S w 9B11N022 GEMINI ELECTRONICS D.docx

S w
9B11N022
GEMINI ELECTRONICS
Dan Thompson wrote this case solely to provide material for
class discussion. The author does not intend to illustrate either
effective
or ineffective handling of a managerial situation. The author
may have disguised certain names and other identifying
information to
protect confidentiality.
Richard Ivey School of Business Foundation prohibits any form
of reproduction, storage or transmission without its written
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Publishing, Richard Ivey School of Business Foundation, The
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of Western Ontario, London, Ontario, Canada, N6A 3K7; phone
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Copyright © 2012, Richard Ivey School of Business Foundation
Version: 2012-02-03

Sarah McIvor, CA, a junior partner with Price Waterhouse
Coopers, had been selected to conduct a
financial review of Gemini Electronics Ltd. Gemini was an up-
start American electronics company that
recently went public and now wanted to expand its business in
order to rival major Korean and Japanese
producers. Before the company finalized any expansion plans,
Dr. Frank Wang, the founder, felt it was
prudent to conduct an independent evaluation of Gemini’s
financial condition.
Having managed a number of audits of leading companies in the
industry, McIvor’s knowledge of
consumer electronics was extensive. If the report was well-
received by Gemini, this would mean a lot of
additional auditing and consulting business for her firm and a
promotion to senior partner. She decided to
clear her desk of all other files and to focus on the Gemini
account for the next two weeks.
COMPANY FORMATION
Gemini Electronics was a U.S.-based manufacturer of
televisions (TVs). The company was founded in
2002 by Frank Wang, a second-generation American of Chinese
descent. As part of his PhD studies in
electrical engineering at the California Institute of Technology
(CIT) in the early 1990s, Wang participated
in a number of basic research projects relating to the
development of liquid crystal displays (LCD). Despite
being only a doctoral student, he made a number of significant

contributions to these projects and came in
contact with venture capitalists who were working with CIT to
commercialize this important work.
Coming from a family of entrepreneurs, Wang became very
interested in the business side of research and
development (R&D). His plan after graduation was not to
pursue a career in teaching and research as most
of his colleagues wanted to do but to build a major electronics
firm to rival the likes of Samsung, Sony and
LG. Not only would he bring honour and wealth to himself and
his extended family, but he felt strongly
that such an enterprise would allow the United States to re-
establish itself as a major manufacturer of
consumer electronic products. Since the 1980s the United States
continued to make major contributions in
the area of basic research, but most of the design and
manufacturing was done by firms in countries such as
Japan, Korea and Taiwan. Wang’s goal was to reverse this
trend.
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Page 2 9B11N022
Realizing that he needed to acquire practical design and

production experience, in 1995 Wang made the
decision to return to his father’s home country of Taiwan and
work for a number of electronics contract
manufacturers there who did TV work for the Koreans and
Japanese. Wang stayed in Taiwan for nearly six
years before returning to the U.S. with his young family.
Immediately upon his arrival, he went to work
promoting his business plan for Gemini Electronics to venture
capitalists in California.
Gemini was going to produce big-screen LCD and plasma TVs
for the U.S. market. Wang hoped to
capitalize on American patriotism and disappointment over the
loss of so many U.S. brands such as RCA,
Zenith, Quazar and Motorola to other countries. He planned to
cater primarily to big box retailers such as
Best Buy, Costco, Sam’s Club, Walmart and Target who wanted
to shorten their supply chains by sourcing
TVs in North America. Gemini would produce its TVs on a just-
in-time basis and pass on most of the
distribution savings (transportation and warehousing) to the
consumer. This would allow Gemini to
quickly build market share in the U.S., Canada and Mexico by
offering prices that were considerably
below the competition.
RAPID GROWTH
By 2005 this strategy had proven to be a great success. Gemini
was the largest TV producer in the U.S.
with a 35 per cent market share. Major retailers quickly agreed
to carry the brand because of its reputation
for excellent quality at an affordable price. Gemini was
becoming a source of great concern for its major
competitors Samsung, Sony and LG. Due to changing

technology, Gemini decided to focus on just LCD
TVs but had added a number of additional products such as
DVD players (HD and Blue Ray), home
theatre sound systems and cable sets. The venture capitalists
had taken the company public in December
2004.
In addition to a deep recession in 2008 and 2009, in late 2009 a
major threat emerged as Gemini’s Korean
and Japanese competitors began lowering their prices to
comparable levels. With the falling U.S. dollar,
brought on by that country’s large trade deficit, and Gemini’s
significant advantage in logistic costs, it was
felt these lower prices were not sustainable. Of greater worry
were a number of technological trends. First,
Sony announced that it would introduce a 3-D TV by summer
2010, and other major producers were
expected to quickly follow. Initially, prices for these new
products would be high and 3-D recorded content
would be in short supply, but it was expected that within a few
years 3-D TVs would be the industry
standard; when this actually occurs will depend on how quickly
consumers replace their TVs again after
just having upgraded to digital/HD units. A second trend was
the need to add video phone capabilities to
TVs. With the growing popularity of Internet phone services
such as Skype, it was felt that a much higher
percentage of phone calls would be made with video. TVs
would have to accommodate the dialling of
numbers and contain video recording and voice input
capabilities. Finally, future TVs will likely have to
incorporate hardware and software so users can “surf” the Web
and read/send e-mail without a micro,
laptop or notebook computer. Gemini felt it would be able to
produce 3-D TVs within 18 months, likely in
time to meet the expected growth in demand. Introducing video

phones, Web browsing and e-mail
capabilities is something it can do now as all needed technology
is available; in fact, the company already
has prototypes under development.
PRODUCT DIVERSIFICATION
In January 2010, Wang formed an ad hoc committee of senior
managers at Gemini to study different
growth options. One option was to continue to focus on TVs but
to expand geographically into South
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Page 3 9B11N022
America, Europe and Asia. Wang felt that geographic expansion
was wise, but he also wished to develop
Gemini’s product offering so he could compete with Samsung,
Sony and LG in all market segments.
Possibilities included smart phones, e-readers and tablets, MP3
players, game machines, advanced audio
systems and notebook, laptop and micro computers. Gemini
could design these new products internally or
expand through acquisition. Motorola had expressed interest in

selling its cell phone unit while Palm had
clearly stated it was looking to be acquired by a firm with
greater financial resources. Taiwan’s Acer was
disappointed with its acquisition of Gateway in 2007 and was
rumoured to want to sell. Bose had discussed
merging its audio business with a larger company that had
greater access to international markets.
FINANCIAL STATEMENTS
Exhibits 1, 2 and 3 contain financial statements provided by
Gemini Electronics for the last five years since
the initial public offering (IPO). Exhibit 4 contains industry
averages.
OPERATIONS
Gemini had a number of advantages over its Asian competitors.
As a young and relatively small company
compared to others in the industry, it was more innovative and
less prone to bureaucratic delays and in-
fighting. The company was forced to greatly expand the number
of administrative and sales personnel in
2006 and 2007, but rapid growth soon improved efficiency.
Southern California, despite inroads from other countries, was
still the premiere location in the world for
R&D in the electronics industry. Gemini had been trying to take
advantage of this by purchasing a number
of patents from U.S. universities and expanding its own R&D
program. In 2009, Gemini opened a new
research facility on the CIT campus.
LCD TVs were large items that were expensive to ship and

prone to damage during their long journey
from Asian factories. These costs necessitated higher selling
prices as did the fact that retailers had to keep
larger inventories on hand to guard against supply interruptions.
Gemini’s just-in-time production and
delivery of TVs from factories in the U.S. allowed them to sell
units at greatly reduced prices despite
having to pay much more for labour in the U.S. and in Mexico
where many of their component parts were
produced.
Gemini’s production facilities were state-of-the-art as they were
only a few years old. Assembly lines were
highly automated and could be quickly changed to produce
different models, resulting in smaller
inventories of work-in-progress and finished goods to meet
retailer demand. Due to the limited amount of
electronics manufacturing being done in the U.S., Gemini still
had to source many of its parts from Asian
contractors. This meant that larger parts inventories had to be
maintained because of long delivery times.
In recent years, the company had been successful in sourcing a
much greater proportion of their parts in
North America.
Being a new American TV brand in an industry that had long
been dominated by Asian producers, Gemini
had a hard sell trying to convince major retailers that their
products were worth carrying. All appreciated
the low costs and fast delivery time, but none were sure whether
the customer could be convinced to buy
this new brand. To compensate, many retailers demanded more
generous credit terms than Net 30, which
was standard in the industry. Interest was also not charged on
overdue accounts.

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Market research indicated that most Americans did not realize
that Gemini TVs were made in the United
States, so in early 2009 the company felt it was in a financial
position to begin advertising this point
heavily in TV spots. Previously, its advertising was limited to
funding product ads in store flyers.
Wang knew from experience that consumer electronics was a
very competitive industry and that Asian
competitors were long-term thinkers who were willing to
sacrifice profits in the short term to build market
share. Company policy was to maintain large cash balances to
guard against this uncertainty.
Venture capitalists funded Gemini’s start-up with a number of
rounds of financing beginning in fall 2002,
and by late 2004 they had accumulated a 45 per cent equity
stake. After just three years, the decision was
made by the venture capitalists to take the company public in an
IPO. Wang owned the remaining 55 per
cent of the company and was very concerned about losing

control. Subsequent to the IPO, the company
adopted a policy of paying no dividends and financing all
growth with debt; no new common shares would
be issued.
Gemini had a $500,000,000 line of credit with Wells Fargo
Bank to finance seasonal variations in net
working capital — the loan had to be 200 per cent secured by
inventory and accounts receivable. All land,
plant, equipment and some patents were financed with term
loans. These loans were negotiated with a
number of banks so Gemini could diversify its funding sources.
To comply with the line of credit and term
loans, the current ratio had to be kept above 1.5.
All inventory purchases were on terms 2/10, Net 60, and most
suppliers charged interest at 12 per cent per
annum on any overdue amounts.
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Page 5 9B11N022
Exhibit 1

INCOME STATEMENT
2005 2006 2007 2008 2009
Sales 2,142,659,000 5,413,625,000 8,671,715,000
12,175,476,500 3,664,714,160
Cost of Goods Sold 1,323,957,000 3,120,000,500
5,032,513,200 7,886,796,000 8,974,149,576
Gross Profit 818,702,000 2,293,624,500 3,639,201,800
4,288,680,500 4,690,564,584
Operating Costs
Selling and Distribution 212,340,640 545,980,400 854,300,000
934,532,230 1,001,234,530
R&D 93,640,450 220,340,340 365,660,340 476,350,230
785,774,340
Administration 95,003,300 405,340,300 832,740,300
999,453,230 980,340,500
Amortization 81,414,429 122,465,588 187,929,165 288,216,088
394,440,051
Operating Profit 336,303,182 999,497,873 1,398,571,995
1,590,128,722 1,528,775,163
Interest 53,251,456 145,434,234 288,898,584 277,686,944
329,923,700
Earnings Before Taxes 283,051,726 854,063,638 1,109,673,411
1,312,441,778 1,198,851,462

Taxes 99,068,104 298,922,273 388,385,694 459,354,622
419,598,012
Net Income 183,983,622 555,141,365 721,287,717 853,087,156
779,253,450
Exhibit 2
BALANCE SHEETS
2005 2006 2007 2008 2009
Cash 310,630,300 790,419,373 1,437,227,573 1,366,526,361
1,413,474,400
A/R 316,972,950 758,988,750 1,201,094,250 1,328,523,975
1,503,560,340
Parts Inventory 253,578,360 607,191,000 960,875,400
1,062,819,180 1,201,345,530
WIP Inventory 26,789,180 45,354,460 66,650,675 75,640,210
89,575,400
Finished Goods Inventory 359,340,630 960,187,250
1,451,230,215 1,605,660,505 1,805,340,520
Total Current Assets 1,267,311,420 3,162,140,833
5,117,078,113 5,439,170,231 6,013,296,190

L,P,&E, Net 710,727,625 812,956,891 1,317,388,220
2,281,077,095 3,363,891,508
Intangibles 103,416,660 411,698,984 561,903,428 601,083,781
580,509,006
Total Assets 2,081,455,705 4,386,796,708 6,996,369,761
8,321,331,107 9,957,696,704
A/P 422,630,600 1,011,985,000 1,305,530,320 1,509,430,300
1,564,430,450
Current Portion of LT Debt 147,920,710 341,394,916
607,184,919 651,847,287 785,532,620
Total Current Liabilities 570,551,310 1,353,379,916
1,912,715,239 2,161,277,587 2,349,963,070
Long-term Debt 739,603,550 1,706,974,582 3,035,924,595
3,259,236,437 3,927,663,101
Shareholders’ Equity 771,300,845 1,326,442,210 2,047,729,927
2,900,817,082 3,680,070,533
Total Liabilities and Equities 2,081,455,705 4,386,796,708
6,996,369,761 8,321,331,107 9,957,696,704
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Page 6 9B11N022
Exhibit 3
SALES ANALYSIS
2005 2006 2007 2008 2009
TV-LCD
Unit Price $ 1,640 $ 1,485 $ 1,425 $ 1,250 $ 1,070
Unit Cost $ 950 $ 835 $ 819 $ 810 $ 702
Quantity 250,000 2,620,000 4,889,600 8,560,300 11,230,388
TV-Plasma
Unit Price $ 1,340 $ 1,100 $ 1,000 - -
Unit Cost $ 850 $ 700 $ 646 - -
Quantity 1,080,000 830,000 530,400 - -
DVD-HD
Unit Price $ 250 $ 240 $ 225 $ 180 $ 140

Unit Cost $ 145 $ 134 $ 125 $ 120 $ 112
Quantity 240,000 1,400,000 2,010,000 1,400,000 350,000
DVD-Blue Ray
Unit Price - - $ 275 $ 220 $ 185
Unit Cost - - $ 175 $ 161 $ 138
Quantity - - 330,000 1,580,000 2,890,000
Cable Sets
Unit Price $ 105 $ 100 $ 100 $ 95 $ 95
Unit Cost $ 45 $ 45 $ 43 $ 40 $ 41
Quantity 245,600 399,400 854,300 1,298,700 1,654,200
Home Theatre
Unit Price $ 570 $ 570 $ 570 $ 550 $ 520
Unit Cost $ 350 $ 355 $ 355 $ 350 $ 335
Quantity 350,300 410,500 956,500 1,367,500 1,745,000
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Page 7 9B11N022
Exhibit 4
INDUSTRY AVERAGES
Key Financial Ratios Industry
Averages
2009
Vertical Analysis (%)
Income Statement 2009
Vertical Analysis (%)
Balance Sheet 2009
Current Ratio 2.84X Sales 100.00 Cash 4.54
Cash Ratio 0.05X Cost of Goods Sold 62.00 Accounts
Receivable 8.34
Parts Inv Turnover in
Days 32.26 days

Gross Profit 38.00
Parts Inventory 5.48
WP Inv Turnover in Days 7.89 days Operating Costs WIP
Inventory 1.34
FG Inv Turnover in Days 188.33 days Selling and Distribution
10.89 Finished Goods Inventory 31.99
A/R Turnover in Days 30.44 days R&D 7.01 Total Current
Assets 51.69
A/P Turnover in Days 11.11 days Administration 8.34 Land,
Plant & Equipment, Net 41.34
Cash Conversion Cycle 192.81 days Depreciation 4.35 Other
Assets 6.97
Fixed Assets Turnover 2.42X Operating Profit 7.41 Total
Assets 100.00
Total Assets Turnover 1.00X Interest 2.31
Debt Ratio 0.50X Earnings Before Taxes 5.10 Accounts
Payable 11.23
Times Interest Earned 3.21X Taxes 1.79 Current Portion of
LT Debt 7.00
Gross Profit Margin 38.00% Net Income 3.32 Total Current
Liabilities 18.23
Operating Profit Margin 7.41% Long-term Debt 31.50
Net Profit Margin 3.32% Shareholders’ Equity 50.27
Return on Assets 3.32% Total Liabilities and Equities
100.00
Return on Equity 6.60%
Source: Industry average information from a reliable third party
source.

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BUSN 6021: Corporate Finance 1
TRU Open Learning
Case Study 1: Financial Statement Analysis
Introduction: Gemini Electronics
Sarah McIvor, CA, a junior partner with Price Waterhouse Coop
ers, has been
selected to conduct a financial review of Gemini Electronics Ltd
. Gemini is an “up‐
start” American electronics company who recently went public a
nd now wants to
expand its business to rival the major Korean and Japanese prod
ucers. Before the
company finalizes any expansion plans, Dr. Wang, the founder,
feels it is prudent to
conduct an independent evaluation of Gemini’s financial conditi
on.
The two‐page evaluation memo should be divided into sections
entitled liquidity,
asset management, long‐term debt paying ability, profitability, a
nd
recommendations. It should be single‐spaced, 11‐point Arial fon
t with 0.7 inch

margins. All headings should be in 12‐point bold font.
In addition to the two‐page memo, the following financial exhib
its for 2005 through
2009 should be included:
table
analysis of income statements and balance sheets
horizontal analysis (index numbers) of income statements and b
alance sheets
flow statements (2006 through 2009)
analysis of ROE
All ratios should be calculated based on year‐end totals only—
no averages should
be used. The specific ratios to be used include the following:
2005 2006 2007 2008 2009 Industry Average
Liquidity
Current ratio
Cash ratio
Asset Management
Parts inventory turnover
in days

2 Case Study 1: Financial Statement Analysis
TRU Open Learning
2005 2006 2007 2008 2009 Industry Average
Work‐in‐progress
turnover in days
Finished goods turnover
in days
A/R turnover in days
A/P turnover in days
Cash conversion cycle
Fixed assets turnover
Total asset turnover
Long‐term debt paying
ability
Debt Ratio
Long‐term debt to total
capitalization

Times Interest Earned
Cash flow coverage
Profitability
Gross margin
Operating profit margin
Net profit margin
ROA
ROE
BUSN 6021: Corporate Finance 3
TRU Open Learning
Analysis of ROE
EBIT/Sales EBT/EBIT NI/EBT Total Asset Turnover
Debt
Ratio ROE
2005
2006
2007

2008
2009
Evaluation Rubric
The following are the grading criteria for Case Study 1.
Total: ______ / 100
Letter Grade: _________
Accuracy of Financial Data (25% of grade)
Ratio table /10
Vertical/horizontal analysis /5
Cash flow statements /5
5‐part analysis of ROE /5
Note: One mark is deducted for each calculation error.
4 Case Study 1: Financial Statement Analysis
TRU Open Learning

Thoroughness of Analysis (50% of grade)
Liquidity /8
Asset management /12
Long‐term debt paying ability /6
Profitability /10
Recommendations /14
Memo Format and Writing Quality (25% of grade)
Memo layout /5
Grammatical and spelling errors /10
Writing style /10
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