L. Point of View The group decided to look into the Regina Company case using the perspective of a financial analyst who will report to the Electrolux management and board. This decision was due to the following reasons: 1. Any further audit from the side of Regina, Electrolux or the SEC will only yield a similar result as the last audit thus being redundant and utterly useless 2. Looking at the case in the perspective ofa member of the board of Regina will prove to be useless in evaluating the case since we will have no more say on anything that will happen in the company under the new owners. The only perspective left is someone that will look at what happened in Regina Company, evaluate the events and the effects what happened and create recommendations on how to improve the company from within. II. Case Context The Company The Regina Company is a manufacturing company specializing in electric vacuum cleaners and electric floor care products which started operating in 1910. It was then acquired by the General Signal Corporation but later elected to sell it off to some senior managers when they decided that manufacturing Regina’s products is not part f their long-range strategy.
The company is originally set to be sold at $31 million but due to the leveraged buyout scheme, the buyers ended up buying the company whose worth $98 million in assets and annual sales volumes. Of the new owners, Donald Sheelen, the former marketing head and now newly named CEO of Regina Company, ended up owning 54% of the firm with an investment of only $750,000. Duly financed by bank borrowings and a promissory note to General Signal, Regina started its independent operations with a debt-to-asset ratio of 96%.
Business Highlights For 18 months since acquisition, the company was financed by Sheelen and his associates, at the same time without any major changes implemented, the business recorded $67 million and $1. 1 million worth of net income but in order to achieve this the company invested heavily in improving their market presence causing their advertising expense to increase from 10. 9 to 13. 6% of cost of sales at the same time, they made preparations to expand their product lines. to sell their shares for a total of $18. 5 million. 11 million of these proceeds went irectly to the original investors and the remainder was used to settle a portion of their outstanding debt for the acquisition of the Regina Company. They managed to bring down their debt-to-asset ratio to 75% while still maintaining control of 62% of the company. Sales trend continued to go up on the years 1986 to 1987 recording sales of $128 million and net income of $7. 1 million. This improvement was partly due to the introduction of their new upright vacuum cleaner and the Homespa personal whirlpool which bears high margins compared to their existing lines.
Year 1988 marked the company’s peak in sales wherein they achieved sales of $181 million and net income of almost $11 million. The company credits this growth to their improved product mix and the introduction of new product lines especially their disposable parts and accessories which contributed 10% to their sales and 20% of their profits. In the report given by the CEO to the shareholders, he expressed his optimism to the company’s future citing that their goal of becoming US’s number one floor care manufacturing company is at hand and that even though the future might e uncertain, he feels the company can achieve what it aims for.
This was reinforced by a positive review given by Value Line magazine reporting that Regina’s profits will continue to grow another 30% for the next year. After the company released its 1988 income statements, the company then requested these documents withdrawn, claiming that the statements were materially incorrect; consequently, Sheelen resigned his position as chairman and CEO. Over a two-week period, the company stock prices dropped from $27 to $4 due to the rumors of uality problems in their Housekeeper and Housekeeper products causing massive product returns reaching up to 20 to 30% which is way above the industry average of 1%.
The company’s board, suspicious of the financial reports, dismissed its auditing firm and hired another to re-audit the 1988 values. The audit results uncovered inconsistencies and inaccuracies made in the financial reports made by the CEO and its CFO, Vincent Golden. Account receivables were padded by not accounting returns of defective products and recording orders worth $6 million as sales. Phantom sales totaling $5. million were also booked near the end of 1988 by creating fake invoices.
Operating expenses were also understated by $3 million. These findings compounded by the company’s unsuccessful attempts to improve product quality forced the board to declare bankruptcy and sell the companys remaining assets to their competitor, Electrolux for less than $4million. Ill. Problem Definition provide recommendations to help them provide the best direction to the company and make the most out of the acquisition. We are to address the following issues: 1. After the discovery of the fraud committed by the CEO and CFO of Regina
Company to their financial statements, what would be the actual financial position of the company? 2. Given the circumstances leading to the sale of the Regina Company, what can we, as analysts recommend to the management to solve the problems encountered by the operations of the previous management as mentioned in the context above? 3. Bound by the high inventory levels both from the purchase and returns from trade, what would be the best course of action to recover the cost of inventories and production?
Given that the there were massive returns from trade, the trust to the rand and products produced by Regina would have lost a lot of customer trust and confidence, what can we recommend to gain back that trust in the brand and increase sales? IV. Framework for Analysis Evaluate Regina Company’s Financial Statements Financial statements, such as the income statement and balance sheet reported by Regina Company in fiscal year ended June 30, 1988 were carefully evaluated and analyzed.
Regina’s cash flow statement was also prepared using the indirect method to determine the cash inflows and outflows from the company’s operating, investing nd financing activities. Prepare Adjusted Financial Statements of Regina Company Based on the financial statements prepared by Regina’s management and the findings from the re-audit ordered by the Board, an adjusted income statement and balance sheet was prepared by the group to reflect the true financial position and performance of the company.
Analyze Financial Ratios of the Original ; Adjusted FS Financial ratios from the tainted financial statements prepared by management under Donald Sheelen were compared with the ratios generated from the adjusted FS. One of the ratios used in the analysis was the return on equity (ROE) using the Du Pont formula to determine the performance of Regina in cost management and efficiency in generating sales.
Other indicators used were the accounts receivables and payables turnover, inventory turnover, collection period and levels of purchases. Based on the analysis made on Regina’s financial ratios, the group has identified certain areas of improvement in the company’s operations strategies. Specific recommendations were made for the new management as the best course of action to recover the investment made by Electrolux.