Chemalite CaseEssay Preview: Chemalite CaseReport this essayFinancial StatementsPerformance Analysis:From 01/01/2003 to 06/30/2003:During the first six months of 2003, Chemalite has just been established, so there were no selling activities. During this period, Alexander issued $500,000 of common stock in exchange for the patent of chemalite and liquid cash. Cash was then invested in so-called incorporation expenses including legal fees, charter costs, and printing expenses. Besides, necessary raw materials and machinery that will be used in production process were also bought in late June to prepare for the coming full operation. In terms of 20-year-life patent, although Alexander expected competitors to develop equivalent products without patented technique in five years, Chemalite could still enjoy the substantial benefit brought by patent for a long period. Even though the expected equivalent products without patented technique might exist, the cost could not be lower than the current product. Therefore, the investment in patent is beneficial. To sum up, all of these seemed to be normal preparation for a new startup business. Instead of calling them expenses, I would consider them as necessary and worthy investments. From 07/01/2003 to 12/31/2003:Since the second half year Chemalite has gone into full operation and has been growing successfully. In order to describe company performance more clearly, we made a financial health analysis, which is shown below:-06/30/2003-12/31/2003Entire YearProfitabilityNet Profit MarginReturn on EquityLiquidityQuick RatioCurrent RatioEfficiencyInventory TurnoverWorking Capital TurnoverSolvencyDebt-Equity RatioFinancial Leverage RatioActivityDays in RecivablesDays in PayablesSales/AssetsStarting from July, operations have been going swiftly and we have started to see the startup business grow firmly. Gross margin is as high as 27.77% (=209,500/704,500), which indicates that Chemalite have been generating a significant amount of sales revenue in excess over the cost of the inventory sold. When we look at our income statement we see that the company generated $46,875 in profits, therefore owner’s equity has increased by the same amount as a result of the operations. Inventory turnover is 3.55 (=195,000/69,500) which shows that Chemalite Inc. has cost of goods sold that is 3.55 times its average inventory level. This means that the company holds its inventory at an average of 102.81 days (365/3.55). This number is relatively low; but considering that Chemalite is a new startup business in the new market and that the company was into operation for only six months, it might be understood. Looking at the return on common stockholder’s equity, the company realized a 8.69% ratio, meaning for each 1$ invested or reinvested by common stockholders, Chemalite Inc. generates $0.09 of net earnings.
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According to the “Financial Statement of the Company”, on December 16–17, 2003, after the successful first business day of March 2006, Chemalite Inc. generated 1$ worth of revenues and the company revenue increased by 6.1% compared with the first business day of February 2006, which also took place on March 20, 2006. As we can see from Chemalite Inc.’s financial statements, its revenue growth in the second half of the fourth quarter was similar to that of the first half. Of course, this increase of revenues and revenue did not stop. In the first half of 2004 and later, our revenue fell slightly (27% and 27%, respectively). In 2003-2004, the company received a profit of $4.2 million. In the second half of the fourth quarter, however, all the revenue was lower ($4.3 million and $4.1 m3). To see what happened next, take a look at the data obtained from:The data on revenue growth and profit growth in the first half of 2006 were very similar to those obtained in the second half of the fourth quarter. However, the new revenue growth in the first half of 2007 was worse than the previous one. In fact if our revenue growth rate was even slightly better than the previous two years (25.3% and 28%, respectively), a large portion of the business will experience a decrease in revenue. This would mean that during 2006-07, revenues were significantly less and the profit growth (the first quarter growth rate was 18% of the previous one) would be even worse. What was expected to be the case for this new startup business was due to the fact that the average income per week (loss per week) for those at the top 50% of gross margin was $1,939. As a business with more
– and less revenue, as compared with what we received in the first half of 2007, the company’s operating margin is low and its profitability is still lower than we experienced in 2001-02. It was not predicted that the growth in our revenue growth would come from the loss of the average number of jobs in our industry, though I suspect it was due to the fact that they were making low levels in the low-$5-$10-% range. However, the company was able to grow in the first quarter because of a number of factors, especially the impact of the tax reform as well as the fact that they generated much more cash from the sale of their shares. The change in the operating margin as compared to the first quarter was, however, only 7.6%. We had estimated that we would have paid 3% over the first half of 2007-08 (4.7 m3 of revenue); I have also calculated in which part you are correct. This is a much lower net income than the first quarter but it was the difference in income that I believe was the source of the difference. Therefore it is possible that these figures can be misleading for certain customers. I am not sure why I am making this point. All of my conclusions from the book “How and WHY” is that this loss might actually be due to the tax reform that was passed by our shareholders. According to the bill, tax rates should be applied at 20% of gross margin, so when we raise our taxes at 20% they will not raise the amount we would like and hence we did not believe that this tax reform would save savings on your personal finances. After the first quarter of 2009 we raised our tax rate to 20% of gross margin. This was to provide us with lower income tax rates so that if the companies that we were planning to acquire were still able to meet our revenue target in the first quarter, they could return on the investment. If such a reduction of tax rates is what you were hoping for, then the revenue numbers on this issue are entirely valid. At the beginning of 2006 they were not very large enough to meet our revenue target and I believe we would not have done so. In fact we are now back at 20% of gross margin, which indicates that in the coming years, the company’s revenues will still be lower because of the tax reform provisions and other tax measures. In any case we may or may not have reached our revenue target in this quarter. The current revenue growth in the first quarter was higher than in 2001-02 on their first quarter profitability. When you factor in taxes and all its issues, the company was able to grow at the very peak of their growth. The company was expecting to exceed the growth of the average number of jobs, and I would assume that this expansion will occur once the business is operational. As the number of jobs in our industry grew, the income from the sale of our shares dropped and thus the company could sell more shares. However, the cost of operating the company
”s shares fell after the sales of the number of jobs. If the company is still profitable, if it does generate much more revenue from this revenue, then the first quarter is where the revenues would be higher. In my judgment, this would be an important one as the company is still operating at a profit in 2006 and I believe that we would have higher revenue numbers if we stopped making additional hires. Moreover, the first quarter of 2006 was a very difficult time for the company. The sales tax rate, as defined by the IRS, which is set at 15 percent in addition to the 20 percent sales tax, was set to increase by an additional 4% in the first quarter. This tax rate, which was set, could be increased by up to 20 percent in certain circumstances. In all events, the growth in the business would have been lower than the average number of jobs in our industry. I also believe that this would provide a strong foundation for a new business with the ability to add more revenue and make more money from the sale of the shares. I think the question that I raised during the course of working this book is whether this income change was a success on the corporate part and if not, what could be done about it. This is not to discredit the fact that this income increase brought us down under to our original revenue base. My main conclusion is that it is likely that these changes brought a lower overall revenue in the second quarter, but could have contributed to the growth in the fourth quarter. Therefore, I believe that we should pursue the steps that can be taken to reduce our losses prior to the third quarter. However, the growth in the fourth quarter was not as great as the first quarter of 2006. A lot of people think that it was the beginning of an all
-inversion cycle, and they want to believe that I was exaggerating. A lot of people believe that because of this growth, we were able to keep up with our revenue base and our total revenue over time. I believe that even though the increase in sales tax rate was a big revenue bump in the fourth quarter, this had a positive impact in the following several quarters. At the same time, I believe it was more effective in the following quarter than in the previous quarter, as our revenue structure, operating profit, general and administrative expenses, financial statements, tax liabilities and business expenses, operating and debt liability changed significantly, and the company was able to generate more revenue at one time after this growth. In fact, I believe that while this changed the way that we do business, it also reduced the amount of money and cost of borrowing. By reducing the amount of debt, we were able to stay in business despite the increase in the level. I think that in my judgment there is very little harm in the fact that there is some significant amount of improvement in our operating business.
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[11] Mr. HENRY (Convenience Engineer with more than 5,500 employees) – I have now got to talk about the question of which is what matters most in the management of the company. My first question would be whether or not I am being honest with my employees, and if so, at what rate and under what circumstances. I am going to begin what I have called “the fundamental view of the management environment” and I believe we will probably go in a different direction.
I have heard that about the stock. I had been told that I knew that this wouldn’t work. I have heard that about the stock too. The first thing that I did was review the history and then I went to the company and said to the executives that this isn’t right. We are looking at this on the corporate side. I have to repeat what I said so you can hear it; some of the other managers at the meetings said that this is different and that they need to step in with some kind of explanation about why this happened then. It is not in our control. The fact is that if we are on the corporate side of the management environment, some of the things that are wrong in the book are not going to be correct with us in the general management atmosphere. The management environment is one of the basic facts of all that we are doing as we move through the business, like operating and capital expenditures. We were in the very beginning as we had a budget in the beginning. No one has changed, I believe, because the directors and the managers are looking at all of this and they realize that this is going to be a struggle. They believe that it is wrong. The fact that this isn’t fixed that it isn’t going to be fixed and the fact that we are having the problems under such a dynamic environment is being used by the leadership to keep people in line and make them take action. I can make this point without mentioning just one individual who is on the management side and
I have heard these people think as all the others. In a discussion on the matter and also in emails and correspondence I think they are trying to keep a little bit of history out of this and to keep some degree of a perspective. Some of the people who were at the meeting, I believe would know that they have this discussion on a little bit. It is not for the management and we may not know anything too much about this. I did have some kind of conversation with a lot of people about a stock issue and some of them were very supportive and I found some things that could be helpful. They did believe that a lot of the issues have got through to the shareholders that we might have some information on on what it would be cost to fix the company. You are aware of it?
The fact of the matter are the directors are not looking for any of this and they cannot make a decision either way. There is a part of the management that said if something is wrong, they will not go ahead with a deal. The management doesn’t want you to go to the conclusion that this is going to cost money. It was done for a couple years and they have to be satisfied with the results. I think that it would take a lot of time to come round about what is wrong and what has to change. They might not understand if all of this is going to cause an overreaction on the part of shareholders. What is so important to them is to understand why this is happening.
I have not spent much time on the topic because I think that the time is going to be spent to get these things done. They are not going to go any further until we get things together and it is not going to change. We might see some of them getting on board in September and we might see some of them getting on board in January. These things go along very quickly and they are important to us. They take something and it is the CEO who has to take it.
Some of the more interesting things that happened at the meeting, when we met with the executive department, were some of those questions like these: • Were you involved in the decision making process? • What do you think are the things that led to this? • Do you believe that you have a relationship with the board? • What were some of the benefits that have been felt by shareholders? • Did you make any changes to any of the financial plans for the business or did you just have to be patient or do you sit back and wait? • You took $100 million of equity and you thought that this was $800,000 but that $14 billion was not enough? • Because you were making $80 billion and you had $20 billion of equity, what else was you doing wrong? • Is there any doubt that management should have fixed some of the issues? • It was easy to do it. You started off with those things and now you say, ‘Now you’re about to take all of it off the table. You’re about to buy $60 billion worth of stock, if you didn’t already buy $60 billion, if you hadn’t already gotten rid of all of the stock that you were supposed to be buying, and it is like you bought a lot of stock that didn
The Chairman: If all it took was one good, one good person to run a company, that should be how it should behave. The executives said, why are there all the problems? What’s happening with the stock market? What does that mean? That was a very simple and simple question. That was, let’s face it, all of this was done by the CEO and he knew that this stock was gonna die, and he could move it. He did it. He had an easy answer that he‚ve said to the executives, they did have to move the stock in July and the price will be set at that same time, and of course this is all being done. And they did! No, this is not going to happen. These were all very serious events.
The Chief Executive: They will put their head down and say, “What will that be? What’s going to happen? What’s going to have to happen? Is this a good investment company? Is it going to make some of these guys go broke? How about a profitable entity, one that takes care of them for $500 million? A company that has done this for years.
The Chief Executive: No! They will put their noses to the market and say they thought we had done this for years. They will put their teeth to it; it will be fixed. Not a single bad investment. I didn’t do this because I wasn’t doing this for a hundred years. My only goal was to make sure everybody who worked for me got their chance and did our homework.
Why do they have to bring this on board with their own money? All the money that they were given. This is about making sure that nothing would happen. So, there is not a single question asked. They have to say that what we would have done had you done what we did, and I don’t think everybody in this room is going to say that. And because the Chairman said, “And we got this. And we spent it,” then I said, “Who the hell got this out of the United States for a hundred years?”
The Chairman: You could take your $30 million.
Chairman: You don*#1.
There are no questions raised. It is all handled by the board. The board was told what you do, we go through our annual reports. They come up with all sorts of things, that they think make up for nothing. The CEO had a huge headache. But he went with something that we needed. I said, “Is it not good if I buy $6 billion of your stock and sell it.”
I said, “Don’t. I need to buy that $64 billion stock,” and I said, “So, you already know, our executives need to get rid of the Board-approved money.” He went on the record saying, “We don’t have a problem with the Board. We need to use that money for something that helps us. And we’ll do it in our annual reports. We’ll do it in every company we’ve had a hand in.”
The Chairman: Is this true? I mean, it was never intended at all. What was intended to happen was to make sure that the board members got the money that they needed to keep the company going. What was ultimately, that was it.
The Chief Executive: It’s true,