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Pro-forma Statements

PLEASE HELP! I am to use the attached Mini-Case Study (Home Safety Inc) and prepare a one-year financial plan by creating a pro forma set of financial statements (income statement, balance sheet, and statement of cash flows) based on a 25% increase in profitability and other criteria presented in the case. Microsoft® Excel® must be used to create spreadsheets of actual statements.

I am to also answer the following questions:

1. How much revenue growth is needed to achieve the desired profitability?

2. Based on your review of the pro forma financial statements, what general observations and recommendations can you make?

3. Do you believe that these pro forma statements will meet the company's overall goals and objectives? Why or why not?

4. What other assumptions and considerations are necessary for this plan to work?

Mini-Case Study: Home Safety, Inc.
In late 2002, Home Safety, Inc., a leading developer, marketer, and distributor of child safety products, was riding high. Since 1997, sales had increased from just $7.7 million to more than $70 million. Over the past three years, net income had more than doubled and the company's stock price had nearly tripled from $12 per share to more than $32 per share. Michael Lowe, the CEO, exuded confidence, remarking, "We've only just begun to hit our stride. As we implement our new growth strategy into home security products, there's no telling how high sales or our stock price can go."

Industry Overview
The juvenile products industry has experienced significant growth in retail sales from about $1.5 billion in 1992 to nearly $4.0 billion for 2001, an annually compounded growth rate of more than 10 percent. Juvenile products include not only child safety and child care products, but baby apparel, furniture, convenience, and activity products. The drivers behind this growth have been favorable demographic trends, coupled with a significant marketing push by the industry. According to an industry trade group, first-time parents have accounted for about 40 percent of total births over the past 10 years. And, it is these parents who are the largest purchasers of juvenile products. Furthermore, today's parents are more aware of and place a greater emphasis on child safety than parents of previous generations. These facts, together with studies indicating that couples are marrying later in life and have higher disposable income per family due to more dual-income households, mean that they are more willing to spend money on their children.

The home security products industry was also experiencing significant growth, primarily as a result of heightened public concern with crime and home safety issues. Current industrywide annual sales were estimated at $5 billion, with annual growth rates modestly estimated to range between 30 percent and 50 percent for the next 10 years. Additionally, the expansion of "do-it-yourself" home center chains offer consumers less expensive options for making homes safe and provide a wide distribution network for home safety products.

Business Strategy
Home Safety, Inc. recognized these trends earlier than most companies. It believed that its flagship brand name, Baby Safety®, was closely associated with child safety among consumers. The company had already garnered national attention from its distinctive yellow and black diamond-shaped car window signs reading "Baby on Board" and "Child on Board." Since then, Home Safety had continually expanded its line of safety products from basic items, such as outlet plugs and drawer and cabinet locks, to safety gates, bed rails and balcony guards. The company believed that it was the leading supplier of child safety products in the United States.

In 2001, Home Safety embarked on its new strategy of expanding into the home security market by introducing a new line of products. These products included locks, bolts, and latches for doors, windows, and cabinets, as well as electrical safety items, home automation products, carbon monoxide detectors, and smoke detectors. Increased marketing efforts and favorable demographic trends were expected to keep sales on its upward growth path. By year-end 2003, juvenile product offerings were expected to increase from 200 to 400 products, whereas home security products were forecast to increase from 100 to 250 products.

Home Safety expected to accomplish this growth by using the following key objectives.

? New and innovative products: The company expected to develop and market high-quality products with innovative features and sell them at competitive prices.

? Expansion of markets and customer base: Home Safety has continually expanded its child safety product line while also developing child care, convenience, and activity products. The expansion into the home security market has enabled the company to broaden its customer base. It now markets products not only to large discount retailers, but also to food and drug chains, hardware and home center chains, warehouse clubs, and mail-order catalogs.
? International expansion: Home Safety continues to expand internationally and now sells products in over 55 countries either directly or through distributorships. To support this expansion, the company has established a new position of vice president of international sales and has set up seven new regional offices on six different continents.

? Brand name recognition: Being the first marketer of child safety products, Home Safety has established a strong brand name. Its use of distinctive blue and yellow graphic packaging, and photography that depicts the actual use of the product, has contributed to a strong brand awareness. Given its push into international markets, the company plans to introduce bilingual text and an updated use of its color design.

? Commitment to serving customer needs: Home Safety is committed to serving customer needs. This is evidenced through its use of an advanced electronic data ordering system, which permits customers to place orders directly through the company's Web site. Satisfying the customer is critical to the success of the company.

Financial Planning
Because of its rapid expansion, financial planning at Home Safety had never been at the top of its agenda. With its new business strategy, however, the time had come to plan for 2003's growth targets. As a newly hired financial analyst, your job is to put together the financial statement forecast for Mr. Lowe. Toward that end, you have had several conversations with him in which he had often referred to his principal financial goal, annual growth in net income of 25 percent. In years past, the company has had no problems in reaching this goal, and Mr. Lowe was confident that next year would prove no different. He noted that the company currently operated at full capacity and was therefore planning $11.5 million in capital expenditures for 2003. Mr. Lowe felt that liquidity would be no problem, as the company had engaged in two stock issues over the past two years to take advantage of receptive investors who believed in the company's growth story. However, if any additional short-term funding was needed, Mr. Lowe was confident the company's revolving credit facility at the local bank would more than handle it. Additionally, he felt that, as a percentage of sales, the trends in current as well as noncurrent assets and liabilities would probably continue. However, he really wasn't all that concerned about the balance sheet.

As the company had grown over the past few years, advertising expenses had grown commensurately. Mr. Lowe believed the historical growth rate in advertising would continue and was essential to the company's success. Additionally, he pointed out that, as part of the international expansion and the new push into home security products, the company would soon be hiring 45 new employees. Mr. Lowe thought that the fixed
nature of the general and administrative expenses and advertising would help the company's performance, but he wasn't exactly sure how. He was hoping you could enlighten him.

In your last conversation with him, Mr. Lowe mused, "You know, I remember back in 2000 when we had just 48 employees. I knew everyone and their family back then! Then in 2001, we added only 9 employees and, last year, why, we hired 31! I love growth, but it sure makes it hard to keep up with everyone!" He then smiled and nodded his head. "Better get to work on that forecast for next year. And, by the way, be sure to tell me what the sales growth rate has to be so that net income grows by 25 percent. I'd hate to lose my bonus check over a slight miss."

You felt like you nearly had all the data you needed to put together the financial statement forecast for next year. The historical income statements and balance sheets were in Table 1-8 and 1-9, respectively. Finally, you figured that any short-term investments and cash equivalents would earn interest at 1.20 percent and the bank would charge the company 4.50 percent interest on the revolving credit facility. You took a deep breath, opened up your laptop, and got to work.


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Please see the attached file. The details provided in the case are ...

Solution Summary

The solution explains how to prepare pro-forma financial statements for Home Safety Inc