Licensing and Registrations Inc. (LRI) Dan McKinley, a long-time friend, has come to you, CA seeking some advice. The following conversation takes place on Wednesday morning: Dan: Im 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 dont have much experience with this type of thing, and we are hoping you can help us out. CA: Ill try, Dan. Is there anything specific that I can help you with? Dan: 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 egg that we have built up in the past. Steve has prepared and information package for us regarding the history of the business and its potential in the future (Exhibit 1). 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? CA: Sure Dan. How soon do you need an answer? Dan: Steve wants an oral commitment and small deposit by this Friday. I know thats not a lot of time, but I dont 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. CA: No problem, Dan. Well see you on Friday morning. Required: Prepare the report for Dan McKinley. EXHIBIT 1 INFORMATION PACKAGE SUPPLIED BY STEVE DOTY REGARDING THE PROPOSED BUSINESS ACQUISITION September 10, 2011 Mr. Dan McKinley 2500 Devils Advocate Way, Unit 007 Scout Town, ON T0L 1M0 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 INFORMATION PACKAGE SUPPLIED BY STEVE DOTY REGARDING THE PROPOSED BUSINESS ACQUISITION Proposal 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 31, 2011, unaudited financial statements. The proposed closing date is October 1, 2011. Company background In February 2011, the provincial government privatized the services that are now offered by LRI. The government believes that the private sector can distribute the products now offered by LRI more efficiently and with enhanced service to the public at large. LRI was incorporated in November2006 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 LRI is allowed to perform are governed by an agency agreement signed with the provincial government. The agreement gives LRI non-exclusive rights to distribute drivers licenses, lottery licenses, 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. EXHIBIT 1 (continued) INFORMATION PACKAGE SUPPLIED BY STEVE DOTY REGARDING THE PROPOSED BUSINESS ACQUISITION In September 2009, the provincial government temporarily revoked the agency agreement with LRI, 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 Doty on November1, 2009 for $50,000. In addition to the amount paid to Tom Jones, Steve Doty paid a licensing fee of $40,000 to the provincial government for the right to sell the government products. LRI reopened for business on December 1, 2009. Competition In the small town where LRI operates, no other businesses are currently allowed to distribute any of the products being offered by LRI. Expansion opportunities LRI began to register and incorporate businesses for the provincial government in September 2010. These corporate services have been very successful to date. Under the agency agreement, LRI may offer private services in addition to the government services that it provides. Other businesses similar to LRI elsewhere in the province offer additional services in the following areas: Automobile insurance Foreign currency exchange Cheque cashing services The additional services are subjected 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. EXHIBIT 1 (continued) INFORMATION PACKAGE SUPPLIED BY STEVE DOTY REGARDING THE PROPOSED BUSINESS ACQUISITION INCOME STATEMENT For the years ended July 31 (unaudited) Revenues Drivers licences Vehicle registrations Lottery licences (Note 4) Birth certificates Corporate services 2011 $ 50,000 96,000 36,000 13,000 44,000 239,000 2010 (Note 2) $ 44,000 70,000 20,000 8,000 ___-___ 142,000 6,000 52,000 55,500 12,000 25,000 3,200 4,500 158,200 (16,200) (4,050) $(12,150) 2009 $ 64,000 108,000 50,000 16,000 ___-___ 238,000 7,000 52,000 64,000 13,000 26,000 23,000 5,000 190,000 48,000 11,600 $ 36,400 2008 $ 63,000 105,000 54,000 17,000 ___-___ 239,000 5,000 52,000 63,000 13,400 27,000 26,000 6,000 192,400 46,600 7,200 $ 39,400 2007 (Note 1) $ 44,000 76,000 36,000 12,000 ___-___ 168,000 8,000 52,000 66,000 11,200 28,000 21,500 9,000 197,700 (27,700) ____-___ $(27,700) Operating expenses Advertising 5,000 Rent (Note 5) 40,000 Wages and benefits (Note 6) 68,000 Supplies 10,000 Amortization 24,000 Meals and entertainment Interest expense Income (loss) before taxes Income taxes Net income (loss) 3,000 4,000 154,000 85,000 20,200 $ 64,800 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 2007 2008 2009 2010 2011 2011 $ 83,000 2,400 7,000 116,450 40,000 $248,850 $ 55,000 95,000 48,000 100 50,750 $248,850 $0 $0 $10,000 $20,000 $20,000 2009 Assets $ 93,000 1,000 5,600 90,600 ___-___ $190,200 2008 $ 69,000 2,400 6,000 83,400 ____-___ $160,800 $ 5,000 72,000 72,000 100 11,700 $160,800 2007 $ 76,000 1,400 5,000 90,000 ____-___ $172,400 $ 8,000 72,000 120,000 100 (27,700) $172,400 EXHIBIT 1 (continued) INFORMATION PACKAGE SUPPLIED BY STEVE DOTY REGARDING THE PROPOSED BUSINESS ACQUISITION BALANCE SHEET As at July 31 (unaudited) 2010 $ 96,000 1,600 6,400 68,050 40,000 $212,050 Liabilities and equity $ 6,000 144,000 56,000 100 5,950 $212,050 $ 7,000 81,000 64,000 100 38,100 $190,200 EXHIBIT 1 (continued) INFORMATION PACKAGE SUPPLIED BY STEVE DOTY REGARDING THE PROPOSED BUSINESS ACQUISITION Notes 1. LRI opened for business on January 1, 2007. 2. LRI was closed from September 15, 2009, through November 30, 2009, due to the provincial governments decision to temporarily revoke the agency agreement with Tom Jones, the former owner of LRI. 3. Customers who want to purchase drivers licences, birth certificates and vehicle registrations must visit LRI and present the required forms and documentation. LRI then issues the documents requested by the customers. Customers make their payment (cash, cheque or debit card) directly to LRI. LRI then remits the money, net of its fee, to the government. 4. 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. LRI records the revenue when cash is received. The customers must then visit LRI 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 government must do a background check before the licence can be issued. 5. During fiscal 2010 LRI moved from its old location to a new, comparable location with lower rent. LRI 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 2016. The new long-term lease in effect at the new location expires on July 31, 2021. 6. Wages and benefits include only amounts for the staff at LRI. No salary has ever been received by Tom Jones or Steve Doty. 7. At July 31, 2011, the capital assets, at cost, on the balance sheet consist of the following: Digital imaging system Computer equipment Furniture and equipment Leasehold improvements old location Leasehold improvements new location Total capital assets costs Less: accumulated amortization Total capital assets - net $ 30,000 44,000 20,000 65,000 38,000 197,000 (80,550) $116,450