SMARTTOOL, INC. A CASE STUDY G. Ed McCormack, Associate Professor Berea College, Berea, Kentucky Elmer L. Parlier, Vice President of Investments Kentucky Highlands Investment Corp., London, Kentucky BACKGROUND Eb Hammer is a full time tenured associate professor at East Central College in the mid-south. A licensed CPA and member of the AICPA, he also has a small accounting practice registered with the State Board of Accountancy. He conducts this practice, undergoing peer review etc.; in order to keep his hand in public practice. He enjoys the work and feels it energizes his teaching. In 1985, an area non-profit investment company (NFP) engaged Eb to evaluate the investment poten- tial of a small but growing tool and die company who had approached it for financing. The company, SmartTool, Inc. appeared to offer good investment potential because it had established a customer base in the automotive industry, which had began a substantial migration into the southern United States in the region near SmartTool's plant. SmartTool had begun operations about five years earlier as a part time moonlighting operation by three toolmakers, a design engineer, and a professor of industrial arts at a nearby regional university. It had grown to a full time operation for the toolmakers and design engineer and in 1984 had generated $450,000 in revenues. Doug Bays, the entrepreneur who would ultimately become the CEO and largest stockholder, had wisely encouraged the others to take equity positions to provide the company's initial round of financing. As a result, in 1985 the company still had relatively little debt and was a profitable company with plenty of borrowing capacity to finance additional growth. NFP had been contacted by SmartTool to finance the purchase of a wire EDM machine, a sophisti- cated CNC (computer numerical controlled) metal cutting machine costing $200,000. Commercial banks were not interested in financing the purchase because of a pending law suit against the company. Eb's investigation revealed that residents of a sub-division adjacent to SmartTool's plant, alleging the company had misrepresented its intended use of the land, had brought the lawsuit. Eb concluded the suit had no merit (later at trial SmartTool prevailed) and, based on that and other work he made a favorable recom- mendation to NFP, who decided to finance the purchase of the wire EDM. The purchase of this technology enabled the company to pursue larger, more profitable jobs, and set an aggressive pattern of growth that would continue for years.