VERSION: April 12, 2011

Competition Bikes, Inc.Comparative Income StatementsDecember 31, Years 6, 7, and 8

Year 8 Year 7 Year 6REVENUE:Net Sales 5,083,000 5,980,000 4,485,000Cost of Goods Sold 3,711,600 4,342,000 3,294,000 Gross Profit 1,371,400 1,638,000 1,191,000

OPERATING EXPENSESSelling Expenses Advertising (60% variable) 27,428 32,760 23,820 Website Creation and Maintenance 6,000 6,000 6,000 Sales Commissions 152,490 179,400 134,550 Distribution Network Support 50,830 59,800 44,850 Transportation Out ($30/unit contract) 102,000 120,000 90,000 Total Selling Expense 338,748 397,960 299,220

General and Admin Expenses Administrative Salaries 170,000 170,000 140,000 Executive Compensation 220,000 220,000 170,000 Employment taxes 29,835 29,835 23,715 Utilities & Services 150,000 135,000 130,000 Payroll Service - non manufacturing 33,000 33,000 32,000 Research and Development 82,284 98,280 71,460 Depreciation Expense 80,000 80,000 80,000 Other General and Admin Expenses 170,000 158,000 120,500 Total General and Admin Expenses 935,119 924,115 767,675

Total Operating Expenses 1,273,867 1,322,075 1,066,895 OPERATING INCOME 97,533 315,925 124,105

Interest Income (Expense): Interest Income 5,600 5,800 4,200 Interest Expense -55,000 -60,000 -65,000 Interest, net -49,400 -54,200 -60,800 EARNINGS BEFORE INCOME TAXES 48,133 261,725 63,305

Provision for Income Taxes 12,033 65,431 15,826 NET EARNINGS 36,100 196,294 47,479

123 B C D E F G H124125126127 MSRP 2990128 Trade Disc. 1495129 F H130 YR Sales Units Selling Price131 Titianium132 8 Carbon Lite D131 - CL 3400 1,495133 134 7 Carbon Lite D133 - CL 4000 1,495135 136 6 Carbon Lite D135 - CL 3000 1,495137 138139140 140 COGS141 141 Yr 8 Materials 2,220,200142 142 Labor 1,020,000143 143 Overhead 471,400144 144 Total 3,711,600145 145 Yr 7 Materials 2,612,000146 146 Labor 1,200,000147 147 Overhead 530,000148 148 Total 4,342,000149 149 Yr 6 Materials 1,959,000150 150 Labor 900,000151 151 Overhead 435,000152 152 Total 3,294,000

Yr 8 Yr7 Yr 6VariableSales Comm 0 0 0Depreciation 150,000 150,000 150,000Other manu Ex 321,400 380,000 285,000

471,400 530,000 435,000

95

e g iCompetition Bikes, Inc.

Balance SheetsDecember 31, Years 6, 7, and 8

Year 8 Year 7 Year 6ASSETS Current Assets: Cash and Cash Equivalents 445,024 118,549 261,000 Short-Term Investments 220,000 220,000 198,500 Accounts Receivable, net 609,960 717,600 271,503 Raw Materials Inventory 91,573 88,808 104,480 Work In Process Inventory 130,260 130,260 98,820 Finished Goods Inventory 0 0 0 Other Current Assets 110,000 104,000 95,000 Total Current Assets 1,606,817 1,379,217 1,029,303Property and Equipment, at cost: Land 100,000 100,000 100,000 Manufacturing Plants 2,000,000 2,000,000 2,000,000 Non-Manufacturing Assets 800,000 800,000 800,000 Furniture, Fixtures and Equipment 500,000 500,000 500,000

3,400,000 3,400,000 3,400,000 Less Accumulated Depreciation (690,000) (460,000) (230,000) Net Property and Equipment 2,710,000 2,940,000 3,170,000TOTAL ASSETS 4,316,817 4,319,217 4,199,303

LIABILITIESCurrent Liabilities: Accounts and Notes Payable 261,200 195,900 67,080 Accrued Salaries and Related Expense 13,000 12,800 16,000 Other Accrued Expenses 26,000 25,000 22,000 Total Current Liabilities 300,200 233,700 105,080Long-Term Liabilities: Mortgage Payable 1,600,000 1,700,000 1,800,000 Other Long-Term Liabilities 80,000 85,000 90,000 Total Long-Term Liabilities 1,680,000 1,785,000 1,890,000 Total Liabilities 1,980,200 2,018,700 1,995,080

STOCKHOLDERS' EQUITY: Common Stock ($1.00 Par) 1,000,000 1,000,000 1,000,000 Paid In Capital 225,000 225,000 225,000 Retained Earnings 1,211,617 1,175,517 979,223 Treasury Stock, at $4/share cost (25,000 Sh) (100,000) (100,000) 0 Total Stockholders' Equity 2,336,617 2,300,517 2,204,223TOTAL LIABILITIES and EQUITY 4,316,817 4,319,217 4,199,303

Competition Bikes, Inc.Comparative Income StatementsDecember 31, Years 6, 7, and 8

Horizontal Analysis Horizontal AnalysisYear 8 Year 7 Year 6 Years 7 and 8 Years 6 and 7

REVENUE: Change % Inc (Dec) ChangeNet Sales 5,083,000 5,980,000 4,485,000 (897,000) -15.0% 1495000Cost of Goods Sold 3,711,600 4,342,000 3,294,000 (630,400) -14.5% 1048000 Gross Profit 1,371,400 1,638,000 1,191,000 (266,600) -16.3% 447000

OPERATING EXPENSESSelling Expenses Advertising 27,428 32,760 23,820 (5,332) -16.3% 8940 Website Creation and Maintenance 6,000 6,000 6,000 0 0.0% 0 Sales Commissions 152,490 179,400 134,550 (26,910) -15.0% 44850 Distribution Network Support 50,830 59,800 44,850 (8,970) -15.0% 14950 Transportation Out 102,000 120,000 90,000 (18,000) -15.0% 30000 Total Selling Expense 338,748 397,960 299,220 (59,212) -14.9% 98740

General and Admin Expenses Administrative Salaries 170,000 170,000 140,000 0 0.0% 30000 Executive Compensation 220,000 220,000 170,000 0 0.0% 50000 Employment taxes 29,835 29,835 23,715 0 0.0% 6120 Utilities 150,000 135,000 130,000 15,000 11.1% 5000 Payroll Services - Non Manufacturing 33,000 33,000 32,000 0 0.0% 1000 Research and Development 82,284 98,280 71,460 (15,996) -16.3% 26820 Depreciation Expense 80,000 80,000 80,000 0 0.0% 0 Other General and Admin Expenses 170,000 158,000 120,500 12,000 7.6% 37500 Total General and Admin Expenses 935,119 924,115 767,675 11,004 1.2% 156440

Total Operating Expenses 1,273,867 1,322,075 1,066,895 (48,208) -3.6% 255180

OPERATING INCOME 97,533 315,925 124,105 (218,392) -69.1% 191820

Interest Income (Expense): Interest Income 5,600 5,800 4,200 (200) -3.4% 1600 Interest Expense -55,000 -60,000 -65,000 5,000 -8.3% 5000 Interest, net -49,400 -54,200 -60,800 4,800 -8.9% 6600 EARNINGS BEFORE INCOME TAXES 48,133 261,725 63,305 (213,592) -81.6% 198420

Provision for Income Taxes 12,033 65,431 15,826 (53,398) -81.6% 49605 NET EARNINGS 36,100 196,294 47,479 (160,194) -81.6% 148815

Competition Bikes, Inc.Comparative Balance SheetsDecember 31, Years 8 and 7

Year 8 Year 7 Year 6 Horizontal Analysis Horizontal AnalysisASSETS Years 7 and 8 Years 6 and 7Current Assets: Change % Inc (Dec) Change Cash and Cash Equivalents 445,024 118,549 261,000 326,475 275.4% (142,451) Short-Term Investments 220,000 220,000 198,500 0 0.0% 21,500 Accounts Receivable, net 609,960 717,600 271,503 (107,640) -15.0% 446,097 Raw Materials Inventory 91,573 88,808 104,480 2,765 3.1% (15,672) Work In Process Inventory 130,260 130,260 98,820 0 0.0% 31,440 Finished Goods Inventory 0 0 0 0 -- 0 Other Current Assets 110,000 104,000 95,000 6,000 5.8% 9,000 Total Current Assets 1,606,817 1,379,217 1,029,303 227,600 16.5% 349,914 Property and Equipment, at cost: Land 100,000 100,000 100,000 0 0.0% 0 Manufacturing Plants and Offices 2,000,000 2,000,000 2,000,000 0 0.0% 0 Furniture, Fixtures and Equipment 500,000 500,000 500,000 0 0.0% 0

2,600,000 2,600,000 2,600,000 0 0.0% 0 Less Accumulated Depreciation -690,000 -460,000 -230,000 (230,000) 50.0% (230,000)

Net Property and Equipment 2,710,000 2,940,000 3,170,000 (230,000) -7.8% (230,000)

TOTAL ASSETS 4,316,817 4,319,217 4,199,303 (2,400) -0.1% 119,914

LIABILITIESCurrent Liabilities: Accounts and Notes Payable 261,200 195,900 67,080 65,300 33.3% 128,820 Accrued Salaries and Related Expense 13,000 12,800 16,000 200 1.6% (3,200) Other Accrued Expenses 26,000 25,000 22,000 1,000 4.0% 3,000 Total Current Liabilities 300200 233700 105,080 66,500 28.5% 128,620 Long-Term Liabilities: Mortgage Payable 1,600,000 1,700,000 1,800,000 (100,000) -5.9% (100,000) Other Long-Term Liabilities 80,000 85,000 90,000 (5,000) -5.9% (5,000) Total Long-Term Liabilities 1,680,000 1,785,000 1,890,000 (105,000) -5.9% (105,000) Total Liabilities 1,980,200 2,018,700 1,995,080 (38,500) -1.9% 23,620

STOCKHOLDERS' EQUITY: Common Stock ($1.00 Par) 1,000,000 1,000,000 1,000,000 0 0.0% 0 Paid In Capital 225,000 225,000 225,000 0 0.0% 0 Retained Earnings 1,211,617 1,175,517 979,223 36,100 3.1% 196,294 Treasury Stock, at $4 cost (25000 Sh) -100,000 -100,000 0 0 0.0% (100,000) Total Stockholders' Equity 2,336,617 2,300,517 2,204,223 36,100 1.6% 96,294

TOTAL LIABILITIES and EQUITY 4,316,817 4,319,217 4,199,303 (2,400) -0.1% 119,914

Horizontal Analysis Two Wheel Years 6 and 7 Competition Bikes, Inc. Racing

% Inc (Dec) Ratio Analysis: Year 8 Year 7 Year 833.3% Ratio:31.8%37.5% Current Ratio 5.35 5.90 4.2

Acid-Test Ratio 4.25 4.52 3.4

37.5% Inventory Turnover N/A N/A 3.40.0% No FGI. Shipped when made

33.3%33.3% Average Collection Period 43.8 43.8 32.533.3%33.0% Debt Ratio 45.9% 46.7% 38%

Gross Profit Margin 27.0% 27.4% 32.10%21.4%29.4% Operating Profit Margin 1.9% 5.3% 5.20%25.8%

3.8% Net Profit Margin 0.7% 3.3% 5.14%3.1%

37.5% Earnings per Share 0.04 0.20 0.080.0%

31.1% Return on Total Assets 0.8% 4.5% 4.80%20.4%

Return on Common Equity 1.5% 8.5% 8.10%23.9%

Ratios: The Horngren eText has been used for ratio calculations. Other sources might modify the ratio

factors.

154.6% Price / Earnings Ratio 83.73 49.67 29

Times Interest Earned 1.77 5.27 4.2438.1%-7.7%

-10.9%313.4%

313.4%313.4%

Horizontal AnalysisYears 6 and 7

% Inc (Dec)-54.6%10.8%

164.3%-15.0%31.8%--

9.5%34.0%

0.0%0.0%0.0%0.0%

100.0%

-7.3%

2.9%

192.0%-20.0%13.6%

122.4%

-5.6%-5.6%-5.6%1.2%

0.0%0.0%

20.0%N/A

4.4%

2.9%

Competition Bikes, Inc.Comparative Income StatementsDecember 31, Years 6, 7, and 8

Year 8 Year 7 Year 6REVENUE:Net Sales 5,083,000 100.0% 5,980,000 100.0% 4,485,000 100.0%Cost of Goods Sold 3,711,600 73.0% 4,342,000 72.6% 3,294,000 73.4% Gross Profit 1,371,400 27.0% 1,638,000 27.4% 1,191,000 26.6%

OPERATING EXPENSESSelling Expenses Advertising 27,428 0.5% 32,760 0.5% 23,820 0.5% Website Creation and Maintenance 6,000 0.1% 6,000 0.1% 6,000 0.1% Sales Commissions 152,490 3.0% 179,400 3.0% 134,550 3.0% Distribution Network Support 50,830 1.0% 59,800 1.0% 44,850 1.0% Transportation Out 102,000 2.0% 120,000 2.0% 90,000 2.0% Total Selling Expense 338,748 6.7% 397,960 6.7% 299,220 6.7%

General and Admin Expenses Administrative Salaries 170,000 3.3% 170,000 2.8% 140,000 3.1% Executive Compensation 220,000 4.3% 220,000 3.7% 170,000 3.8% Employment taxes 29,835 0.6% 29,835 0.5% 23,715 0.5% Utilities 150,000 3.0% 135,000 2.3% 130,000 2.9% Payroll Services - non manufacturing 33,000 0.6% 33,000 0.6% 32,000 0.7% Research and Development 82,284 1.6% 98,280 1.6% 71,460 1.6% Depreciation Expense 80,000 1.6% 80,000 1.3% 80,000 1.8% Other General and Admin Expenses 170,000 3.3% 158,000 2.6% 120,500 2.7% Total General and Admin Expenses 935,119 18.4% 924,115 15.5% 767,675 17.1%

Total Operating Expenses 1,273,867 25.1% 1,322,075 22.1% 1,066,895 23.8% OPERATING INCOME 97,533 1.9% 315,925 5.3% 124,105 2.8%

Interest Income (Expense): Interest Income 5,600 0.1% 5,800 0.1% 4,200 0.1% Interest Expense -55,000 -1.1% -60,000 -1.0% -65,000 -1.4%

Interest, net -49,400 -1.0% -54,200 -0.9% -60,800 -1.4% EARNINGS BEFORE INCOME TAXES 48,133 0.9% 261,725 4.4% 63,305 1.4%

Provision for Income Taxes 12,033 0.2% 65,431 1.1% 15,826 0.4% NET EARNINGS 36,100 0.7% 196,294 3.3% 47,479 1.1%

Competition Bikes, Inc.Balance Sheets

December 31, Years 6, 7, and 8

Year 8 Year 7 Year 6ASSETSCurrent Assets: Cash and Cash Equivalents 445,024 10.3% 118,549 2.7% 261,000 6.2% Short-Term Investments 220,000 5.1% 220,000 5.1% 198,500 4.7% Accounts Receivable, net 609,960 14.1% 717,600 16.6% 271,503 6.5% Raw Materials Inventory 91,573 2.1% 88,808 2.1% 104,480 2.5% Work In Process Inventory 130,260 3.0% 130,260 3.0% 98,820 2.4% Finished Goods Inventory 0 0.0% 0 0.0% 0 0.0% Other Current Assets 110,000 2.5% 104,000 2.4% 95,000 2.3% Total Current Assets 1,606,817 37.2% 1,379,217 31.9% 1,029,303 24.5%

Property and Equipment, at cost: 100,000 2.3% 100,000 2.3% 100,000 2.4% Land 2,000,000 46.3% 2,000,000 46.3% 2,000,000 47.6% Manufacturing Plants and Offices 500,000 11.6% 500,000 11.6% 500,000 11.9% Furniture, Fixtures and Equipment 2,600,000 60.2% 2,600,000 60.2% 2,600,000 61.9% Less Accumulated Depreciation (690,000) -16.0% (460,000) -10.7% -230,000 -5.5% Net Property and Equipment 2,710,000 62.8% 2,940,000 68.1% 3,170,000 75.5%TOTAL ASSETS 4,316,817 100.0% 4,319,217 100.0% 4,199,303 100.0%

LIABILITIESCurrent Liabilities: Accounts and Notes Payable 261,200 6.1% 195,900 4.5% 67,080 1.6% Accrued Salaries and Related Expense 13,000 0.3% 12,800 0.3% 16,000 0.4% Other Accrued Expenses 26,000 0.6% 25,000 0.6% 22,000 0.5% Total Current Liabilities 300,200 7.0% 233,700 5.4% 105,080 2.5%

Long-Term Liabilities: Mortgage Payable 1,600,000 37.1% 1,700,000 39.4% 1,800,000 42.9% Other Long-Term Liabilities 80,000 1.9% 85,000 2.0% 90,000 2.1% Total Long-Term Liabilities 1,680,000 38.9% 1,785,000 41.3% 1,890,000 45.0% Total Liabilities 1,980,200 45.9% 2,018,700 46.7% 1,995,080 47.5%

STOCKHOLDERS' EQUITY: Common Stock ($1.00 Par) 1,000,000 23.2% 1,000,000 23.2% 1,000,000 23.8% Paid In Capital 225,000 5.2% 225,000 5.2% 225,000 5.4% Retained Earnings 1,211,617 28.1% 1,175,517 27.2% 979,223 23.3% Treasury Stock, at $4 cost (25000 Sh) -100,000 -2.3% -100,000 -2.3% 0 0.0% Total Stockholders' Equity 2,336,617 54.1% 2,300,517 53.3% 2,204,223 52.5%TOTAL LIABILITIES and EQUITY 4,316,817 100.0% 4,319,217 100.0% 4,199,303 100.0%

Competition Bikes, Inc.Historical Trend AnalysisDecember 31, Years 6-8

Year 8 Year 7 Year 6

Net Sales 5,083,000 5,980,000 4,485,000

Trend Percentages 113.3% 133.3% 100.0%

Competition Bikes, Inc.Forecasted Trend Analysis with Year 8 as base year

December 31, Years 9, 10, & 11

Year 11 Year 10 Year 9 Year 8

Net Sales 5,681,000 5,471,700 5,247,450 5,083,000

Trend Percentages 111.8% 107.6% 103.2% 100.0%

Internal Controls

SARBANES - OXLEY (SOX) Requirements Based on what you know about the company internal controls did management make the correct

statement to comply with Sarbanes-Oxley requirements.

“The purchasing department will issue a purchase order to the supplier based on the monthly budget projections. Purchasing checks with three sources for similar quality materials and selects the low bidder from the three. The purchase order is sent to the supplier by the Purchasing Department on the first of the projected month. Upon receipt of the goods they will be brought to the production line for use during the month. Any unused parts are sent to the raw materials inventory stores on the last day of the month. Purchasing sends the suppliers invoice to accounting and accounting writes a check to pay the invoice. “

Management is responsible for ensuring the internal control processes prevent material misstatements from being reported in the financial statements. They also must provide a Report on Internal Control that is published in the annual report. The following excerpt from the Competition Bikes, Inc. year end report indicates no material weaknesses existed.

“The management of Competition Bikes, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Competition Bikes, Inc. internal control system was designed to provide reasonable assurance to the company’s management and board of directors regarding the preparation and fair presentation of published financial statements.

Competition Bikes, Inc. assessed the effectiveness of the company’s internal control over financial reporting as of December 31, Year 8. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment we believe that, as of December 31, Year 8, the company’s internal control over financial reporting is effective based on those criteria.”

Units expected to be sold 3510

Competition Bikes, Inc.Balance Sheet

December 31, Year 8 Year 8

ASSETS Current Assets: Cash and Cash Equivalents 445,024 Short-Term Investments 220,000 Accounts Receivable, net 609,960 Raw Materials Inventory 91,573 Work In Process Inventory 130,260 Finished Goods Inventory 0 Other Current Assets 110,000 Total Current Assets 1,606,817Property and Equipment, at cost: 0 Land 100,000 Manufacturing Plants and Offices 2,000,000 Furniture, Fixtures and Equipment 500,000

3,400,000 Less Accumulated Depreciation -690,000 Net Property and Equipment 2,710,000TOTAL ASSETS 4,316,817

LIABILITIESCurrent Liabilities: Accounts and Notes Payable 261,200 Accrued Salaries and Related Expense 13,000 Other Accrued Expenses 26,000 Total Current Liabilities 300,200Long-Term Liabilities: Mortgage Payable 1,600,000 Other Long-Term Liabilities 80,000 Total Long-Term Liabilities 1,680,000 Total Liabilities 1,980,200

STOCKHOLDERS' EQUITY: Common Stock ($1.00 Par) 1,000,000 Paid In Capital 225,000 Retained Earnings 1,211,617 Treasury Stock, at $4/share cost (25,000 Sh) -100,000 Total Stockholders' Equity 2,336,617TOTAL LIABILITIES and EQUITY 4,316,817

Competion Bikes, Inc.Sales Budget

For the Year Ended December 31, Year 9

Sales in units 3,510

Selling price 1,495Revenue From Sales 5,247,450

Competion Bikes, Inc.Schedule of Cash Receipts

Accounts receivable, beginning balance 609,960Total budgeted revenue 5,247,450Accounts receivable 629694Cash receipts from collections 5,227,716

Competion Bikes, Inc.Production Budget

For the Year Ended December 31, Year 96970 Expected units to be sold 3,51071 Plus desired ending inventory Made to order72 Less beginning inventory Made to order73 Total Units to Be Produced 3,510747576 Competion Bikes, Inc.77 Raw Materials Budget--Components78 For the Year Ended December 31, Year 97980 Carbon Lite8182 Expected bikes to be produced 3,51083 Plus target ending inventory 14084 Less beginning inventory 14085 Total component sets to be purchased 3,51086 Unit price 27587 Total Costs 9652508889 Competion Bikes, Inc.90 Raw Materials Budget--Frame Materials91 For the Year Ended December 31, Year 99295 Expected bikes to be produced 3,51096 Carbon Fiber Sheets/Unit 4297 Total materials for frame production 147,42098 Target ending Inventory 5,89799 Less beginning inventory 5,897

100 Total Carbon Fiber sheets to purchase 147,420101 Unit price 9.00102 Total Cost for Frame Materials 1,326,778103104105 Competion Bikes, Inc.106 Schedule of Expected Cash Disbursements107108 Accounts payable, beginning balance 261,200109 Total frame materials purchases 1,326,778

110 Total cost of component sets 965250111 Accounts payable, ending balance 229203112 Cash disbursements for materials 2,324,025113114 Competion Bikes, Inc.115 Direct Labor Budget116 For the Year Ended December 31, Year 9117118 Expected production 3,510119 Direct Labor hours per unit 15120 Total direct labor hours needed 52,650121 Cost per direct labor hour 20122 Total direct labor cost per model 1,053,000123124125 Competion Bikes, Inc.126 Manufacturing Overhead Budget127 For the Year Ended December 31, Year 9128129 Unit Level Costs:130 Quality Control 122,850131 Total Unit Level Costs 122,850132133 Batch Level Costs:134 Factory Setups 34,481135 Material Handling 41,294136 Total Batch Level Costs 75,775137138 Product Level Costs:139 Engineering Services 77,426140 Total Product Level Costs 77,426141142 Facility and General Operations Level Costs:143 Utilities and Services 55,747144 Depreciation 150,000145 Total Facility and General Operations Level Costs 205,747146147 Total Overhead 481,798148 Less Depreciation 150,000149 Total Cash Disbursed for Overhead. 331,798150151152 Competion Bikes, Inc.153 Selling, General, and Administrative Budget154 For the Year Ended December 31, Year 9155156 Unit Level Expenses:157 Sales Commissions (variable) 157,424158 Total Unit Level Expenses 157,424159160 Customer Level Expenses:161 Distribution Network Support (fixed) 50,830162 Transportation Out (variable) 105,300

163 Total Customer Level Expenses 156,130164165 Facility and General Operations Level Expenses:

Advertising (variable) 28,412 Website Creation and Maintenance 6,000 Administrative Salaries 170,000 Executive Compensation 220,000 Employment taxes 29,835 Utilities 150,000 Payroll Services 33,000 Research and Development 85,237 Depreciation Expense 80,000 Other General and Admin Expenses 170,000 Utilities and Services 54,000

Total Facility and General Operations Level Expenses 1,026,485

Total Overhead 1,340,038181 Less Depreciation 80,000182 Total Cash Disbursed for Overhead. 1,260,038183184185 Competion Bikes, Inc.186 Cash Budget187 For the Year Ended December 31, Year 9188189 Receipts: 190 Cash Receipts 5,227,716191 Interest Income 5,600192 5,233,316193 Disbursements194 Raw Materials 2,324,025 .195 Direct Labor 1,053,000 .196 Manufacturing Overhead 331,798197 Selling and Admin Expenses 1,260,038

Mortgage Payable 100,000 Other Long-Term Liabilities 5,000

208 Interest Expense Paid 50,000209 Total of Cash Disbursements 5,123,862210211212 Net Cash Increase (Decrease) 109,454213 Cash Balance at Beginning of Year 445,024

Cash Balance at Year end 554,478

Competition Bikes, Inc.Budgeted Schedule of Cost of Goods Manufactured and Sold

For the Year Ended December 31, Year 9

Direct Materials223 Raw Materials Inventory, January 1 91,681

Add: Purchases of Raw Materials 2,292,028 Raw Materials Available for Use 2,383,709 Deduct: Raw Materials, December 31 91,681Direct Materials Used 2,292,028Direct Labor 1,053,000Manufacturing Overhead:

Quality Control 122,850Factory Setups 34,481Material Handling 41,294Engineering Services 77,426Utilities and Services 55,747Depreciation 150,000

Total Overhead 481,798Cost of Goods Manufactured 3,826,826Add: Finished Goods Inventory, January 1 0Cost of Goods Available for Sale 3,826,826Deduct: Finished Goods Inventory, December 31 0

Cost of Goods Sold 3,826,826

Competion Bikes, Inc.Budgeted Income Statement

For the Year Ended December 31, Year 9

Year 9 REVENUE:Net Sales 5,247,450Cost of Goods Sold 3,826,826 Gross Margin 1,420,624

OPERATING EXPENSESSelling, General, Administrative Expenses 1,340,038 OPERATING INCOME 80,585

Interest Income (Expense): Interest Income 5600 Interest Expense 50000 Interest, net -44400 Earnings Before Income Taxes 36,185

Competition Bikes, Inc.Budgeted Balance Sheet

For the Year Ended December 31, Year 9

ASSETSCurrent Assets: Cash and Cash Equivalents 554,478 Short-Term Investments 220,000 Accounts Receivable, net 629,694 Raw Materials Inventory 91,573 Work In Process Inventory 130,260 Finished Goods Inventory 0

Other Current Assets 110,000 Total Current Assets 1,736,005Property and Equipment, at cost: Land 100,000 Manufacturing Plants and Offices 2,000,000 Furniture, Fixtures and Equipment 500,000

3,400,000 Less Accumulated Depreciation -920,000 Net Property and Equipment 2,480,000TOTAL ASSETS 4,216,005

LIABILITIESCurrent Liabilities: Accounts and Notes Payable 229,203

291 Accrued Salaries and Related Expense 13,000292 Other Accrued Expenses 26,000293 Total Current Liabilities 268,203294 Long-Term Liabilities:295 Mortgage Payable 1,500,000296 Other Long-Term Liabilities 75,000297 Total Long-Term Liabilities 1,575,000298 Total Liabilities 1,843,203299300 STOCKHOLDERS' EQUITY:301 Common Stock ($1.00 Par) 1,000,000302 Paid In Capital 225,000303 Retained Earnings 1,247,803304 Treasury Stock, at cost (25,000 shares @ $4/share -100,000305 Total Stockholders' Equity 2,372,803306 TOTAL LIABILITIES and EQUITY 4,216,005307308309310 Competition Bikes, Inc.

Budgeted Cash Flow StatementFor the Year Ended December 31, Year 9

Cash Flows from Operating Activity:Cash receipts from customers 5,227,716Interest Revenue 5,600Cash Paid for raw materials 2,324,025Cash Paid for Direct Labor 1,053,000Cash Paid for Manufacturing Overhead 331798Cash Paid for Selling, General, Admin Expenses 1,260,038Interest Expense 50,000

5,018,862Net Cash Flow from Operating Activities 214,454

Cash Flows from Investing Activity:

Net Cash Flow from Investing Activities 0

Cash Flows from Financing Activity:

Loan Repayments -5000Mortgage Principal -100000

-105000Net Cash Flow from Financing Activities

Net Increase in Cash 109,454

Beginning of Year Cash Balance 445,024

End of Year Cash Balance 554,478

Competition Bikes, Inc.Budgeted Contribution Margin Income Statement

December 31, Year 9

Standard Output Actual Output Variance Favorable/3510 3400 Amount Unfavorable

REVENUE:Net Sales 5,247,450 5,083,000 -164,450 U

Variable Costs:Direct Materials 2,292,028 2,220,200 -71,828 FDirect Labor 1,053,000 1,020,000 -33,000 FManufacturing Overhead - Variable 331,798 321,400 -10,398 FVariable Selling Expenses 157,424 152,490 -4,934 FAdvertising Expenses 28,412 31,250 2,838 UTransportation Out 105,300 107,569 2,269 UTotal Variable Costs: 3,967,962 3,852,909 -115,053 F

Contribution Margin 1,279,488 1,230,091 -49,397 U

Fixed Manufacturing Expenses:Depreciation 150000 150000 0 --Total Fixed Manufacturing Expenses 150,000 150,000 0 --

Fixed Selling Expenses: Website Creation and Maintenance 6,000 6,000 0 -- Distribution Network Contracted Support 50,830 50,830 0 -- Total Selling Expense 56,830 56,830 0 --

Fixed General and Admin Expenses: Administrative Salaries 170,000 170,000 0 -- Executive Compensation 220,000 220,000 0 -- Employment taxes 29,835 29,835 0 -- Utilities and services 150,000 150,000 0 -- Payroll Services 33,000 33,000 0 --

Research and Development 85,861 82,284 -3,577 F Depreciation Expense 80,000 80,000 0 -- Other General and Admin Expenses 170,000 170,000 0 --

Other Utilities and Services 54,000 54,000 -- Total General and Admin Expenses 992,696 989,119 -3,577 F

Total Operating Expenses 1,199,526 1,195,949 -3,577 F

OPERATING INCOME 79,962 34,142 -45,820 U

THIS STATEMENT IS PRESENTED IN ANNUAL REPORT SEQUENCE. SOME OF THE ANALYSISSHEETS THAT FOLLOW ARE IN YEAR TO YEAR ORDER. BE SURE TO SELECT CORRECT DATA.

Competition Bikes, Inc. (Forecasted Canadian Operations)Comparative Pro Forma Income Statements - Low Sales Expectations

December 31, Years 13 - 9

Year 13 Year 12 Year 11 Year 10 Year 9REVENUE:Net Sales 840,931 824,442 808,276 800,274 792,350Cost of Goods Sold 548,168 537,419 526,882 521,665 516,500 Gross Profit 292,763 287,022 281,395 278,609 275,850

OPERATING EXPENSESSelling and Admin Expenses Advertising 90,000 90,000 100,000 110,000 120,000 Sales Commissions 8,783 8,611 8,442 8,358 8,276 Distribution Network Support 2,928 2,870 2,814 2,786 2,759 Transportation Out ($30/unit contract) 15,000 15,000 15,000 15,000 15,000 Factory Manager/Staff 66,853 63,669 60,638 57,750 55,000 Total Selling and Admin 183,563 180,150 186,893 193,894 201,034

Depreciation Expense 20,000 20,000 20,000 20,000 20,000 EARNINGS 89,200 86,872 74,501 64,714 54,816

Cash Flows 109,200 106,872 94,501 84,714 74,816

Competition Bikes, Inc. (Forecasted Canadian Operations)Comparative Income Statements - Moderate Sales Expectations

December 31, Years 6, 7, and 8

Year 13 Year 12 Year 11 Year 10 Year 9

REVENUE:Net Sales 935,786 891,224 848,785 820,082 792,350Cost of Goods Sold 604,120 575,353 547,955 531,995 516,500 Gross Profit 331,665 315,872 300,830 288,087 275,850

OPERATING EXPENSESSelling and Admin Expenses Advertising 90,000 90,000 100,000 110,000 120,000 Sales Commissions 9,950 9,476 9,025 8,643 8,276 Distribution Network Support 3,317 3,159 3,008 2,881 2,759 Transportation Out ($30/unit contract) 15,000 15,000 15,000 15,000 15,000 Factory Manager/Staff 66,853 63,669 60,638 57,750 55,000 Total Selling and Admin 185,119 181,304 187,671 194,273 201,034

Depreciation Expense 35,000 35,000 35,000 35,000 35,000 Earnings before Interest and Tax 146,546 134,568 113,160 93,814 74,816

Cash Flows 181,546 169,568 148,160 128,814 109,816

Use cell K6 to enter the EBIT from the Canadian Sales Forecast. Each year can be analyzed individually. 0 Year 9Year 10

CHOOSING AN OPTIMAL CAPITAL STRUCTURE FOR THE MODERATE CANADIAN BUDGETED EARNINGS Year 11Year 12Year 13

50% Preferred 20% 40% 60%Alternative Capital Sources (5%, $50 par) and 9% Bonds and 9% Bonds and 9% Bonds and

9% Bonds 50% Common Stock Common Stock Common Stock Common StockBonds 600,000 120,000 240,000 360,000Preferred 300,000Common 300,000 480,000 360,000 240,000Total 600,000 600,000 600,000 600,000 600,000

Earnings before Interest and Tax (EBIT) 0 0 0 0 0Interest on Bonds 54,000 0 10,800 21,600 32,400 Income before tax (EBT) -54,000 0 -10,800 -21,600 -32,400Income Tax (25% marginal rate) -13,500 0 -2,700 -5,400 -8,100 Net Income -40,500 0 -8,100 -16,200 -24,300Preferred Stock Dividends 15,000Total Income Available for Common Stock -40,500 -15,000 -8,100 -16,200 -24,300Common Stock Shares Outstanding 975,000 1,275,000 1,455,000 1,335,000 1,215,000Earnings per Common Stock share -0.042 -0.012 -0.006 -0.012 -0.020

Low Moderate74,816 109,81684,714 128,81494,501 148,160

106,872 169,568109,200 181,546

Competition Bikes, Inc. Capital Budgeting for New Canadian Plant decision

Projected Income Statement for New Product - Low DemandYear 9 Year 10 Year 11 Year 12 Year 13

Expected Annual Sales Increase from New Location 792,350 800,274 808,276 824,442 840,931

Expected Costs of New Product: Cost of Goods Sold (Direct materials & Labor, $80/unit O/H 516,500 521,665 526,882 537,419 548,168 Depreciation on new asset 20,000 20,000 20,000 20,000 20,000 Selling and administrative expenses 201,034 193,894 186,893 180,150 183,563Income before taxes 54,816 64,714 74,501 86,872 89,200Income tax at 25% marginal rate 13,704 16,179 18,625 21,718 22,300Net income 41,112 48,536 55,876 65,154 66,900Net cash flow 61,112 68,536 75,876 85,154 86,900

Projected Income Statement for New Product - Moderate DemandYear 9 Year 10 Year 11 Year 12 Year 13

Expected Annual Sales Increase from New Location 792,350 820,082 848,785 891,224 935,786

Expected Costs of New Product: Cost of Goods Sold (Direct materials & Labor, $80/unit O/H 516,500 531,995 547,955 575,353 604,120 Depreciation on new asset 20,000 20,000 20,000 20,000 20,000 Selling and administrative expenses 201,034 194,273 187,671 181,304 185,119Income before taxes 54,816 73,814 93,160 114,568 126,546Income tax at 25% marginal rate 13,704 18,453 23,290 28,642 31,636Net income 41,112 55,360 69,870 85,926 94,909Net cash flow 61,112 75,360 89,870 105,926 114,909

Net Present Value - Low Demand: 10% Present Cash Flows PV Factors Value

Year 9 61,112 0.909 55551

Year 10 68,536 0.826 56610Year 11 75,876 0.751 56983Year 12 85,154 0.683 58160Year 13 86,900 0.621 53965Working Capital Return 200,000 0.621 124200Salvage Return 250,000 0.621 155250

Total Present Value 560,719Investment 600,000Net Present Value -39,281

Net Present Value - Moderate Demand: 10% Present Cash Flows PV Factors Value

Year 9 61,112 0.909 55551Year 10 75,360 0.826 62248Year 11 89,870 0.751 67492Year 12 105,926 0.683 72347Year 13 114,909 0.621 71359Working Capital Return 200,000 0.621 124200Salvage Return 250,000 0.621 155250

Total Present Value 608,447Investment 600,000Net Present Value 8,447

Internal Rate of Return: Low Demand Moderate DemandCash Flows Cash Flows

Investment -600,000 -600,000Year 1 61,112 61,112Year 2 68,536 75,360Year 3 75,876 89,870Year 4 85,154 105,926Year 5 536,900 564,909

Internal Rate of Return 8.2% 10.4%

Competition Bikes, Inc. Lease vs. Buy DecisionThe $200,000 in working capital and $50,000 down payment would have to be internally funded.

Interest and Principal CalculationsPayments

Loan Beg., Year End YearEnd of Year Payments Principal Interest Principal Principal

9 83089 350,000 21,000 62,089 287,91110 83089 287,911 17,275 65,814 222,09711 83089 222,097 13,326 69,763 152,33312 83089 152,333 9,140 73,949 78,38413 83089 78,384 4,703 78,386 -1

After tax Cash Flow if PurchasedLoan Operational Total Tax After Tax

End of Year Payments Costs Depreciation Interest Deductions Shields Cash Flows9 83089 18,000 20,000 21,000 142,089 35,522 65,567

10 83089 18,000 20,000 17,275 138,364 34,591 66,49811 83089 18,000 20,000 13,326 134,415 33,604 67,48512 83089 18,000 20,000 9,140 130,229 32,557 68,53213 83089 18,000 20,000 4,703 125,792 31,448 69,641

Lease vs. Purchase Comparison of Cash Flows

Leasing PurchasingAfter Tax Present Value Present Value After Tax Present Value Present Value

End of Year Cash Flows Factors of Outflows Cash Flows Factors of OutflowsYear 8 Down Payment 50,000

9 67,500 0.943 63,653 65,567 0.943 61,82910 67,500 0.890 60,075 66,498 0.890 59,18311 67,500 0.840 56,700 67,485 0.840 56,68812 67,500 0.792 53,460 68,532 0.792 54,27713 67,500 0.747 50,423 69,641 0.747 52,022

Cash buyout 50,000 0.747 37,350321,660 333,999

Assessing Expansion by Merger or Acquistion

CONSIDER A MERGERFinancial Data for Competition Bikes and Canadian Biking

Competition Bikes Canadian BikingEarnings Available for Common Stock 54,816 24,200# of shares of common stock outstanding 975,000 200,000Earnings per share 0.056 0.121Market price per share $2.25 $1.35 Price/Earnings ratio 40 11

Earnings per ShareBefore Merger After Merger

Competition Bikes 0.056 0.076Canadian Biking 0.121

Canadian Biking Earnings ProjectionsYear 9 Year 10 Year 11 Year 12 Year 13

After tax earnings per year 24684 27152 29868 32854 36140Cash Flows 53244 56255 59025 62071 65423Canadian Biking has been increasing sales over the last couple of years.This growth is expected to continue at about 10% per year.

CONSIDER AS AN ACQUISTION

Net Present Value of Canadian Biking Present Value Present

Years Cash Inflows factor Value9 53,244 0.897 47,760

10 56,255 0.797 44,83611 59,025 0.712 42,02612 62,071 0.636 39,477 Offer/share: 1.4313 65,423 0.567 37,095

Total 296,019 211,193 Offer Price: 286,000

San Diego Plant Sales Mix (Titanium, 900 units; CarbonLite, 500 units)

Titanium CarbonLite TotalSales price per unit 900 1495Variable Cost per Unit 679 1384Contribution Margin per Unit 221 111Sales mix in units 900 500 1400Contributin margin 198900 55500 254400Weight average contribution margin/unit 181.71

Breakeven units for the product sales mix: 2201

The breakeven point in units for each model.

Titanium 1415CarbonLite 786

The breakeven point in sales dollars for each model.Units Revenue/unit Total

Titanium 1415 900 1,273,500CarbonLite 786 1495 1,175,070

2,448,570

San Diego Sales Mix (Titanium, 900 units; CarbonLite, 500 units)

Determine the Competition Bikes' breakeven point based on the San Diego plants costs and the fixed costs given in the case.

$50,000 increase in fixed costs and 10% direct materials increase

Titanium CarbonLite TotalSales price per unit 900 1495Variable Cost per Unit 709.30 1451Contribution Margin per Unit 191 44Sales mix in units 900 500 1400Contributin margin 171630 22000 193630Weight average contribution margin/unit 138

Determine the breakeven point for Competition Bikes with increases:Breakeven units for the product sales mix: 3254

The breakeven point in units for each model with increases.

Titanium 2092CarbonLite 1162

The breakeven point in sales dollars for each model with increases.

Titanium 2092 900 1,882,800CarbonLite 1162 1495 1,737,190

3,619,990

Titanium Units 900Carbon Lite Units 500

Overhead Analysis - Traditional vs. ABCSix overhead items with identified costs

Item Cost Driver Pool Rate Product Line

Factory 33,400 Setups 545 61.284 Titanium 45 2,757.80 900 3.06Setups Carbon Lite 500 30,642.20 500 61.28

Quality 119,000 QC Inspections 509 233.792 Titanium 9 2,104.13 900 2.34Control Carbon Lite 500 116,895.87 500 233.79

Engineering 75,000 Engineering 12 6250.00 Titanium 2 12,500.00 900 13.89Service Carbon Lite 10 62,500.00 500 125.00

Product 40,000 Forklift Service 3800 10.526 Titanium 1800 18,947.37 900 21.05Movements Carbon Lite 2000 21,052.63 500 42.11

Utilites 54,000 Factory use by prod 1400 38.571 Titanium900

34,714.29 900 38.57

Carbon Lite 500 19,285.71 500 38.57Total

Depreciation 150,000 Factory use by prod 2300 65.217 Titanium1800

117,391.30 900 130.43

Carbon Lite 500 32,608.70 500 65.22

Activity Cost Pool

Cost Driver Quantity

Cost Driver Quantity for Product Line

Activity Cost for Product

Line

Product Line Production

Volume

Activity Cost per Unit of

Product

471400

Summary: Titanium Carbon DLTraditional ABC Traditional ABC

Direct Material 272,700 272,700 335,000 335000Direct Labor 129,600 129,600 112,000 112000Total direct cost per unit for materials and labor 402,300 402,300 447,000 447,000

Manufacturing Overhead (ABC) Traditional 239,020 232,380Factory Setups 2,758 30,642Quality Control 2,104 116,896Engineering Services 12,500 62,500Product Movements 18,947 21,053Utiliities and Services 34,714 19,286Depreciation 117,391 32,609Total ABC Overhead Cost ABC 188,415 282,985Total Product cost 641,320 590,715 679,380 729,985

Unit Cost Comparisons:TitaniumUnit Cost - Traditional 713 Unit Cost SummaryUnit Cost - Activity Based 656 Titanium XL 900

CarbonLite 500

Carbon Lite DM -T 303Unit Cost - Traditional 1,359 -C 670Unit Cost - Activity Based 1,460 DL - T 144

-C 224