Clarkson Lumber Company Experienced Significant Sales Growth

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From 1993 through 1995, Clarkson Lumber Company experienced significant sales growth – 19.0% from 1993 to 1994 and 30.0% between 1994 and 1995. Profitability also increased, but not nearly at the same pace as sales revenue. Net income rose from $60,000 in 1993 to $68,000 in 1994 (a 13.3% increase), to $77,000 in 1995 (13.2% increase). This increase in sales and profitability demanded growth in working capital and fixed assets to finance the growth, creating a need for cash that outpaced free cash flow into the firm. Furthermore, Mr. Clarkson’s buyout payments to Mr. Holtz in 1995 and 1996 only added to the liquidity predicament. Thus, Clarkson was compelled to draw upon his line of credit with Suburban National Bank and begin relying heavily on trade credit, quickly maxing out his bank credit line by the end of 1995.

The financial strength of Clarkson Lumber has deteriorated between 1993 and 1995. Clarkson had a free cash flow to the firm of +$2,000 in 1994, but that dropped to -$159,000 for 1995. EBITDA increased over the period, but not matching the pace of net debt increases; Clarkson’s leverage (Net Debt / EBITDA) was 1.21 in 1993, increasing to 2.31 and 2.95 in 1994 and 1995, respectively. First quarter 1996 statements annualized over the entire year projected leverage to increase to 4.94 by the end of 1996, assuming no credit line cap and no other changes.

The trade discount of 2% provides a very attractive opportunity for Clarkson Lumber to dramatically increase

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