Microsoft Power Point Report To Client Template April 2008

ABC Inc.

Initial findings and restructuring plan

April XX, 2008

Contents

Overview 3

Executive summary 4

Performance analysis (Financial) 7

Performance analysis (Operations) 19

Restructuring plan 24

Appendix A 27

© Samson Bélair/Deloitte & Touche s.e.n.c.r.l. and affiliated entities.
ABC Inc.
2

Overview

• ABC Inc. (“ABC” or the “Company”) has experienced a rapid downturn in its sales volume and has, for the first
time, missed the expected financing covenants with its financial partners. These events have put pressure on the
Company’s finances and caused management to question the present financial and operational structure.
• As such, Samson Bélair/Deloitte & Touche s.e.n.c.r.l. (“Deloitte”) has been hired by the Company to analyze its
current financial situation and to recommend ways to improve cash flow and thus return the Company to the
desired level of profitability.
• The following report outlines initial findings. The majority of findings are supported by a series of analyses. Other
findings and recommendations presented are based on interviews with management and other on-site
observations.
• Management has requested that portions of this report be communicated to the principal financial stakeholders and
that Deloitte assist management in the preparation and the implementation of a communication strategy.

Management of the Company has prepared the prospective financial information referred to herein to present the revised forecast for 2007-2008, the cash
flow and borrowing base. Therefore management is solely responsible for representations about its plans and expectations and for disclosure of significant
information that might affect the ultimate realization of the prospective financial information. Deloitte has not expressed any opinion or other form or
assurance on this information or its feasibility or its achievability and assumes no responsibility for, and disclaims any association with the prospective financial
information. This information is not fact and should not be relied upon as being necessarily indicative of future results, and readers of this report are cautioned
not to place reliance on the prospective financial information. The assumptions and estimates underlying management’s prospective financial information are
inherently uncertain and, though considered reasonable by management as of the date of its preparation, are subject to a wide variety of significant business,
economic and competitive risks and uncertainties that could cause actual results to differ materially from those contained in the prospective financial
information.

ABC Inc.
3

Executive Summary
The following serves as a summary of key issues identified to date:

General overview • The US economy’s downturn began around August 2007 and, as financial markets became unstable,
consumer spending tightened such that retail sales slumped. This decline became most evident to ABC
when it observed disappointing peak season results (Oct-Dec 2007) relative to initial forecasts.
• The Company has experienced financial problems over the past months related to the following:
– Rapidly declining sales levels;
– Lower accounts receivable turnover yielding higher balances due to slower payments from customers;
– Increasing levels of returns.
• The Company’s sales have been adversely affected from the rise of the Canadian dollar, and though
measures were taken in 2007 with its main supplier to naturally hedge its risk, a significant loss
($14.5M) was incurred between 2005 and 2007.

Immediate issues Managing financial stakeholders’ expectations
and concerns
For the first time, the Company finds itself in a negative borrowing base position;
• Short-term liquidity concerns may impair the Company’s ability to develop certain projects;
• Pressure from a key supplier, XYZ Inc. (“XYZ”), may add to the Company’s financial challenges;
• At present, the Company needs to review contractual obligations with key financial stakeholders.

Understanding and addressing declining sales and increased returns

• The Company’s traditional sales channels are tightening up. The Company must turn to alternative
channels to liquidate excess inventory and generate cash flow;
• Inventory management and clients order management have had a significant impact on the Company’s
cash flow.

ABC Inc.
4

Executive Summary (continued)

Immediate issues Optimizing the cost structure
and concerns
• Though management recognized the advantages of outsourcing part of its operations to XYZ, this
(continued)
transition should be completed to reduce fixed costs and optimize the Company’s financial structure to
give it additional flexibility;
• Initial calculations indicate that significant savings could be generated by completing the transition to
outsourcing;
• Though management proactively implemented cost-cutting measures to date, it may become necessary
to consider additional initiatives to right-size operations if sales continue to decline.

ABC Inc.
5

Executive Summary (continued)

Other issues and Managing and forecasting
concerns
• The Company does not appear to have the management tools needed to properly review the
profitability of sales:
– Analysis of profitability by SKU;
Operations
– Analysis of return rates by SKU and how they affect profit.
• The Company does not have the proper financial tools necessary to prepare accurate and useful
forecast and to monitor actual results:
– Linked P&L, balance sheet and cash flow schedule.
• Proper tools will need to be put in place in order to improve financial reporting, monitoring and
operational planning.
Slow moving inventory
• A systematic liquidation of slow moving inventory should be considered as a permanent measure to
generate additional liquidities and deal with excess inventory.

ABC Inc.
6

Performance analysis

Financial

Financial results analysis
Actual Quarterly Results
Annual Results
18,000
45,000
16,000
40,000
14,000
35,000
12,000
30,000

CAN$000
CAN$000

10,000
25,000
20,000 8,000

15,000 6,000
10,000 4,000
5,000 2,000
-
-
2002 2003 2004 2005 2006 2007 2008
(5,000) Q2 - Q3 - Q4 - Q1 - Q2 - Q3 - Q4 - Q1 - Q2 -
2006 2006 2006 2007 2007 2007 2007 2008 2008
Audited Audited Audited Audited Audited Audited Forecast
Net sales EBITDA Net sales Gross margin EBITDA

Key insights

• Since 2002, net sales have steadily risen from $21.4M to $37.9M in 2007 for a compound growth of 77%. The revised sales
forecast for 2008 estimates sales will decline to $25.4M of sales for a decrease of 33%.
• EBITDA, for the same period, has improved from $1.8M to $3.3M for a compound growth of 83% but forecasted EBITDA for
2008 will decline to negative ($2.15M).
• Quarterly results made available since 2006 indicate that Q2 (Oct–Dec) is traditionally the peak sales period.
• Sales for Q2 2008 were significantly lower than historical results and off by $2.5M relative to forecasts.
• These results have prompted a review of the 2007-2008 forecast presented hereinafter.

While the sales have trended upward and Q2 has historically been a peak period for sales,
2007-2008 results will likely reverse that trend.

ABC Inc.
8

Financial results analysis (continued)

Actual % of Actual % of Actual % of Actual % of
($000) 20061 Net sales 20071 Net sales Q1 - 20082 Net sales Q2 - 20082 Net sales
Net sales 35,910.9 37,915.9 9,481.9 8,625.7
Cost of sales 23,840.4 24,993.9 6,701.2 5,727.4
Gross margin 12,070.5 33.61% 12,922.0 34.08% 2,780.7 29.33% 2,898.3 33.60%

Administrative salaries 2,117.4 2,443.0 582.3 643.5
Sales salaries and commissions 2,003.7 1,779.3 362.9 385.5
Warehouse salaries 499.3 667.5 151.8 99.7
Other SG&A expenses 5,814.8 6,575.8 1,382.3 1,464.6
Total SG&A expenses 10,435.2 29.06% 11,465.6 30.24% 2,479.3 26.15% 2,593.3 30.06%

Earnings before income taxes 1,635.3 4.55% 1,456.4 3.84% 301.4 3.18% 305.0 3.54%

Note 1: Not based on the Company's fiscal year, but based on the calendar year (January 1 to December 31).
Note 2: Q1 and Q2 of 2008 Company's fiscal year are included in Actual 2007 as the last 6 months of 2007.

Key insights

• For 2006 and 2007, SG&A expenses increased by 9.8% from $10.4M to $11.5M while sales increased by 6% for the same
period.
• As fixed costs growth has outpaced sales growth for the period the Company’s earnings have dropped by 12%.
• In reaction to these results, the Company implemented a first round of cost-cutting measures estimated at $1.8M
annually, whose benefits will impact cash flow and results positively as of April 2008.

The Company initiated cost-cutting measures estimated to yield $1.8M in annual savings
when sales growth no longer outpaced fixed costs growth.

ABC Inc.
9

Foreign exchange impact
Audited Audited Audited YTD Total
1
($000) 2008
2005 2006 2007
Net sales 32,653 32,660 37,916 18,108
USA sales (80% of net sales) ($CAN) 26,122 26,128 30,333 14,486

Average foreign exchange 1.2494 1.1629 1.1327 1.0134
USA sales (US$) 20,908 22,468 26,779 14,295

2
USA sales (CAN$) without foreign exchange fluctuation 27,638 29,700 35,399 18,896
Loss (Gain) of sales due to foreign exchange fluctuation 1,516 3,572 5,067 4,410 14,565

Note 1: 6 month-period ended as of December 31, 2007.
Note 2: Calculated with a foreign exchange rate of 1.3219 as of July 2004.

Key insights

• The US dollar dropped by 23% from CAN$1.3219 in
July 2004 to CAN$1.0134 by December 31, 2007.
• The graph on the right illustrates the foreign exchange
fluctuations of this period, starting with July 2004
(fiscal 2005) and trending downwards to December
2007(6 months of fiscal 2008).
• The cumulative impact of these foreign exchange
fluctuations on net sales from 2005 to this year is
estimated to represent a loss of $14.6M in net sales.

ABC Inc.
10

Balance sheet analysis
Quarterly evolution of receivables and inventory vs net sales
Annual evolution of receivables and inventory
vs evolution of net sales
25,000
40,000
20,000
35,000

(CAN$000)
30,000
(CAN$000)

15,000
25,000
20,000
10,000
15,000
10,000 5,000
5,000
-
-
2006 2006 2006 2007 2007 2007 2007 2008 2008
2002 2003 2004 2005 2006 2007 2008
Jan Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Audited Audited Audited Audited Audited Audited Forecast

Net sales Receivables Inventory
Net sales Receivables Inventory

2002 2003 2004 2005 2006 2007
Key insights ($000)
Net sales 21,416 27,133 29,894 32,652 32,660 37,916
COGS 14,548 17,796 20,714 21,025 21,385 24,967
• From 2002 to 2006, accounts receivable steadily grew
from $8M to $13.7M (compound growth of 71%) while
AR (% of net sales) 37.4% 20.2% 23.7% 35.1% 42.0% 49.7%
sales volume grew from $21.4M to $32.7M (compound
Turnover (days) 137 74 86 128 153 182
growth of 53%).
• In 2007, however, sales grew by $5.3M (16%) while Inventory (% of COGS) 38.3% 33.9% 32.6% 38.9% 32.7% 33.2%
accounts receivable grew by $5.1M (37%). Turnover (days) 140 124 119 142 119 121
• More notably, sales decreased steadily from $11.1M in
Note: Based on fiscal year - July 1 to June 30.
Q2 2007 to $8.6M in Q2 2008 (compound decline of
23%).
• Accounts receivable for the same period grew from Accounts receivable turnover has been out of step
$20.8M to $21.6M (compound growth of 4%). with the evolution of sales, turning over more slowly
thus putting additional pressure on cash flow.
• Accounts receivable turnover slowed by 108 days
(compound growth of 146%) from 74 days in 2003 to The Company would have generated $3M
182 days in 2007. of additional cash flow if its 2007 accounts receivable
turnover had matched its 2006 statistics of 153 days.
• Inventory turnover stayed stable for the same period.

ABC Inc.
11

Cash flow analysis
Audited Audited Audited Audited Internal Total
($000) FY 2004 FY 2005 FY 2006 FY 2007 YTD 20081

Operating activities (459.7) (2,351.0) (2,636.3) (1,751.3) (942.6) (8,140.9)
Investing activities (882.2) (801.6) (859.8) (512.0) (72.2) (3,127.8)

Financing activities
Increase in bank indebtedness 1,640.0 2,600.9 (2,822.3) 2,649.3 1,263.2 5,331.1
Issuance of LT debt - - 5,000.0 - - 5,000.0
Issuance of share capital - - 1,000.0 - - 1,000.0
Repayment of LT debt (71.6) (69.7) (227.2) (299.3) (208.3) (876.1)
Loan from parent company - 500.0 (86.7) (86.7) (40.1) 286.5
1,568.4 3,031.2 2,863.8 2,263.3 1,014.8 10,741.5

Net cash (Outflow) inflow 226.5 (121.4) (632.3) - - (527.2)
Note 1: YTD 2008 is for the 6-month period ended on December 31, 2007.

Key insights

• For the past 4½ years, the Company has generated $8.1M in negative cash flow from operating activities. This outflow
generally results from an increase in accounts receivable of $9.5M over the past 2 years which has allowed the Company
to generate a positive net income for the period.
• The $3.1M outflow from investing activities represents the acquisitions of masters, licenses and capital assets.
• The Company financed its $11.3M negative cash flow from operating and investing activities by securing additional
external financing. This was achieved by an increase of $5.3M of its operating line of credit, an additional $5M in
long-term financing from the other financial institution and a $1M investment by the principal shareholder stemming from
a sale-leaseback transaction of the Company’s head office property.
• In addition, the Company also sold $2.8M of packaging inventory to a supplier in 2007, in a non-cash transaction which
resulted in a reduction of the inventory and payables.

The Company’s negative cash flow has been entirely financed through debt issuance ($10.3M),
sale of assets ($1M) or has been borne by suppliers ($2.8M).

ABC Inc.
12

Eight-month actual results for 2007-2008
8 months - July 2007 to February 2008
% of net % of net
Detail of other expenses ($000)
Initial budget sales Actual sales Variance
Interest expense 573
($000) ($000) ($000)
Advertising & promotion 481
Revenues
Rent & utilities 427
Sales 35,309 28,136 7,173
Interest on long-term debt 393
Returns (8,121) 23% (7,640) 27% (481) Car, travel & entertainment 389
Net sales Professional fees 332
27,188 20,496 6,692
Warehouse salaries 312
Commissions 248
Cost of sales 17,988 66% 15,436 75% 2,552
Amortization - licenses and masters 182
Office & computer expenses 160
Gross profit 9,200 34% 5,060 25% 4,140
Amortization - capital assets 156
Insurance and taxes 123
Operating and administrative expenses Provision for FX losses 94
Administrative salaries 1,824 7% 1,679 8% 145 Bad debts 93
Sales salaries Telecommunications 78
1,082 4% 740 4% 342
Capital tax expense 60
Others 4,943 18% 4,220 21% 723
Bank charges 34
Total operating SG&A 7,849 6,639 1,210
Repairs & maintenance 32
Amortization - deferred expenses 32
Earnings (Loss) before income taxes 1,351 (1,579) (2,930) Miscellaneous 21
4,220
Note 1: This budget was submitted to the bank in May 2007.

Key insights

• Actual net sales were $6.7M (24.6%) less than budgeted for the period with Q2 having been 21% off the initial forecast.
• Cost of sales declined by $2.55M (14.2%), though not as quickly as sales over the same period.
• The decline in sales, and consequently in gross profits, has resulted in a decline of the earnings before income taxes of $2.9M.
• SG&A expenses have decreased by 15% as gross sales decreased by over 20%.

Year-to-date sales are $7.2M lower than forecasts for the same period. Management reacted positively
by implementing cost-cutting measures, but the lag in timing has not insulated the Company from losses.

ABC Inc.
13

Revised forecast for the remainder of 2007-2008
4 months - March to June 2008
% of net % of net
Initial forecast1 sales Revised forecast sales Variance
($000) ($000) ($000)
Revenues
Sales 16,693 11,544 (5,149)
Returns (3,839) 23% (7,551) 65% (3,712)
Net sales 12,854 3,994 (8,860)

Cost of sales 8,524 66% 3,950 99% (4,574)

Gross profit 4,330 34% 44 1% (4,286)

Operating and administrative expenses
Administrative salaries 908 7% 519 13% (389)
Sales salaries 541 4% 233 6% (308)
Others 2,423 19% 1,732 43% (691)
Total operating SG&A 3,872 2,484 (1,388)

Earnings (Loss) before income taxes 458 (2,441) (2,899)

Key insights
• Prevailing market conditions have led management to review its sales forecast downwards by $5.2M (30%) for the remainder of the
2007-2008 year (four months).
• Expected returns for the balance of the year (from March to June 2008) have been increased significantly by $3,7M (97%) to reflect the
Company’s plan to demand that unsold inventory be reprocessed and sold through existing or alternative channels.
• Forecasted SG&A expenses have been reduced to reflect implemented cost-cutting measures. However, due to the rapid decline of net
sales, SG&A expenses have not been able to be adjusted as quickly, consequently, these expenses have not matched the sales decline.
• The Company now forecasts a loss before income taxes for the final 4 months of the fiscal year in excess of $2.4M.

The combination of rapid sales decline and high returns will have made a significant impact from March to June 2008
yielding an expected loss of $2.4M.

ABC Inc.
14

Revised forecast
Revised
Actual Actual Budget
Actual Forecast
July 07 to March 08 to Revised
Initial 2006 2007 2008
February 08 June 08 forecast
forecast1 (8 months) (4 months) (12 months)
($000)
(In thousand $)
Revenues
Sales 52,000 28,136 11,544 39,680
Returns (11,960) (7,640) (7,551) (15,191)
Net sales 40,040 20,496 3,994 24,489
Net sales 35,911 37,916 24,489
- -
Cost of sales 26,509 15,436 3,950 19,386
- -
Gross profit 13,531 5,060 44 5,103 Cost of sales 23,840 24,994 19,386

Operating and administrative expenses
Administrative salaries 2,732 1,679 519 2,198
Sales salaries 2,271 740 233 973 Gross Profit 12,071 12,922 5,103
Others 6,719 4,220 1,732 5,952
33.6% 34.1% 20.8%
Total operating SG&A 11,722 6,639 2,484 9,123
- -
Operating and administrative expenses 10,435 11,466 9,123
Earnings (Loss) before income taxes 1,809 (1,579) (2,441) (4,020)

29.1% 30.2% 37.3%
Begining retained earnings 4,030 4,030

Ending retained earnings 5,839 10 Earnings (Loss) before income taxes 1,636 1,456 (4,020)

Key insights

• Revised forecasts for fiscal year 2007-2008 now show a loss before income taxes of approximately $4M as opposed to
forecasted earnings of $1.8M.
• Net sales are expected to decline by $13M (35%) for 2008 and gross profit will be significantly lower at $5M.
• Retained earnings as at June 2007 were $4M, expected losses will eliminate retained earnings by fiscal year-end.

Earnings forecasts for 2008 have been revised downwards significantly due to a rapid sales slowdown
thus yielding an estimated $4M loss for the year.
ABC Inc.
15

Estimated borrowing base calculation
as at March 31, 2008
At At
($000) February 29 March 31 Key insights

Accounts receivable 20,576 18,954

Less: Account over 150 days 8,299 7,113 • Between February 29 and March 31,
the borrowing base deficit has
Total admissible accounts receivable 12,277 11,841
increased to over $870k, a
deterioration of almost $500k.
Applicable financing ratio: 68% 68%
• The borrowing base has remained
stable, however the bank loan has
Lending value on accounts receivable 8,348 8,052
increased by $500k between
February 29 and March 31, 2008.
Lending value on inventory 2,716 3,000
• Ineligible accounts receivable have
decreased by over $1M, in part
11,064 11,052 because of the high level of returns.
• Lending value on inventory is capped
Total claims to be deducted (1) 792 792 at $3M due to the high levels of
returns in February. These returns
caused inventory levels to increase
Borrowing base 10,272 10,260
significantly.
Estimated loan balance 10,662 11,131

Surplus (Deficit) (390) (871)
Note 1: Prior claims as at March 31 were estimated to be the same as the previous month.

Borrowing base deficit has deteriorated by $500k in the month of March as the bank loan has increased by the same amount.

ABC Inc.
16

Forecasted 13-week cash flow and borrowing base

March 31 May 5 June 2
Critical success factors
to to to
May 2 May 30 June 27 Total

Estimated loan balance - Opening 11,131 11,331 10,174 11,131
• The Company will liquidate finished goods inventory
for $1M;
Total receipts 2,128 3,018 2,120 7,266
• The other financial institution will agree to a
Total disbursements 2,328 1,862 1,769 5,958
moratorium on the repayment of interest and capital
on its long-term debt for 6 months.
Net source (Use) of funds from operations (200) 1,157 351 1,308
• The Company’s accelerated accounts receivable
objectives will be met.
Net loan balance - Closing 11,331 10,174 9,823 9,823

Borrowing base 10,792 9,949 10,251
Surplus (Deficit) (539) (225) 428

Key insights

• Management estimates that its short-term liquidity measures will yield improvements for the bank’s position.
• The loan balance is estimated to drop from $11.1M to $9.8M, while the borrowing base reverts from a deficit of $539k to a surplus of
$428k over the same period.
• However, the weekly cash flow and borrowing base prepared by the Company (see Appendix A) show a loan balance that rises as high
as $12.5M before decreasing to $9.8M.
• Since accounts receivable collections are traditionally month-end loaded, this explains the borrowing base deficits in the interim periods.
• The borrowing base deficit reaches a high of $1.4M before reverting to a surplus position of $428k by the end of June.
• Cash receipts include $1M in receipts from the liquidation of excess inventory.

Management’s short-term liquidity measures can lower the outstanding bank balance and improve the borrowing base.

ABC Inc.
17

Estimated liquidation value as at March 31, 2008

Book Estimated Estimated
Value Realization Liquidation
($000) March 31 Value
Key insights
Accounts receivable
Accounts under 150 days 11,841.0
Expected returns 30% (3,552.3)
Net receivables 8,288.7 60% 4,973.2

Accounts over 150 days 7,113.0
• The bank loan as at March 31, 2008 is $11.1M.
Expected returns 75% (5,334.8)
Net receivables 1,778.3 60% 1,067.0
• The liquidation value of the assets subject to the
Other receivables 537.6 0% -
bank’s security as at March 31, 2008 is estimated at
Total 6,040.2
$10M before liquidation costs.
Inventory
Raw materials at XYZ Inc. 791.7 5% 39.6
• The estimated deficit for the bank if operations ceased
Other raw materials 588.2 5% 29.4
at March 31, 2008 would have been $1.1M before
Inventory at XYZ Inc. 2,139.6
liquidation costs.
Best-seller products 47% 1,005.6 50% 502.8
Regular products 19% 406.5 50% 203.3
• Accounts receivable are significantly discounted to
Slow-moving products 26% 556.3 20% 111.3
Non-moving products 8% 171.2 15% 25.7
reflect expected discounts to customers.
100%

• Challenges related to the liquidation of inventory:
Inventory in LaVille and on consignment 6135.8
Best-seller products 17% 1,043.1 50% 521.5
– Limited to North American market (licensing rights);
Regular products 29% 1,779.4 50% 889.7
Slow-moving products 24% 1,472.6 20% 294.5
– Purchasers need retail outlets which would compete with
Non-moving products 30% 1,840.7 15% 276.1
existing clients;
100%

– Accounts receivable and inventory realization values
Returns from clients (A/R) 8,887.1
Returns at cost 50% 4,443.5 20% 888.7
could be negatively impacted if there was a flood of
3,782.6
product on the market.
Intellectual property
• Intellectual property includes licenses, masters and
(book value as at January 30, 2008) 800.0 25% 200.0

pre-paid royalties.
Liquidation value of the assets subject to
the security of the bank 10,022.7

Estimated loan balance as at March 31, 2008 11,100.0

Surplus (Deficit) (1,077.3)

In a liquidation scenario, the bank’s estimated position at March 31, 2008 would have been deficient by $1.1M.

ABC Inc.
18

Performance analysis

Operations

Client analysis Returns in percentage of sales
2006 2007 2006 2007
($000) Sales Returns % of sales Sales Returns % of sales ($000) Sales Returns % of sales Sales Returns % of sales
Superstore A 23,381.9 7,115.3 30.43% 27,023.4 6,007.9 22.23%
Superstore D (US) 16,717.6 6,038.1 36.12% 19,531.6 4,952.6 25.36%
Superstore B 6,610.7 1,236.8 18.71% 4,620.0 2,230.8 48.29%
Superstore E (US) 2,918.6 355.5 12.18% 3,450.1 335.9 9.74%
Superstore C 2,352.3 58.2 2.47% 4,434.4 583.2 13.15%
Superstore E (CDN) 2,227.0 542.8 24.37% 2,165.6 421.9 19.48%
Others (CDN) 3,294.4 741.1 22.50% 2,959.7 669.8 22.63%
Superstore A (CDN) 1,518.7 178.9 11.78% 1,876.1 297.5 15.86%
Others (US) 7,692.8 299.5 3.89% 6,663.3 595.4 8.94%
Total Superstore A 23,381.9 7,115.3 30.43% 27,023.4 6,007.9 22.23%
Total 43,332.1 9,450.9 21.81% 45,700.8 10,087.1 22.07%

Key insights
Key insights

• Return rates with Superstore B increased significantly from • Superstore D return rates are significantly higher than other
18.71% in 2006 to 48.29% in 2007. Management believes that intermediaries who cater to Superstore A, though the rate has
this was exceptionally due to a communication breakdown on a dropped measurably from 2006 to 2007.
promotion item which was improperly marketed by the client.
• Management’s challenge will be to improve communication with
• Notwithstanding the preceding, sales to Superstore B dropped Superstore D so as to better coordinate production with expected
by 30% from 2006 to 2007. A review of the client approach is returns to optimize inventory management.
warranted to identify means to recapture lost sales.
• If Management had better controlled Superstore D returns and
• Superstore C represents a potential avenue to grow sales all the yielded an average return rate equivalent to the other
while limiting returns due to the promotion package in place. intermediaries (14%), returns for 2007 would have been 2.2M
units lower.
• Overall, return sales have remained stable relative to sales.

ABC Inc.
20

Warehouse analysis
Impacts of outsourcing warehousing of LaVille
Warehouse in LaVille Actual Warehouse
($000) ($000)
2007 2007
Warehouse salaries (100%) 668 668 Estimated costs of implementing this strategy
Cost to disclaim lease1
Rent (70%) 655 459 (330)
Insurance and taxes (70%) 184 129 Moving costs (15)
Employees2
Repairs and maint. (100%) 74 74 (40)
Warehouse equipment liquidation3
Cost of returns ($0.205/unit) - Supplier 128 140
Processing cost of units sent to XYZ Inc.4
1,581 1,458 (300)
Liquidation of LaVille's inventory5 1,000
455
Shipped quantity from LaVille (000 units) 6,416
Returned quantity to LaVille (000 units) 623
Note 1: Cost to disclaim the lease is estimated to be 6 months of the actual rent which is
about $55k per month.
XYZ Inc. fulfillment (per unit) 0.10
XYZ Inc. return processing (per unit) 0.17 Note 2: Company would keep two employees with an annual salary of $40k each for 6
months to manage the inventory liquidation and transition.
Cost to outsource to XYZ Inc.
Note 3: Warehouse equipment realization is estimated at 50% of its book value of $285k.
Shipping cost ($0.10/unit) 642
Processing cost ($0.17/unit) 106 Note 4: Company would liquidate all its $3.2M of non-moving and slow-moving products at a
net value of $1M.
Total 748
Note : Company would send the balance of $2.8M of its inventory in LaVille to XYZ Inc. and
will assume a processing cost of $0.17 per unit.
Estimated loss (Benefit) to outsource (710)

Key insights

• Outsourcing its warehousing to XYZ would have represented savings of approximately $700k for the fiscal year ended December 31,
2007. This excludes other potential savings which we were not able to evaluate such as transport fees and duplicated fulfillment fees
related to orders for inventory coming from the three warehouses, other potential production and IT savings, costs of some special
pallets, depreciation of fixed assets, potential volume rebates from XYZ, etc.

The outsourcing of its Canadian warehouse management to XYZ would represent significant annual savings.
The Company must find a way to leave its current premises, to move its administration into smaller offices
and to outsource its Canadian warehousing to XYZ.

ABC Inc.
21

Unit margin by client and products
Superstore D Superstore B Superstore E Superstore E
Superstore D Superstore B Superstore E Superstore E
USA USA USA Canada USA USA USA Canada
CD Multipack CD Single
Unit price 7.14 17.28 5.03 3.52 Unit price 3.51 N/A 3.57 1.96
Unit cost (2.41) (5.29) (2.02) (2.42) Unit cost (1.00) (1.07) (0.91)
Unit margin 4.73 11.99 3.01 1.10 Unit margin 2.51 2.50 1.05

Royalties1 (0.88) (2.13) (0.62) (0.43)
Royalties1 (0.43) (0.44) (0.24)
Fulfillment (0.10) (0.10) (0.10) (0.10)
Fulfillment (0.10) (0.10) (0.10)
Display N/A (0.35) N/A N/A
Delivery, freight and duty2 (0.18) (0.18) (0.10)
Delivery, freight and duty2 (0.36) (0.86) (0.25) (0.18)
Gross margin 1.80 1.78 0.61
Gross margin 3.39 8.55 2.04 0.39

Each return
Each return
Processing (0.17) (0.17) (0.17)
Processing (0.17) (0.17) (0.17) (0.17)
Fulfillment (0.10) (0.10) (0.10)
Fulfillment (0.10) (0.10) (0.10) (0.10)
Delivery, freight and duty2
Delivery, freight and duty2 (0.18) (0.18) (0.10)
(0.36) (0.86) (0.25) (0.18)
(0.45) (0.45) (0.37)
(0.63) (1.13) (0.52) (0.45)

Number of profitable returns 4.00 3.96 1.65
Number of profitable returns 5.38 7.57 3.92 0.87

Superstore D
Key insights
USA
DVD Multipack
Unit price 3.15
Unit cost (2.21)
• Margins vary widely for the same product across clients.
Unit margin 0.94
• Generally, for each kind of product, the Company has smaller margins with Superstore E
Royalties1 (0.39)
than with other clients we evaluated.
Fulfillment (0.10)
Delivery, freight and duty2 • The unit margin for Superstore E Canada is very small, but we did not test other Canadian
(0.16)
Gross margin 0.29 clients. If the Company thinks it could be useful, we could do so for their other big clients.
• The Company appears to have very good margins with Superstore B, but sales to
Each return
Superstore B are decreasing and returns are increasing.
Processing (0.17)
Fulfillment (0.10)
• DVD sales, which represent approximately 18% of sales, have a profitable return rate of
2
Delivery, freight and duty (0.16)
less than 1 indicating that such sales are riskier.
(0.43)

Number of profitable returns 0.67

Note 1: The Company estimated its average royalties payable at 12.35% of selling price because the data on file does not produce a cost analysis which includes
this expense.
Note 2: Delivery, freight and duty expenses have been evaluated as a percentage of 2007 gross sales.

ABC Inc.
22

Benchmarking

2006 2007
Key insights from Competitor’s Y/E report
Competitor DS Variance Competitor DS Variance
($000) USD CAD USD CAD
Net sales 77,109 35,911 41,198 93,195 37,916 55,279
• Competitor has liquidated $3M worth of
COGS 52,721 23,840 28,881 67,765 24,994 42,771
discontinued, overstock and slow-moving
Gross margin 24,388 12,071 12,318 25,430 12,922 12,508
inventory.
• Competitor outsources most of its manufacturing
Gross Margin 31.6% 33.6% -2.0% 27.3% 34.1% -6.8%
and all of its return processing requirements.
EBITDA (% of net sales) 7.0% 9.1% -2.1% 5.1% 9.6% -4.6%
• Competitor’s declared business strategy :
AR (% of net sales) 37.9% 57.9% -20.0% 30.7% 56.8% -26.1%
- Expand footprint outside of traditional music
Turnover (days) 138 211 -73 112 207 -95
marketplace
- Increase the efficiency of its cost structure
Inventory (% of net sales) 19.2% 21.7% -2.6% 20.2% 22.4% -2.2%
Turnover (days) 70 79 -9 74 82 -8
- Increase market share.
• Statistics show that retail unit sales were
AP (% of COGS) 34.1% 40.1% -6.0% 29.3% 41.0% -11.7%
down 15% for fiscal year-end 2007 from fiscal
Turnover (days) 125 146 -22 107 150 -43
year-end 2006.
Note: Based on calendar year - Jan 1 to Dec 31.

Key insights

• ABC gross margin and EBITDA are better than Competitor’s and have progressed in 2007.
• Based on December 31 accounts receivable figures, ABC’s turnover is significantly lower than Competitor’s. ABC takes
approximately three months more ($9.9M) than Competitor to collect its receivables.
• ABC’s payable turnover is approximately two months faster than its receivable turnover, thus financing its customers for
60 days ($6.3M).

ABC Inc.
23

Restructuring plan
Number of Annual
Key insights

Department Employees ($000)
• The Company has contacted liquidators to liquidate slow-moving inventory. Administration 3 77
Management has forecasted receipts of $1M for this initiative.
Creative 3 79
• Administrative, sales and warehouse salaries have been reduced by
Production 1 44
approximately $150k/month with savings beginning as of April 2008.
Product developer 3 231
• The Company had discussions with the other financial institution regarding a
IT 1 27
moratorium on the repayment of capital and interest on its long-term debt,
which would represent a cash flow saving of approximately $110k/month – Sales 5 381
discussions are still underway.
Warehouse 6 128
• The Company plans to negotiate an agreement with its key supplier, XYZ, to
Agency personel 370
agree on terms of payment for its account payable and possibly transition
Total lay offs 22 1,337
additional distribution operations.
• The Company is looking into transferring all of its fulfillment and return
General pay cuts 6 443
processing requirements to XYZ in order to gain some additional cash flow by
lowering fixed costs.
Total savings 28 1,780

Short-term cash inflows Long-term recurring cash flow improvements
($000) ($000)

Liquidation of slow-moving inventory 1,000 Salary cuts 1,800

Moratorium on repayment of debt Transfer Canadian processing and 710
(6 months) 660 returns to XYZ Inc. (Projected)
1,660 2,510

Preliminary restructuring plan initiatives could generate recurring annual cash flow improvements of approximately $2.5M.

ABC Inc.
25

Management tools

Key tools

A review of the Company’s operational management systems has revealed the absence of key management tools which
hampered the Company’s ability to react to market factors in a timely manner.

• A complete monthly budgeting tool including a linked P&L, balance sheet and cash flow
This would allow the Company to forecast results and bank position in advance, track inventory needs and asset utilization.
• A monthly budget control tool which would allow the monthly comparison of actual results to the forecast
This tool is essential to identify trends and to quickly flag problems during an operational cycle.
• A unit cost system which will permit the Company to evaluate the cost and margin for each of its products
This would allow the Company to adjust its selling price as necessary and to determine which products should be produced or not.
• A tracking system of licenses, masters and prepaid royalties
This would enable the Company to determine the profitability of each of its masters license and royalty in order to evaluate the
individual profitability and determine a break-even point based on the forecasted sales.
• A tracking system of returns by client and by product
• A tracking system of margins by product by client
• A tracking system linked with the major customers to forecast estimated returns by product
This would allow the Company to plan future production by product based on estimated returns.
• A systematic liquidation process for slow-moving products
To keep inventory levels at a minimum and generate cash flow.

With the proper tools in place, the Company would be in a better position to improve its financial and operational planning,
track its performance and identify challenges to better react.

ABC Inc.
26

Appendix A
Detailed cash flow projection
($000) BUDGET BUDGET BUDGET BUDGET BUDGET BUDGET BUDGET BUDGET BUDGET BUDGET BUDGET BUDGET BUDGET TOTAL
Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Week 9 Week 10 Week 11 Week 12 Week 13

Week beginning 31-Mar 7-Apr 14-Apr 21-Apr 28-Apr 5-May 12-May 19-May 26-May 2-Jun 9-Jun 16-Jun 23-Jun Total
11,131 11,537 11,802 12,278 12,508 11,331 11,740 12,122 12,445 10,174 10,718 11,211 11,552 11,131
Estimated loan balance net & term Loan - Opening

Receipts
Receipts from opening accounts receivable 11 250 15 90 1,762 83 220 13 2,202 5 10 5 1,600 6,266
Receipts from new accounts receivable - - - - - - - - - - - - - -

Sale of obsolete inventory - - - - - - - - 500 - - - 500 1,000
Total receipts 11 250 15 90 1,762 83 220 13 2,702 5 10 5 2,100 7,266

Disbursements
Payroll and payroll deductions - - 110 - 110 - 110 - 110 - 90 - 90 620
Commissions - 25 - - - 15 - - - 53 - - - 93
Suppliers 313 315 271 246 406 262 412 262 252 362 262 262 212 3,837
Royalties, licenses and masters 23 23 23 23 23 23 23 23 23 23 23 23 23 299

Rent - - - - - 56 - - - 56 - - - 112

Utilities - 7 - - - 7 - - - - 7 - - 20
Insurances - - 10 - - - 10 - - - - 10 - 30
Corporate taxes 20 20 20 20 20 20 20 20 20 20 20 20 20 260
Professional fees 40 20 35 10 5 5 5 10 5 5 5 10 5 160

Long term debt (capital and interests) - - - - - - - - - - - - - -

Interests on the credit line - 75 - - - 75 - - - - 75 - - 225

Other 21 30 22 21 21 30 22 21 21 30 22 21 21 303
Foreign exchange effect - - - - - - - - - - - - - -
Total disbursements 417 515 491 320 585 493 602 336 431 549 504 346 371 5,958

(406) (265) (476) (230) 1,177 (410) (382) (323) 2,271 (544) (494) (341) 1,729 1,308
Net source (Use) of funds from operations

11,537 11,802 12,278 12,508 11,331 11,740 12,122 12,445 10,174 10,718 11,211 11,552 9,823 9,823
Net loan balance - Closing

Borrowing base 10,401 10,627 11,013 11,347 10,792 10,282 10,687 11,232 9,949 9,856 10,596 11,339 10,251

Surplus (Deficit) (1,136) (1,174) (1,265) (1,160) (538) (1,458) (1,435) (1,213) (225) (862) (616) (213) 428

ABC Inc.
28

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professional services firms in Québec and Canada, providing audit, tax, financial advisory and
consulting services. In Québec, approximately 1,900 people regularly draw on their expertise for
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