Cartwright Lumber

Cartwright Lumber Company

I.Company Background & Situation

Cartwright lumber company was located in a suburb of a large city in the Pacific Northwest; its operations were limited to the retail distribution of lumber products in the local area. In 1994, Cartwright Lumber Company was established as a partnership by Mark Cartwright and his brother-in-law Henry Stark. However, in 2001, Cartwright brought out Henry’s interest for $105,000 and incorporated the company. About 55% of the total sales of Cartwright Lumber Company were made in the six months from April through September. There were no sales representative; orders were taken exclusively over telephone. Sales volume had been largely on the basis of successful price competition, made possible by careful control of operating expenses and by quantity purchases of material at substantial discounts. Besides, good relationship with suppliers and high loyalty of employees contributed to its success. Cartwright Lumber Company’s financial status was promising; from 2001 to 2004, they experienced an average sales increase rate of about 29.7% yearly. However, debt existed. In order to buy off Stark’s interest, Cartwright got a loan of $70,000 in late 2001; the loan was secured by land and buildings, carried an interest rate of 11%, and was repayable in quarterly installments at the rate of $7,000 a year over the next 10 years. During the last two years, Cartwright Lumber Company was short for funds arising from the purchase of Stark’s interest in the business and the additional investment in working capital associated with the company’s increasing sale volume. The tentative discussions between Northrop Bank and Cartwright Lumber Company had been about a revolving secured 90-day note not to exceed $465,000. Interest would be set on a floating-rate basis, which was about 10.5% under conditions in effect in early 2004. The problems were, how much should Cartwright borrow, should Northrop Bank approve the loan?...