Science Technology

Background and purpose

Prior to the upcoming board meeting in which the five year financial forecast will be presented, I have reviewed your projections as these will be the basis for planning the future financial policies and development of our company.

Recommendation and Summary

My recommendation is to revise the financial projections before presenting them to the board of directors. Several of the assumptions are not consistent with the company's historical performance and do not take into account future financial conditions or potential competitive pressures.

The projection of sales growth of 30% per year is unrealistic compared to the historical growth of 12% over the past five years and our inaccurate forecasts for 1984. Sales are forecast to increase from the current level of $227 million in 1984 to $834 million in 1989. This is a compounded increase of 285% over the next five years. This exceeds the projected compound annual growth rate of 26% for industry sales from $1.6 billion to $4.0 billion. While we have made some progress in regaining market share in the printed circuit board and VLSI, several new competitors have entered the mix that will intensify the battle over market share.

|Science Technology Projection |1985 |1986 |1987 |1988 |1989 |

|Ratios |1985 |1986 |1987 |1988 |1989 |

|Current Ratio |4.5 |2.9 |2.2 |1.8 |1.6 |

|Acid Test |2.6 |1.7 |1.3 |1.1 |0.9 |

|Debt/Equity |13% |22% |33% |44% |55% |

|Competitors |Teradyne |Fluke |LTX | |

|Current Ratio |3.6 |3.4 |2.5 | |

|Acid Ratio |2.0 |1.9 |1.7 | |

|Liabilities/Assets |36% |39% |52% | |

|Bank and long term debt/equity |28% |27% |61% | |

Table 2 Ratios

Conclusion

With the optimistic sales growth and cost assumptions, the five year projections do not reflect a reasonable forecast of future performance. A more conservative approach considering the increase in competition, retaining more comparable liquidity ratios, and the application of historical cost ratios where appropriate is needed.

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