January 22, 2014

Q: If Mr. Schumacher has less than 100% on all of the business entities except for Clovis Supply, then, why do we still take 100% of the cash flow under those entities and not pro-rata basis?

A: Our purpose is to identify cash flow available for debt service for each of the business entities and then compile an analysis of global cash flow for the combined companies relative to their combined debt service.  Using less than 100% of the cash flow for each entity would distort the analysis regardless of the ownership structure.  

Mr. Schumacher’s readily available cash resources rather than personal cash flow in excess of his personal debt service and living expenses are included in the final global cash flow analysis.  Note that the readily available cash of any partner or guarantor would also be added to the final global cash flow analysis to present a complete picture.  Partners or joint and several guarantors are contingently liable for all company debt, a fact that drives this comprehensive approach.  

Today’s webcast introduces this approach and a template for use in building the global cash flow.  All owners or guarantors were not included in the calculations in the interest of time and to avoid redundancy in the presentation.  

Q: Why wasn’t the $4,112,432 contribution to Sequoia Properties by Mr. Schumacher addressed in the personal cash flow analysis?

A: The $4,112,432 equity injection, or contribution, was a reclassification of Fritz Schumacher's long term loan from debt to equity per Footnote 4 to the Sequoia Properties’ financial statements.   No cash changed hands during 2007 in conjunction with this conversion of debt to equity.  The entire event was handled through accounting entries only.

You are correct in your comment.  Any cash infusion of this nature would be included in the personal cash flow Statement of the investing owner.  We did examine equity accounts in all entities and there were no cash capital injections 2007.

Q: Why weren’t the balance sheets in the tax returns for Clovis Supply, Fresno Properties, and Modesto Services examined for any changes from year to year in paid in capital or equity injections?

A: A review of Clovis Supply’s, Fresno Properties’, and Modesto Services’ balance sheets, Statements of Cash Flows, and Statements of Retained Earnings or Partnership Capital indicates no paid-in-capital or capital contributions for either 2006 or 2007.  Further, the review of Clovis Supply’s balance sheet indicates no change in the value of their investment in Modesto Services in 2007 of which they acquired an 18% interest in 2003.  

Q: Is 50% the normal ownership threshold to request a Schedule K-1? If ownership is less than that is a Schedule K-1 not needed?

A: The most prudent course of action is to request all Schedules K-1 regardless of ownership shares or ownership position.  A minority owner may be extremely important to a company or partnership because of his or her financial resources, contacts within the industry, business acumen, etc., and, as a result, may benefit from significant loans or distributions from the company or partnership that have no real relationship to the percent of ownership. One never knows until the Schedule K-1 is in hand.

Q: Do you include Section 179 deductions in depreciation expense?

A: No. Do not include Section 179 deductions as company depreciation expense. They are totally separate from company depreciation expense per specific IRS guidelines.  A Section 179 deduction applies only to the tax position of the individual to whom it is granted.  That owner or partner is able to reduce his or her taxable income from the company as reported on the Schedule K-1 and, in turn, included on the owner’s or partner’s Form 1040.

Q: Why did you not consider Luis Castillo in all this analysis since he is 50% owner of two of the companies?

A: We should properly do so. His contribution would be based on his ready cash measured against his amount of personal guarantees.  We chose not to include all owners or guarantors in the global cash flow calculations in the interest of time and to avoid redundancy in the presentation.  

Q: Why are the personal debt obligations of Mr. Schumacher not considered in the global cash flow analysis?

A: We did include those obligations in computing Fritz Schumacher’s surplus after personal debt service.

Recall, however, that we recognized that it is a guarantor’s readily available cash resources that truly define the value a guarantor provides rather than his or her personal cash flow surplus.  Therefore, we substitute a guarantor’s readily available cash resources in place of his or her personal cash flow surplus in arriving at global cash flow. As a result, a guarantor’s personal debt obligations play no direct role in the resulting global cash flow.  

Q: Should 2007 CMLTD for Fresno Properties be $107,491 and not $166,000?

A: The $166,915 we included in Fresno’s 2008 projected debt service calculation is the sum of the 2007 CMLTD of $107,491 and the scheduled principle pay-down on the proposed new term debt during 2008 in the amount of $59,424.  See the commentary presented in Exercise Step 1.

Q: How do you treat taxes on capital gains in relation to personal cash flow?

A: All taxes are picked up in the Cash Taxes Paid section of the personal cash flow statement, which includes capital gains taxes.

Q: Should we always check for changes in paid in capital, as this could possibly be a change in cash.

A: Yes. Always check for changes in equity and satisfy yourself that the change is a cash injection and not a reclassification as was the case with Sequoia Properties.