Finance 4210 - Friendly Cards

...

Estimated dollar sales of cards at the retail level were three times the sales figures shown in income statement.

Financial Problems.

Capital intensive, good relations with banks and suppliers.

6.25m line of credit.

2.5 percentage points above prime rate

Current prime rate 8.5%

Peak needs for bank and trade credit (over $9 Million at the end of 87) occurs in December and January.

Low borrowing point following selling season occurs in april. Trade credit reduced to 50% of peak needs.

Needs to seek additional equity capital.

Bankers feel that the company depends on debt capital for financing ops. Exhibit 2

Covenants:

Bank loans outstanding at any time could not exceed 85% of friendlys accounts recievable.

Total liabilities could not exceed 3 times the BV of the companies net worth.

Maximum ratio of all interest bearing debt/ equity to maximum of 2/1

Decisions for Friendly Cards:

Should we invest in envelope machine

Should we acquire creative designs inc( Midwestern manufacturer of studio cards.)

Should we go to market to raise additional equity capital to relieve pressure?

Possible Envelope Machine Proposal:

Envelopes one of the largest total costs.

1987 spent 15000000 to purchase 100 m envelopes used that year.

Acquisition 500k

Envelope equipment economic life of 8 years.

Annual staffing cost for machine of 91k

Other expenses in exhibit 4 additional warehouse space exhibit 4

If purchased, Net working capital Requirement immediately increases by 200k for the 8 year period.

Estimated positive cash flow for 8 years.

Possible acquisition of Creative Designs Inc.

Privately owned with sales of 5m in 1987. Exhibit 6

If acquired, its COGS would reduced by 5% or 154k with current sales levels.

Eliminating duplication could reduce CD’s other expenses by 10% or 155k

After first year, sales increase of 6% per year

Suppliers would be willing to help out more with trade credits.

Unused bank credit lines and other debt capacity.

Cost of acquisition 11X 1987 earnings. She could pay in Friendly common stock valued at 9.50 a share giving them 198000 total shares.

Exchange of securities is Tax Free

Possible Sale of New common stock:

This will curtail projected growth in sales.

Increases in orders turned down results in failure to retain customers. Also don’t want restrictions on new orders.

Its hard to compute a Beta value due to the low volume of shares being traded in the OTC market.

Past two months, price had held at $9.50

Ms Beaumont currently owns 55% of stock currently outstanding.

20% owned by officers of the company.

25% owned by the public.

Offer from west coast investors:

Offered to buy 200k shares at 8 a share.

If executed they will have to pay a 80k 10,000 share finders fee to person who brought the offer up.

I banker Samuel Hexter says now is a tough time to raise equity money for a small company. October crash was a killer. Dow jones has fallen from 2596 to under 2000. It wouldn’t make sense to take friendly stock to market at more than $8 per share.