Question: Cermco produces and sells specialty customer relationship management (CRM) solutions to small and medium-size businesses in the United States and Canada. The company is more than 20 years old and has a steady, loyal customer base.
A major reason for Cermco's success lies in the ability of its product to easily integrate with various accounting and ERP systems. As a result, even when clients upgrade their entire accounting systems to expensive ERP solutions, they continue to use Cermco's CRM because of its superior features.
Annual revenues for Cermco's three most recent years are about $11 million (20X3), $7 million (20X4), and $3 million (20X5), respectively. Overall interest expenses and operating margins have remained a relatively constant percentage of revenues.
Cermco attributes the decline in revenues to declines in market share as a result of natural client turnover and the entrance of many other small competing software companies into the market. Nevertheless, Cermco's CRM product continues to enjoy the highest industry ratings and a loyal customer base.
Cermco's balance sheets for the most recent three years follow:
| CERMCO Balance Sheet December 31 |
|
20X5 |
20X4 |
20X3 |
|
| Assets |
| Current assets |
|
Cash and cash equivalents |
$390 |
$1,386 |
$2,603 |
|
Short-term investments |
- |
- |
- |
|
Net receivables |
720 |
664 |
1,225 |
|
Inventory |
- |
- |
- |
|
Other current assets |
412 |
469 |
892 |
|
| Total current assets |
$1,522 |
$2,519 |
$4,720 |
| Long-term investments |
1,215 |
- |
- |
| Property, plant, and equipment |
76 |
258 |
454 |
| Goodwill |
545 |
1,757 |
2,194 |
| Intangible assets |
999 |
1,844 |
3,644 |
| Accumulated amortization |
- |
- |
- |
| Other assets |
- |
- |
- |
| Deferred long-term asset charges |
- |
- |
- |
|
| Total assets |
$4,357 |
$6,378 |
$11,012 |
|
| Liabilities |
| Current liabilities |
|
Accounts payable |
$469 |
$1,174 |
$1,436 |
|
Short/Current long-term debt |
- |
- |
600 |
|
Other current liabilities |
1,227 |
1,358 |
1,496 |
|
| Total current liabilities |
$1,696 |
$2,532 |
$3,532 |
| Long-term debt |
- |
- |
- |
| Other liabilities |
- |
- |
- |
| Deferred long-term liability charges |
- |
- |
- |
| Minority Interest |
- |
- |
- |
| Negative goodwill |
- |
- |
- |
|
| Total liabilities |
1,696 |
2,532 |
3,532 |
|
| Stockholders' equity |
| Misc. stock option warrants |
- |
- |
- |
| Redeemable preferred stock |
- |
- |
- |
| Preferred stock |
3,014 |
3,211 |
2,333 |
| Common stock |
16 |
16 |
13 |
| Retained earnings |
-25,513 |
-23,814 |
-19,165 |
| Treasury stock |
- |
- |
- |
| Capital surplus |
25,168 |
25,564 |
25,862 |
| Other stockholders' equity |
-24 |
-1,131 |
-1,563 |
|
| Total stockholders' equity |
$2,661 |
$3,846 |
$7,480 |
|
Produce a valuation estimate for Cermco for December 31, 20X5. Use whatever valuation method you think best but justify your choice. Note that you can estimate the annual income from year-to-year changes in the balance sheet.