what kind of arrangement is this disposal?
Case 03-04 Looking For Some Winners Winning Big (WB, our client), a public company, operates casinos and racetracks, and produces and sells gaming machines. WB has signed an agreement to enter into a transaction with Bugsy Siegel, a shareholder owning 10 million shares of WB common stock (40% of the common stock outstanding), whereby WB will do the following: 1) Repurchase 8 million common shares of WB from Bugsy for $35 per share, financing the transaction with a combination of bank debt and publicly issued bonds, and 2) Exchange for the remaining 2 million common shares of WB owned by Bugsy (also valued at $35 per share) both (a) 100% of the stock of Paradise City (PC), a holding company purchased one year ago by WB, that operates a racetrack and casino, and (b) WB's 25% interest in Trifecta (T), a racetrack leasing company which receives rentals primarily from racetrack operators. WB's interest in T represents its only interest in racetrack leasing companies. At April 30, 2000, the book value of PC's racetrack and casino (including allocated goodwill of $30 million and intercompany payables of $3 million) was $45 million, and the book value of WB's investment in T was approximately S4 million. Fees for investment bank advisory services, faimess opinions, accountants, attorneys, and printers allocated to the exchange are estimated to total S1 million. Because WB will receive consideration of 2 million shares valued at $35 per share in the agreement (the market price of the stock at the time an agreement in principle between the parties was reached). subtracting out the book values of the net assets of PC and the investment in T, as well as the related fees, results in a pre-tax book gain of approximately $20 million. The net assets included in the exchange for the 2 million shares of WB stock represent a portion of WB's "Gaming Operations" segment as reported in the footnotes to WB's financial statements. Shareholder and regulatory approval for the transfer of the racetrack and casino have not yet been attained; however, such procedures are usually perfunctory WB maintains a March 31 year-end. The exchange agreement was signed in May 2000, subsequent to WB's year-end, but prior to the filing of its year-end financial statements. Required: Should WB record the disposal of 100% of PC and or 25% of T as a discontinued operation? Should WB halt depreciation and amortization of its assets involved in the transaction, or should it continue to depreciate and amortize those assets? Caigh 3001 Deine Descent LLC All Rights Reserved Case 03-04 Looking For Some Winners Winning Big (WB, our client), a public company, operates casinos and racetracks, and produces and sells gaming machines. WB has signed an agreement to enter into a transaction with Bugsy Siegel, a shareholder owning 10 million shares of WB common stock (40% of the common stock outstanding), whereby WB will do the following: 1) Repurchase 8 million common shares of WB from Bugsy for $35 per share, financing the transaction with a combination of bank debt and publicly issued bonds, and 2) Exchange for the remaining 2 million common shares of WB owned by Bugsy (also valued at $35 per share) both (a) 100% of the stock of Paradise City (PC), a holding company purchased one year ago by WB, that operates a racetrack and casino, and (b) WB's 25% interest in Trifecta (T), a racetrack leasing company which receives rentals primarily from racetrack operators. WB's interest in T represents its only interest in racetrack leasing companies. At April 30, 2000, the book value of PC's racetrack and casino (including allocated goodwill of $30 million and intercompany payables of $3 million) was $45 million, and the book value of WB's investment in T was approximately S4 million. Fees for investment bank advisory services, faimess opinions, accountants, attorneys, and printers allocated to the exchange are estimated to total S1 million. Because WB will receive consideration of 2 million shares valued at $35 per share in the agreement (the market price of the stock at the time an agreement in principle between the parties was reached). subtracting out the book values of the net assets of PC and the investment in T, as well as the related fees, results in a pre-tax book gain of approximately $20 million. The net assets included in the exchange for the 2 million shares of WB stock represent a portion of WB's "Gaming Operations" segment as reported in the footnotes to WB's financial statements. Shareholder and regulatory approval for the transfer of the racetrack and casino have not yet been attained; however, such procedures are usually perfunctory WB maintains a March 31 year-end. The exchange agreement was signed in May 2000, subsequent to WB's year-end, but prior to the filing of its year-end financial statements. Required: Should WB record the disposal of 100% of PC and or 25% of T as a discontinued operation? Should WB halt depreciation and amortization of its assets involved in the transaction, or should it continue to depreciate and amortize those assets? Caigh 3001 Deine Descent LLC All Rights Reserved
