st year 3.15, 2.97 and 2.77 times respectively, and the limitation on the reduction of an equity multiplier of 2.7 will not be achieved. Our analysis also shows that debt to total assets will become 61% in the 1st year, 59% in the 2nd year, 57% in 3rd and 55% for the 4th year, hence, it also shows that the company will be unable to reduce the debt to total assets to 55% for the first three years.........................
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