Generally, our business valuation reports are divided into the transmittal, introduction, description, financial review, valuation, and exhibits sections. The transmittal section contains the report cover page, the letter of transmittal with the salient valuation data and information, the certification page, the statement of limiting conditions, and the table of contents. Contained in the introduction section is the appraisal date, appraisal purpose, definition of value, a discussion of the format of the report, and sources of information. A review of national economic trends leads the descriptive section, followed by industry and subject company data. In the company discussion, we review the history and nature of the firm, competition and prospects, as well as offering appraisal related financial statement observations. In the valuation section, we most often employ a multi-faceted Capital Markets technique, if available a Share Sales technique and/or Sales of Comparable Companies, usually a Discounted Cash Flow analysis, and possibly the Adjusted Balance Sheet technique. Capital Markets Technique In the Capital Markets technique, various financial measures of the company are compared to those of a guideline sample of publicly traded companies. Generally, these guideline companies are in the same or similar lines of business as the subject and/or have similar operating characteristics. While the ratio of price to earnings (P/E ratio) is the most commonly quoted multiple, use of other measures may prove useful. Other indicators may be worthy of consideration depending upon the company / guideline characteristics, industry, profitability and/or cash flow, etc. In our appraisals, five measures are most often used. • Stock Price / After Tax Earnings • Stock Price / After Tax Cash Flow • Total Invested Capital / Earnings Before Interest and Taxes (EBIT) • Total Invested Capital / Earnings Before Interest, Taxes and Depreciation / Amortization (EBITDA) • Total Invested Capital / Revenues These measures are used in conjunction with each other and offer an indication of pricing behavior of investors and sellers. The first two measures define stock value directly, while the last three define the value of total invested capital (equity plus non-current debt). Use of these measures helps to eliminate the effects of differences in capital structure among the guideline companies and the subject. Once the value of total invested capital is estimated, the total market value of the debt is subtracted, resulting in an indicator of equity value. It should be noted that to properly apply market multiples, certain adjustments may be made to take into account difference in specific business and operating characteristics between the subject and the guideline companies. In addition, further adjustments may be made to reflect the differences in marketability between the subject and the guideline counterparts. Share Sales Where there have been recent exchanges of shares of the subject’s stock, the prices and terms of those exchanges are examined. Clearly, if such exchanges represent arms’ length transactions, they may be considered as significant indicators of value. In closely held companies, however, these transactions are frequently between related parties and do not meet the criterion of an arms’ length transaction. Sales of Comparable Companies Examining transactions involving the sale of companies in similar lines of business as the subject company can also be useful in gaining insight on the value of the subject company. Care is used in the consideration of these transactions since the full nature of terms and conditions is frequently not available. Such issues as covenants not to compete, seller financing, and distressed sales can effect the reported sale price. When the valuation of the subject involves less than a controlling interest in the company, adjustments are made to the comparable sale price to eliminate the control premium that is part of the transaction price. Discounted Cash Flow Technique In the Discounted Cash Flow technique, a pro forma analysis is made of the company to estimate the available cash flow on an un-leveraged basis. Available cash flow is the amount that could be paid out to the providers of debt and equity capital without impairment of business operations. Available debt-free cash flow is determined as follows: Net Income Before Taxes and Interest Minus (-) Provision for Income Taxes Plus (+) Depreciation and Amortization Minus (-) Capital Expenditures Minus (-) Additional Working Capital Equals (=) Available Cash Flow The Capital Asset Pricing Model considers the theoretical risk-less rate, company size, and relative volatility compared to the public markets. The result is utilized considering the relationship between debt and equity to ascertain the Weighted Average Cost of Capital. The resulting discount rate is applied to available free cash flow to ascertain present value. The residual amount, or perpetuity value at the end of the forecast period, is also discounted to indicate present value. The sum of these two components represents the amount a prudent investor would pay for the invested capital of an operating business entity on an independent basis. To value the stockholders’ equity, the market value of the debt is then subtracted from the indication of invested capital to derive the equity value. Adjusted Balance Sheet Technique In a capital intensive business, or if there is not adequate economic support based on earnings, we may also consider an Adjusted Balance Sheet technique, wherein the assets and liabilities are marked to market or “squeezed” down to the equilibrium level of economic support. The assets less the liabilities indicate net worth. A Liquidation Value method may be warranted, with termination costs considered, if piecemeal sale of the business assets (as a whole or by various groups) is indicated. Other Valuation Techniques As appropriate, other valuation methods may be considered. Embedded in the valuation techniques or applied during the appraisal process, are considerations for key person, marketability and/or minority interest discounts. The valuation conclusion considers these factors and a weighting of the appraisal techniques. Often we issue working / discussion drafts of our reports for the review of clients, accountants, investment bankers, commercial bankers, attorneys, etc. When completed, our final reports are put together with exhibits and staff qualifications included.  The exhibits section usually includes 3-5 years of historical balance sheets and operating statements, with 100% profiles shown. A ratio analysis is presented. For the Market Multiples technique, the guideline companies’ relative measures are scheduled and compared to the subject. The Discounted Cash Flow Analysis, with pro forma data, is calculated. As appropriate Share Sales, Sales of Comparable Companies, and Adjusted Balance Sheet information is developed. Lastly, the professional qualifications of contributing staff members is included. The purposes of the appraisals may be the following: • Fairness Opinions • Solvency Opinions • Fraudulent Conveyance Opinions • Feasibility Studies • Options Valuations • Warrants Valuations • “Cheap” Stock / Pre-IPO Valuations • Purchase Price Allocations for Tax and/or Financial Reporting • Valuations of Target • Valuations for Sales Price • Valuations for Financial and Succession Planning, Gifting, Estate • Valuations for Other Investment Decisions • Valuations for Various Legal Disputes Our reports are reviewed and accepted by accountants, attorneys, investment bankers, venture capital firms, commercial banks, various courts, the Internal Revenue Service, the Securities and Exchange Commission, as well as other interested parties or entities.