Clarkson-Lumber-Company

HarvardBusinessSchool9-297-028Rev.October29,1996Thiscasewaspreparedasthebasisforclassdiscussionratherthantoillustrateeithereffectiveorineffectivehandlingofanadministrativesituation.Copyright©1996bythePresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685orwriteHarvardBusinessSchoolPublishing,Boston,MA02163.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,usedinaspreadsheet,ortransmittedinanyformorbyanymeans—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.1ClarksonLumberCompanyAfterarapidgrowthinitsbusinessduringrecentyears,theClarksonLumberCompany,inthespringof1996,anticipatedafurthersubstantialincreaseinsales.Despitegoodprofits,thecompanyhadexperiencedashortageofcashandhadfounditnecessarytoincreaseitsborrowingfromtheSuburbanNationalBankto$399,000inthespringof1996.ThemaximumloanthatSuburbanNationalwouldmaketoanyoneborrowerwas$400,000andClarksonhadbeenabletostaywithinthislimitonlybyrelyingveryheavilyontradecredit.Inaddition,SuburbanwasnowaskingthatMr.Clarksonguaranteetheloanpersonally.KeithClarkson,soleownerandpresidentoftheClarksonLumberCompany,wasthereforeactivelylookingelsewhereforanewbankingrelationshipwherehewouldbeabletonegotiatealargerloanthatdidnotrequireapersonalguarantee.Mr.ClarksonhadrecentlybeenintroducedbyafriendtoGeorgeDodge,anofficerofamuchlargerbank,theNorthrupNationalBank.ThetwomenhadtentativelydiscussedthepossibilitythattheNorthrupbankmightextendalineofcredittoClarksonLumberuptoamaximumamountof$750,000.Mr.Clarksonthoughtthataloanofthissizewouldimproveprofitabilitybyallowinghimtotakefulladvantageoftradediscounts.Subsequenttothisdiscussion,Mr.DodgehadarrangeforthecreditdepartmentoftheNorthrupNationalBanktoinvestigateMr.Clarksonandhiscompany.TheClarksonLumberCompanyhadbeenfoundedin1981asapartnershipbyMr.Clarksonandhisbrother-in-law,HenryHoltz.In1994,Mr.ClarksonboughtoutMr.Holtz’sinterestfor$200,000.Mr.Holtzhadtakenanotefor$200,000,tobepaidoffin1995and1996inordertogiveMr.Clarksontimetoarrangeforthenecessaryfinancing.Thisnotecarriedaninterestrateof11%,andwasrepayableinsemi-annualinstallmentsof$50,000,beginningJune30,1995.ThebusinesswaslocatedinagrowingsuburbofalargecityinthePacificNorthwest.Thecompanyownedlandwithaccesstoarailroadsiding,andfourlargestoragebuildingshadbeenerectedonthisland.Thecompany’soperationswerelimitedtotheretaildistributionoflumberproductsinthelocalarea.Typicalproductsincludedplywoodmoldingsandsashanddoorproducts.Quantitydiscountsandcredittermsofnet30daysonopenaccountwereusuallyofferedtocustomers.Salesvolumehadbeenbuiltuplargelyonthebasisofsuccessfulpricecompetition,madepossiblebycarefulcontrolofoperatingexpensesandbyquantitypurchasesofmaterialsatsubstantialdiscounts.Mostofthemoldingsandsashanddoorproducts,whichconstitutedsignificantitemsofsales,wereusedforrepairwork.About55%oftotalsalesweremadeinthesixmonthsfromAprilthroughSeptember.Annualsalesof$2,921,000in1993,$3,477,000in1994,and$4,519,000in1995yieldedaftertaxprofitsof$60,000in1993,$68,000in1994,and$77,000in1995.297-028ClarksonLumberCompany2Operatingstatementsfortheyears1993-1995andforthethreemonthsendingMarch31,1996aregiveninExhibit1.Mr.Clarksonwasanenergeticman,49yearsofage,whoworkedlonghoursonthejob.Hewashelpedbyanassistant,whointhewordsoftheinvestigatoroftheNorthrupNationalBank,“hasbeendoingandcandoabouteverythingthatMr.Clarksondoesintheorganization.”Otheremployeesnumbered15inearly1996,8ofwhomworkedintheyardanddrovetrucks,and7ofwhomassistedintheofficeandinsales.Aspartofitscustomaryinvestigationofprospectiveborrowers,theNorthrupNationalBanksentinquiriesconcerningMr.Clarksontoanumberoffirmsthathadbusinessdealingswithhim.Themanagerofoneofhislargesuppliers,theBarkerCompany,wroteinanswer:Theconservativeoperationofhisbusinessappealstous.Hehasnotwastedhismoneyindisproportionateplantinvestment.Hisoperatingexpensesareaslowastheycouldpossiblybe.Hehaspersonalcontrolovereveryfeatureofhisbusiness,andhepossessessoundjudgmentandawillingnesstoworkharderthananyoneIhaveeverknown.This,withagoodpersonality,giveshimagoodturnover;andfrommypersonalexperienceinwatchinghimwork,Iknowthathekeepsclosecheckonhisowncredits.Alltheothertradelettersreceivedbythebankboreoutthisopinion.Inadditiontoowningthelumberbusiness,whichwashismajorsourceofincome,Mr.Clarksonheldjointlywithhiswife,anequityintheirhome.Thehousehadcost$72,000tobuildin1979andwasmortgagedfor$38,000.Healsohelda$70,000lifeinsurancepolicy,payabletoMrs.Clarkson.Mrs.Clarksonownedindependentlyahalfinterestinahouseworthabout$85,000.Otherwise,theyhadnosizablepersonalinvestments.Thebankgaveparticularattentiontothedebtpositionandcurrentratioofthebusiness.Itnotedthereadymarketforthecompany’sproductsatalltimesandthefactthatsalesprospectswerefavorable.Thebank’sinvestigatorreported:“Salesareexpectedtoreach$5.5millionin1996andmayexceedthislevelifpricesoflumbershouldrisesubstantiallyinthenearfuture.”Ontheotherhand,itwasrecognizedthatageneraleconomicdownturnmightslowdowntherateofincr