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STATMATT2000,

The wrinkle here for me is irrevocable standby letters of credit, otherwise it is understandable.

Let's take the bank line of credit for $18,000,000 first. I think of this as something like a home equity loan. A bank gives you a home equity line of credit of let's say $18,000. If you don't borrow anything against it, it doesn't add to your debt, but it's there for emergencies, or that trip to Jacksonville in two weeks.

Lot's of businesses have arrangements for lines of credit. For HCSG, you say they have no fixed debt, and no borrowings against their line of credit, so they are debt free so far.

I had to look up the irrevocable standby letters of credit wording, however, because I've never seen this before. Here's a site that explains it pretty well...

http://www.crfonline.org/orc/cro/cro-9-1.html

In this case, HCSG has insurance obligations to its customers. If for whatever reason, HCSG couldn't pay those obligations (and under normal circumstances this shouldn't happen), then the bank is obligated to pay up to $13,000,000 to cover them.

So I think of this like insurance. HCSG doesn't owe the bank anything, but if something unforseen happens to its business, the bank will cover its insurance obligations to its customers. I'm not sure how the bank is compensated for this risk.

I think the bank would therefore only allow HCSG to draw $5,000,000 on it's 18,000,000 line of credit if needed, because it will reserve the 13,000,000 for the letters of credit.

In any case, I don't believe this affects any of the three income statements. You say the company has no fixed debt, and they have not drawn on their line of credit, so I would say the company is debt free at the point in time you are looking at (1999?).

I hope you get a better response from someone with more experience in this area. Looking forward to your first IETC analysis, if you plan to share it here.

Best to you,
Bill


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