CLARKSON LUMBER COMPANY

1996 - Anticipated Sales increase

Profit but shortage in cash
Increase borrowing from Suburban National Bank - $399,000 => Bank's Limit is $400K
Clarkson rely heavily on Trade credit which is the credit extended to you by suppliers who let
you buy now and pay later.
Problem: Suburban is asking Mr. Clarkson - provide personal guarantee; need bigger loan
Northrup National Bank: Credit Limit $750K - Advantage: Can avail Trade Discount - improve
profitability

History
Partnership by Clarkson and Holtz in 1981
1994 Holtz was bought out for $200K
Payment of note: Paid off in 1995 and 199 6 with interest rate of 11% and was repayable in semi-
annual installments of $50,000, beginning June 30, 1995.

Company
Located in a growing suburb of a large city in the Pacific Northwest.
The company owned land with access to a railroad siding, and four large storage buildings had
been erected on this land.
The company's operations were limited to the retail distribution of lumber products in the local
area.
Typical products included plywood moldings and sash and door products.
Quantity discounts and credit terms of net 30 days on open account were usually offered to
customers.
Sales volume - price competition => controlled operating expenses & discounted quantity
purchases of materials
About 55% of total sales were made in the six months from April through September. Annual sales
of $2,921,000 in 1993, $3,477,000 in 1994, and $4,519,000 in 1995 yielded after-tax profits of
$60,000 in 1993, $68,000 in 1994, and $77,000 in 1995.

Employees 1996
Mr Clarkson
1 assistant
15 Operations
7 Admin and Sales

Credit Investigation
Large Supplier: Barker Company
o Conservative operations
o Proportionate plant investment
o Low operating expenses
o Personal Control, sound judgment, hard worker, good personality
o Good turnover (employee?)
o Keep close of personal credits
Trade Letters Opinion
o Joint Equity of House with wife
o 1979 House Cost $72K. Mortgage for $38K; worth $85K
o Life Insurance Policy $70
o No other sizable investment

Bank's Attention
o Debt Position
o Current Ratio
o Ready Market for company's products
o Favorable Sales prospects
o Sales are expected to reach $5.5 million in 1996
o May exceed this level if prices of lumber should rise substantially in the near future.
o Recognized that a general economic downturn might slow down the rate of increase in
sales.
o Business protected from fluctuations because of high proportion of its repair business
o Projections beyond 1996: continued growth in the sales volume
o Rapid increase in Clarkson Lumbers accounts and notes payable in 1995 and in the spring of
1996.
o Terms of purchase in the trade provided for a discount of 2% for payments made within 10
days of the invoice date.
o Accounts were due in 30 days at the invoice price, but it is ok suppliers if delayed payment
o Last 2 years, only few purchase discounts due to lack of funds -- purchase of Holtz,
additional investments in working capital associated with the company's increasing sales
volume.
o Serious Trade credit extension in the spring of 1996 - struggled with $400K credit limit from
Suburban National Bank

Northrup Bank Discussion

o Terms of a revolving, secured, 90-day note not to exceed $750,000.
o Provisions: No additional borrowings, agreed level of net working capital; Additional Fixed
Assets Investments need prior approval; Withdrawal of funds limitation for Mr. Clarkson.
o Interest: floating rate at 2' percentage points above the prime rate
o Initial Rate early 1996: approx. 11%
o Cut ties with Suburban