BASIC VALUATION FOR AUTO COMPANY INC - iBusiness value · Financial Statements ..... 4 Adjusted...

BASIC VALUATION

FOR

AUTO COMPANY, INC.

i

© 2011 iBusiness Value

TABLE OF CONTENTS

Table of Contents ............................................................................................................. i

Letter of Opinion............................................................................................................. 1

Purpose of the Assignment ..................................................................................... 1

Function of the Assignment .................................................................................... 1

Date of Value .......................................................................................................... 1

Standard of Value ................................................................................................... 2

Conclusion of Fair Market Value ........................................................................... 2

Executive Summary ........................................................................................................ 3

Company Description ............................................................................................. 3

Products and Services ............................................................................................. 3

Customer Base ........................................................................................................ 3

Competition............................................................................................................. 3

Company Outlook ................................................................................................... 3

Financial Statements ....................................................................................................... 4

Adjusted Balance Sheet .......................................................................................... 4

Adjusted Income Statement .................................................................................... 5

Ratio Analysis ................................................................................................................. 6

Valuation Methodology .................................................................................................. 7

Net Cash Flow/Discounted Cash Flow (DCF) Method .......................................... 7

Market Method........................................................................................................ 8

Historical Cost/Book Value Method ....................................................................... 8

Discounts......................................................................................................................... 9

Minority Interest Discounts .................................................................................... 9

Lack of Marketability Discount ............................................................................ 10

Value Summary ............................................................................................................ 11

Scedule 1 ....................................................................................................................... 12

Schedule 1A .................................................................................................................. 13

Schedule 1B .................................................................................................................. 14

Schedule 1C .................................................................................................................. 16

Schedule 1D .................................................................................................................. 17

Schedule 1E .................................................................................................................. 18

Schedule 1F ................................................................................................................... 19

Schedule 1G .................................................................................................................. 20

Schedule 2 ..................................................................................................................... 21

Schedule 3 ..................................................................................................................... 22

Schedule 4 ..................................................................................................................... 23

Sources of Information ................................................................................................. 24

Certification and Contigent and Limiting Conditions .................................................. 25

1


10/3/2002

Mr. Robert Fong

President

Auto Company, Inc.

368 South Tustin Avenue

Tustin, California 91604-2226

Re: Basic Valuation Valuation of Auto Company, Inc. for Mr. Robert Fong’s

41.66% minority common stock interest.

Dear Mr. Fong,

Per your request, iBusiness Value (“IBV”) has performed a “Basic Valuation” valuation

of Auto Company, Inc. (“Auto” or the “Company”) for Mr. Robert Fong (“Mr. Fong” or

the “Client”). A “Basic Valuation” is not a full appraisal or full valuation, but an

estimate of fair market value given very limited information. The “Basic Valuation” does

not include an extensive detailed financial analysis, company analysis or industry

analysis. The “Basic Valuation” is intended solely for internal informational use by the

Company or Client and is not intended for other purposes such as IRS tax issues, tender

offer for securities or for any other purpose other than for internal information for Mr.

Fong or any individual within the Company, any third party legal counsel with whom Mr.

Fong wishes to share the “Basic Valuation”.

PURPOSE OF ASSIGNMENT

The purpose of IBV’s assignment is to determine an estimated “Basic Valuation” fair

market value of the Company’s operations as of June 30, 2001.

FUNCTION OF THE ASSIGNMENT

The function of this “Basic Valuation” valuation is to provide information for Mr. Robert

Fong regarding the approximate fair market value of Mr. Fong’s 41.66% minority interest

in the Company’s common stock.

DATE OF VALUE

The date of value utilized herein is June 30, 2001.

2


STANDARD OF VALUE

IBV considered the following definitions of Fair Market Value, Going Concern Value

and Goodwill:

Fair Market Value: The amount at which an arm’s-length transaction

would be expected to occur between normally motivated investors under

open market conditions, without considering any special benefits for any

particular buyer or seller.

Going Concern Value: 1. The value of an enterprise, or an interest

therein, as going concern. 2. Intangible elements of value in a business

enterprise resulting from factors such as: having a trained work force; an

operational plant; and the necessary licenses, systems and procedures in

place.

Goodwill: The intangible asset which arises as result of name, reputation,

customer patronage, location, products and similar factors that have not

been separately identified and/or valued but which generate economic

benefits.

CONCLUSION OF FAIR MARKET VALUE

As of the date of value, June 30, 2001, based upon the initial results of our research,

analysis and methods, the fair market value range for Mr. Fong’s 41.66% minority

interest in the Company’s common stock is as follows:

Fair Market Value Range: $900,000 to $1,400,000

The schedules that follow include an explanation of our research and analyses. Also

attached is list of information used in reaching our opinion. This initial valuation is

subject to the enclosed “Certification and Contingent and Limiting Conditions.”

Respectfully submitted,

Mr. Ryan W. Fong, CFA

Chief Executive Officer

iBusiness Value Enclosures

3


EXECUTIVE SUMMARY

Company Description Auto Company, Inc. is an online auto parts retailer based out of Tustin, California. The

company provides auto parts for a wide market including the high-performance market

and traditional replacement part market.

Products and Services The company’s product line covers after-market high-performance brand, after-market

replacement part brand and original manufacturer dealer parts for all automobiles sold

and driven in the United States. It competes nationwide and not just locally in Tustin,

California.

Customer Base The company’s customer base includes car enthusiasts who modify their cars, auto

mechanics, and everyday people who are looking for discount after-market parts.

Competition The competition includes brick and mortar auto supply stores such as O’Rielly Auto

Parts, Pep Boys, Auto Zone and other independent stores. Online retailers are the direct

competition as they are online and have the ability to compete on cost with Auto

Company, Inc. because of their low overhead. Auto Dealers also compete, but aren’t as

competitive because they charge large premiums for parts. Auto mechanics and their

direct parts suppliers also compete with the company.

Company Outlook The company expects to continue as a going-concern business supplying auto parts to the

same market it is currently marketing too. It plans to reinvest cash flow and grow the

company’s market share. The company is entering into some exclusive contracts with

Chinese manufacturers of after-market performance parts which will give them the power

to compete on quality, proprietary manufacturing design and cost.

4


FINANCIAL STATEMENTS

Below are your company’s historical and adjusted financial statements with adjustments.

The adjustments are made to present the financial statements as they would be if the

company was a public company. This is done so that the statements are comparable to

public companies for analysis of accounts and ratios associated with the financial

statements.

Adjusted Balance Sheet

Historical Adjustments Adjusted Historical Adjustments Adjusted Historical Adjustments Adjusted

Assets:

Current Assets 680,424 799,983 1,480,408 1,169,999 890,800 2,060,799 1,040,518 1,389,348 2,429,866

Other Assets 250 - 250 23,750 - 23,750 8,115 - 8,115

Intangible Assets - - - - - - - - -

Fixed Assets 471,141 - 471,141 460,221 - 460,221 1,582,739 - 1,582,739

Total Assets 1,151,816$ 799,983$ 1,951,799$ 1,653,970$ 890,800$ 2,544,770$ 2,631,372$ 1,389,348$ 4,020,720$

Edit Check (Should Equal 0) - - - - - - - - -

Liabilities:

Current Liabilities 404,010 - 404,010 745,429 (13,472) 731,957 1,031,721 (30,052) 1,001,668

Other Liabilities - - - - - - - - -

Noncurrent Liabilities 264,637 - 264,637 290,956 - 290,956 821,784 - 821,784

Total Liabilities 668,647 - 668,647 1,036,384 (13,472) 1,022,913 1,853,504 (30,052) 1,823,452

Stockholders' Equity 483,169 799,983 1,283,152 617,586 904,272 1,521,858 777,868 1,419,401 2,197,268

Total Liabilities and Stockholders' Equity 1,151,816$ 799,983$ 1,951,799$ 1,653,970$ 890,800$ 2,544,770$ 2,631,372$ 1,389,348$ 4,020,720$

Edit Check (Should Equal 0) - - - - - - - - -

1999 2000 2001

5


Adjusted Income Statement

Historical Adjustments 1999 Adjusted Historical Adjustments 2000 Adjusted Historical Adjustments 2001 Adjusted

Revenues 6,612,970$ -$ 6,612,970$ 8,686,124$ -$ 8,686,124$ 9,370,100$ -$ 9,370,100$

Cost of Goods Sold:

Cost of Goods Sold 5,164,538 - 5,164,538 6,914,780 - 6,914,780 7,418,852 - 7,418,852

Total Cost of Goods Sold 5,164,538 - 5,164,538 6,914,780 - 6,914,780 7,418,852 - 7,418,852

Gross Profit 1,448,432 - 1,448,432 1,771,344 - 1,771,344 1,951,247 - 1,951,247

Operating Expenses:

Operating Expenses 1,154,677 - 1,154,677 1,493,494 - 1,493,494 1,543,678 - 1,543,678

Robert Fong's Salary and perquisites - (100,000) (100,000) - (112,540) (112,540) - (101,340) (101,340)

Steven Fong's Excess Compensation - (125,000) (125,000) - (125,000) (125,000) - (125,000) (125,000)

Total Operating Expenses 1,154,677 (225,000) 929,677 1,493,494 (237,540) 1,255,954 1,543,678 (226,340) 1,317,338

Operating Profit 293,755 225,000 518,755 277,850 237,540 515,390 407,569 226,340 633,909

Interest 37,497 - 37,497 30,142 - 30,142 86,301 - 86,301

Depreciation 36,434 - 36,434 20,705 - 20,705 57,618 - 57,618

Amortization - - - - - - 614 - 614

Other Income - - - - - - - - -

Other Expenses - - - - - - - - -

Income before Taxes 219,824 225,000 444,824 227,003 237,540 464,543 263,036 226,340 489,376

Provision for Income Taxes 81,814 84,652 166,466 92,586 96,665 189,251 102,754 88,942 191,696

Extraordinary Items:

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

Total Extraordinary Items - - - - - - - - -

Net Income 138,010$ 140,348$ 278,358$ 134,417$ 140,875$ 275,292$ 160,282$ 137,398$ 297,680$

Additions to Net Income:

Robert Fong's Salary and perquisites 100,000 112,540 101,340

Steven Fong's Excess Compensation 125,000 125,000 125,000

Total Additions to Net Income 225,000 237,540 226,340

Effective Tax Rate 37.6% 40.7% 39.3%

Taxes on Additions to Net Income 84,652 96,665 88,942

Adjustments to Net Income 140,348 140,875 137,398

Extraordinary Item Adjustments - - -

Adjusted Net Income 278,358$ 275,292$ 297,680$

Edit Check (Should Equal 0) - - -

Net Income 138,010 134,417 160,282

Interest 37,497 30,142 86,301

Taxes 81,814 92,586 102,754

Taxes on Additions to Net Income 84,652 96,665 88,942

Adjustments to Net Income 140,348 140,875 137,398

Extraordinary Item Adjustments - - -

Adjusted EBIT 482,321$ 494,685$ 575,677$

Edit Check (Should Equal 0) - - -

1999 2000 2001

6


RATIO ANALYSIS

Below is a ratio analysis of the company’s financial information. The industry SIC code

that the company is being compared to is 5531 Auto and Home Supply Stores. The

differences highlighted in green indicate good attributes of the company and differences

highlighted in red indicate bad attributes of the company. Differences highlighted in

orange can be both good and bad depending on the other attributes of the company.

Ratio AnalysisCompany Historical RMA Difference

Current Ratio 1.01 1.70 (0.69)

Quick Ratio 0.27 0.30 (0.03)

Sales/Receivables 32.59 348.10 (315.51)

Days in Receivables 11.20 1.05 10.15

Cost of Sales/Inventory 10.22 2.40 7.82

Days in Inventory 35.72 152.08 (116.36)

Cost of Sales/Payables 8.95 7.50 1.45

Days in Payables 40.79 48.67 (7.88)

Sales/Working Capital 1,065.10 7.70 1,057.40

EBIT/Interest 4.05 3.00 1.05

Fixed/Worth 2.03 0.30 1.73

Debt/Worth 2.38 2.00 0.38

% Profit Before Taxes/Tangible Net Worth 33.82% 12.70% 21.12%

% Profit Before Taxes/Total Assets 10.00% 3.60% 6.40%

Sales/Net Fixed Assets 5.92 30.10 (24.18)

Sales/Total Assets 3.56 2.30 1.26

% Depreciation, Depletion Amortization/Sales 0.62% 60.00% -59.38%

2001 Officers', Directors', Owners'

Compensation 426,340$ 187,402$ 238,938$

% Officers', Directors', Owners' Comp/Sales 4.55% 2.00% 2.55%

Gross Profit 20.82% 35.30% -14.48%

Operating Profit 3.73% 2.70% 1.03%

All Other Expenses (net) 0.92% 0.40% 0.52%

Profit Before Taxes 1.10% 2.30% -1.20% Note: RMA is the Risk Management Association’s 2001 Annual Statement Studies Financial Ratio Benchmarks for SIC

Code 5531 Auto and Home Supply Stores.

7


VALUATION METHODOLOGY

The valuation methodologies used in this analysis are the Market Method and Net Cash

Flow Method, also known as the Discounted Cash Flow (DCF) Method.

Net Cash Flow/Discounted Cash Flow (DCF) Method

The net cash flow method uses the cash flow after reinvestment into operating net

working capital, other net operating assets, and capital expenditures that are required to

keep the firm in operations and to fuel growth of future cash flows. This net cash flow

measurement is the theoretical amount of cash the company can pay out in dividends and

is a controlling interest cash flow. It is a controlling interest cash flow because a

minority interest shareholder will not have control over whether this cash flow is paid out

in total to shareholders. (See Schedules 1, 1A, 1B)

The net cash flows are discounted using a discount rate that is a blended rate of the cost

of various forms of financing used to finance the company. The discount rate uses the

build-up method and weighted-average-cost-of-capital method to derive a discount rate.

The build-up method starts out with estimating betas of stock returns of comparable

public companies in the Company’s SIC codes SIC codes 5013 and 5531 to derive a cost

of capital. Then various company specific discount rate premiums are added for risks

such as the small company effect, local competition, and the local economy. This in

combination with the 10-year treasury yield (Risk-Free Rate) and the premium the stock

market returns over the risk free rate is used to estimate an adjusted cost of equity. The

estimated after-tax cost of debt and the estimated cost of preferred equity are all

incorporated into the final discount rate using the weight-average-cost-of-capital

(WACC), to derive a blended rate. The weights used are estimated market values of each

form of financing (equity and interest-bearing debt) the company uses. (See Schedule 1C)

We have included an EVA® (Economic Value Added), also known as economic profit,

reconciliation to DCF. EVA® represents the profit (Net Operating Profit Less Adjusted

Taxes or NOPLAT) earned above that which is required for an investor to invest in this

line of business given the risk of this line of business. The profit required to invest in the

business is represented by the WACC times the operating invested capital. The present

value of the EVA® is equal to Market Value Added which when added to the operating

invested capital as of the date of the valuation equals the DCF value. The Market Value

Added is an approximation of the value of the company’s goodwill. Goodwill is all the

value a company has over and above its operating invested capital. (See Schedule 1D)

The Return on Invested Capital is a performance measurement of management and the

company’s performance. The EVA® measurements can be a performance measurement

of the value the company creates for each period. (See Schedule 1D)

8


Also included are sensitivity analysis tables and charts for you to understand how your

tax rate, discount rate and terminal growth rate (assumed growth rate of the free cash

flows at the end of the forecast for all future periods going forward) affect the value of

your firm. The assumed terminal growth rate is 5% as this is the average nominal growth

rate in GDP. (See Schedule 1E, Schedule 1F and Schedule 1G)

Market Method

The market method uses the price paid in an acquisition of a public or private company

(transaction method), or a public common equity value, as a multiple of net income, book

value, sales or some other financial statement item. Only comparable company

transactions in the Company’s SIC codes 5013 and 5531 were used.

Multiples that use the price paid in an acquisition of a public or private firm give a

controlling interest multiple, as we use only transactions that are for a 100% interest in

the firm being purchased.

Public peer group common equity multiples provide minority interest multiples, as public

common equity shareholders hold only a minority (non-controlling) interest. The market

methods we have used in this “Basic Valuation” are the transaction method and the

public peer group common equity multiple method. (See Schedules 2 and 3)

Historical Cost/Book Value Method

The historical cost, or book value method, takes the equity book value from the balance

sheet and adjusts its value to the appropriate amount. Book value is a controlling

marketable value. The book value method however is not a going concern value. It is a

value that shows what the value of the equity is if we were to sell all the assets off at

historical cost and pay down all forms of financing other than equity. It is used here to

show that it is an inferior measure of value to the market and net cash flow/discounted

cash flow methods for a going concern value. (See Schedule 4)

9


DISCOUNTS

The following discounts were applied in reaching our opinion:

Minority Interest Discounts

Controlling interest public equity transactions have typically shown a premium over the

purchased firm’s market equity value. The control premiums from the Houlihan, Lokey,

Howard & Zukin 2001 Mergerstat Review are presented below:

Control Premiums

Year Average Premium

All Companies

Median Premium

All Companies

Median Premium

Purchase Price -

$25 million or less

1996 36.6% 27.3% 32.2%

1997 35.7% 27.5% 36.9%

1998 40.7% 30.1% 39.8%

1999 43.3% 34.6% 35.5%

2000 49.2% 41.1% 42.9%

Average 41.1% 32.1% 37.5%

Median 40.7% 30.1% 36.9%

Source: Houlihan, Lokey, Howard & Zukin 2001 Mergerstat Review

The premium can be used to calculate an implied discount for lack of control using the

formula below.

Minority Interest Discount = 1 – (1/(1+Control Premium))

As the value represented by the DCF method and historical cost/book value methods

represents a controlling interest, we must apply a discount for lack of control to obtain a

minority interest value. The appropriate control premium to value the Company is the

36.9% median of the median premium purchase price for transactions with a purchase

price of $25 million or less. The implied minority interest discount is 26.95%. (See

Schedule 4)

10


Lack of Marketability Discount

The Company does not trade in an established market and the Company’s shares are not

available for open public trade. As a result, consideration must be given for a discount for

lack of marketability. The discount for lack of marketability discount of 33.45% was

selected as follows:

Discount for Lack of Marketability

Restricted Stock Studies Discount

SEC 32.60%

Gelman 33.00%

Trout 33.45%

Moroney 0.00%

Maher 34.73%

Standard Research Concultants Study 45.00%

Willamette Managemnt Associates Study 31.20%

Silber Study 33.75%

FMV Opionions, Inc., Study 23.00%

Average 29.64%

Median 33.00%

Pre IPO Private Transaction Studies

Robert W. Baird & Company Studies 46.00%

Willamette Management Assoicates Studies 51.41%

Average 48.70%

Median 48.70%

Average of All Studies 33.10%

Median of All Studies 33.45%

11


VALUE SUMMARY

Below is a summary of the results of the value methods herein.

Value Summary

Value Summary

DCF Value of Minority Interest 1,088,114$

Book Value of Minority Interest June 30, 2001 444,987$

Peer Group Comparable Values:

Price/Sales 1,688,593$

Price/Earnings 1,043,843$

Price/Cash Flow 738,500$

Comparable Transactions Values:

Price/Sales 778,022$

Price/EBIT 1,483,152$

Price/EBITDA 1,661,134$

Average 1,211,622$

Median 1,088,114$

Min 738,500$

Max 1,688,593$

Estimated Value of Equity Interest 1,200,000$

12


SCHEDULE 1

Historical

Year 1999 2000 2001

Revenues 6,612,970 8,686,124 9,370,100

%Growth 31.3% 7.9%

Expenses 6,474,960 8,551,707 9,209,818

Net Income 138,010 2.1% 134,417 1.5% 160,282 1.7%

Interest 37,497 30,142 86,301

Taxes 81,814 92,586 102,754

Adjustments to EBIT:

Robert Fong's Salary and perquisites 100,000 112,540 101,340

Steven Fong's Excess Compensation 125,000 125,000 125,000

Adjusted EBIT 482,321 7.3% 494,685 5.7% 575,677 6.1%

Plus Amortization - - 614

Adjusted EBITA 482,321 7.3% 494,685 5.7% 576,291 6.2%

Estimated Cash Taxes @ 40.0% of Adjusted EBITA 192,928 197,874 230,516

NOPLAT 289,393 296,811 345,775

Plus Depreciation 36,434 20,705 57,618

Estimated Gross Cash Flow 325,827 4.9% 317,516 3.7% 403,393 4.3%

Less Change in Operating Net Working Capital 196,640 176,848

Less Change in Net Other Assets 23,500 (15,635)

Estimated Adjusted Cash Flow From Operations 97,376 1.1% 242,179 2.6%

Less Capital Expenditures 9,785 1,180,135

Free Cash Flow to the Firm 87,591 (937,956)

13


SCHEDULE 1A

DCF Forecast

Year 2002 2003 2004 2005 2006

Revenues 12,957,922 16,845,299 19,372,094 21,309,303 22,374,768

%Growth 38.3% 30.0% 15.0% 10.0% 5.0%

EBIT 987,002 1,280,243 1,472,279 1,619,507 1,700,482

EBIT Margin 7.6% 7.6% 7.6% 7.6% 7.6%

Plus Amortization 1,604 738 738 738 738

EBITA 988,606 1,280,981 1,473,017 1,620,245 1,701,220

Estimated Cash Taxes @ 40.0% of Adjusted EBITA 395,442 512,392 589,207 648,098 680,488

NOPLAT 593,164 768,588 883,810 972,147 1,020,732

Plus Depreciation 57,618 57,618 57,618 57,618 57,618

Estimated Gross Cash Flow 650,782 826,206 941,428 1,029,765 1,078,350

Gross Cash Flow Margin 5% 5% 5% 5% 5%

Less Change in Operating Net Working Capital 513,347 522,743 381,896 292,787 161,033

Less Change in Net Other Assets 2,251 3,110 2,021 1,550 852

Estimated Adjusted Cash Flow From Operations 135,183 300,353 557,510 735,428 916,465

Less Capital Expenditures 57,618 57,618 57,618 57,618 57,618

Terminal Value

Free Cash Flow to the Firm (FCFF) 77,565 242,735 499,892 677,810 858,847 10,300,809

Discount Rate 13.8%

Date of Value June 30, 2001

Present Value Discount Factor 0.879086 0.772792 0.679350 0.597207 0.524996 0.524996

Present Value of FCFF As of June 30, 2001 68,186 187,584 339,602 404,793 450,891 5,407,885

Firm Value As of June 30, 2001 6,858,941

Edit Check (Should Equal 0) -

Estimated Outstanding Interest Bearing Debt As of June 30, 2002 1,486,021

Estimated Outstanding Preferred Equity As of June 30, 2002 -

Equity Value 5,372,921

% of Ownership 41.66%

Value of Equity Interest Before Discounts 2,238,359

Minority Interest Discount % 26.95%

Discount 603,327

Value of Minority Interest 1,635,032

Discount for Lack of Marketability % 33.45%

Discount 546,918

Value of Equity Interest 1,088,114$

14


SCHEDULE 1B

15


16


SCHEDULE 1C

Discount Rate Analysis

Capital Structure

Estimated Market Value of Common Equity 1,232,207$

Estimated Market Value of Debt 903,471$

Estimated Market Value of Preferred -$

Total Value 2,135,678$

Discount Rate Calculation

Risk Free Rate (10-Year Treasury Rate) 3.00%

Market Risk Premium 6.00%

Industry Beta 1.20

Estimated Market Cost of Common Equity 10.20%

Small Company Premium 5.00%

Adjusted Estimated Market Cost of Common Equity 15.20%

Local Competition 1.00%

Local Economic Risk 5.00%

Final Adjusted Estimated Market Cost of Equity 21.20%

Common Equity Weight 0.58

Estimated Cost of Debt 6.00%

After Tax Cost of Debt @ 40% Tax Rate 3.60%

Debt Weight 0.42

Estimated Cost of Preferred Equity 9.00%

Preferred Equity Weight -

Estimated Discount Rate (WACC) 13.75%

17


SCHEDULE 1D

EVA® / Economic Profit Check

EVA® Value

Historical Forecast

Year 1999 2000 2001 2002 2003 2004 2005 2006

NOPLAT 296,811 345,775 593,164 768,588 883,810 972,147 1,020,732

Operating Invested Capital 1,607,789 1,817,009 3,100,739 3,616,338 4,142,191 4,526,109 4,820,446 4,982,332

ROIC 18.5% 19.0% 19.1% 21.3% 21.3% 21.5% 21.2%

Discount Rate 13.8% 13.8% 13.8% 13.8% 13.8% 13.8% 13.8%

Difference (EVA®/Economic Profit Percentage) 4.7% 5.3% 5.4% 7.5% 7.6% 7.7% 7.4%

Operating Invested Capital 1,607,789 1,817,009 3,100,739 3,616,338 4,142,191 4,526,109 4,820,446 4,982,332 Terminal Value

Required Return 221,144 249,921 426,493 497,411 569,740 622,546 663,031

EVA® 75,667 95,853 166,671 271,177 314,071 349,601 357,702 5,318,477

% Growth in EVA® 26.7% 73.9% 62.7% 15.8% 11.3% 2.3%

Discount Rate 13.8% Edit Check - - - - - - -

Present Value Discount Factor 0.87909 0.77279 0.67935 0.59721 0.52500 0.52500

PV EVA® As of June 30, 2001 146,518 209,564 213,364 208,784 187,792 2,792,180

Market Value Added (Goodwill Value) 3,758,202$

Operating Invested Capital as of June 30, 2001 3,100,739$

Firm Value As of June 30, 2001 6,858,941$

Edit Check (Should Equal 0) -$

18


SCHEDULE 1E

Discounted Cash Flow Equity Value vs. Tax Rate vs. Discount Rate Sensitivity Analysis

Discount Rate

Tax Rate 7.8% 10.8% 13.8% 16.8% 19.8%

20% 6,656,094$ 2,889,557$ 1,713,186$ 1,142,982$ 808,646$

30% 5,639,237$ 2,408,673$ 1,400,650$ 912,668$ 626,979$

40% 4,622,381$ 1,927,789$ 1,088,114$ 682,354$ 445,312$

50% 3,605,524$ 1,446,905$ 775,578$ 452,040$ 263,645$

60% 2,588,667$ 966,021$ 463,042$ 221,726$ 81,978$

19


SCHEDULE 1F

Discounted Cash Flow Equity Value vs. Growth Rate vs. Discount Rate Sensitivity Analysis

Discount Rate

Growth Rate 7.8% 10.8% 13.8% 16.8% 19.8%

3.0% 2,652,193$ 1,409,710$ 867,461$ 566,566$ 376,892$

4.0% 3,374,913$ 1,630,399$ 966,477$ 619,921$ 408,930$

5.0% 4,622,381$ 1,927,789$ 1,088,114$ 682,354$ 445,312$

6.0% 7,291,830$ 2,350,276$ 1,241,122$ 756,397$ 486,983$

7.0% 17,036,908$ 2,997,815$ 1,439,435$ 845,622$ 535,189$

20


SCHEDULE 1G

Discounted Cash Flow Equity Value vs. Growth Rate vs. Tax Rate Sensitivity Analysis

Tax Rate

Growth Rate 20.0% 30.0% 40.0% 50.0% 60.0%

3.0% 1,405,119$ 1,136,290$ 867,461$ 598,633$ 329,804$

4.0% 1,543,361$ 1,254,919$ 966,477$ 678,035$ 389,593$

5.0% 1,713,186$ 1,400,650$ 1,088,114$ 775,578$ 463,042$

6.0% 1,926,810$ 1,583,966$ 1,241,122$ 898,278$ 555,434$

7.0% 2,203,688$ 1,821,562$ 1,439,435$ 1,057,309$ 675,182$

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SCHEDULE 2

Peer Group

Comparables Min Max Average Median Input Base Value

% of

Ownership

Minority Interest

Discounts

Minority

Interest

Value

Lack of

Marketability

Discount

Indicated

Value

Price/Sales 0.29 1.56 0.80 0.65 0.65 9,370,100 6,090,565 41.66% 0.00% 2,537,329 33.45% 1,688,593

Price/Earnings 17.17 66.42 31.57 23.49 23.49 160,282 3,765,024 41.66% 0.00% 1,568,509 33.45% 1,043,843

Price/Cash Flow 6.11 21.99 14.43 12.19 12.19 218,514 2,663,686 41.66% 0.00% 1,109,691 33.45% 738,500

22


SCHEDULE 3

Comparable

Transactions Min Max Average Median Input Base Value

% of

Ownership

Minority

Interest

Discounts

Minority

Interest

Value

Lack of

Marketability

Discount

Indicated

Value

Price/Sales 0.08 1.73 0.59 0.41 0.41 9,370,100 3,841,741 41.66% 26.95% 1,169,079 33.45% 778,022

Price/EBIT 0.87 40.71 9.03 7.42 7.42 987,002 7,323,554 41.66% 26.95% 2,228,629 33.45% 1,483,152

Price/EBITDA 1.31 19.35 7.85 7.84 7.84 1,046,224 8,202,395 41.66% 26.95% 2,496,068 33.45% 1,661,134

23


SCHEDULE 4

Book Value

Book Value June 30, 2001 777,868$

% of Ownership 41.66%

Book Value of Interest Before Discounts 324,060$

Minority Interest Discount % 26.95%

Discount 87,347$

Book Value of Minority Interest 236,713$

Discount for Lack of Marketability % 33.45%

Discount 79,180$

Book Value of Equity Interest 157,532$

24


SOURCES OF INFORMATION

1. Auto Company, Inc. externally compiled financial statements for the years ending

June 30, 1999 through 2001 and an internal six-month statement ending December

31, 2001.

2. Conversations and correspondence with Mr. Robert Fong, President of Auto

Company, Inc.

3. Company information obtained from Auto Company, Inc. website (www.Auto.com).

4. SIC Code information obtained from Standard Industrial Classification Manual, 1987

and from the Occupational Safety & Health Administration, U.S. Department of

Labor.

5. Public company research from the Wall Street Research Net and Yahoo! Finance.

6. AICPA Practice Aid Series, Assets Acquired in a Business Combination to be Used

in Research and Development Activities: A Focus on Software, Electronic Devices,

and Pharmaceutical Industries, AICPA.

7. Copeland, Tom. Valuation: Measuring and Managing the Value of Companies. New

York, NY: Wiley, 1996.

8. Damodaran, Aswath. Investment Valuation: Tools and Techniques for Determining

the Value of Any Asset. New York, NY: Wiley, 1996. 192 – 197.

9. Fowler, Bradley A. “How Do You Handle It?” Business Valuation Review,

December 1993: 189.

10. Plummer, James L. QED on Venture Capital Financial Analysis. QED Research, Inc.

Palo Alto, CA: 1987.

11. Pratt, Shannon P., Robert F. Reilly and Robert P. Schweihs. Valuing a Business: The

Analysis and Appraisal of Closely Held Companies 3rd

edition. New York, NY:

McGraw-Hill, 1996.

12. Scherlis, Daniel R., and William A. Sahlman, A Method for Valuing High-Risk, Long

Term, Investments: The Venture Capital Method. Boston, MA: Harvard Business

School Publishing: 1987.

13. Houlihan Lokey Howard & Zukin. 2001 Mergerstat Review.

14. Valuation data and research.

25


CERTIFICATION AND CONTINGENT AND LIMITING CONDITIONS

1. The function of this “Basic Valuation” valuation is to provide information for Mr.

Robert Fong regarding the approximate fair market value of Mr. Fong’s 41.66%

minority interest in the Company’s common stock as of June 30, 2001.

2. Factual data and statements of fact contained in this report are true and correct to the

best of IBV’s knowledge and belief. No factors affecting the conclusions have been

knowingly omitted. IBV does not maintain responsibility for any change in its

conclusions due to undisclosed information, information unavailable at the time of

writing, or changes in financial market conditions, industry outlook or Company-

specific events.

3. The analyses, opinions and conclusions in this report are limited only by our

assumptions and limiting conditions, and are our personal, unbiased professional

analyses, opinions and conclusions.

4. Our compensation is not contingent on any resulting action or event from the

analyses, opinions, or conclusions in, or use of, this report.

5. The valuation and its conclusions are subject to review upon presentation of new data

that is not disclosed or unavailable as of the date of this report.

6. No person or persons other than those indicated below have provided significant

professional assistance regarding the production, analysis, opinion, or conclusions of

this “Basic Valuation”.

7. This report is not for the appraisal of real estate, but only for the valuation of the

Company’s operations.

8. The “Basic Valuation” should not be construed as a formal appraisal.

9. No responsibility can be attributed to the appraisers for the inability of the owners to

sell the interest valued in this report.

10. This report assumes that the Company and/or the client is in compliance with all legal

matters, including the assumption of good title with respect to the ownership interest

valued in this report.

11. All ownership information provided by the client is assumed to be correct.

12. Only liabilities or commitments against the Company’s assets indicated in the

furnished financial statements are considered in this report.

13. No expert witness testimony before a court or other government agency is included in

the fees of this report. Expert witness testimony may be provided at Mr. Fong’s

request, provided additional compensation arrangements are agreed upon by IBV and

Mr. Fong.

26


14. This report shall not be made public or shared with any party, by any means, other

than Mr. Fong, his legal counsel, or IBV, unless previously specified. Dissemination

of this report to those restricted above is contingent upon the approval of IBV.

15. The date of value for this report is June 30, 2001. The use of a different date of value

could materially impact the opinions herein.

16. The receipt and acceptance of this report is subject to the foregoing contingent and

limiting conditions.

Date: October 3, 2002

Mr. Ryan W. Fong, CFA

Chief Executive Officer

iBusiness Value

BASIC VALUATION FOR AUTO COMPANY INC - iBusiness value · Financial Statements ..... 4 Adjusted...

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