I ntroduction

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 long-term 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. Al though RIS conducted business country-
wide. BISs home town Barron, approximately 100 kilometers northeast of a large metropolitan city, was currently the largest
and fastest growing industrial center 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
was currently in good standing with all payments up to date.1 BISs success continued, and by June 2006, monthly sales volumes
averaged more than $200,000. (See Exhibits 1-5 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 brand- name 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 en trance 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 meters to 15,000 square
meters in size. Not only did these retailers offer lower prices, but they also provided a wide variety of products or retail and
commercial consumers. At present, there were three major retailers in Barton with a fourth scheduled to open in the coining
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 e-commerce 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 anti-equipment
market in J3arron 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 200S would be $36,528 and $71,924
respectively. The associated annual interest payments on these outstanding liabilities would be $20,9l4 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 cash flows 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 (or 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.