Like many start-up companies, AMT has not been able to reap a profit during its first three years of operations. The company was successful in making sales, but unsuccessful in turning those sales into profit. Western National Bank was told that the research and development costs associated with a new product and new markets are what are causing the company to bog down. However, general and administrative expenses increased 81 percent from 1983 to 1984, and 28 percent from 1984 to 1985. AMT needs to bring these expenses under control if it is going to be successful over the long-term.
It is necessary to use pro-forma financial statements to determine how much is needed by year-end 1988. The forecast using historical ratios provides an objective and quantifiable analysis. Based on these figures, the company will post a loss of $2.3 million, $3.8 million and $5.8 million for the years 1986, 1987 and 1988, respectively. In this case, the company will need an additional $11.9 million. Management, on the other hand, forecasts profits for each of these three years, but provides no data to explain how these forecasts are calculated.
Western National Bank would be ill-advised to loan the requested funds to AMT. Although the relationship with Biological Labs is close and strong, and the infusion of cash that the latter has provided has enabled AMT to continue to this point, AMT needs to bring its costs in line and reduce its reliance on short-term debt financing. Its inventory levels are also excessive, and the company needs to take steps to reduce these, as well.
AT&T's financial policies over most of its history were indeed appropriate for the monopoly status that it held in the telecommunications industry. The company could sustain a high debt ratio because future revenues were assured, and it could sustain a high dividend payout ratio (making it the choice of "widows and orphans") for the same reason. Competition was not...