BODIE INDUSTRIAL SUPPLY INC

It was late October 2006 when Brad MacDougall, account manager at the Canadian
Commercial Bank (CCB) in Barron, Ontario, reviewed a loan request for
$200,000 from Liz Bodie. As owner of Bodie Industrial Supply Inc. (BIS), a
distributor of commercial-grade tools, parts and equipment, Bodie requested the
long-term loan to cover construction costs associated with a major expansion to
BISs warehouse. BIS was currently operating without a line of credit, and
MacDougall wondered whether the business could generate enough cash to cover
its expenses, including the new loan payments. MacDougall had to be thorough
in his analysis because he knew Bodie was relying on financing from the bank for
the expansion.

COMPANY BACKGROUND

In 2003, Liz Bodie purchased the business from its previous owner and changed the
companys name to reflect its new ownership. Prior to acquiring the business,
Bodie had worked for a variety of different companies, including one of BISs
current metropolitan-based competitors. During those years, it was Bodies longterm ambition to operate her own business. Her first entrepreneurial venture
was a franchised retail hardware store that she operated for several years before
selling it to acquire BIS.

Drawing on her work experience, Bodie expanded BIS into a full-service

distributor of top-line, brand name, new and used certified machine tools,
maintenance parts and related equipment for the construction, utility and
farming markets. The company strove to uphold its reputation as the single
source for all industrial equipment needs. Although BIS conducted business
country-wide, BISs hometown of Barron, approximately 100 kilometres northeast
of a large metropolitan city, was currently the largest and fastest growing industrial
centre in its region with a population of 135,000. BISs customers were primarily
the industrial maintenance departments of medium- to large-sized corporations in
the manufacturing, commercial construction and engineering industries. BIS also
attracted some high- margin retail business from farming communities and summer
cottage trade in the surrounding area.

Bodie was pleased with BISs progress since she had purchased it and had
experienced considerable success in growing sales. The businesss success was
such that in August 2005, BIS purchased its rented facilities when the landlord
offered the property at what Bodie regarded as a very attractive price.
MacDougall had arranged the loan for the land and building purchase. The loan
1
was currently in good standing with all payments up to date. BISs success
continued, and by June 2006, monthly sales volumes averaged more than $200,000.
(See Exhibits 1 to 5 for historical financial data, cash flow statements, and selected
company and industry financial ratios.)

Bodie was also proud of the companys reputation for dependability and integrity.
She believed her success was due largely to the personalized service and
engineering advice she offered BISs customers. Bodie also noted that an important
factor in attracting new customers and building lasting relationships was BISs
success in obtaining exclusive rights to offer the products of some top-line brandname manufacturers. She also believed that maintaining good supplier relations
with those manufacturers who granted BIS exclusivity was a key element to future
success.
THE COMPETITION
Until late 2005, BIS had been the only distributor of machine tools, parts and
equipment in Barron. Minimal competition had come from salespeople operating
from out-of-town warehouses, but in the fall of 2005, a new distributor opened in
downtown Barron.
Bodie believed that the new competitor would compete
directly with only a small portion of her business because of BISs exclusive brand
distribution rights and complete line of specialized products. Additionally, this new
distributor had not yet earned a reputation comparable to that of BIS for dependable
service.

Although not necessarily considered a direct threat, the entrance of big-box retailers
did increase competition among Canadian wholesalers and retailers alike. Big-box
retailers competing within the home improvement, construction and building
maintenance industries, such as Home Depot, RONA and Lowes, opened stores
from 3,500 square metres to 15,000 square metres in size. Not only did these
retailers offer lower prices, but they also provided a wide variety of products for
retail and commercial consumers. At present, there were three major retailers in
Barron with a fourth scheduled to open in the coming months. Although these
retailers did not carry specialized, large and commercial-grade industrial equipment,
they did offer a wide selection of construction supplies typically used by many of
BISs smaller, higher margin accounts. Bodie was still uncertain how and to what
extent mass retailers and wholesalers could influence the business.

Bodie believed a more eminent threat was the rapid growth of Internet-based
selling. Many of BISs competitors now had websites with online ordering and ecommerce capabilities that provided added convenience and quicker service to
customers looking to order general use supplies. Online selling also reduced the
need for customers to do business with a local supplier, potentially vastly
increasing BISs pool of competition. Although BIS did currently have a company
website, it was purely informational.

FINANCIAL PROJECTIONS FOR EXPANSION

Although market information was limited, Bodie thought that BIS had about 35 per
cent of the machine tool and equipment market in Barron and the surrounding
region. Given the existing market potential, she believed sales could not increase
beyond $4 million without expanding BISs geographical market. For the next two
years, she projected sales at $2.8 million for the year ending January 31, 2007, and
$3.2 million for the year ending January 31, 2008.
Bodies major concern was the cramped space in BISs warehouse. She believed
the business could not handle any significant increases in inventory, given its
present facilities. In order to maintain BISs standard of service and delivery,
Bodie wanted to add a warehouse extension, estimated at a cost of $200,000, by
the beginning of November.

If the loan was approved, principal payments would be $40,000 each year,
beginning February 1, 2007, and annual interest payments would be approximately
$13,000 for the first two years. In addition to these new loan payments, the
combined principal payment on the total amount of all existing long-term debt for
fiscal 2007 and 2008 would be $36,528 and $71,924 respectively. The associated
annual interest payments on these outstanding liabilities would be $20,914 for
2007 and $35,528 for 2008. Other items on the statement of earnings would
remain roughly the same percentage of sales as was experienced in 2006.

Bodie believed the days of inventory would not change after the warehouse
expansion, even though sales were expected to increase. She did consider, however,
that increasing inventory levels could present a risk to cashflows if sales did not
increase proportionately. One of Bodies top priorities was to reduce the age of
BISs accounts payables to 60 days before the end of the next fiscal year. If this
was not accomplished, some of BISs exclusive distribution agreements could be
jeopardized. Although Bodie thought BIS could reduce its days of accounts
payables as sales and profits grew, she wondered whether this objective was
attainable within the next year. For this reason, Bodie anticipated that BIS could be
in need of a line of credit to support the increased working capital requirements in
addition to the requested new long-term loan.
THE DECISION

BIS had shown strong growth results within the past three years, but MacDougall
was concerned about providing more financing in addition to the loan the Canadian
Commercial Bank had already extended in August 2005. Furthermore, he was
aware of the pressure BISs preferred suppliers were putting on Bodie to reduce
days of accounts payables. Could BIS support such an aggressive reduction at
this time? Without a short-term source of financing, MacDougall wondered whether
BIS would even be able to generate the cash required to cover its debt payments
over the next few years.