Cartwright Lumber Company
After a rapid growth in its business during recent years, the Cartwright Lumber Company in thespring of 2004 anticipated a further substantial increase in sales. Despite good profits, the companyhad experienced a shortage of cash and had found it necessary to increase its borrowing fromSuburban National Bank to $247,000 in the spring of 2004. The maximum loan that SuburbanNational would make to any one borrower was $250,000, and Cartwright had been able to stay withinthis limit only be relying very heavily on trade credit. In addition, Suburban was now asking thatCartwright secure the loan with its real property. Mark Cartwright, sole owner and president of theCartwright Lumber Company, was therefore looking elsewhere for a new banking relationshipwhere he would be able to negotiate a larger and unsecured loan.
Cartwright had recently been introduced by a friend to George Dodge, an officer of a much largerbank, Northrop National Bank. The two men had tentatively discussed the possibility that NorthropBank might extend a line of credit to Cartwright Lumber up to a maximum amount of $465,000.Cartwright thought that a loan of this size would more than meet his foreseeable needs, but he waseager for the flexibility that a line of credit of this size would provide. After this discussion, Dodgehad arranged for the credit department of Northrop National Bank to investigate Mark Cartwrightand his company.
The Cartwright Lumber Company had been founded in 1994 as a partnership by Mark Cartwrightand his brother-in-law Henry Stark. In 2001 Cartwright bought out Stark’s interest for $105,000 andincorporated the business. Stark had taken a note for $105,000, to be paid off in 2002, to giveCartwright time to arrange for the financing necessary to make the payment of $105,000 to him. Themajor portion of the funds needed for this payment was raised by a loan of $70,000 negotiated in late2001. This loan was secured by land and buildings, carried an interest rate of 11%, and was repayablein quarterly installments at the rate of $7,000 a year over the next 10 years.
The business was located in a growing suburb of a large city in the Pacific Northwest. Thecompany owned land with access to a railroad siding, and two large storage buildings had beenerected on this land. The company’s operations were limited to the retail distribution of lumberproducts in the local area. Typical products included plywood, moldings, and sash and doorproducts. Quantity discounts and credit terms of net 30 days on open account were usually offered tocustomers.
Sales volume had been built up largely on the basis of successful price competition, made possibleby careful control of operating expenses and by quantity purchases of materials at substantialdiscounts. Much of the moldings and sash and door products, which constituted significant items ofsales, were used for repair work. About 55% of total sales were made in the six months from April________________________________________________________________________________________________________________
Professor Thomas R. Piper prepared this case. HBS cases are developed solely as the basis for class discussion. Certain details have beendisguised. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.through September. No sales representatives were employed, orders being taken exclusively over the
telephone. Annual sales of $1,697,000 in 2001, $2,013,000 in 2002, and $2,694,000 in 2003 yielded aftertax profits of $31,000 in 2001, $34,000 in 2002, and $44,000 in 2003.1 (Operating statements for the
years 2001–2003 and for the three months ending March 31, 2004, are given in Exhibit 1.)
Mark Cartwright was an energetic man, 39 years of age, who worked long hours on the job. He
was helped by an assistant who, in the words of the investigator for Northrop National Bank, “has
been doing and can do about everything that Cartwright does in the organization.” Other employees
numbered 10 in early 2004, five of whom worked in the yard and drove trucks and five of whom
assisted in the office and in sales.
As part of its customary investigation of prospective borrowers, Northrop National Bank sent
inquiries concerning Mark Cartwright to a number of firms that had business dealings with him. The
manager of one of his large suppliers, the Barker Company, wrote in answer:
The conservative operation of his business appeals to us. He has not wasted his money in
disproportionate plant investment. His operating expenses are as low as they could possibly
be. He has personal control over every feature of his business and he possesses sound
judgment and a willingness to work harder than anyone I have ever known. This, with a good
personality, gives him a good turnover; and from my personal experience in watching him
work, I know that he keeps close check on his own credits.
All the other trade letters received by the bank bore out this opinion.
In addition to owning the lumber business, which was his major source of income, Cartwright
held jointly with his wife an equity in their home. The house had cost $130,000 to build in 1992 and
was mortgaged for $90,000. He also held a $100,000 life insurance policy, payable to his wife. She
owned independently a half interest in a house worth about $80,000. Otherwise, they had no sizable
The bank gave particular attention to the debt position and current ratio of the business. It noted
the ready market for the company’s products at all times and the fact that sales prospects were
favorable. The bank’s investigator reported: “Sales are expected to reach $3.6 million in 2004 and may
exceed this level if prices of lumber should rise substantially in the near future.” On the other hand, it
was recognized that a general economic downturn might slow down the rate of increase in sales.
Cartwright Lumber’s sales, however, were protected to some degree from fluctuations in new
housing construction because of the relatively high proportion of its repair business. Projections
beyond 2004 were difficult to make, but the prospects appeared good for a continued growth in the
volume of Cartwright Lumber’s business over the foreseeable future.
The bank also noted the rapid increase in Cartwright Lumber’s accounts and notes payable in the
recent past, especially in the spring of 2004. The usual terms of purchase in the trade provided for a
discount of 2% for payments made within 10 days of the invoice date. Accounts were due in 30 days
at the invoice price, but suppliers ordinarily did not object if payments lagged somewhat behind the
due date. During the last two years, Cartwright had taken very few purchase discounts because of
the shortage of funds arising from his purchase of Stark’s interest in the business and the additional
investments in working capital associated with the company’s increasing sales volume. Trade credit
1 Sales in 1999 and 2000 amounted to $778,000 and $1,103,000, respectively; profit data for these years are not comparable with
those of 2001 and later years because of the shift from a partnership to a corporate form of organization. As a corporation,
Cartwright was taxed at the rate of 15% on its first $50,000 of income, 25% on the next $25,000 of income, and 35% on all
additional income above $75,000.
This document is authorized for use only by Kassia Fortuna in 2014 HCMBA FINANCIAL MANAGEMENT taught by
Neil G Cohen from March 2014 to May 2014.
For the exclusive use of K. Fortuna
Cartwright Lumber Company
was seriously extended in the spring of 2004 as Cartwright strove to hold his bank borrowing
within the $250,000 ceiling imposed by Suburban National Bank. (Balance sheets at December 31,
2001–2003, and March 31, 2004, are presented in Exhibit 2.)
The tentative discussions between George Dodge and Mark Cartwright had been about a
revolving secured 90-day note not to exceed $465,000. The specific details of the loan had not been
worked out, but Dodge had explained that the agreement would involve the standard covenants
applying to such a loan. He cited as illustrative provisions the requirement that restrictions on
additional borrowing would be imposed, that the net working capital would have to be maintained
at an agreed-upon level, that additional investments in fixed assets could be made only with the prior
approval of the bank, and that limitations would be placed on withdrawals of funds from the
business by Cartwright. Interest would be set on a floating-rate basis. Dodge indicated that the initial
rate to be paid would be about 10.5% under conditions in effect in early 2004. Both men also
understood that Cartwright would sever his relationship with Suburban National Bank if he entered
into a loan agreement with Northrop National Bank.
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For the exclusive use of K. Fortuna204-126
Cartwright Lumber Company
Exhibit 1 Operating Statements for Years Ending December 31, 2001–2003, and for First Quarter
2004 (thousands of dollars)