Outline of �The Deal�

Outline of “The Deal” Advanced Business Valuation Conference Sheraton Hotel Seattle, Washington October 25-26, 2001 1 Outline “The Deal” This session is designed to educate appraisers about the process of a merger and acquisition transaction and how the different valuation and technical disciplines are used. The Subject Company, Suggins Rentals (a fictitious name), is a family business engaged in the rental and operation of heavy duty cranes for industrial and commercial use. The business is valued primarily on a cash flow basis but asset values are important, as well. Real estate is a key component and environmental concerns are directly linked to this. Attached to this handout are the basic schedules and tables to be used in the negotiations. 2 Outline “The Deal” (Cont…) The Players: Lynn McCrary (Buyer), Bob Howard (Seller), Alex Howard (Buyer’s Advisor- BV), Al Lannom (Seller’s Advisor-BV), Ray Klaris (Real Estate appraisal), and Will Frazier (Moderator). ACT I Participants: Seller (S), Seller’s Advisor (SA), Buyer (B), Buyer’s Advisor (BA) B: Buyer opens with his reasons for wanting the Company and what they plan for it. Buyers tell what they are prepared to pay for the Company and that this will be structured as an asset sale. The price is subject to: 1) financing and 2) appraisal of the equipment, land and buildings. Buyer is willing to pay based on the multiple of EBITDA represented by the average of the comparables shown on Table V-A. 3 Outline “The Deal” (Cont…) BA: The price is based on a multiple of EBITDA but that it must be supported by equipment values of at least 2/3 of overall purchase price. All of the Company’s assets will be pledged as a part of the Buyer’s acquisition financing. The Buyer will put in no more than 30 percent equity. The price also assumes that the seller will leave $5 million in working capital in the Company. S: Seller, Billy Bob Suggins, explains that this is a business that has been in his family for 40 years. His Company is the leading Company in his market area and would give the buyer the lion’s share of this lucrative market. SA: An asset deal is out of the question since it would create additional $4 million in capital gains taxes it would not have in a stock deal. This is news to the Seller. 4 Outline “The Deal” (Cont…) SA: Basing the price of this deal on average of multiples paid in the past is not fair because this Company is well above average. Also, Suggins is expecting significantly higher revenues next year so that the offer is only about 5x estimated EBITDA. Furthermore, the amount of taxes due on an asset sale is unacceptable. On a DCF basis using modest projections of growth and maintenance of margins the Company is worth about 7x EBITDA- not 6x. B/BA: The Buyer will not do a stock purchase primarily because of contingent liability issues. Also, of course, there is no write-up of assets in a stock sale. The Buyer’s Advisor does not want to rely on DCF because the projections appear overly optimistic. 5 Outline “The Deal” (Cont…) ACT II Structuring the Deal Participants: B, BA, S, SA B: Explains that while they are a strategic buyer they still will finance their purchase, therefore the values on the RE and M&E are important. BA: Explains how the financing will be structured. The bank will provide a revolver and working capital line to finance inventory and receivables. Long-term notes will be made on fixed assets based on Table VI. Owners will not put more than 30% cash into the deal so the appraisal on the assets is important. 6 Outline “The Deal” (Cont…) ACT III Real Estate/ Environmental REA explains the appraisal process and the end results. He also notes apparent environmental problems with one property. REA states that they can not borrow on the largest parcel because of the environmental problem. This is out of the equation for the financing package. REA also notes that the second parcel appraises well below the current mortgage on this property. 7 Outline “The Deal” (Cont…) ACT IV Solution and Closing BA and SA: To justify a higher price, SA shows projected DCF, with the higher depreciation base B would have received in an asset sale. The present value of the difference between an asset sale and a stock sale is discussed with BA. Next, they discuss their differences on the Market Approach. Neither B nor S want to undergo a huge remediation cost. The suggestion is made for the Seller to keep the property and lease it to the Buyer. The adjustment to the purchase price is discussed. It is also suggested that the property that does not appraise at an adequate amount will not be financed with the Lender. Buyer will assume mortgage. A funding gap exists because of lower asset values. S agrees to take a note back for the difference. The Deal is done! 8 Exhibits                 Historical Income Statements Historical Balance Sheets Valuation Approaches Income Approach - Discounted Cash Flow Analysis A. Weighted Average Cost of Capital B. Assumptions C. Stock Sale * Projected income statements, balance sheets, and cash flow statements * Indicated Value D. Asset Sale * Projected income statements, balance sheets, and cash flow statements * Indicated Value V. Market Approach - Comparable Transaction Analysis A. Comparable Acquisitions B. Indicated Value VI. Loan Values A. Based on Seller’s Values B. Revised Based on Buyer’s Appraisals 9 I. II. III. IV. Exhibits (Contd.)     VII. Capital Gains Taxes Asset Sale VIII. Seller’s Indicated Net Asset Value – Asset Sale IX. Seller’s Calculation of Final Net proceeds X. Buyer’s Funding Sources 10 I. Historical Income Statements Revenue Expenses Depreciation Employee benefit programs Insurance Leased equipment Payroll tax Repairs and maintenance Supplies Taxes and licenses Travel and entertainment Utilities and telephone Officers salaries Payroll Miscellaneous Total operating expenses Operating profit Other income (expenses): Interest expense Income before taxes Provision for income taxes Net income % of 1995 revenue $18,951,678 100.0% For the Fiscal Years Ended August 31, % of % of % of 1996 revenue 1997 revenue 1998 revenue $21,922,079 100.0% $25,619,439 100.0% $24,607,668 100.0% % of 1999 revenue $28,393,332 100.0% 1,803,542 465,459 887,258 1,693,059 439,568 3,505,280 130,922 249,801 154,896 330,444 412,650 6,082,880 874,797 17,030,553 1,921,125 9.5% 2.5% 4.7% 8.9% 2.3% 18.5% 0.7% 1.3% 0.8% 1.7% 2.2% 32.1% 4.6% 89.9% 10.1% 1,745,837 517,776 724,445 2,446,478 471,789 3,704,888 174,008 308,459 199,545 266,661 431,100 6,390,752 965,916 18,347,651 3,574,428 8.0% 2.4% 3.3% 11.2% 2.2% 16.9% 0.8% 1.4% 0.9% 1.2% 2.0% 29.2% 4.4% 83.7% 16.3% 1,896,234 602,799 665,735 3,606,158 536,541 4,345,737 188,384 349,998 190,632 308,403 366,539 6,965,192 1,971,756 21,994,106 3,625,334 7.4% 2.4% 2.6% 14.1% 2.1% 17.0% 0.7% 1.4% 0.7% 1.2% 1.4% 27.2% 7.7% 85.8% 14.2% 1,989,353 634,638 675,717 3,930,989 638,016 3,935,061 119,006 110,355 256,836 408,299 384,710 7,207,833 1,121,873 21,412,683 3,194,985 8.1% 2.6% 2.7% 16.0% 2.6% 16.0% 0.5% 0.4% 1.0% 1.7% 1.6% 29.3% 4.6% 87.0% 13.0% 2,057,730 713,826 867,851 5,255,624 697,724 3,363,119 202,447 577,883 328,107 391,743 394,901 8,184,669 1,842,698 24,878,320 3,515,012 7.2% 2.5% 3.1% 18.5% 2.5% 11.8% 0.7% 2.0% 1.2% 1.4% 1.4% 28.8% 6.5% 87.6% 12.4% (1,150,550) 770,575 (261,996) $508,580 (6.1%) 4.1% (1.4%) 2.7% (1,209,290) 2,365,138 (804,147) $1,560,991 (5.5%) 10.8% (3.7%) 7.1% (1,200,275) 2,425,058 (824,520) $1,600,538 (4.7%) 9.5% (3.2%) 6.2% (1,494,593) 1,700,392 (578,133) $1,122,259 (6.1%) 6.9% (2.3%) 4.6% (1,474,786) 2,040,226 (693,677) $1,346,549 (5.2%) 7.2% (2.4%) 4.7% 11 II. Historical Balance Sheets 1995 Assets Current assets Cash and equivalents Accounts receivable Inventory Prepaid expenses Other current assets Total current assets Fixed assets Fixtures and vehicles Equipment Buildings Land Gross fixed assets Less: Accumulated depreciation Net fixed assets Other assets Total assets % of total assets 1996 % of total assets As of August 31, % of total 1997 assets 1998 % of total assets 1999 % of total assets $1,781,061 3,339,072 62,694 1,639,937 595,304 7,418,067 6.6% 12.4% 0.2% 6.1% 2.2% 27.7% $1,873,727 3,768,072 62,694 1,563,191 399,122 7,666,805 6.7% 13.4% 0.2% 5.6% 1.4% 27.3% $2,304,671 4,561,595 62,694 2,466,159 231,170 9,626,288 7.2% 14.3% 0.2% 7.8% 0.7% 30.3% $1,079,144 5,352,996 62,694 3,351,551 79,358 9,925,742 3.6% 17.6% 0.2% 11.0% 0.3% 32.7% $1,188,815 5,992,056 62,694 725,046 742,850 8,711,461 4.1% 20.5% 0.2% 2.5% 2.5% 29.8% 2,715,680 10.1% 35,198,123 131.2% 9,275,988 34.6% 781,899 2.9% 47,971,689 178.8% (28,565,007) (106.5%) 19,406,682 72.3% 747 $26,825,496 0.0% 3,046,212 10.8% 37,380,821 132.9% 9,506,203 33.8% 837,662 3.0% 50,770,898 180.5% (30,310,844) (107.8%) 20,460,054 72.7% 300 0.0% 100.0% 3,382,322 10.6% 40,641,577 127.8% 9,523,564 30.0% 825,662 2.6% 54,373,124 171.0% (32,207,078) (101.3%) 22,166,046 69.7% 300 $31,792,633 0.0% 100.0% 3,697,328 12.2% 40,355,671 132.9% 9,754,036 32.1% 825,662 2.7% 54,632,696 179.9% (34,196,430) (112.6%) 20,436,266 67.3% 300 $30,362,308 0.0% 100.0% 3,638,405 12.4% 47,458,614 162.2% 5,000,000 17.1% 705,512 2.4% 56,802,531 194.1% (36,254,160) (123.9%) 20,548,371 70.2% 300 $29,260,132 0.0% 100.0% 100.0% $28,127,158 12 II. Historical Balance Sheets (cont’d) 1995 Liabilities and shareholders' equity Current liabilities Current portion of long term debt Accounts payable Income tax payable Accrued expenses Other current liabilities Total current liabilities Long-term debt Total liabilities Shareholders' equity Total liabilities and shareholders' equity % of total assets 1996 % of total assets As of August 31, % of total 1997 assets 1998 % of total assets 1999 % of total assets $4,473,293 750,855 153,701 153,644 113,321 5,644,812 10,642,833 16,287,645 10,537,851 $26,825,496 16.7% 2.8% 0.6% 0.6% 0.4% 21.0% 39.7% 60.7% 39.3% 100.0% $4,508,513 882,372 330,113 283,227 239,583 6,243,807 10,494,927 16,738,734 11,388,424 $28,127,158 16.0% 3.1% 1.2% 1.0% 0.9% 22.2% 37.3% 59.5% 40.5% 100.0% $5,177,880 967,890 281,333 445,556 200,459 7,073,117 13,504,535 20,577,651 11,214,982 $31,792,633 16.3% 3.0% 0.9% 1.4% 0.6% 22.2% 42.5% 64.7% 35.3% 100.0% $5,079,914 1,071,866 375,690 644,006 0 7,171,475 13,354,908 20,526,383 9,835,925 $30,362,308 16.7% 3.5% 1.2% 2.1% 0.0% 23.6% 44.0% 67.6% 32.4% 100.0% $5,020,163 976,955 415,064 833,173 0 7,245,354 15,489,741 22,735,095 6,525,037 $29,260,132 17.2% 3.3% 1.4% 2.8% 0.0% 24.8% 52.9% 77.7% 22.3% 100.0% 13 III. Valuation Approaches  Income Approach – Discounted Cash Flow Analysis Market Approach – Comparable Transaction Analysis  14 IV (A). Income Approach - Weighted Average Cost of Capital IBBOTSON DATA: Long-term government bond rate (a) Long-horizon expected equity risk premium (large companies) (b) Expected micro-capitalization equity size premium (c) Expected total rate of return on micro-cap. public stocks Plus: Specific company risk* Cost of equity (rounded) GRABOWSKI AND KING DATA: Long-term government bond rate (a) Smoothed average equity risk premium (d) Expected total rate of return on micro-cap. public stocks Plus: Specific company risk* Cost of equity (rounded) Cost of equity (average of the two methods) Cost of debt Tax rate Cost of equity (rounded) Capitalization Debt Equity Total Weighted average cost of capital Less: Average long-term growth rate Capitalization rate * Specific Company Risk Small size Competitive industry Dependence on key personnel 30.00% 70.00% 100.00% 5.28% 19.50% 1.58% 13.65% 15.23% 15.00% 3.00% 12.00% 8.00% 34.00% 5.28% 6.06% 12.93% 18.99% 1.00% 20.00% 19.50% 7.97% 2.60% 16.63% 2.00% 19.00% 6.06% Notes: (a) 30-year Treasury bond rate as of August 31, 1999 Source: Dow Jones News Retrieval (b) Large company stock total returns minus long-term government bond income returns. Expected risk premia for equities are based on differences of historical arithmetic returns from 1926-1998. (c) Capitalization below $252 million. (d) Based on a study of total returns for various portfolios ranked by size. This data reflects the smoothed average risk premium from 1963 to 1998 for companies in the lowest category of equity values, with an average 1998 equity value of $44 million. Sources: Stocks, Bonds, Bills, and Inflation 1999 Yearbook published by Ibbotson Associates. "PricewaterhouseCoopers Risk Premia Study" Roger Grabowski, ASA and David King, CFA, PricewaterhouseCoopers LLP 15 IV (B). Income Approach - Discounted Cash Flow Analysis - Assumptions Income Statement Assumptions Revenue - Annual growth rate of 10 percent Depreciation expense - $2.0 million per year on existing assets; additional capital expenditures depreciated over 10 years** Employee benefit programs - 2.5 percent of revenues Insurance - 3.0 percent of revenues Leased equipment - 18.0 percent of revenues Payroll tax - 2.3 percent of revenues Repairs and maintenance - 12.0 percent of revenues Supplies - 0.7 percent of revenues Taxes and licenses - 1.3 percent of revenues Travel and entertainment - 1.0 percent of revenues Utilities and telephone - 1.4 percent of revenues Officers salaries - 1.4 percent of revenues Payroll -29.0 percent of revenues Miscellaneous expenses - 5.7 percent of revenues Interest expense - 8 percent per year on outstanding debt Income tax - 34 percent tax rate ** For asset sale, fixed assets are written up to fair market value and both existing assets and additional capital expenditures depreciated over 10 years 16 IV (B). Income Approach - Discounted Cash Flow Analysis - Assumptions (cont’d) Balance Sheet Assumptions Cash and equivalents - $1.0 million per year; excess cash used to pay down longterm debt Accounts receivable - 70 days of annualized revenues Inventory - $62,694 per year Prepaid expenses - $725,046 per year Other current assets - $742,850 per year Fixtures - $100,000 in annual capital expenditures** Vehicles - no capital expenditures** Equipment - $1.9 million in annual capital expenditures** Buildings - $200,000 in annual capital expenditures** Land - constant at $705,512** Other assets - constant at $300 Accounts payable - 14 days of annualized revenues Income tax payable - constant at $415,064 Accrued expenses - constant at $833,17 Long-term debt - Excess cash generated by operations used to retire long-term debt ** For asset sale, existing fixed assets are written up to aggregate fair market value of $35.0 million. 17 IV (C). Income Approach - Stock Sale Projected Income Statements % of 2000 revenue $31,232,665 100.0% For the fiscal years ending August 31, % of % of % of 2001 revenue 2002 revenue 2003 revenue $34,355,932 100.0% $37,791,525 100.0% $41,570,677 100.0% % of 2004 revenue $45,727,745 100.0% Revenue Expenses Depreciation Employee benefit programs Insurance Leased equipment Payroll tax Repairs and maintenance Supplies Taxes and licenses Travel and entertainment Utilities and telephone Officers salaries Payroll Miscellaneous Total operating expenses Operating profit Other income (expenses): Interest expense Income before taxes Provision for income taxes Net income 2,220,000 780,817 936,980 5,621,880 718,351 3,747,920 218,629 406,025 312,327 437,257 437,257 9,057,473 1,780,262 26,675,177 4,557,488 7.1% 2.5% 3.0% 18.0% 2.3% 12.0% 0.7% 1.3% 1.0% 1.4% 1.4% 29.0% 5.7% 85.4% 14.6% 2,440,000 858,898 1,030,678 6,184,068 790,186 4,122,712 240,492 446,627 343,559 480,983 480,983 9,963,220 1,958,288 29,340,695 5,015,237 7.1% 2.5% 3.0% 18.0% 2.3% 12.0% 0.7% 1.3% 1.0% 1.4% 1.4% 29.0% 5.7% 85.4% 14.6% 2,660,000 944,788 1,133,746 6,802,474 869,205 4,534,983 264,541 491,290 377,915 529,081 529,081 10,959,542 2,154,117 32,250,764 5,540,761 7.0% 2.5% 3.0% 18.0% 2.3% 12.0% 0.7% 1.3% 1.0% 1.4% 1.4% 29.0% 5.7% 85.3% 14.7% 2,880,000 1,039,267 1,247,120 7,482,722 956,126 4,988,481 290,995 540,419 415,707 581,989 581,989 12,055,496 2,369,529 35,429,840 6,140,837 6.9% 2.5% 3.0% 18.0% 2.3% 12.0% 0.7% 1.3% 1.0% 1.4% 1.4% 29.0% 5.7% 85.2% 14.8% 3,100,000 1,143,194 1,371,832 8,230,994 1,051,738 5,487,329 320,094 594,461 457,277 640,188 640,188 13,261,046 2,606,481 38,904,824 6,822,921 6.8% 2.5% 3.0% 18.0% 2.3% 12.0% 0.7% 1.3% 1.0% 1.4% 1.4% 29.0% 5.7% 85.1% 14.9% (1,640,792) 2,916,696 (991,677) $1,925,019 (5.3%) 9.3% (3.2%) 6.2% (1,466,284) 3,548,953 (1,206,644) $2,342,309 (4.3%) 10.3% (3.5%) 6.8% (1,299,082) 4,241,679 (1,442,171) $2,799,508 (3.4%) 11.2% (3.8%) 7.4% (1,080,489) 5,060,348 (1,720,518) $3,339,829 (2.6%) 12.2% (4.1%) 8.0% (805,288) 6,017,632 (2,045,995) $3,971,637 (1.8%) 13.2% (4.5%) 8.7% 18 IV (C). Income Approach - Stock Sale Projected Balance Sheets % of total assets % of total assets As of August 31, % of total 2002 assets % of total assets % of total assets 2000 Assets Current assets Cash and equivalents Accounts receivable Inventory Prepaid expenses Other current assets Total current assets Fixed assets Fixtures and vehicles Equipment Buildings Land Gross fixed assets Less: Accumulated depreciation Net fixed assets Other assets Total assets 2001 2003 2004 $1,000,000 5,973,461 62,694 725,046 742,850 8,504,051 3.4% 20.6% 0.2% 2.5% 2.6% 29.3% $1,000,000 6,588,809 62,694 725,046 742,850 9,119,399 2.9% 19.0% 0.2% 2.1% 2.1% 26.4% $1,000,000 7,247,690 62,694 725,046 742,850 9,778,280 2.7% 19.4% 0.2% 1.9% 2.0% 26.1% $1,000,000 7,972,459 62,694 725,046 742,850 10,503,049 2.5% 19.9% 0.2% 1.8% 1.9% 26.2% $1,000,000 8,745,744 62,694 725,046 742,850 11,276,334 2.4% 20.6% 0.1% 1.7% 1.7% 26.5% 3,738,405 12.9% 49,358,614 170.0% 5,200,000 17.9% 705,512 2.4% 59,002,531 203.2% (38,474,160) (132.5%) 20,528,371 70.7% 300 $29,032,722 0.0% 6,436,384 18.6% 51,258,614 148.1% 5,400,000 15.6% 705,512 2.0% 66,398,489 191.9% (40,914,160) (118.2%) 25,484,329 73.6% 300 0.0% 100.0% 9,134,363 24.4% 53,158,614 142.1% 5,600,000 15.0% 705,512 1.9% 71,196,468 190.4% (43,574,160) (116.5%) 27,622,308 73.9% 300 $37,400,888 0.0% 100.0% 11,832,342 29.5% 55,058,614 137.5% 5,800,000 14.5% 705,512 1.8% 75,994,447 189.8% (46,454,160) (116.0%) 29,540,287 73.8% 300 $40,043,636 0.0% 100.0% 14,530,321 34.2% 56,958,614 134.0% 6,000,000 14.1% 705,512 1.7% 80,792,426 190.0% (49,554,160) (116.6%) 31,238,266 73.5% 300 $42,514,900 0.0% 100.0% 100.0% $34,604,028 19 IV (C). Income Approach - Stock Sale Projected Balance Sheets (cont’d) % of total assets % of total assets As of August 31, % of total 2002 assets % of total assets % of total assets 2000 Liabilities and shareholders' equity Current liabilities Current portion of long term debt Accounts payable Income tax payable Accrued expenses Total current liabilities Long-term debt Total liabilities Shareholders' equity Total liabilities and shareholders' equity 2001 2003 2004 $5,000,000 1,194,692 415,064 833,173 7,442,929 13,328,552 20,771,481 8,261,240 $29,032,722 17.2% 4.1% 1.4% 2.9% 25.6% 45.9% 71.5% 28.5% 100.0% $5,000,000 1,317,762 415,064 833,173 7,565,999 11,238,522 18,804,520 10,603,549 $29,408,070 17.0% 4.5% 1.4% 2.8% 25.7% 38.2% 63.9% 36.1% 100.0% $5,000,000 1,449,538 415,064 833,173 7,697,775 8,506,118 16,203,893 13,403,058 $29,606,951 16.9% 4.9% 1.4% 2.8% 26.0% 28.7% 54.7% 45.3% 100.0% $5,000,000 1,594,492 415,064 833,173 7,842,729 5,066,104 12,908,833 16,742,887 $29,651,720 16.9% 5.4% 1.4% 2.8% 26.4% 17.1% 43.5% 56.5% 100.0% $5,000,000 1,749,149 415,064 833,173 7,997,386 813,095 8,810,480 20,714,524 $29,525,005 16.9% 5.9% 1.4% 2.8% 27.1% 2.8% 29.8% 70.2% 100.0% 20 IV (C). Income Approach - Stock Sale Projected Cash Flow Statements 2000 Cash flows from operations Net income Adjustments to reconcile net income to cash flows from operations Plus: Depreciation expense Total interest expense Increase in accounts payable Less: Increase in net accounts receivable Total cash from operations Cash used in investing activities Fixed capital investment - fixtures Fixed capital investment - equipment Fixed capital investment - buildings Cash used in investing activities Memo: Debt-free cash flows Cash flows from financing activities Interest expense Increase in current portion of long-term debt Increase in non-current portion of long-term debt Cash used in financing activities Net increase (decrease) in cash $1,925,019 For the fiscal years ending August 31, 2001 2002 2003 $2,342,309 $2,799,508 $3,339,829 2004 $3,971,637 2,220,000 1,640,792 217,737 (18,595) 6,022,144 2,440,000 1,466,284 123,070 615,348 5,756,315 2,660,000 1,299,082 131,776 658,881 6,231,485 2,880,000 1,080,489 144,954 724,769 6,720,504 3,100,000 805,288 154,657 773,285 7,258,298 (100,000) (1,900,000) (200,000) (2,200,000) 3,822,144 (100,000) (1,900,000) (200,000) (2,200,000) 3,556,315 (100,000) (1,900,000) (200,000) (2,200,000) 4,031,485 (100,000) (1,900,000) (200,000) (2,200,000) 4,520,504 (100,000) (1,900,000) (200,000) (2,200,000) 5,058,298 (1,640,792) (20,163) (2,161,189) (3,822,144) $0 (1,466,284) 0 (2,090,030) (3,556,315) $0 (1,299,082) 0 (2,732,404) (4,031,485) $0 (1,080,489) 0 (3,440,014) (4,520,504) $0 (805,288) 0 (4,253,009) (5,058,298) $0 21 IV (C). Income Approach - Stock Sale Indicated Value 2000 Projected debt-free cash flows $3,822,144 For the fiscal years ending August 31, 2001 2002 2003 $3,556,315 $4,031,485 $4,520,504 2004 $5,058,298 Terminal Value $43,417,058 (a) Discount rate 15.00% Enterprise value (b) Less: Debt oustanding (c) Plus: Excess cash (d) Equity value $35,348,887 (20,509,904) 1,486,270 $16,325,254 Notes:(a) Terminal value = (projected debt-free cash flow in fiscal 2004 * 1.03)/capitalization rate of 12% (b) Present value of projected debt-free cash flows plus present value of terminal value (c) Debt outstanding on August 31, 1999 (d) Working capital in excess of $5 million. 22 IV (D). Income Approach - Asset Sale Projected Income Statements Revenue Expenses Depreciation Employee benefit programs Insurance Leased equipment Payroll tax Repairs and maintenance Supplies Taxes and licenses Travel and entertainment Utilities and telephone Officers salaries Payroll Miscellaneous Total operating expenses Operating profit Other income (expenses): Interest expense Income before taxes Provision for income taxes Net income % of 2000 revenue $31,232,665 100.0% For the fiscal years ending August 31, % of % of % of 2001 revenue 2002 revenue 2003 revenue $34,355,932 100.0% $37,791,525 100.0% $41,570,677 100.0% % of 2004 revenue $45,727,745 100.0% 3,720,000 780,817 936,980 5,621,880 718,351 3,747,920 218,629 406,025 312,327 437,257 437,257 9,057,473 1,780,262 28,175,177 3,057,488 11.9% 2.5% 3.0% 18.0% 2.3% 12.0% 0.7% 1.3% 1.0% 1.4% 1.4% 29.0% 5.7% 90.2% 9.8% 3,940,000 858,898 1,030,678 6,184,068 790,186 4,122,712 240,492 446,627 343,559 480,983 480,983 9,963,220 1,958,288 30,840,695 3,515,237 11.5% 2.5% 3.0% 18.0% 2.3% 12.0% 0.7% 1.3% 1.0% 1.4% 1.4% 29.0% 5.7% 89.8% 10.2% 4,160,000 944,788 1,133,746 6,802,474 869,205 4,534,983 264,541 491,290 377,915 529,081 529,081 10,959,542 2,154,117 33,750,764 4,040,761 11.0% 2.5% 3.0% 18.0% 2.3% 12.0% 0.7% 1.3% 1.0% 1.4% 1.4% 29.0% 5.7% 89.3% 10.7% 4,380,000 1,039,267 1,247,120 7,482,722 956,126 4,988,481 290,995 540,419 415,707 581,989 581,989 12,055,496 2,369,529 36,929,840 4,640,837 10.5% 2.5% 3.0% 18.0% 2.3% 12.0% 0.7% 1.3% 1.0% 1.4% 1.4% 29.0% 5.7% 88.8% 11.2% 4,600,000 1,143,194 1,371,832 8,230,994 1,051,738 5,487,329 320,094 594,461 457,277 640,188 640,188 13,261,046 2,606,481 40,404,824 5,322,921 10.1% 2.5% 3.0% 18.0% 2.3% 12.0% 0.7% 1.3% 1.0% 1.4% 1.4% 29.0% 5.7% 88.4% 11.6% (1,640,792) 1,416,696 (481,677) $935,019 (5.3%) 4.5% (1.5%) 3.0% (1,425,484) 2,089,753 (710,516) $1,379,237 (4.1%) 6.1% (2.1%) 4.0% (1,215,327) 2,825,433 (960,647) $1,864,786 (3.2%) 7.5% (2.5%) 4.9% (951,513) 3,689,324 (1,254,370) $2,434,954 (2.3%) 8.9% (3.0%) 5.9% (628,702) 4,694,219 (1,596,034) $3,098,184 (1.4%) 10.3% (3.5%) 6.8% 23 IV (D). Income Approach - Asset Sale Projected Balance Sheets 2000 Assets Current assets Cash and equivalents Accounts receivable Inventory Prepaid expenses Other current assets Total current assets Fixed assets Fixtures and vehicles Vehicles Equipment Buildings Land Gross fixed assets Less: Accumulated depreciation Net fixed assets Other assets Total assets % of total assets 2001 % of total assets As of August 31, % of total 2002 assets 2003 % of total assets 2004 % of total assets $1,000,000 5,973,461 62,694 725,046 742,850 8,504,051 2.3% 13.6% 0.1% 1.6% 1.7% 19.3% $1,000,000 6,588,809 62,694 725,046 742,850 9,119,399 2.2% 14.7% 0.1% 1.6% 1.7% 20.3% $1,000,000 7,247,690 62,694 725,046 742,850 9,778,280 2.2% 15.9% 0.1% 1.6% 1.6% 21.5% $1,000,000 7,972,459 62,694 725,046 742,850 10,503,049 2.2% 17.3% 0.1% 1.6% 1.6% 22.8% $1,000,000 8,745,744 62,694 725,046 742,850 11,276,334 2.2% 18.8% 0.1% 1.6% 1.6% 24.3% 2,600,000 2,000,000 26,900,000 5,200,000 2,500,000 39,200,000 (3,720,000) 35,480,000 300 $43,984,351 5.9% 4.5% 61.2% 11.8% 5.7% 89.1% (8.5%) 80.7% 0.0% 100.0% 4,700,000 2,000,000 28,800,000 5,400,000 2,500,000 43,400,000 (7,660,000) 35,740,000 300 $44,859,699 10.5% 4.5% 64.2% 12.0% 5.6% 96.7% (17.1%) 79.7% 0.0% 100.0% 6,800,000 2,000,000 30,700,000 5,600,000 2,500,000 47,600,000 (11,820,000) 35,780,000 300 $45,558,580 14.9% 4.4% 67.4% 12.3% 5.5% 104.5% (25.9%) 78.5% 0.0% 100.0% 8,900,000 2,000,000 32,600,000 5,800,000 2,500,000 51,800,000 (16,200,000) 35,600,000 300 $46,103,349 19.3% 4.3% 70.7% 12.6% 5.4% 112.4% (35.1%) 77.2% 0.0% 100.0% 11,000,000 2,000,000 34,500,000 6,000,000 2,500,000 56,000,000 (20,800,000) 35,200,000 300 $46,476,634 23.7% 4.3% 74.2% 12.9% 5.4% 120.5% (44.8%) 75.7% 0.0% 100.0% 24 IV (D). Income Approach - Asset Sale Projected Balance Sheets (cont’d) % of total assets % of total assets As of August 31, % of total 2002 assets % of total assets % of total assets 2000 Liabilities and shareholders' equity Current liabilities Current portion of long term debt Accounts payable Income tax payable Accrued expenses Total current liabilities Long-term debt Total liabilities Shareholders' equity Total liabilities and shareholders' equity 2001 2003 2004 $5,000,000 1,194,692 415,064 833,173 7,442,929 12,818,552 20,261,481 21,722,869 $41,984,351 11.9% 2.9% 1.0% 2.0% 17.7% 30.5% 48.3% 51.7% 100.0% $5,000,000 1,317,762 415,064 833,173 7,565,999 10,191,594 17,757,592 23,102,106 $40,859,699 12.2% 3.3% 1.0% 2.0% 18.5% 24.9% 43.5% 56.5% 100.0% $5,000,000 1,449,538 415,064 833,173 7,697,775 6,893,912 14,591,687 24,966,892 $39,558,580 12.6% 3.8% 1.0% 2.1% 19.5% 17.4% 36.9% 63.1% 100.0% $5,000,000 1,594,492 415,064 833,173 7,842,729 2,858,774 10,701,502 27,401,846 $38,103,349 13.1% 4.4% 1.1% 2.2% 20.6% 7.5% 28.1% 71.9% 100.0% $2,979,217 1,749,149 415,064 833,173 5,976,603 0 5,976,603 30,500,031 $36,476,634 8.2% 4.8% 1.1% 2.3% 16.4% 0.0% 16.4% 83.6% 100.0% 25 IV (D). Income Approach - Asset Sale Projected Cash Flow Statements 2000 Cash flows from operations Net income Adjustments to reconcile net income to cash flows from operations Plus: Depreciation expense Total interest expense Increase in accounts payable Less: Increase in net accounts receivable Total cash from operations Cash used in investing activities Fixed capital investment - fixtures Fixed capital investment - equipment Fixed capital investment - buildings Cash used in investing activities Memo: Debt-free cash flow Cash flows from financing activities Interest expense Increase in current portion of long-term debt Increase in non-current portion of long-term debt Cash used in financing activities Net increase (decrease) in cash $935,019 For the fiscal years ending August 31, 2001 2002 2003 $1,379,237 $1,864,786 $2,434,954 2004 $3,098,184 3,720,000 1,640,792 217,737 (18,595) 6,532,144 3,940,000 1,425,484 123,070 615,348 6,252,443 4,160,000 1,215,328 131,776 658,881 6,713,009 4,380,000 951,513 144,954 724,769 7,186,652 4,600,000 628,702 154,657 773,285 7,708,258 (100,000) (1,900,000) (200,000) (2,200,000) 4,332,144 (100,000) (1,900,000) (200,000) (2,200,000) 4,052,443 (100,000) (1,900,000) (200,000) (2,200,000) 4,513,009 (100,000) (1,900,000) (200,000) (2,200,000) 4,986,652 (100,000) (1,900,000) (200,000) (2,200,000) 5,508,258 (1,640,792) (20,163) (2,671,189) (4,332,144) $0 (1,425,484) 0 (2,626,958) (4,052,443) $0 (1,215,327) 0 (3,297,681) (4,513,009) $0 (951,513) 0 (4,035,139) (4,986,652) $0 (628,702) (2,020,782) (2,858,774) (5,508,258) $0 26 IV (D). Income Approach - Asset Sale Indicated Value 2000 Projected debt-free cash flows $4,332,144 For the fiscal years ending August 31, 2001 2002 2003 $4,052,443 $4,513,009 $4,986,652 2004 $5,508,258 Terminal Value $47,279,215 (a) Discount rate 15.00% Enterprise value (b) Less: Debt oustanding (c) Plus: Excess cash (d) Equity value $38,894,525 (20,509,904) 1,486,270 $19,870,892 Notes: (a) Terminal value = (projected debt-free cash flow in fiscal 2004 * 1.03)/capitalization rate of 12% (b) Present value of projected debt-free cash flows plus present value of terminal value (c) Debt outstanding on August 31, 1999 (d) Working capital in excess of $5.0 million 27 V (A). Market Approach - Comparable Acquisitions Comparable Acquisitions Rental Equipment Companies Target Name Work Safe Supply Company, Inc. Genpower Pump and Equipment Co. Cormier Equipment Corp. Dragon Rentals Albany Ladder Falconite, Inc. Lone Star Rentals, Inc. BAT Rentals, Inc. Aerial Platforms, Inc. Sprintank MST Enterprises Date Announced 02/04/98 01/12/98 03/04/98 03/02/98 03/30/98 06/08/98 03/17/97 04/01/97 02/18/97 06/01/97 07/18/97 Status Completed Completed Competed Completed Completed Completed Completed Completed Competed Completed Completed Consideration Cash Cash Cash Cash Cash Cash, notes Cash Cash Cash Cash Cash Equity Value $7,845,000 8,000,000 27,500,000 23,000,000 43,454,000 175,000,000 10,950,000 15,900,000 4,150,000 25,300,000 6,000,000 Interest Bearing Debt $579,000 1,009,000 4,249,000 11,692,000 12,270,000 104,544,000 4,348,000 2,891,000 1,214,000 8,624,000 2,396,000 Cash $383,000 20,000 5,000 46,000 87,000 1,642,000 0 1,609,000 265,000 373,000 84,000 Enterprise Value (less: cash) $8,041,000 8,989,000 31,744,000 34,646,000 55,637,000 277,902,000 15,298,000 17,182,000 5,099,000 33,551,000 8,312,000 Target Name Work Safe Supply Company, Inc Genpower Pump and Equipment Co. Cormier Equipment Corp. Dragon Rentals Albany Ladder Falconite, Inc. Lone Star Rentals, Inc. BAT Rentals, Inc. Aerial Platforms, Inc. Sprintank MST Enterprises Target Revenue $7,364,000 12,101,000 15,627,000 16,564,000 34,204,000 65,905,000 9,349,000 13,140,000 4,746,000 9,598,000 5,832,000 Target EBITDA $3,022,000 3,222,000 4,677,000 3,176,000 7,224,000 25,897,000 2,249,000 5,562,000 1,329,000 3,673,000 1,701,000 Target EBIT $2,107,000 2,625,000 1,850,000 2,272,000 3,139,000 11,256,000 640,000 2,877,000 998,000 1,503,000 407,000 Target BV $5,220,000 2,303,000 4,727,000 2,479,000 12,932,000 33,232,000 3,444,000 8,305,000 1,307,000 3,938,000 1,415,000 Target NI $1,381,000 1,676,000 1,553,000 717,000 1,446,000 994,000 248,000 1,849,000 521,000 312,000 135,000 Rev. 1.1 x 1.7 x 2.0 x 3.3 x 1.6 x 4.2 x 1.6 x 1.3 x 1.1 x 3.5 x 1.4 x EBITDA 2.7 x 2.8 x 6.8 x 10.9 x 7.7 x 10.8 x 6.8 x 3.1 x 3.8 x 9.1 x 4.9 x Multiples EBIT 3.8 x 3.4 x 17.2 x 15.2 x 17.7 x 24.7 x 23.9 x 6.0 x 5.1 x 22.3 x 20.4 x BV 1.5 x 3.5 x 5.8 x 9.3 x 3.4 x 5.3 x 3.2 x 1.9 x 3.2 x 6.4 x 4.2 x NI 5.7 x 4.8 x 17.7 x 32.1 x 30.1 x 176.1 x 44.2 x 8.6 x 8.0 x 81.1 x 44.4 x Average 75th percentile Median 25th percentile $17,675,455 $16,095,500 $12,101,000 $8,356,500 $5,612,000 $5,119,500 $3,222,000 $2,635,500 Average 75th percentile Median 25th percentile 2.1 2.7 1.6 1.4 x x x x 6.3 8.4 6.8 3.5 x x x x 14.5 x 21.4 x 17.2 x 5.6 x 4.3 5.6 3.5 3.2 x x x x 41.2 x 44.3 x 30.1 x 8.3 x Source: Securities Data Corp. and SEC filings 28 V (B). Market Approach - Indicated Value - Seller Market Approach - Transaction Method: EBITDA (Fiscal 1999) Multiple of EBITDA (a) Indicated enterprise value Plus: Excess cash (b) Less: Debt (c) Indicated equity value (a) Equal to median multiple for comparable transactions (b) Working capital in excess of $5.0 million (c) Debt outstanding at August 31, 1999 $5,572,742 6.8x $37,894,646 1,486,270 (20,509,904) $18,871,012 29 V (C). Market Approach - Indicated Value - Buyer Buyer's Schedule Market Approach - Transaction Method: EBITDA (Fiscal 1999) Multiple of EBITDA (a) Indicated enterprise value Plus: Excess cash (b) Less: Debt (c) Indicated equity value (a) Equal to average multiple for comparable transactions (b) Working capital in excess of $5.0 million (c) Debt outstanding at August 31, 1999 $5,572,740 6.3x $35,108,262 1,486,270 (20,509,904) $16,084,629 30 VI.(A.) Loan Values – Based on Seller’s Asset Values Asset Working capital Land Buildings Equipment Fixtures & vehicles ($000s) $5,000 705 7,500 746 17,459 1,638 $25,548 (a) Acquisition price of $35,607,000 permitted at 30% equity. ($000s) $5,000 Ratio 80% ($000s) $4,000 75% 5,625 23,000 2,500 $38,000 60% 60% 13,800 1,500 $24,925 (a) 31 VI.(B.) Loan Values – Revised Buyer's Net Book Value Appraised Value Loan to Value ($000s) ($000s) Ratio $5,000 705 3,000 Buildings Equipment Fixtures & vehicles 746 17,459 1,638 $25,548 23,000 2,500 $33,500 60% 60% 13,800 1,500 $21,550 (a) 75% 2,250 $5,000 80% Loan Value ($000s) $4,000 Asset Working capital Land (a) Total loan value supports acquisition price of $29,714,000 at 30% equity 32 VII. Capital Gains Taxes – Asset Sale Asset Working capital Land Buildings Equipment Fixtures & vehicles Net Book Value Appraised Value ($000s) ($000s) $5,000 705 7,500 746 17,459 1,638 $25,548 23,000 2,500 $38,000 $5,000 Gain $0 Capital Gains Taxes $0 $6,049 2,057 $5,541 $862 1,884 293 $4,234 33 VIII. Seller’s Indicated Net Value-Asset Sale EBITDA Revised Multiple Enterprise Value Plus: Excess cash Less: Debt (a) Indicated equity value Cap Gains Taxes Seller's Net Equity Value $5,572,740 6.3 X $35,108,262 $ 1,486,270 $ (20,509,904) $ $ 16,084,628 (4,234,000) $ 11,850,628 * * Compares to seller's calculation of net as a stock sale of $16.3 million (Income Approach) to $18.9 million (Market Approach) 34 IX. Seller’s Calculation of Final Net Proceeds EBITDA before lease after lease Revised Multiple Revised Enterprise Value Less: RE Adjustment Indicated Enterprise Value Plus: Excess cash Less: Debt (a) Indicated equity value Leased Land Net Cap Gains Taxes FINAL NET PROCEEDS $5,572,740 $5,287,740 6.5 $34,370,310 ($500,000) $33,870,310 $ 1,486,270 $ (19,009,904) $ 16,346,677 $ 4,500,000 $ 20,846,677 $ (2,704,000) $ 18,142,677 Notes: (a) Original debt repayment of $20,509,904 reduced by $1,500,000 by mortgage assumption of Buyer. (b) Seller note of $2,670,000 required. Included in Price above. 35 X. Buyer’s Funding Sources Adjusted Purchase Price Bank Loan Proceeds Mortgage Assumed Buyer's Cash Contribution Funding from Buyer Seller's Note Required $33,870,000 $20,800,000 $1,500,000 $8,900,000 $31,200,000 $2,670,000 36