Bergner Construction Case

* Mechanical contracting business, specializing in specialty construction projects in food and beverage manufacturing facilities. * “Custom-built” contractor, using primary stainless steel to build the vessels and piping necessary for assembly lines in food & beverage processing. * They work on a project-by-project basis, for which it provides engineering design and construction expertise to its clients. * Required relatively little, complex specialized production equipment , and most inventory was associated with specific job in progress * Thinly capitalized (equity less than debt)

History: * The company was incorporates in 1982 by president John Bergner * He did business with FirstOhio Bank of Cleveland, where his account was handled by Peter Davis and a good relationship was kept between them for five years from 1982 till 1987 * In December 1987, Mr. Davis accepted a new position at Westside National Bank. Located in Cleveland * Therefore, a new loan officer was appointed for the company in January 1988 Present Position:

* Bergner Construction Company had recorded a small net operating profit of $13,088 (net income of 16502) in 1987 * During the first four months of 1988, the company’s completed jobs slumped, leading to a loss of $53,556 (net loss of 47682) due to problems encountered on one project, for which a former estimator had underestimate a construction cost. (If no single project is excessively dominant, then a loss on one does not imply that the firm’s profit potential would be significantly affected). * The company enjoyed a sales growth rate of 23 percent over the past 2 years, and projected sales by the end of 1988 were $1.

3million Management of the company: * The company’s president: John Bergner was 40 years of age. * He had a degree in mechanical engineering from Ohio State University. * Bergner began his career as a foreman for a large construction company that manufactured specialty food and beverage facilities. He formed his own company, which was incorporated in 1982 Operations of the company: * Bergner construction company had limited its operations to the Midwestern market, generally within a 500-mile radius of Cleveland * Mr.

Bergner had always been anxious to expand his business, and specially to search for contracts in other part of the country to achieve greater geographical diversification. The case: * Bergner had successfully bid for a renovation project at Pepsi-Cola bottling plant in Boulder, Colorado in April 1988 * Increase line of credit from $100,000 to $250,000 to finance a large construction project that his company had just been awarded & to cover his losses. * But the new loan officer of FirstOhion bank refused the request so he wanted to transfer his account to Westside National, where he hoped his business would continue to be handled by Mr.

Davis. * Mr. Davis recommended John Bergner’s company at the bank’s loan committee, stressing his honesty and positive business attitude. * He was prepared to approve a loan because of his honesty even if the client’s financial statements might be considered somewhat weak. * So Mr. Davis had a meeting with the Loan Review Committee and requested the following: 1. The sum of $100,000, which would be CD secured, the proceeds of which would be used to pay off Bergner’s outstanding debt at FirstOhio bank. ( he must not take loan to repay another loaN OR a loss) 2.

A $250,000 revolving line of credits to be secured by accounts receivable and inventory (replacing an existing line of $100,000 at FirstOhio). The company’s inventory consisted mainly of work in progress and raw materials. (Inventory mostly work in process so it can’t be used as collateral, but with regards to A/R it can be used as collateral due to its large amount BUT if 250000 was used as collateral he would not be able to pay-off his A/P) 3. A total of $128,000 in various equipment loans. These loans were secured by filings on various pieces of equipment, such as trucks, cars, forklifts, air compressors, and other tools.

These loans were already approved and funded at FirstOhio. The loans and related security arrangements would also be moved, but this represented no increase in balances outstanding on this equipment. In most cases, the bank financed 100 percent of the original cost of equipment purchased. * By expanding his business, it would represent the largest single construction project that his company had ever undertaken ($400,000), and he projected a 15 percent pretax profit of 60000 as part of his winning bid. Its successful completion would, he hoped, improve prospects for future profitability.