Case Study #1: Primapel Manufacturing Company, Inc.
Primapel Manufacturing Company, Inc. was a trader and manufacturer of paper products. October 9, 1996 – PMCI registered with the Securities and Exchange Commission primarily to trade sorted waste paper products, kraft liner board and to manufacture paper products. Year 1996 – PMCI obtained a BOI-registration to manufacture paper products. Year 2002 – Production facilities were actually put up.
PMCI was owned and managed by two families: the Lees and the Parks. Lee Family:
Had been in the business of paper trading since 1950.
Jerry Lee Sr. – the patriarch of the family, was a major stockholder of one of the biggest producers of corrugated boxes in the Philippines. Park family:
Kevin Park – the patriarch of the family, had extensive worldwide connection in sourcing materials and marketing paper products. Upon the death of Kevin Park in 2003 and Jerry Lee Sr. in 2004, their children inherited the business and took over the company’s management. Ryan Park – eldest son of Kevin Park, 48 years old, a CPA with 20 years of experience as trader of paper products, became the new chairman and president. Jayme Park – 45 years old, became the vice president and director. Paolo Park – 40 years old, an engineer, became a director. Jerry Lee Jr. – son of Jerry Lee Sr., 45 years old, a CPA, was appointed as vice chairman and treasurer. Atlas Machinery Co. – owned about 5 percent of PMCI. It had about 10 years of experience in manufacturing paper making equipment and was responsible for maintaining the machinery and equipment of PMCI.
Statement of the Problem:
As the company realized its market share and sales, it seemed to be ever dependent on renewals and increase in credit lines with banks. Management gets the feeling that it was partly due to its history of delays and problems in its start-up.
What is the appropriate capital structure for a start-up company?
Presentation of Facts:
Jerry Lee Jr. was requesting the renewal and increase in PMCI’s existing P57.5 million omnibus line to P80.5 million. Lee explained that they intended to use the P23 million increase to finance the importation of more raw materials needed to support the expected increase in sales in 2006 to P495 million from P446 million in 2005. The Bank granted the original P57.5 million OL to PMCI in November 2004 to finance working capital. It was a clean loan supported by the JSS (Joint and Solidary Signature) of PMCI principals Ryan Park and Jerry Lee Jr. The company offered to provide another JSS to cover the P23 million increase in OL being requested, PMCI’s outstanding line availments as of November 21, 2005 was P57 million. The average daily balance of PMCI promissory notes and trust receipts coursed through Equitable PCIBank in 2004 were P30.2 million and P13 million, respectively. Letters of credit with a total volume of $1.4 million were also coursed through Equitable PCIBank. The company maintained a CA/SA with an average daily balance of P495, 000. Aside from the P57.5 million credit line with the Bank, the credit investigation report showed that as of November 25, 2005, PMCI had credit dealings with six other banks.
Business Operation, Strategy and Plan
PMCI’s manufactured products include high-grade fine printing and writing paper such as book, bond, computer paper and security paper. PMCI’s clients:
Bangko Sentral ng Pilipinas – for security paper
Paper converter companies
Companies manufacturing paper products under their own brand names Corrugated box manufacturers – for sorted waste paper/kraft liner Paper manufacturers – for board and corrugating medium
Raw materials consisted of 75% waste paper and 25% wood pulp. PMCI imported waste paper from the USA while wood pulp came from Canada and Indonesia. The cost of paper in the international market stabilized in 2005 after...
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