CONTEXT

- GdL is a family business based in Italy which manufactures and sells toys
- Toy industry is very competitive and highly seasonal; toys have a short life cycle
- Demand depends on advertising, supply chain relationships and popular influences

COMPANY STRATEGY
- They make traditional toys so they are not as highly affected by Christmas seasonality
- Reduce manufacturing costs as much as possible; less personnel and more automation
- Does not want to lay off workers
- Obtained line of credit to solve operating capital problems
2001:
Factory and machinery expansion to boost production capacity and increase sales
Obtained 10 year bank loan of 20 million

THE PROBLEM
Sales and Profit are growing each year, but Line of Credit is being used extensively. Where is the cash going?

CONCLUSIONS
- Big part of cash flow is going to 50% Dividend. Priority should be to repay line of credit before declaring such a high dividend
- Reduce period of receivables
- Redistribute payments of dividends and buildings over 12 months
claring such a high dividend
 Giocattolo di Legno
Pro Forma Income Statement
Fiscal Year
2004 2003
Net Revenue
Sales 81,500 70,872
Cost of Goods Sold 42,600 37,420
Gross Profit 38,900 33,452

Expenses
Operating Expenses
Selling and Administrative 24,300 21,909
Other overhead expenses 4,100 3,600
Operating Profit 10,500 7,943
Financial Expenses 1,200 1,098
Profit Before Taxes 9,300 6,845
Corporate Tax 2,790 2,054
Net Income
Profit After Taxes 6,510 4,792

Dividends 4,000 2,300

 Giocattolo di Legno
Pro Forma Balance Sheet
12/31/2004 12/31/2003
Assets
Current Assets
Cash 2,000 2,000
Accounts Receivable 22,200 19,200
Inventories 12,371 10,271
Total current assets 36,571 31,471
Non-current assets
Buildings, Plant & Equipment (net dep) 41,300 38,100
Total non-current assets 41,300 38,100

Total Assets 77,871 69,571

Liabilities and Shareholders' equity

Current Liabilities
Short-term debt (line of credit) 11,361 5,319
Current portion of long-term debt 2,000 2,000
Accounts Payable 6,400 5,200
Taxes Payable 990 442
Other Payables 309 309
Total current liabilities 21,060 13,270
Non-current Liabilities
Long-term debt 12,000 14,000
Total non-current liabilities 12,000 14,000
Shareholders' Equity
Capital Stock and additional paid-in capital 12,800 12,800
Retained Earnings 32,011 29,501
Total shareholders' equity 44,811 42,301

Total Liabilities and Stockholders' Equity 77,871 69,571

Debt Ratio 0.425 0.392

Current Ratio 1.737 2.372
Working Capital 15,511 18,201
Assets-to-Equity 2 2
Debt-to-Equity 0.738 0.645

Working Capital:
OE + Non Current Liabilities - Non Current Assets = Long-Term Resources
42301 + 14000 - 38100 = 18201
 Inventories B&E (net) Accounts Payable
10,271 O/B 38,100 O/B O/B 5,200
38,400 RM 6,000 Purchases Purchases 38,400
3,500 DL and MAN EXP Depn 2,800 37,200 Payments
2,800 Depn

COGS 42,600

12,371 41,300 6,400

 Taxes Payable Retained Earnings
O/B 442 O/B 29,501
442 March Payment of outstanding taxes Net Income 6,510
600 June Prepayment 4,000 Dividend
600 September Prepayment
600 December Prepayment
Corp Tax 2,790

990 32,011
 Gdl (Giocattolo di Legno), SpA
Exhibit 4

Cash Budget for 2004

(in Thousands of Euros)

January February March April May June July

Receipts

Receipts from customers 8,100 6,600 5,800 3,500 3,400 3,600 6,500

Total receipts 8,100 6,600 5,800 3,500 3,400 3,600 6,500

Payments

Payments to suppliers 2,354 2,846 3,200 3,200 3,200 3,200 3,200

Labor and manufacturing expenses 280 280 280 280 280 280 280

SG&A expenses 1,100 1,100 1,100 1,100 3,000 4,000 1,100

Other overheads 300 300 300 300 300 300 300

Payment of net financial expenses 64 58 86 92 125 142 132

Payment of taxes - 442 600

Payments for purchases of plant and equipment - 1,500 1,500 1,500 1,500

Payment of long-term debt -

Payment of dividends - 2,000

Total payments (excluding short-term debt) 4,098 6,084 8,908 6,472 8,405 8,522 5,012

Net cash flow (excluding short-term debt) 4,002 516 (3,108) (2,972) (5,005) (4,922) 1,488

Short-term debt (line of credit)

Start balance 5,319 1,317 801 3,909 6,881 11,886 16,808

Additional needs (4,002) (516) 3,108 2,972 5,005 4,922 (1,488)

End balance 1,317 801 3,909 6,881 11,886 16,808 15,320

Cash flow from operations 4,002 2,016 392 (1,472) (3,505) (4,922) 1,488

Cash flow from investing - (1,500) (1,500) (1,500) (1,500) - -

Cash flow from financing (4,002) (516) 1,108 2,972 5,005 4,922 (1,488)

Do not fill out

Includes formula (do not change)
Fill out with number or formula
 Gdl (Giocattolo di
Exhibi

Estimates of some Payments and Receip

(in Thousands

August September October November December Total

Estimated receipts
Estimated net sales from customers

January 3,700 8,100

13,100 9,100 4,900 4,700 9,200 78,500 February 2,900 6,600
13,100 9,100 4,900 4,700 9,200 78,500 March 3,300 5,800
April 6,100 3,500
3,200 3,200 3,200 3,200 3,200 37,200 May 9,800 3,400
280 280 280 280 420 3,500 June 10,200 3,600
1,100 1,100 1,100 4,000 4,500 24,300 July 8,500 6,500
400 400 400 400 400 4,100 August 4,500 13,100
112 100 84 90 115 1,200 September 4,000 9,100
600 600 2,242 October 10,600 4,900
November 9,800 4,700
6,000 December 8,100 9,200

2,000 2,000 Total 81,500 78,500

2,000 4,000

5,092 7,680 5,064 7,970 11,235 84,542

8,008 1,420 (164) (3,270) (2,035) (6,042)

15,320 7,312 5,892 6,056 9,326

(8,008) (1,420) 164 3,270 2,035 6,042

7,312 5,892 6,056 9,326 11,361 11,361

8,008 3,420 (164) (3,270) (35) 5,958

- - - - - (6,000)

(8,008) (3,420) 164 3,270 35 42

 Gdl (Giocattolo di Legno), SpA
Exhibit 3

me Payments and Receipts in 2004 (in Thousands of Euros)

(in Thousands of Euros)

Estimated Estimated Estimated

Estimated balance payments to payments for SG&A payments for
of receivables suppliers expenses financial expenses

14,800 2,354 1,100 64

11,100 2,846 1,100 58
8,600 3,200 1,100 86
11,200 3,200 1,100 92
17,600 3,200 3,000 125
24,200 3,200 4,000 142
26,200 3,200 1,100 132
17,600 3,200 1,100 112
12,500 3,200 1,100 100
18,200 3,200 1,100 84
23,300 3,200 4,000 90
22,200 3,200 4,500 115

37,200 24,300 1,200

Giocattolo di Legno Cash Flow Statement 2004
Net income $6,510.00
Depreciation and Amortization $2,800.00
Change in Inventories ($2,100.00)
Change in Accounts Receivable ($3,000.00)
Change in Accounts Payable $1,200.00
Change in Taxes Payable $548.00
Change in Other Payables $0.00

Cash flows from Operations $5,958.00

Purchase of New PPE ($6,000.00)

Cash flows from Investing ($6,000.00)

Change in Line of Credit $6,042.00

Repayment of Long-Term Debt ($2,000.00)
Dividends paid ($4,000.00)

Cash flows from Financing $42.00

Net increase in cash and cash equivalents $0.00

Cash at beginning of year $2,000.00

Cash at end of year $2,000.00