Evaluating Commercial Loan Request - College of Business

Evaluating Commercial Loan Request - College of Business

Evaluating Commercial Loan Request Two types of errors in judgment regarding lending : Type I Error Making a loan to a customer who will ultimately default Type II Error Denying a loan to a customer who would ultimately repay the debt. Five key questions/issues: 1. 2. 3. 4. 5. What is the character of the borrower and the quality of information provided? What are the loan proceeds going to be used for? How much does the customer need to borrow? What is the primary source of repayment and when? What collateral is available ? (Secondary source of repayment) Four steps in evaluating credit requests 1. Overview of management and operations 2. Spread the financial statements 3. Cash flow analysis 4. Pro forma projections and analysis Overview of management and operations Gather information on: Business and related industry Management quality Nature of loan request Quality of the data Spread the financials Spread the financials and compute common size ratios Compare with industry averages Compare over time (on trend) Calculate a series of financial ratios that indicate performance and risk Compare with industry averages Compare over time Exhibit 16.3 Wades Office Furniture - Income Statement Wades Office Furniture

Unaudited: , SIC #2522 INCOME STATEMENT [- H I S T O R I C A L -] [- H I S T O R I C A L -] 2006 % of 2007 % of % Cha $ 1,000 Total % Cha $ 1,000 Total [- H I S T O R I C A L -] RMA 2008 % of 6/30/07 % Cha $ 1,000 Total 3/31/08 Net sales Cost of goods sold Gross profit #N/A #N/A #N/A 7,571 100.0% 8.10% 8,184 100.0% 51.88% 12,430 100.0% 5,089 67.2% 6.58% 5,424 66.3% 52.19% 8,255 66.4% 2,482 32.8% 11.20% 2,760 33.7% 51.27% 4,175 33.6% Selling expenses Management salaries General & administrative expenses Research and development expenses Depreciation & amortization Other operating expenses Total operating expenses #N/A #N/A #N/A #N/A #N/A #N/A #N/A 906 0 1,019 0 70 0 1,995 #N/A 487 #N/A #N/A #N/A #N/A #N/A #N/A #N/A 0 0 141 0 63 0 (204) 0.0% 0.00% 0.0% 0.00%

1.9% -15.60% 0.0% 0.00% 0.8% 36.51% 0.0% 0.00% -2.7% 0.49% 0 0 119 0 86 0 (205) #N/A 283 3.7% -12.72% Income taxes #N/A Extraordinary and other income (exp.) #N/A Net income #N/A 100 0 183 Dividends Retained earnings 0 183 Operating profit Interest on marketable securities Income on long term investments Interest expense - Bank Notes Interest expense - Term notes + LTD All other expenses All other income Total All Other Income (Expenses) Profit before taxes #N/A #N/A 12.0% 13.25% 1,026 0.0% 0.00% 0 13.5% 18.84% 1,211 0.0% 0.00% 0 0.9% 1.43% 71 0.0% 0.00% 0 26.4% 15.69% 2,308 13.1% 0.0% 13.6% 0.0% 0.6% 0.0% 27.3% 25.7%

785 6.3% 7.0% 0.0% 0.00% 0.0% 0.00% 1.5% 31.93% 0.0% 0.00% 1.1% 17.44% 0.0% 0.00% -2.5% 25.85% 0 0 157 0 101 0 (258) 0.0% 0.0% 1.3% 0.0% 0.8% 0.0% -2.1% 247 3.0% 113.36% 527 4.2% 1.3% -5.00% 0.0% 0.00% 2.4% -16.9% 95 0 152 1.2% 97.89% 0.0% 0.00% 1.9% 123.0% 188 0 339 1.5% 0.0% 2.7% 0.0% 0.00% 2.4% -16.94% 0 152 0.0% 0.00% 1.9% 123.03% 0 339

0.0% 2.7% 6.4% -7.19% 452 12.5% 58.67% 1,628 0.0% 0.00% 0 14.8% 39.47% 1,689 0.0% 0.00% 0 0.9% 2.82% 73 0.0% 0.00% 0 28.2% 46.88% 3,390 100.0% 67.3% 32.7% 5.5% 73.67% 6.2% Wades Office Furniture: Historical Balance Sheet (Assets) Wades Office Furniture Unaudited: , SIC #2522 BALANCE SHEET [- H I S T O R I C A L -] 2006 % of % Cha $ 1,000 Total [- H I S T O R I C A L -] 2007 % of % Cha $ 1,000 Total [- H I S T O R I C A L -] RMA 2008 % of 6/30/07 % Cha $ 1,000 Total 3/31/08 ASSETS Cash Marketable securities Accounts receivable Inventory Prepaid expenses Deferred tax asset Other current assets Current assets #N/A #N/A #N/A #N/A #N/A #N/A #N/A

#N/A 141 0 1,254 1,160 47 0 0 2,602 Gross fixed assets Leasehold improvements Less accumulated dep. Net fixed assets #N/A #N/A #N/A #N/A 629 198 206 621 Notes & contracts receivable Long-term investments Intangible assets Other noncurrent assets Total Assets #N/A #N/A #N/A #N/A #N/A 4.3% -5.67% 133 0.0% 0.00% 0 38.4% 11.56% 1,399 35.6% 3.88% 1,205 1.4% 6.38% 50 0.0% 0.00% 0 0.0% 0.00% 0 79.7% 7.11% 2,787 3.9% 0.0% 40.8% 35.2% 1.5% 0.0% 0.0% 81.4% 19.3% 7.15% 6.1% 2.02% 6.3% 34.47% 19.0% -3.54% 19.7% 5.9% 8.1% 17.5%

674 202 277 599 -45.86% 72 0.00% 0 35.53% 1,896 46.39% 1,764 -70.00% 15 0.00% 0 0.00% 0 34.45% 3,747 17.36% 17.82% 24.91% 14.02% 791 238 346 683 1.6% 0.0% 42.3% 39.4% 0.3% 0.0% 0.0% 83.6% 5.5% 28.8% 29.7% 2.4% 66.4% 17.7% 5.3% 7.7% 15.2% 28.2% 0 0.0% 0.00% 0 0.0% 0.00% 0 0.0% 0 0.0% 0.00% 0 0.0% 0.00% 0 0.0% 40 1.2% -2.50% 39 1.1% 28.21% 50

1.1% 0 0.0% 0.00% 0 0.0% 0.00% 0 0.0% 3,263 100.0% 4.96% 3,425 100.0% 30.80% 4,480 100.0% 0.4% 5.0% 100.0% Wades Office Furniture: Historical Balance Sheet (Liabilities and Equity) Wades Office Furniture Unaudited: , SIC #2522 BALANCE SHEET [- H I S T O R I C A L -] [- H I S T O R I C A L -] 2006 2007 % of % of % Cha $ 1,000 Total % Cha $ 1,000 Total [- H I S T O R I C A L -] 2008 % of % Cha $ 1,000 Total RMA 6/30/07 3/31/08 LIABILITIES & EQUITY Notes payable - bank Accounts payable Accrued expenses Income tax payable Current maturity - Term notes Current maturity - LTD Other current liabilities Current liabilities #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A 643 836 205 41 0 75 0 1,800 19.7% -9.49% 582 25.6% 8.61% 908 6.3% 25.85% 258 1.3% 51.22% 62

0.0% 0.00% 0 2.3% 0.00% 75 0.0% 0.00% 0 55.2% 4.72% 1,885 17.0% 26.5% 7.5% 1.8% 0.0% 2.2% 0.0% 55.0% 53.26% 892 41.19% 1,282 34.88% 348 27.42% 79 0.00% 0 0.00% 75 0.00% 0 41.96% 2,676 19.9% 28.6% 7.8% 1.8% 0.0% 1.7% 0.0% 59.7% Deferred tax liability Term notes Long-term debt (LTD) Other noncurrent liabilities Total liabilities #N/A #N/A #N/A #N/A #N/A 0 0 450 0 2,250 0.0% 0.00% 0 0.0% 0.00% 0 13.8% -16.67% 375 0.0% 0.00% 0 69.0% 0.44% 2,260 0.0% 0.00%

0 0.0% 0.00% 0 10.9% -20.00% 300 0.0% 0.00% 0 66.0% 31.68% 2,976 0.0% 0.0% 6.7% 0.0% 66.4% 20.1% 0.9% 58.1% 600 18.4% 0.00% 600 17.5% 0.00% 600 13.4% 100 3.1% 0.00% 100 2.9% 0.00% 100 2.2% 0 0.0% 0.00% 0 0.0% 0.00% 0 0.0% 0 0.0% 0.00% 0 0.0% 0.00% 0 0.0% 313 9.6% 48.56% 465 13.6% 72.90% 804 17.9% 1,013 31.0% 15.00% 1,165 34.0% 29.10% 1,504 33.6% 3,263 100.0% 4.96% 3,425 100.0% 30.80% 4,480 100.0% 41.9% 100.0% Common stock - par #N/A Paid-in surplus #N/A Preferred stock #N/A Treasury and other equities #N/A Retained earnings #N/A #N/A Stockholder's equity #N/A Total Liabilities and Equity 6.0% 14.0% 1.7% 3.6% 11.8%

37.1% Ratio analysis Liquidity and activity ratios Leverage ratios Profitability ratios Liquidity and activity ratios Net Working Capital = CA - CL Current Ratio = CA / CL Quick Ratio = (Cash + A/R) / CL Days Cash = Cash / Avg. daily sales Inventory Turnover = COGS / Avg. Inv. AR Collection (Days A/R) = (A/R) / Avg. daily sales Days Cash to Cash = Days Cash + Days A/R + Days inventory Days Payable Outstanding =AP / Avg. daily pur. = AP / [(COGS + Inventory) / 365] Sales to net fixed assets = Sales / Net fixed assets Wades Office Furniture: Liquidity Ratios Wades Office Furniture Unaudited: , SIC #2522 FINANCIAL RATIOS Credit sales [- H I S T O R I C A L -] [- H I S T O R I C A L -] [- H I S T O R I C A L -] 2006 2007 2008 $ 1,000 $ 1,000 $ 1,000 RMA 6/30/07 3/31/08 $ 7,571 $ 8,184 $ 12,430 1.45 0.78 Days Times 6.80 53.70 x 60.46 6.04 x 83.20 4.39 x 150.45 48.83 7.47 x 59.96 6.09 x 1.48 0.81

Days Times 5.93 61.53 x 62.39 5.85 x 81.09 4.50 x 149.41 60.60 6.02 x 61.10 5.97 x 1.40 1.70 0.74 0.90 Days Times Days Times 2.11 172.64 x 55.67 6.56 x 45.0 8.1x 78.00 4.68 x 65.0 5.6x 135.79 53.09 6.88 x 32.0 11.3x 56.68 6.44 x 11.3x 101.62 $1,417 88.81 $1,320 82.70 $1,870 Liquidity Ratios Current Ratio Quick Ratio Days Cash Days Accts Receivable (Turnover) Days Inventory (Turnover) Cash-to-cash asset cycle Days AP Outstanding (Turnover) Memo: COGS / Accounts payable Days Cash to Cash Cycle Est. W.C. financing Needs 3.59 x 4.11 x 4.41 x Leverage ratios Debt Ratio = Debt / Total assets Debt to tangible net worth = Debt / Tang. NW Times interest earned = EBIT / Int. exp. where, EBIT = Earns before tax plus int. exp. Fixed Charge Coverage = (EBIT+lease pay) / (Int. exp.+ lease pay) Net Fixed Assets to Tangible NW Dividend Payout % = Dividends paid / Net profit Wades Office Furniture: Leverage Ratios

Wades Office Furniture Unaudited: , SIC #2522 FINANCIAL RATIOS [- H I S T O R I C A L -] [- H I S T O R I C A L -] [- H I S T O R I C A L -] 2006 2007 2008 $ 1,000 $ 1,000 $ 1,000 RMA 6/30/07 3/31/08 Leverage Ratios Debt to Tangible Net Worth 2.31 x Times Interest Earned 3.01 x Fixed Charge Coverage 1.96 x Net Fixed Assets to Tangible Net Worth63.82% Dividend Payout 0.00% 2.01 x 3.08 x 1.79 x 53.20% 0.00% 2.05 x 4.36 x 2.09 x 46.97% 0.00% 1.7x 5.3x 1.7x 50.0% Profitability ratios Return on Equity (ROE) = Net income / Total equity Profit before taxes to net worth = Profit before taxes / Tangible net worth Return on Assets (ROA) = Net income / Total assets Profit before taxes to total assets = Profit before taxes / Total assets Asset utilization (AU)= Sales / Total assets

sometimes referred to as asset turnover Profit margin (PM) = Net income / Sales Sales growth = Sales / Last periods sales Income taxes to profit before taxes = Reported income tax / Profit before taxes Wades Office Furniture: Profitability Ratios Wades Office Furniture [- H I S T O R I C A L -] [- H I S T O R I C A L -] [- H I S T O R I C A L -] RMA 6/30/07 3/31/08 Unaudited: , SIC #2522 2006 2007 2008 FINANCIAL RATIOS $ 1,000 $ 1,000 $ 1,000 Profitability Ratios Return on Net Worth (ROE) Profit Before Taxes to Net Worth Return on Assets (ROA) Profit Before Taxes to Total Assets Equity multiplier (leverage = TA / TE) 18.07% 29.09% 5.61% 8.67% 3.22 x 13.05% 21.94% 4.44% 7.21% 2.94 x 22.54% 36.24% 7.57% 11.76% 2.98 x Income Tot. asset turnover (net sales / TA) All other income / total assets 2.32 x 0.00% 2.39 x

0.00% 2.77 x 0.00% Expenses Net profit margin (NI / net sales) 2.42% COGS / net sales 67.22% Operating expenses / net sales 26.35% Income Taxes to Earnings Before Taxes 35.34% 1.86% 66.28% 28.20% 38.46% 2.73% 66.41% 27.27% 35.67% Sales / Net Fixed Assets 13.66 x 18.20 x 12.19 x 27.7% 12.1% 2.4x 2.1x 67.3% 25.7% Cash flow analysis: Cash pays a loan not net income Cash Assets n m A L i i 1 j NW j1 Let A1 = Cash, then: m n A1 L j j1 A NW i

i 2 Let NW = stock + surplus + NI - DIV m n A1 L j j1 A stock + surplus + NI - DIV i i 2 Let NI = Revenues - Expenses - Taxes m A1 L j j1 n A i stock + surplus i 2 + Revenues - Expenses - Taxes - DIV Sources and uses of cash m A1 L j j1 n A i stock + surplus i 2 + Revenues - Expenses - Taxes - DIV Sources of cash are: Increase in any liability Decrease in any non-cash asset New issues of stock Additions to surplus Revenues Uses of cash are: Decrease in any liability Increases in any non-cash assets Repayment / refunding of stock Deductions from surplus Cash expenses, taxes, dividends

Understanding sources and uses Assets are a use of cash: = -(At - At-1) Liabilities are a source of cash: = +(Lt - Lt-1) Revenues are a source of cash: = +Revenues Expenses are a use of cash: = -Expenses Sum up each part There are two types of cash flow statements 1. Direct Converts the income statement into a cash based income statement. Begins with net sales and adjusts for changes in balance sheet items. 2. Indirect Adjusts net income for non-cash charges and changes in balance sheet items. Four sections in either cash flow statement. 1. Operations 2. Investing 3. Includes all long term assets Financing 4. Includes income statement items and all current assets and current liabilities. Includes all long term liabilities and equity (except retained earnings) plus cash dividends paid. Cash Total of the above, but must equal the actual change in cash and marketable securities. Converting the income statement into a cash based income statement 1.

Operating: Cash sales: + Net Sales - Accounts receivables = Cash sales Cash purchases (negative value): - COGS - Inventory + Accounts payable = Cash purchases = Cash gross margin Converting the income statement into a cash based income statement (continued) Operating (continued): Cash operating expenses (negative value): - Operating expenses + Non-cash charges (dep. and amortization.) - Prepaid expenses + Accruals = Cash operating expenses Other expenses and taxes: - Other expenses + Other income - Reported taxes + Income tax payables and deferred inc. tax = Other expenses and taxes = Cash flow from operations (CFO) Cash based income statement (cont.) 2. Investing: - Capital Exps. = Net fixed assets + depreciation - Other long term assets = Cash used for Investing. 3. Financing: - Payments for last periods current maturity debt - Payments for dividends = Payments for financing + Debt + EOP CM L-T debt + New stock issues = External Financing 4. = Change in cash and marketable securities Wades Cash Flow from Operations Wades Office Furniture

[- H I S T O R I C A L [--] H I S T O R I C A L [-] H I S T O R I C A L -] Unaudited: , SIC #2522 CASH BASED INCOME STATEMENT Net sales Change in accounts receivable Cash receipts from sales Cost of goods sold Change in inventory Change in accounts payable Cash purchases Cash margin Total operating expenses Depreciation & amortization Change in prepaid expenses Change in accruals Change in other current assets & liab. Cash operating expenses Cash operating profit 2006 $ 1,000 2007 $ 1,000 2008 $ 1,000 7,571 #N/A #N/A 8,184 (145) 8,039 12,430 (497) 11,933 (5,089) #N/A #N/A #N/A (5,424) (45) 72 (5,397) (8,255) (559) 374 (8,440) 2,642 3,493 (2,308) 71 (3) 53 0 (2,187) (3,390) 73

35 90 0 (3,192) #N/A (1,995) 70 #N/A #N/A #N/A #N/A #N/A 455 301 Interest on marketable securities Income on long term investments All other expenses & income (net) Cash before interest & taxes 0 0 (63) #N/A 0 0 (86) 369 0 0 (101) 200 Interest expense - Bank notes Interest expense - Term notes and LTD Income taxes reported Change in income tax payable Change in deferred income taxes (141) 0 (100) #N/A #N/A (119) 0 (95) 21 0 (157) 0 (188) 17 0 Cash flow from operations (CFO) #N/A 176 (128)

Wades Cash Flow Statement (investing, financing and cash Sections). Wades Office Furniture [- H I S T O R I C A L[- -]H I S T O R I C A L[--]H I S T O R I C A L -] Unaudited: , SIC #2522 CASH BASED INCOME STATEMENT Cash flow from operations (CFO) 2006 $ 1,000 2007 $ 1,000 2008 $ 1,000 #N/A 176 (128) Capital exp. and leasehold improvements Change in long-term investments Change in intangible assets Change in other noncurrent assets Cash Used for Investments #N/A #N/A #N/A #N/A #N/A (49) 0 1 0 (48) (157) 0 (11) 0 (168) Payment for last period's CM Term note Payment for last period's CMLTD Dividends paid (DIV) Payments for financing #N/A #N/A 0 #N/A 0 (75) 0 (75) 0 (75) 0 (75)

#N/A 53 (371) Change in short-term bank debt Change in term notes & EOP CM term notes Change in LT debt + EOP CMLTD Change in stock & surplus Change in preferred stock Change in treasury and other equities Change in other noncurrent liabilities External financing #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A (61) 0 0 0 0 0 0 (61) 310 0 0 0 0 0 0 310 Extraordinary exp. and cha. In acct. prin. Current period accounting adjustment 0 (130) 0 0 0 0 Change in cash & mktbl securities #N/A (8) (61) #N/A (8) (61) Cash before external financing

Actual change in cash Projections of financial condition Pro Forma projections of the borrowers condition reveal: How much financing is required. When the loan will be repaid. Use of the loan. Pro Forma Projections Determine critical and non critical assumptions. Use industry projections, internal projections and judgment to determine sales projections. Pro Forma: Income Statement Sales2009 = Sales2008 x (1 + gsales) = $12,430 x (1 + 0.20) = $14,916 COGS2009 = Sales2009 x COGS % of Sales = $14,916 x 0.68 = $10,143 Sell. Exp2009 = Sales2009 x Selling Exp. % of Sales = $14,916 x 0.13 = $1,939 G&A Exp2009 = Sales2009 x G&A Exp. % of Sales = $14,916 x 0.122 = $1,820 Int. Exp2009 = (Bank debt2009 x rate on bank debt) + (L.T. debt2009 x rate on L.T. debt) = $697 x 0.145 + [($75 + $50 + $350 + $225) x 0.09] = $186 Pro Forma: Balance Sheet (Assets) Associate balance sheet items with sales. AR2009 = Days A/R x Average Daily Sales2009 = 50 x ($14,916 / 365) = $2,043 Inventory2009 = COGS2009 / Inventory turnover = $10,143 / 4.9 = $2,070 Capital expenditures from the capital budget: Gross fixed (GFA)2009 = GFA2008 + Cap. Exp.2009 = $791 + $400 = $1,191 Accumulated depreciation2009 =Acc. Dep.2008 + depreciation exp.2009 = $346 + $110 = $973 Determine appropriate turnover rates from historical trends or industry averages. Pro Forma: Balance Sheet (Liabilities) Trade credit may be tied to inventory growth, thus accounts payable tied to inventory growth: AP2009 = Days AP x Avg. Daily purchases2009 = Days AP x ((COGS2009 + Inv.2009) / 365) = 53 x ($10,143 + ($2,070 $1,764) / 365)

= $1,517 Principal payments on debt can be obtained from the capital budget: LTD2009 = LTD2008 + New LTD2009 CM LTD2009 = $300 + $0 $75 = $225 Term notes (TN)2009 = TN2008 + New TN2009 CM TN2009 = $0 + $400 $50 = $350 Note: CM = Current maturity Pro Forma: Balance Sheet (Equity) Balance sheet definitions: Retained earnings (RE)2009 = RE2008 + (NI2009 Div.2009) + Acct Adjust. = $804 + ($389 $0) +0 = $1,193 Stock2009 = Stock2008 + New stock issues Note: an accounting adjustment is only needed when adjustments have been made to retained earnings. Pro Forma: Determining the Plug Figure Sales growth will determine growth in receivables, inventory and profit. Net Income varies directly with sales in a stable environment. The difference in projected asset base and total funding without new debt determines additional credit needed or the Plug figure. When Assets2009 > (Liabilities2009 + Net worth2009) Additional financing is required (notes payable plug): Notes payable2009 = A2009 (L2009 + NW2009) When Assets2009 < (Liabilities2009 + Net worth2009) Surplus cash, invest (marketable securities (plug): Mkt. securities 2009 = (A2009 (L2009 + NW2009)) Wades financial projections assumptions: Most likely circumstances, income statement Sales increase by 20 percent annually. Cost of goods sold equals 68 percent of sales. Selling expenses average 13 percent of sales, G&A expenses average 12.2 percent of sales Depreciation equals $110,000 annually. Noninterest expense equals $110,000 in 2009 and $135,000 in 2010. Interest expense equals 14.5 percent of bank debt and 9

percent of other long-term debt. Income taxes equal 36 percent of earnings before taxes Income tax payable increases annually by the rate of change in 2008. No dividends are paid. Wades financial projections assumptions: Most likely circumstances, balance sheet A/R collection improves to: 50 in 2009 and 46 in 2010. Inventory turnover increases to: 4.9 in 2009 and 5.1 times in 2010. Days AP outstanding remains constant at 53. Prepaid expenses increase by $5,000 Accruals increase by $20,000 annually. $400,000 is loaned to purchase new equipment, with the principal repaid in 8 equal annual installments. depreciation on the new equip. $40,000, while depreciation on old will be $70,000 per year. The minimum cash required is $120,000. Other assets remain constant at $50,000. Pro forma Projections: Wades Office Furniture, Income Statement Wades Office Furniture Unaudited: , SIC #2522 INCOME STATEMENT [- H I S T O R I C A L -] 2008 % of % Cha $ 1,000 Total [-- P R O F O R M A --] 2009 % of % Cha $ 1,000 Total [-- P R O F O R M A --] 2010 % of % Cha $ 1,000 Total Net sales Cost of goods sold Gross profit 51.88% 12,430 100.0% 20.00% 14,916 100.0% 20.00% 17,899 100.0% 52.19% 8,255 66.4% 22.87% 10,143 68.0% 20.00% 12,171 68.0% 51.27% 4,175 33.6% 14.33% 4,773 32.0% 20.00% 5,728 32.0% Selling expenses Management salaries General & administrative expenses Research and development expenses Depreciation & amortization Other operating expenses Total operating expenses 58.67%

0.00% 39.47% 0.00% 2.82% 0.00% 46.88% 1,628 0 1,689 0 73 0 3,390 73.67% 785 0.00% 0.00% 31.93% 0.00% 17.44% 0.00% 25.85% 0 0 157 0 101 0 (258) 113.36% 527 4.2% 97.89% 0.00% 123.0% 0.00% 123.03% Operating profit Interest on marketable securities Income on long term investments Interest expense - Bank Notes Interest expense - Term notes + LTD All other expenses All other income Total All Other Income (Expenses) Profit before taxes Income taxes Extraordinary and other income (exp.) Net income Dividends Retained earnings 13.1% 19.11% 0.0% 0.00% 13.6% 7.74% 0.0% 0.00% 0.6% 50.68% 0.0% 0.00% 27.3% 14.12% 6.3%

15.20% 1,939 0 1,820 0 110 0 3,869 13.0% 20.00% 0.0% 0.00% 12.2% 20.00% 0.0% 0.00% 0.7% 0.00% 0.0% 0.00% 25.9% 19.43% 2,327 0 2,184 0 110 0 4,621 13.0% 0.0% 12.2% 0.0% 0.6% 0.0% 25.8% 1,107 6.2% 904 6.1% 22.43% 0 0 101 85 110 0 (296) 0.0% 0.0% 0.7% 0.6% 0.7% 0.0% -2.0% 0.00% 0.00% -48.49% -16.47% 22.73% 0.00% -12.84% 0

0 52 71 135 0 (258) 0.0% 0.0% 0.3% 0.4% 0.8% 0.0% -1.4% 15.41% 608 4.1% 39.60% 849 4.7% 188 0 339 1.5% 16.46% 0.0% 0.00% 2.7% 14.8% 219 0 389 1.5% 39.60% 0.0% 0.00% 2.6% 39.6% 306 0 543 1.7% 0.0% 3.0% 0 339 0.0% 0.00% 2.7% 14.82% 0 389 0.0% 0.00% 2.6% 39.60% 0 543 0.0% 3.0% 0.0% 0.00%

0.0% 0.00% 1.3% -35.62% 0.0% #N/A 0.8% 8.91% 0.0% 0.00% -2.1% 14.76% Pro forma Projections: Wades Office Furniture Balance Sheet (Assets) Wades Office Furniture Unaudited: , SIC #2522 BALANCE SHEET [- H I S T O R I C A L -] 2008 % of % Cha $ 1,000 Total [-- P R O F O R M A --] [-- P R O F O R M A --] [2009 % of 2010 % of % Cha $ 1,000 Total % Cha $ 1,000 Total ASSETS Cash Marketable securities Accounts receivable Inventory Prepaid expenses Deferred tax asset Other current assets Current assets -45.86% 72 0.00% 0 35.53% 1,896 46.39% 1,764 -70.00% 15 0.00% 0 0.00% 0 34.45% 3,747 791 238 346 683 1.6% 0.0% 42.3% 39.4% 0.3% 0.0% 0.0% 83.6% 66.67% 120 0.00% 0 7.77% 2,043 17.35% 2,070 33.33% 20 0.00%

0 0.00% 0 13.51% 4,253 Gross fixed assets Leasehold improvements Less accumulated dep. Net fixed assets 17.36% 17.82% 24.91% 14.02% 17.7% 50.57% 1,191 5.3% 0.00% 238 7.7% 31.79% 456 15.2% 42.46% 973 Notes & contracts receivable Long-term investments Intangible assets Other noncurrent assets Total Assets 0.00% 0 0.0% 0.00% 0.00% 0 0.0% 0.00% 28.21% 50 1.1% 0.00% 0.00% 0 0.0% 0.00% 30.80% 4,480 100.0% 17.77% 2.3% 0.0% 38.7% 39.2% 0.4% 0.0% 0.0% 80.6% 0.00% 120 0.00% 0 10.40% 2,256 15.29% 2,387 25.00% 25 0.00% 0 0.00% 0 12.56% 4,787 2.1% 0.0% 39.6% 41.9%

0.4% 0.0% 0.0% 84.0% 22.6% 0.00% 1,191 4.5% 0.00% 238 8.6% 24.12% 566 18.4% -11.31% 863 20.9% 4.2% 9.9% 15.1% 0 0.0% 0 0.0% 50 0.9% 0 0.0% 5,276 100.0% 0.00% 0.00% 0.00% 0.00% 8.04% 0 0.0% 0 0.0% 50 0.9% 0 0.0% 5,700 100.0% Pro forma Projections: Wades Balance Sheet (Liabilities and Equities) Wades Office Furniture Unaudited: , SIC #2522 BALANCE SHEET [- H I S T O R I C A L -] 2008 % of % Cha $ 1,000 Total [-- P R O F O R M A --] 2009 % of % Cha $ 1,000 Total [-- P R O F O R M A --] 2010 % of % Cha $ 1,000 Total LIABILITIES & EQUITY Notes payable - bank Accounts payable Accrued expenses Income tax payable

Current maturity - Term notes Current maturity - LTD Other current liabilities Current liabilities Deferred tax liability Term notes Long-term debt (LTD) Other noncurrent liabilities Total liabilities 53.26% 41.19% 34.88% 27.42% 0.00% 0.00% 0.00% 41.96% 892 1,282 348 79 0 75 0 2,676 19.9% -21.85% 28.6% 18.35% 7.8% 5.75% 1.8% 27.42% 0.0% #N/A 1.7% 0.00% 0.0% 0.00% 59.7% 4.93% 697 1,517 368 101 50 75 0 2,808 13.2% -48.49% 28.8% 19.52% 7.0% 5.43% 1.9% 27.42% 0.9% 0.00% 1.4% 0.00% 0.0% 0.00% 53.2% 0.20% 359 1,813 388 128 50 75 0 2,814 6.3% 31.8% 6.8% 2.3% 0.9% 1.3%

0.0% 49.4% 0.00% 0.00% -20.00% 0.00% 31.68% 0 0 300 0 2,976 0.0% 0.00% 0.0% #N/A 6.7% -25.00% 0.0% 0.00% 66.4% 13.68% 0 350 225 0 3,383 0.0% 0.00% 6.6% -14.29% 4.3% -33.33% 0.0% 0.00% 64.1% -3.53% 0 300 150 0 3,264 0.0% 5.3% 2.6% 0.0% 57.3% Common stock - par 0.00% Paid-in surplus 0.00% Preferred stock 0.00% Treasury and other equities 0.00% Retained earnings 72.90% 29.10% Stockholder's equity 30.80% Total Liabilities and Equity 600 13.4% 0.00% 100 2.2% 0.00% 0 0.0% 0.00% 0 0.0% 0.00% 804 17.9% 48.41% 1,504 33.6% 25.88% 4,480 100.0% 17.77%

600 11.4% 0.00% 100 1.9% 0.00% 0 0.0% 0.00% 0 0.0% 0.00% 1,193 22.6% 45.54% 1,893 35.9% 28.70% 5,276 100.0% 8.04% 600 10.5% 100 1.8% 0 0.0% 0 0.0% 1,737 30.5% 2,437 42.7% 5,700 100.0% Pro forma Projections: Wades Office Furniture Liquidity and Leverage Ratios Wades Office Furniture [- H I S T O R I C A L -] Unaudited: , SIC #2522 2008 FINANCIAL RATIOS $ 1,000 Credit sales $ 12,430 [-- P R O F O R M A --] [-- P R O F O R M A --] 2009 $ 1,000 2010 $ 1,000 $ 14,916 $ 17,899 Liquidity Ratios Current Ratio Quick Ratio Days Cash Days Accts Receivable (Turnover) Days Inventory (Turnover) Cash-to-cash asset cycle Days AP Outstanding (Turnover) Memo: COGS / Accounts payable Days Cash to Cash Cycle Est. W.C. financing Needs 1.40 0.74 Days

Times 2.11 172.64 x 55.67 6.56 x 78.00 4.68 x 135.79 53.09 6.88 x 56.68 6.44 x 1.51 0.77 Days Times 2.94 124.30 x 50.00 7.30 x 74.49 4.90 x 127.43 53.00 6.89 x 54.60 6.69 x 1.70 0.84 Days Times 2.45 149.16 x 46.00 7.93 x 71.57 5.10 x 120.02 53.00 6.89 x 54.38 6.71 x 82.70 $1,870 74.43 $2,068 67.02 $2,235 4.41 x 4.90 x Leverage Ratios Debt to Tangible Net Worth 2.05 x Times Interest Earned 4.36 x Fixed Charge Coverage 2.09 x Net Fixed Assets to Tangible Net Worth 46.97% Dividend Payout 0.00% 1.84 x 4.27 x 2.19 x 52.79%

0.00% 1.37 x 7.90 x 2.89 x 36.16% 0.00% 5.45 x Pro forma Projections: Wades Profitability, Cash Flow and Growth Ratios Wades Office Furniture Unaudited: , SIC #2522 FINANCIAL RATIOS [- H I S T O R I C A L -] [-- P R O F O R M A --] [-- P R O F O R M A --] 2008 2009 $ 1,000 2010 $ 1,000 $ 1,000 Profitability Ratios Return on Net Worth (ROE) Profit Before Taxes to Net Worth Return on Assets (ROA) Profit Before Taxes to Total Assets Equity multiplier (leverage = TA / TE) 22.54% 36.24% 7.57% 11.76% 2.98 x 20.56% 33.00% 7.38% 11.53% 2.79 x 22.30% 35.58% 9.53% 14.90% 2.34 x Income Tot. asset turnover (net sales / TA) All other income / total assets 2.77 x 0.00% 2.83 x 0.00% 3.14 x 0.00%

Expenses Net profit margin (NI / net sales) 2.73% COGS / net sales 66.41% Operating expenses / net sales 27.27% Income Taxes to Earnings Before Taxes 35.67% 2.61% 68.00% 25.94% 36.00% 3.04% 68.00% 25.81% 36.00% Sales / Net Fixed Assets 15.33 x 20.74 x 18.20 x Cash Flow Ratios CFO / (DIV + last CMLTD) CFO / (DIV + last CMLTD + bnk notes) -1.71 -0.13 CFO / (DIV + last CMLTD & CM Term + bnk Notes) -0.13 4.24 0.41 0.39 6.17 1.07 0.96 Growth Rates Sales Growth (annualized) Cost of Goods Sold Net Income Total borrowed debt Total Assets 51.88% 52.19% 123.03% -20.00% 30.80% 20.00% 22.87% 14.82% #N/A 17.77% 20.00% 20.00% 39.60% -47.62% 8.04% [-- P R O

Pro forma projections: Wades Cash Based Income Statement (operations) Wades Office Furniture [- H I S T O R I C A L [--] P R O F O R M A --] [-- P R O F O R M A --] Unaudited: , SIC #2522 2010 2008 2009 $ 1,000 $ 1,000 $ 1,000 CASH BASED INCOME STATEMENT Net sales Change in accounts receivable Cash receipts from sales 12,430 (497) 11,933 14,916 (147) 14,769 17,899 (213) 17,687 Cost of goods sold Change in inventory Change in accounts payable Cash purchases (8,255) (559) 374 (8,440) (10,143) (306) 235 (10,214) (12,171) (317) 296 (12,192) 3,493 4,555 5,495 (3,390) 73 35 90 0 (3,192) (3,869) 110 (5) 20 0 (3,744)

(4,621) 110 (5) 20 0 (4,496) Cash margin Total operating expenses Depreciation & amortization Change in prepaid expenses Change in accruals Change in other current assets & liab. Cash operating expenses Cash operating profit 301 811 999 Interest on marketable securities Income on long term investments All other expenses & income (net) Cash before interest & taxes 0 0 (101) 200 0 0 (110) 701 0 0 (135) 864 Interest expense - Bank notes Interest expense - Term notes and LTD Income taxes reported Change in income tax payable Change in deferred income taxes (157) 0 (188) 17 0 (101) (85) (219) 22 0 (52) (71) (306) 28 0 Cash flow from operations (CFO) (128)

318 463 Pro forma Projections: Wades Cash Based Income Statement (investment, financing and cash) Wades Office Furniture [- H I S T O R I C A L[--] P R O F O R M A [---] P R O F O R M A --] Unaudited: , SIC #2522 2010 2008 2009 $ 1,000 $ 1,000 $ 1,000 CASH BASED INCOME STATEMENT Cash flow from operations (CFO) Capital exp. and leasehold improvements Change in long-term investments Change in intangible assets Change in other noncurrent assets Cash Used for Investments Payment for last period's CM Term note Payment for last period's CMLTD Dividends paid (DIV) Payments for financing Cash before external financing Change in short-term bank debt Change in term notes & EOP CM term notes Change in LT debt + EOP CMLTD Change in stock & surplus Change in preferred stock Change in treasury and other equities Change in other noncurrent liabilities External financing Extraordinary exp. and cha. In acct. prin. Current period accounting adjustment Change in cash & mktbl securities Actual change in cash (128) 318 463 (157) 0 (11) 0 (168) (400) 0 0 0 (400) 0 (75) 0 (75) 0 (75) 0 (75)

(50) (75) 0 (125) (371) (157) 338 310 0 0 0 0 0 0 310 (195) 400 0 0 0 0 0 205 (338) 0 0 0 0 0 0 (338) 0 0 0 0 0 0 0 0 0 0 0 (61) 48 0 (61) 48 0

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