SureCut Shears held fairly sizable deposit balances in its principal banks and had sufficient capital to cover its permanent requirements over the immediate future. The company attempted to produce at an even rate throughout the year in order to accounted as good performance for borrow from bank. Each year during July to December, the company will borrow the capital to support their seasonal sales peak.
In June 1995, David Fischer, treasurer of SureCut Shears, credit $3.5 million from Hudson National Bank (HNB) to support its seasonal working capital and anticipated that loan will completely paid off by December at the same year. Pro forma income statement and balance sheets were shown to support the company request.
Mr. Fischer also request for approximately $1 million funding for the company’s plant modernization program in June 1996. This program is about half completed and it expected to save about $900,000 a year before taxes in manufacturing cost. However, the program required an expenditure of $6 million and estimated to complete by August 1995. In September 1995, $350,000 was requested in addition to the $3.5 million seasonal loan. While in January 1996, SureCuts Shears again request an additional short term loan to support the industry downturn. HNB had agreed with all funding requested by SureCut Shears.
Finally in April 1996, Surecut Shears informed HNB that the company would not be able to pay $1.25 million outstanding short-term loan balance due to the retailing recession and also the company’s inability to liquidate the loan. While agreeing to renew SureCut Shear’s outstanding loan, HNB would first explore if the the modernization program is the cause of SureCut Shears unable to repay its seasonal loan. Various profit and loss statements and balance sheets were examined over the previous 9 months to uncover the reason for the company loan repays inability. SureCut Shears actually did not grow rapidly and needed extra fund to support its unstable sales and the risk of excess inventories during the seasonal sales.
American Home Products Corporation
American Home Products Corporation is a leading company of prescription drugs, packaged drugs, food products, housewares and household products. AHP’s largest and most profitable business is prescription drugs. AHP is almost debt-free balance sheet and growing cash reserves. AHP had its own corporate culture: reticence; frugality and tight financial control; conservatism and risk-aversion; and the firm’s long-standing policy of centralizing complete authority in the chief executive.
Expenditures greater than $500 had to be personally approved by William Laporte. In addition, AHP often avoided risk of R&D and new-product development and introduction in the volatile drug industry. AHP often licensed its new product after other firms’ development or copied competitors’ new products. AHP was more utilized its marketing prowess to promote acquired products and product extensions. Finally, AHP is a management from the top company and their authority was interested in making money for the stockholders and minimizing costs. However, the managerial philosophy performed stable, consistent growth and profitability.
AHP’s sales, earnings, and dividends grew for 29 consecutive years through 1981. AHP’s ROE rose from 24% in 1960s to 30% in 1980s. AHP able to pay almost 60% of its annual earning as dividend and also able to value up its stock price AHP’s P/E ratio fell about 60% during the resignation of Laporte.
Major institutional investors mainly owned AHP’s stock. In addition, AHP was excess liquidity…