Mike is a sole shareholder of Cuteness Dog, Inc. (CDI). He is operating his company as a sub chapter S corporation. It is a small manufacturing company that produces a complete line of accessories for dogs such as collars, clothing, play toys, treats, etc. Many of the designs are unique and have been patented by CDI. In addition, CDI had its logo registered as a trademark.
CDI sells its products to several large retail chains such as Bullseye and Buymart on 30 day terms. Most of the raw materials for the production of the items come from small suppliers within 200 miles of the CDI plant. CDI buys all of its raw material on open account. The CDI plant is located on a 40 acre tract of property and consists of the main manufacturing building, a separate corporate office building, and a warehouse with loading dock. Mike inherited the real estate from his grandfather, and borrowed the money from First National Bank (the "Bank") to build the CDI plant facility. Mike is leasing the factory, office building, and warehouse to CDI. The real property has a conservative market value of $10,000,000.00. Mike currently owes $2,000,000.00. The Bank has the only mortgage on the property. The original debt to the bank was $8,000,000.00.
CDI delivers its own product using its tractor-trailer fleet. The trucks and trailers were purchased from Mad Dog Truck and Trailer Sales, Inc. on an installment sales contract and security agreement. The sales contract and security agreement were sold and assigned to Truck Finance America ("TFA"). TFA's lien is noted on all of the titles for the trucks and trailers. The truck fleet and trailers have a current market value of $4,500,000.00, and CDI owes TFA $1,500,000.00.
CDI wants to expand its market to cover the entire United States. In order to do that, it will need to obtain additional money to develop regional shipping facilities and expand its fleet. CDI goes to the Bank to borrow money for the expansion. Identify what items of collateral CDI can offer to the Bank. Identify the name or category all secured and unsecured credit or debt that CDI or Mike has now. If necessary, Mike would consider signing a guaranty and pledging collateral as well. What could Mike offer the Bank as collateral?
*Do not worry about sales, profit, loss, etc.
CDI can offer several items of collateral to the Bank for the expansion loan. Let's identify them:
1. Real Estate: CDI can offer the 40-acre tract of property, which includes the main manufacturing building, corporate office building, and warehouse with a loading dock. This property has a conservative market value of $10,000,000.00.
2. Patented Designs: CDI can offer its patented designs for dog accessories as collateral. These unique designs have value and can be used as security for the loan.
3. Trademark: CDI can offer its registered trademark logo as collateral. The trademark can be used as security for the loan.
4. Truck Fleet and Trailers: CDI can offer its tractor-trailer fleet, which was purchased from Mad Dog Truck and Trailer Sales, Inc. The fleet and trailers have a current market value of $4,500,000.00.
Now let's identify the secured and unsecured credit or debt that CDI or Mike currently has:
Secured Debt:
1. Mortgage: Mike owes $2,000,000.00 on the real estate, which serves as collateral for the mortgage. The Bank has the only mortgage on the property.
2. Installment Sales Contract and Security Agreement: CDI owes $1,500,000.00 to Truck Finance America (TFA) for the purchase of the truck fleet and trailers. TFA's lien is noted on all the titles, indicating that the debt is secured by the vehicles.
Unsecured Debt:
There is no mention of any unsecured debt in the given information.
As for what Mike can offer the Bank as collateral, he can offer the real estate he inherited from his grandfather, which is currently valued at $10,000,000.00. This can be pledged as additional collateral to support the expansion loan. Additionally, if necessary, Mike could consider signing a guaranty, which would make him personally responsible for the loan if CDI fails to repay it.