352case - '« 4,tif.b°“ Dan McKinley, a long-time...

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Unformatted text preview: '« 4,tif.b°“ Dan McKinley, a long-time friend, has come to you, CA, seeking some advice. 70-352 Case #2 The foll0wing conversation takes place on Wednesday morning: Dan: CA: Dan: CA: Dan: CA: “l'rn thinking of retiring. In fact, my wife, Pam, and I are looking for a small business that we can manage and from which we can earn $50,000 per year to live comfortably. But we don’t have much experience with this type of thing, and we are hoping you can help us out.” ‘ “I’ll try, Dan. Is there anything specific that I can help you with?” “Yes, there is. We have been approached by Steve Doty, who wants to sell his business and was wondering if we were interested. It looks like a good little business for my wife and me and something that we could earn a living from until we retire for good in about ten years’ time. We just want the business to generate enough money so that we can live comfortably and still maintain the retirement nest eg that we have built up in the past. Steve has prepared an information package for us regarding the history of the business and its potential in the future (Exhibit I). Can you please let us know if you think it is a good business and, if so, give us your opinion on whether we should buy it?” “Sure, Dan. How soon do you need an answer?” “Steve wants an oral commitment and a small deposit by this Friday. I know that's not a lot of time, but I don’t need anything fancy - just a report letting us know what you think. After that point he says that we could review his records and contracts in more detail and have a closer look at the business and then finalize the terms of the deal,” “No problem, Dan. We'll see you on Friday morning.” Reguired: Prepare the report for Dan McKinley. 70—352 Case #2 W (continued) EXHIB INFORM/1 HON PACKAGE SUPPLIED BY STEVE DOT)” REGARDIN TH PR POS D BUSIN AC 1 September 10, 2001 Mr. Dan McKinley 2500 Devil’s Advocate Way, Unit 007 Scout Town, Canada TOL IMO Dear Dan: I have attached an information package for you regarding the investment opportunity that we discussed on the phone earlier. I am eager to make a deal as quickly as possible. If you are interested, I would be happy to hold the deal for you with a deposit of $10,000. As I told you, I have also sent the package to several other parties. If you are interested and provide me with the deposit as noted above, I will assume that we have a deal in principle. We can then work out the details over the next few weeks. I look forward to hearing from you soon. Regards, Steve Doty IQ 70—352 Case #2 orgasms; (continued) EXHIBIT I continued INFORM4 TION PACKAGE SUPPLIED BY STEVE DUTY RE A N TH R SE BUSINES A U SIT] P ro posal Sale of 100% of the shares owned by Steve Doty in “Licensing and Registrations Inc.” (LRI). The sale price for the shares will be four times net income before taxes based on the fiscal July 3 l, 2001 unaudited financial statements. The proposed closing date is October l, 200). Company background In February 1991, the provincial government privatized the services that are now offered by LR]. The government believes that the private sector can distribute the products now ofl'ered by LRI more efficiently and with enhanced service to the public at large. LR] was incorporated in November 1996 by Tom Jones. LRI acts as an agency for the provincial government and distributes drivers’ licences, lottery licences, birth certificates and vehicle registrations for the provincial government. Essentially, LRI collects fees from the general public and remits the amounts that it collects to the provincial government. For these services, LRI earns income from the government based on the number of transactions that it performs. The services that LR] is allowed to perform are g0verned by an agency agreement signed with the provincial government. The agreement gives LR! nonexclusive rights to distribute drivers’ licencas. lottery licences, and birth certificates as well as to register vehicles in the small town in which LRI is located. The agreement specifies where these services can be offered and specifies the fees that may be charged for these services. In September 1999, the provincial government temporarily revoked the agency agreement with LR], citing irregularities by Tom Jones and objecting to his management practices. The business was closed, and Tom Jones was given 60 days to sell the business or the provincial agency agreement would be permanently revoked. Tom Jones sold the shares of LRI to Steve Dory on November l, 1999, for $50,000. In addition to the amount paid to Tom Jones, Steve Dory paid a licensing fee of $40,000 to the provincial g0vernrnent for the right to sell the government products. LRI reopened for business on December l, £999. Lu 70-352 Case #2 W (continued) EXHIBIT I continued [NFOWTIONPACMGE SUPPLIED BYSTEVE DOTY RE A IN TH B ISITIO Competition In the small town where LR] operates, no other businesses are currently allowed to distribute any of the products being offered by LRI. Expansion opportunities LR] began to register and incorporate businesses for the provincial government in September 2000. These corporate services have been very successful to date. Under the agency agreement, LR] may offer private services in addition to the government services that it provides. Other businesses similar to LR] elsewhere in the province offer additional services in the following areas: 0 Automobile insurance 0 Foreign currency exchange - Cheque cashing services The additional services are subject to the approval of the provincial government. Currently, LRI does not offer any of these services to the public. However, these services generate annual gross revenues of $30,000 to $60,000 in towns of similar size. 70-352 Case #2 9mm (continued) EXHIBIT I continued INFORM T ION PACKAGE SUPPLIED BY STEVE DOTY REGARDING T HE PRO 0 S ES A U18 1 N INCOME STATEMENT For the rear; endeg July 21 (unaudited) 20 2000 1929 1 929 1997 (Note 2) (Note 1) Revenues Drivers’ licences 3 50,000 3 44,000 3 64,000 5 63,000 5 44,000 Vehicle registrations 96,000 70,000 108,000 105,000 76,000 Lottery licences (Note 4) 36,000 20,000 50,000 54,000 36,000 1311111 certificates 13,000 8,000 16,000 17,000 12,000 Corporate services 44,099 - - —— — 239,0m 142,099 238,090 299,009 169,999 Operating expenses Advertising 5,000 6,000 7,000 5,000 8,000 Rent (Note 5) 40,000 52,000 52,000 52,000 52,000 Wages and benefits (Note 6) 68,000 55,500 64,000 63,000 66,000 Supplies 10,000 12,000 13,000 13,400 1 1,200 Amortization 24,000 25,000 26,000 27,000 23,000 Meals and entertainment 3,000 3,200 23,000 26,000 21,500 Interest expense 4,009 4,500 5,009 6,909 2,009 154,999 158,200 190,009 192,409 195,700 Income (loss) before taxes 85,000 (16,200) 48,000 46,600 (27,700) Income taxes 20,200 (4,050) 1 1,609 7,209 - Netincomcfloss) W W) W 3.224110 $121100) 1.11 70—352 Case #2 mm; (continued) EXHIBIT 1 continued INFORM TION PACKAGE SUPPLIED BY STEVE DOTY REGARD! Cash Miscellaneous receivables Prepaid expenses Capital assets (Note 7) Licensing fee Accounts payable Government payables (Note 3) Long-term bank debt Share capital Retained earnings (deficit) Dividends paid 1997 1998 1999 2000 2001 R POSED BUS ES AC UIS BALANCE SHEET .4: at Jab; 21 (unaudited) 200 2000 1999 Assegg 3 83,000 S 96,000 5 93,000 2,400 1,600 1,000 7,000 6,400 5,600 1 26,450 68,050 90,600 40,000 40,000 ~ $211.00 $1212.03! ‘ 5.122.220 Liabilitie ande i 5 55,000 S 6,000 S 7,000 95,000 144,000 81,000 48,000 56,000 64,000 100 100 100 50,759 5,950 38.100 W $212.03! 51.129290 $0 $0 $10,000 $20,000 $20,000 11/ 199 .1221. 3 69,000 3 76,000 2,400 1,400 6,000 5,000 33,400 90,000 1.1mm $112399 3 5,000 5 8,000 72,000 72,000 72,000 120,000 100 100 11,700 (27,700) 11.69.3912 3112.529 70-352 Case #2 mamas (continued) N EXHIB continued INF ORMA T ION PACKAGE S UPPIJED BY STEVE DOT? REGARDING TH PR OSE BUSINES AC UISITI 0‘28: LRI opened for business on January 1, 1997. LRJ was closed from September 15, 1999, through Nevember 30, 1999, due to the provincial govemment’s decision to temporarily revoke the agency agreement with Tom Jones, the former owner of LRI. Customers who want to purchase driver’s licences, birth certificates and vehicle registrations must visit LRI and present the required forms and documentation. LR] then issues the documents requested by the customers. Customers make their payments (cash, cheque or debit card) directly to LR]. LR] then remits the money, net of its fee, to the government. Lottery licences are issued for $500 per licence. LRI sells these licences through its web site only. The customers provide required information on-line and use their credit card to pay for their lottery licence on—line. LR] records the revenue when cash is received. The customers must then visit LR! in person (usually months after they have paid for their licence) to sign documents and receive their lottery licence. The delay in receiving the licence is because the govemment must do a background check before the licence can be issued. During fiscal 2000 LRJ moved from its old location to a new, comparable location with lower rent. LR! sub~leased its old location for the same amount that it was paying, and therefore the net rent is zero for the old location. The lease for the old location expires in 2006. The new long-term lease in effect at the new location expires on July 31, 2011. Wages and benefits include only amounts for the staff at LR]. No salary has ever been received by Tom Jones or Steve Doty. At July 31, 2001, the capital assets, at cost, on the balance sheet consist of the following: Digital imaging system 3 30,000 Computer equipment 44,000 Furniture and equipment 20,000 Leasehold improvements —— old location 65,000 Leasehold improvements -— new location 38,000 Total capital assets - costs 197,000 Less: accumulated amortization (80,§50) Total capital assets -— net w ...
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352case - '« 4,tif.b°“ Dan McKinley, a long-time...

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