Questions and Answers, Global Cash Flow Webcast, March 23, 2011
Q: What is the $4.1MM capital contribution to Sequoia properties in 2007? Cash or property?
A: On the surface, it definitely looks like a capital contribution from the owner and, therefore, a cash inflow from the owner to the company. But Footnote 4 to the Sequoia financial statements clearly indicates that the company reclassified a loan from the owner in the amount of $4,112,432 as equity. There was no cash injection in 2007. The cash injection took place when the loan was made at some point in the past.
Q: What is the instructor's name?
A: The instructor’s name is Fred Robie, a former banker with 30 years of experience in commercial lending and credit administration.
Q: The packet does not show 2008 financial statements.
A: You are correct. We have not included 2008 financial statements for any of the companies. However, we made the following explicit assumptions with respect to 2008 projections:
Q: What is the source of the $1,650,000 down payment for the proposed acquisition? Additional debt? Capital injection? What is the impact on cash flow? Where will Fresno Properties or Fritz Schumacher get the cash to put down on the proposed transaction?
A: These are excellent questions. In addition to the severe cash flow pressures on this combined set of companies in 2008 (accrued expenses, accounts payable, and a significant increase in current maturities of long term debt), Fresno Properties and/or Fritz Schumacher must make a sizable cash down payment on the $4,750,000 acquisition price.
The source of the down payment is highly uncertain, given the severe 2008 cash requirements on the companies as well as the fact that Schumacher has no liquidity on his personal balance sheet. Consequently, it seems the only possible source of cash would be additional interest-bearing debt, perhaps debt raised by one of the related companies, such as Modesto Services, and then loaned to Fresno Properties for the down payment. Whether a related company such as Modesto Services could, in fact, raise additional debt is an entirely different issue in view of the collective cash flow pressures facing the companies and their owner.
Q: On Fresno Properties' 2007 financial statements, intangible assets declined significantly as did related party notes. Can we assume that these assets were, in effect, transferred to Modesto and Valley Construction?
A: With respect to the related party notes, Due from Related Parties on Fresno Properties’ balance sheet actually increased by $212,150 on a net basis, primarily as a result of a loan made to Sequoia Properties. By the same token, Sequoia Properties also loaned $309,644 to Fresno Properties. The result of these transactions is a cash inflow to Fresno Properties in 2007 in the amount of $97,494 ($309,644 cash inflow minus $212,150 cash outflow. Movements in the related party balances reflect cash payments or cash receipts between Fresno Properties and other related parties.
With respect to Fresno Properties’ intangible assets, it appears that preliminary site costs of $1,128,094 were transferred to Sequoia Properties, since Sequoia Properties experienced a massive $4,620,137 increase in preliminary site costs in 2007. The balance sheets for Modesto Services and Clovis Supply record no preliminary site costs. They do record intangible assets, but those assets increased only slightly in 2007O. Therefore, it appears that Fresno Properties did, indeed, transfer the vast majority of its intangible assets in the form of preliminary site costs to Sequoia Properties.
However, we can only speculate until we ask either the accountant or Fritz Schumacher to provide the necessary clarification.
Q: One of our customers has an S-Corp with an EOY date 11/30, could that be right?
A: With very few exceptions, a Subchapter S corporation must use a December 31 year end because the income taxes associated with the company are the responsibility of the owner(s), who file their tax returns as of April 15 with a December 31 tax year requirement. However, a Subchapter S corporation – or a partnership or limited liability company – can petition the tax authorities and request a fiscal year-end date different from December 31 if there are significant reasons for doing so. In some instances, a non December 31 fiscal year-end date may represent a date in transition as a Subchapter C corporation, for example, is reorganized as a Subchapter S corporation and, in the process, continues to use a non December 31 date for a transition period.
Q: What is the $4.1MM capital contribution to Sequoia properties in 2007? Cash or property?
A: On the surface, it definitely looks like a capital contribution from the owner and, therefore, a cash inflow from the owner to the company. But Footnote 4 to the Sequoia financial statements clearly indicates that the company reclassified a loan from the owner in the amount of $4,112,432 as equity. There was no cash injection in 2007. The cash injection took place when the loan was made at some point in the past.
Q: What is the instructor's name?
A: The instructor’s name is Fred Robie, a former banker with 30 years of experience in commercial lending and credit administration.
Q: The packet does not show 2008 financial statements.
A: You are correct. We have not included 2008 financial statements for any of the companies. However, we made the following explicit assumptions with respect to 2008 projections:
- Assumed 2007 operating results would repeat in 2008 for Clovis Supply, Modesto Services, and Sequoia Properties.
- Used the 2008 operating results for Fresno Properties which were computed during the webcast.
- Assumed Schumacher’s personal cash flow surplus remained unchanged from 2007.
- Updated 2008 debt service to include the proposed acquisition debt.
Q: What is the source of the $1,650,000 down payment for the proposed acquisition? Additional debt? Capital injection? What is the impact on cash flow? Where will Fresno Properties or Fritz Schumacher get the cash to put down on the proposed transaction?
A: These are excellent questions. In addition to the severe cash flow pressures on this combined set of companies in 2008 (accrued expenses, accounts payable, and a significant increase in current maturities of long term debt), Fresno Properties and/or Fritz Schumacher must make a sizable cash down payment on the $4,750,000 acquisition price.
The source of the down payment is highly uncertain, given the severe 2008 cash requirements on the companies as well as the fact that Schumacher has no liquidity on his personal balance sheet. Consequently, it seems the only possible source of cash would be additional interest-bearing debt, perhaps debt raised by one of the related companies, such as Modesto Services, and then loaned to Fresno Properties for the down payment. Whether a related company such as Modesto Services could, in fact, raise additional debt is an entirely different issue in view of the collective cash flow pressures facing the companies and their owner.
Q: On Fresno Properties' 2007 financial statements, intangible assets declined significantly as did related party notes. Can we assume that these assets were, in effect, transferred to Modesto and Valley Construction?
A: With respect to the related party notes, Due from Related Parties on Fresno Properties’ balance sheet actually increased by $212,150 on a net basis, primarily as a result of a loan made to Sequoia Properties. By the same token, Sequoia Properties also loaned $309,644 to Fresno Properties. The result of these transactions is a cash inflow to Fresno Properties in 2007 in the amount of $97,494 ($309,644 cash inflow minus $212,150 cash outflow. Movements in the related party balances reflect cash payments or cash receipts between Fresno Properties and other related parties.
With respect to Fresno Properties’ intangible assets, it appears that preliminary site costs of $1,128,094 were transferred to Sequoia Properties, since Sequoia Properties experienced a massive $4,620,137 increase in preliminary site costs in 2007. The balance sheets for Modesto Services and Clovis Supply record no preliminary site costs. They do record intangible assets, but those assets increased only slightly in 2007O. Therefore, it appears that Fresno Properties did, indeed, transfer the vast majority of its intangible assets in the form of preliminary site costs to Sequoia Properties.
However, we can only speculate until we ask either the accountant or Fritz Schumacher to provide the necessary clarification.
Q: One of our customers has an S-Corp with an EOY date 11/30, could that be right?
A: With very few exceptions, a Subchapter S corporation must use a December 31 year end because the income taxes associated with the company are the responsibility of the owner(s), who file their tax returns as of April 15 with a December 31 tax year requirement. However, a Subchapter S corporation – or a partnership or limited liability company – can petition the tax authorities and request a fiscal year-end date different from December 31 if there are significant reasons for doing so. In some instances, a non December 31 fiscal year-end date may represent a date in transition as a Subchapter C corporation, for example, is reorganized as a Subchapter S corporation and, in the process, continues to use a non December 31 date for a transition period.