Wednesday 27 July 2011 (4 hours) CASE STUDY CANDIDATE NUMBER DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO When instructed: a b check that your question paper contains all the required pages The Institute’s consecutive page numbering may be found under the base line at the foot of each page; enter your candidate number in the box provided above Number each page of your answer consecutively using the space provided at the top right of each sheet Ensure that your candidate number is written on each page of your answer After the instruction to stop writing at the end of the paper, you will be given five minutes to assemble your answer in this folder Fasten your complete script inside this folder using the hole in the back page and the tag provided Do not include your question paper in the folder Answer folders and examination stationery, used or unused, must not be removed from the Examination Hall Question papers may, however, be retained by candidates Your answer must be submitted on the paper provided by the ICAEW in the Examination Hall Any pre-prepared papers, or papers comprising annotated exhibits from the case material, included in your answer WILL NOT be marked by the examiners ICAEW USE ONLY © The Institute of Chartered Accountants in England and Wales 2011 147917 BLANK PAGE List of exhibits The following exhibits were included in the material provided as Advance Information: About you (Ossie Fordham), your employer (Rosslyn Chartered Accountants) and your client (Watchwell Limited) The UK security industry: Background Manned guarding: The business model (Industry briefing document) All about Watchwell Limited (WW) Watchwell Limited board briefing: Business review Watchwell Limited: Management accounts for the year ended 30 June 2010 Watchwell Limited: Business plan Briefing note: Employment issues in manned security (Rosslyn Chartered Accountants – HR Advisory Department) Regulation: The Security Industry Authority (SIA) 10 Watchwell Limited: Tenders 11 Watchwell Limited: Example acquisition appraisal – Tyro Guards 12 Press articles The following items are newly provided: 13 Email dated 27 July 2011 from Alfred Vesey to you: Watchwell Limited (WW) 14 Watchwell Limited: Management accounts for the year ended 30 June 2011 15 Email dated 25 July 2011 from Tom Mitchell to Alfred Vesey: Acquisition target – Mustang 16 Letter dated 21 July 2011 from Corey Thwaites (PQR) to Tom Mitchell (WW): Tender to become sole security provider to combined Funtimes / PQR business 17 Funtimes – where has it come from? (‘Music For Today’ magazine, July 2011) ICAEW/CS/J11 of 15 BLANK PAGE ICAEW/CS/J11 of 15 WATCHWELL LIMITED: CASE STUDY REQUIREMENT You are Ossie Fordham, a final-year trainee Chartered Accountant working for Rosslyn Chartered Accountants, a firm based in Weymouth, a town on the south coast of England You work closely with, and report to, the senior partner, Alfred Vesey One of the firm’s clients is Watchwell Limited (WW), a medium-sized manned security company for which Rosslyn Chartered Accountants have provided business advisory and corporate finance (but not audit) services since its incorporation in 1995 Requirement You are required to prepare a draft report for the WW board, as set out in the email dated 27 July 2011 from Alfred Vesey to you (Exhibit 13) Your report should comprise the following four elements: • • An executive summary Your responses to the three detailed requirements set out in Exhibit 13, including financial appendices (as required) State clearly any assumptions that you make All workings should be attached to your answer Your report should be balanced across the three detailed requirements, and the following time allocation is suggested: Reading and planning Performing calculations and financial analysis Drafting report hour hour hours Marks allocation All of the marks in the Case Study are awarded for the demonstration of professional skills, allocated broadly as follows: Applied to the four elements of your report (as described above) • Assimilating and using information • Structuring problems and solutions • Applying judgement • Drawing conclusions and making recommendations Applied to your report as a whole • Demonstrating integrative and multidisciplinary skills 20% 30% 25% 20% 95% 5% 100% Approximately 15% of the marks are awarded for the executive summary and 10% for the appropriate discussion of ethical issues within your answer to the requirements In planning your report, you should be aware that not attempting one of the requirements will have a significantly detrimental effect on your chances of success, as will not submitting an executive summary In addition, as indicated above, all four skills areas will be assessed under each of the four elements of your report Accordingly, not demonstrating your judgement and failing to include appropriate conclusions and/or recommendations in each element of your report will affect your chances of success ICAEW/CS/J11 of 15 BLANK PAGE ICAEW/CS/J11 of 15 EXHIBIT 13 EMAIL From: To: Date: Subject: Alfred Vesey Ossie Fordham 27 July 2011 Watchwell Limited (WW) We have been asked by the WW board to carry out a review of the company’s latest management accounts and to provide it with advice on some important business decisions that it needs to take I am attaching the following relevant documents: • • • • Management accounts for the year ended 30 June 2011 (Exhibit 14) An email from Tom Mitchell about an acquisition target, Mustang (Exhibit 15) A request from Corey Thwaites of PQR Leisure Parks to tender for the combined Funtimes / PQR contract following the merger of those two companies (Exhibit 16) A recent press article about Funtimes (Exhibit 17) I would like you to prepare a draft report to the WW board, in which you should: Review WW's performance for the year to 30 June 2011 Your review should comprise a commentary on the revenue, gross profit, profit from operations and the six Manned Guarding KPIs, by comparison with the previous year Assess the proposal for the acquisition by WW of Mustang You should calculate the price that WW should offer for Mustang You should explain any assumptions that you make in that calculation You should also advise WW on the factors to consider in appraising Mustang’s client contracts and profile of business activities, with reference to Tom Mitchell’s email dated 25 July 2011 Evaluate the advantages and disadvantages for WW in tendering for PQR’s enlarged manned guarding contract with effect from September 2011 after its merger with Funtimes You should address the commercial and strategic benefits and risks for WW’s business in tendering for this larger contract, dealing with Corey Thwaites’ “matters for consideration” as well as any ethical issues arising I look forward to reading your draft report ICAEW/CS/J11 of 15 EXHIBIT 14 Watchwell Limited: Management accounts for the year ended 30 June 2011 INCOME STATEMENT Note £000 Revenue Cost of sales 18,924 (14,954) Gross profit Administrative expenses 3,970 (2,024) Profit from operations Net interest received 1,946 23 Profit before taxation Corporation tax 1,969 (547) Profit for the year 1,422 STATEMENT OF FINANCIAL POSITION Note £000 227 218 ASSETS Non-current assets Intangibles Property, plant and equipment 445 Current assets Receivables Cash and cash equivalents 2,920 2,475 5,395 Total assets 5,840 EQUITY & LIABILITIES Equity Ordinary share capital Retained earnings 13 3,617 Total equity Current liabilities Total equity & liabilities ICAEW/CS/J11 3,630 2,210 5,840 of 15 CASH FLOW STATEMENT CASH FLOWS FROM OPERATING ACTIVITIES Profit from operations Depreciation and amortisation Profit on sale of property, plant and equipment Increase in receivables Increase in other current liabilities £000 1,946 139 (1) (865) 555 Cash generated from operations Corporation tax paid 1,774 (486) Net cash from operating activities 1,288 CASH FLOWS FROM INVESTING ACTIVITIES Payments to acquire intangibles Payments to acquire property, plant and equipment Receipts from sales of property, plant and equipment Interest received (223) (105) 23 Net cash used in investing activities (299) CASH FLOWS FROM FINANCING ACTIVITIES Net cash used in financing activities – dividends paid (600) Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year 389 2,086 Cash and cash equivalents at end of year 2,475 NOTES TO THE MANAGEMENT ACCOUNTS Analysis of revenue, hours and gross profit Ardwicke Stores PQR Leisure Parks Granville University Soton College Dorset Hospital Jonas Construction Other Manned Guarding – total Revenue £000 5,980 1,789 1,413 912 904 1,452 5,548 Hours 000 494 146 122 79 79 124 467 17,998 1,511 926 Mobile Security 18,924 ‘Other’ includes £1,077,000 revenue and 94,000 hours from Quinto clients (see also note 5) Gross profit arose as follows: Manned Guarding: £3,423,000; Mobile Security: £547,000 ICAEW/CS/J11 of 15 Cost of sales Wages – security guards Vehicles Tendering and business development costs Recruitment and training Uniforms Depreciation £000 14,423 178 149 103 72 29 14,954 Administrative expenses £000 Running costs: Salaries – head office staff (including directors) Advertising Legal and professional charges Telephones, printing, postage and stationery Insurance Rent and rates, heat and light Repairs Other items: Amortisation Impairment of receivables Profit on sale of property, plant and equipment 1,082 174 155 121 79 87 65 110 152 (1) 2,024 Employee numbers and KPIs The average number of employees during the year was as follows: Head office staff (including directors) Security guards 33 822 855 Of the security guards, 13 work in Mobile Security The wages of these guards were £192,000 In Manned Guarding, staff turnover was 24% and utilisation was 90%, while training days and sickness days per employee were 6.9 and 8.2 respectively Intangibles On July 2010, the company acquired Quinto, a manned guarding company, for £223,000 Property, plant and equipment Additions and disposals relate primarily to the upgrade of the time recording system Receivables £000 Trade receivables (net of impairment) Other receivables and prepayments 2,836 84 2,920 ICAEW/CS/J11 Current liabilities Corporation tax Other current liabilities £000 547 1,663 2,210 of 15 BLANK PAGE ICAEW/CS/J11 of 15 EXHIBIT 15 EMAIL From: To: Date: Subject: Tom Mitchell Alfred Vesey 25 July 2011 Acquisition target – Mustang We were approached recently by one of the industry’s corporate agents about the possibility of acquiring a company called Mustang Any acquisition would take effect from October 2011 The purpose of this email is to ask Rosslyn Chartered Accountants to advise on what price we should offer for Mustang and the factors that we should consider in appraising its client contracts and profile of business activities Overview of the business Mustang was formed in 2008 by Sarah Glover (former manager at a mobile security company), Peter Ross (a former police officer) and Edwin Matthews (a former prison governor) These three remain the sole directors of Mustang, with Edwin as Finance Director The company has three divisions: Manned Guarding, Mobile Security and Security Consultancy It has experienced strong growth since its formation, most recently with the development of the Security Consultancy division, for which Peter has been primarily responsible The summarised results for the year to 30 June 2011 were as follows: Revenue Cost of sales Gross profit Mobile Security £000 160 (64) 96 Manned Guarding £000 524 (462) 62 Security Consultancy £000 52 (18) 34 TOTAL £000 736 (544) 192 In line with our normal practice, the directors would not transfer to WW at acquisition We understand that Peter is planning to set up a new security consultancy company in the North of England (where he was born) once he has left Mustang Manned Guarding I initially asked Edwin to complete our proforma spreadsheet, to support the above figures for revenue and gross margin I have reproduced this below Contract Start date Total ICAEW/CS/J11 Weekly Guards Charge hours per shift rate £ Oct 2009 168 9.00 July 2010 48 8.85 Oct 2008 108 8.45 10 of 15 Pay rate £ 5.95 6.10 6.80 Annual charge £ 157,248 176,717 189,821 523,786 Annual pay £ 103,958 121,805 152,755 378,518 Other costs £ 22,871 26,797 33,606 83,274 Gross margin £ 30,419 28,115 3,460 61,994 Although there are only a small number of client contracts, all located in Dorset, you will see that these are all individually significant We established the following specific further facts about each one: • • • Contract (office building): This runs until 30 September 2012 The charge rate will rise to £9.50 on October 2011, when also the number of guards will rise from to Contract (shopping centre): This will be renewed, on the same terms as the existing contract, for another years when it expires on 30 June 2013 Contract (construction site): With this contract due to expire on 30 September 2011, a retender is currently in progress Mustang appears to have a 50% chance of winning this, though it is likely to be at a reduced charge rate For the year to 30 June 2011, the Manned Guarding division reported the following further data: • • Utilisation: 93% Staff turnover: 17% All guards (around 50% of whom are female) carry full SIA accreditation They receive six days of annual training, across a wide range of areas such as ‘Client Skills’, ‘Dealing with Violence’, ‘Technology’, ‘Looking Smart’ and ‘Health and Safety’ Several guards work a 56-hour week Mobile Security All clients are located in the Poole area and contracts typically run for a period of four years A contract with a new client began on July 2011, expected to add £30,000 to annual revenue However, the overall gross profit margin is likely to fall to 50% for the year to 30 June 2012, mainly because the fleet of three motor vehicles (all held under operating leases) will have to be replaced on January 2012, 12 months earlier than planned They repeatedly suffer breakdowns or vandalism, necessitating constant repairs and meaning that Mustang has had to reduce the number of visits to some client sites in the notorious Alpha, Bravo and Charlie neighbourhoods One such client owes £20,000, which it is refusing to pay, claiming that Mustang’s failure to patrol at the designated times was directly responsible for the theft of expensive machinery Security Consultancy Through this division, Mustang offers professional security advice to public sector bodies, both in the UK and in Europe, but does not provide any guarding Peter expects the revenue and gross profit for 2011 (its first full year of operations) to double in the year to 30 June 2012, based on discussions with a number of potential clients However, these discussions are mostly in their early stages and no new contracts have yet been signed I look forward to receiving your advice Tom ICAEW/CS/J11 11 of 15 EXHIBIT 16 PQR Leisure Parks Poole Business Centre Poole Dorset 21 July 2011 Dear Tom, Tender to become sole security provider to combined Funtimes / PQR business As you may have heard, PQR recently announced a merger with the local leisure group Funtimes from September 2011 Funtimes owns theme parks, music festival sites, concert arenas, sports grounds and watersports centres in Dorset Funtimes is currently around the same size as PQR A key attraction for PQR as a merger partner is that Funtimes is heavily involved in the 2012 London Olympics sailing venues, which you will be aware are actually located in Weymouth and Portland as London has no suitable facilities nearby Several ‘showcase’ programmes and ‘trials’ will be held at these sailing venues in the period between now and the Games, starting with the Olympics test events (31 July to 13 August 2011) In view of the time constraints, Funtimes is responsible for security at these test events, using its existing security provider, Logos However, part of the merger agreement is that the entire security contract for the combined Funtimes / PQR business will be reawarded with effect from September 2011 (the start of Funtimes’ financial year); and, among other arrangements, this will include a close involvement in the security for the Games themselves in 2012 Purpose of this letter The purpose of this letter is thus to invite WW to submit a formal written tender to become the sole security provider for the combined Funtimes / PQR business Olivia Jenkins (Facilities Director, Funtimes) is simultaneously asking Logos to tender Both companies will then be asked to make an oral presentation to the Funtimes board No other companies are being invited to tender We are conscious that our existing contract with you is renewable on July 2012 In the normal course of events we would have been allowing it to run until this date We have been extremely happy with the service received from WW in every respect, but you will appreciate that the renewal timing is now superseded by the merger If you were to be unsuccessful, PQR would have to pay you the contractual penalty for early termination We are therefore asking WW to tender for the enlarged contract, for a period of three years from September 2011 to 31 August 2014 This will cover another two summer programmes of events at the Olympics site in the two years following the Games Matters for consideration In preparing your tender document, you should be aware of the following further items: ICAEW/CS/J11 12 of 15 There will be a generally enhanced security need in the whole region because of significantly higher tourist numbers during the period of the Olympics / Paralympics Though security for the Olympics / Paralympics is being co-ordinated and led by the police and other public bodies, the successful bidder will play a major role and work closely with these organisations Past experience of such collaboration is thus vital If WW’s tender is successful, Logos staff currently working on the Funtimes contract will automatically transfer to WW under the TUPE regulations Similarly, if Logos is successful, WW staff currently working on the PQR contract will transfer to Logos At least 80% of staff on the Funtimes / PQR contract must hold SIA accreditation (this is the current figure achieved by Logos), and at least 30% must be female We estimate the annual number of guarding hours under the enlarged contract to be double those for the existing PQR contract However, this is necessarily an average: in particular, there will inevitably be a sharp peak at the time of the Olympics / Paralympics themselves An invoice payment period of 45 days is proposed for the enlarged contract, compared with 30 days in the existing PQR contract Funtimes is looking to expand into other parts of the UK (mainly London) in 2013 It will require bidders to provide security personnel for those areas from that time All staff will have to undertake four days of additional dedicated training (funded by their company), to familiarise themselves with specialised security arrangements for water-based activities, as well as CCTV and other technology required for all Olympics / Paralympics venues We look forward to receiving your written tender by Monday 15 August 2011 Corey Thwaites, Purchasing Director (on behalf of PQR) Note from Tom Mitchell (WW) to Alfred Vesey (Rosslyn Chartered Accountants) We have just received this letter and need your advice on how we should respond to it Corey rang to tell me more about the tender He is very keen that it should be awarded to WW but is well aware that, with Funtimes being the dominant partner in the merger, he has relatively little influence on the decision Corey did, however, tell me that Logos was likely to submit its tender document a week before the 15 August deadline Having read this, he said that – if we wanted – he would ring again to tell me Logos’ proposed price, contract terms and any other ideas from its tender document that we could usefully take into account when finalising ours He also mentioned a rumour he had heard, that Logos sales managers were to visit several WW client sites anonymously over the next week Apparently, the aim was to ‘test’ WW’s security guards by offering them cash bribes to allow them (the sales managers) into prohibited sections of the sites and seeing how these guards would react I thanked Corey for this additional information After speaking to him, I came across the attached article (Exhibit 17), which raises some further interesting issues Finally, just to clarify – we are not asking you to write the tender document for us but rather to provide us with your views on the advantages and disadvantages for our business in tendering for this enlarged contract ICAEW/CS/J11 13 of 15 BLANK PAGE ICAEW/CS/J11 14 of 15 EXHIBIT 17 Funtimes – where has it come from? (‘Music For Today’ magazine, July 2011) When the Dorset dinner-table conversation reaches the topic of local entertainment venues, almost everyone in the county seems to have attended something at Funtimes Field during the past year – not to mention thousands of visitors from much further away, including some who have made the journey over (or under) the English Channel If the same dinner-table conversation had taken place 12 months ago, Funtimes would probably not have received a single mention So what is Funtimes, and where has it suddenly emerged from? In short, it is a company led by charismatic entrepreneur, Oliver Christie, with a portfolio of entertainment venues in Dorset, all acquired from much larger companies and believed to have been funded by Christie himself Further acquisitions are believed to be imminent Funtimes Field is the flagship site – best known for the music festival held there in May and June Funtimes’ very rapid growth has, however, been beset by problems In particular, the riot at Funtimes Field last month has raised serious doubts about its suitability as a concert location, and indeed about Funtimes overall We understand that the company has been reducing costs in a quest to become more efficient One category that has been badly affected is security – Funtimes announced in April that the number of guards (supplied by its contractor Logos) at all venues would have to be reduced But this has proved a false economy: any savings have been dwarfed by the cost of the June riot, in which 50 concert-goers were hurt, cash takings of £10,000 were stolen from the food tent and £100,000 of damage was done to grandstands ICAEW/CS/J11 15 of 15 ... where has it come from? (‘Music For Today’ magazine, July 2011) ICAEW/ CS/J11 of 15 BLANK PAGE ICAEW/ CS/J11 of 15 WATCHWELL LIMITED: CASE STUDY REQUIREMENT You are Ossie Fordham, a final-year... accounts for the year ended 30 June 2011 15 Email dated 25 July 2011 from Tom Mitchell to Alfred Vesey: Acquisition target – Mustang 16 Letter dated 21 July 2011 from Corey Thwaites (PQR) to Tom... will affect your chances of success ICAEW/ CS/J11 of 15 BLANK PAGE ICAEW/ CS/J11 of 15 EXHIBIT 13 EMAIL From: To: Date: Subject: Alfred Vesey Ossie Fordham 27 July 2011 Watchwell Limited (WW) We have