Case 13-6 Butler Lumber Company* After a rapid growth in its business during recent years, the Butler Lumber Company in the spring of 2011 anticipated a further substantial increase in sales. Despite good profits, the company had experienced a shortage of cash and had found it necessary to increase its borrowing from the Suburban National Bank to $247,000 in the spring of 2011. The maximum loan that Suburban National would make to any one borrower was $250,000, and Butler had been able to stay within this limit only by relying very heavily on trade credit. In addition, Suburban was now asking that Butler secure the loan with its real property. Mark Butler, sole owner and president of the Butler Lumber Company, was therefore looking elsewhere for a new banking relationship where he would be able to negotiate a larger and unsecured loan. Butler had recently been introduced by a friend to George Dodge, an officer of a much larger bank, the Northrop National Bank. The two men had tentatively discussed the possibility that the Northrop Bank might extend a line of credit to Butler Lumber up to a maximum amount of $465,000. Butler thought that a loan of this size would more than meet his foreseeable needs, but he was eager for the flexibility that a line of credit of this size would provide. After this discussion, Dodge had arranged for the credit department of the Northrop National Bank to investigate Mark Butler and his company. The Butler Lumber Company had been founded in 2001 as a partnership by Mark Butler and his brother-in-law, Henry Stark. In 2008 Butler bought out Stark’s interest for $105,000 and incorporated the business. Stark had taken a note for $105,000, to be paid off in 2009; to give Butler time to arrange for the financing necessary to make the payment of $105,000 to him. The major portion of the funds needed for this payment was raised by a loan of $70,000, negotiated in late 2008. This 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. The business was located in a growing suburb of a large city in the Pacific Northwest. The company owned land with access to a railroad siding, and two 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 had been built up largely on the basis of successful price competition, made possible by careful control of operating expensesand by quantity purchases of materials at substantial discounts. Much of the moldings and sash and door products, which constituted significant items of sales, were used for repair work. About 55% of total sales were made in the six months from April through September. No sales representatives were employed, orders being taken exclusively over the telephone. Annual sales of $1,697,000 in 2008, $2,013,000 in 2009, and $2,694,000 in 2010 yielded after-tax profits of $31,000 in 2008, $34,000 in 2009, and $44,000 in 2010.1 Operating statements for yap s 2S-2010 and for the three months ending March 31, 201 tare given in Exhibit .6EXHIBIT 1 Operating Statements for Years Ending December 31, 2008-2010, and for First Quarter 2011 (thousands of dollars) Page 399 [ First Quarter 2008 2009 2010 2011 Net sales 11,697 12,013 $2,694 $ 7181 Cost of goods sold Beginning Inventory 183 239 326 418 Purchases 1,278 1,524 2,042 660 11,441 11,763 $2,368 $1,078 Ending Inventory 239 326 418 556 Total cost of goods sold $1,222 11,437 11,950 $ 522 Gross profit 475 576 744 196 Operating expense’ 425 515 658 175 Interest expense 13 20 33 10 Net Income before taxes $ 37 $ 41 $ 53 $ 11 Provision for Income taxes 6 7 9 2 Net Income $ 31 $ 34 1 44 1 9• In die fins quarter of 2010 We were S6913.000 mad Net income ins $7,000. .0pgraby opmws what • wa veiny fat Mr. Bud. of 575.000 n 2005. $115.000 in 2009. 595.000 in 2010. and S22,000 in Mr Bab Jo ma nd sonic olds N.Y.. en.bb mkee yo.,mndpnvat heldIn puller of 2(111Mark Butler 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 of the Northrop National Bank, “has been doing and can do about everything that Butler does in the organization.” Other employees numbered 10 in early 2011, 5 of whom worked in the yard and drove trucks and 5 of whom assisted in the office and in sales As part of its customary investigation of prospective borrowers, the Northrop National Bank sent inquiries conceming Mark Butler 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,
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