Padget Paper Compay

Padgett Paper Product Company

Currently, Padgett Paper Products Company is financing its long-term debt through 90-day notes payable to Caslon Trust. At the end of 1996, Padgett currently has $7.2 million in outstanding 90-day notes payable to Caslon.

Padgett was originally asking for an additional loan of 3.6 million above their current outstanding debt of 3.6 million to bring the total loan balance to a potential 7.2 million. This exceeds the bank’s borrowing limit by 2.2 million. And, by the end of fiscal year 2000, $4.4 million would still be outstanding in short-term debt.

The payback period on this loan is five-years, but as it stands assuming Padgett could generate around $1 million in cash for each subsequent year. This means that a total of 8 years would be needed for Padgett to retire the debt.

The bank is willing to make some exceptions because Padgett’s average daily balance at the bank is 126% higher than other affiliated companies creating opportunities for investment for the bank. A scenario analysis anticipates growth from 5-15% over the next 5 years by acquisitions that they are financing through 90-day notes.

Repayment Plan

7.20 Total Debt (90 day notes)

5.00 Financed to the Insurance Company

2.20 Balance Remaining

0.70 Resulting Cash Flow from Sale of Warehouse

0.50 Inventory Change from FIFO to LIFO

1.00 Financed through Canadian Banks

* All figures in Millions of Dollars

It is possible to refinance $5 million dollars through the insurance company for 12 years at 9 ½ percent. This leaves a deficit of $2.2 million dollars. The company has acquired a redundant warehouse through the recent acquisition of Tri-State Tablet Company, which can be sold for a combined cash value and tax savings on the book loss of $700,000 and applied to the loan. Also, the company can realize a tax benefit of $500,000 upon the transfer of the inventory accounting method from FIFO to LIFO. Padgett’s Canadian Subsidiary has net current assets of...