Re: Basic Valuation Valuation of Auto Company, Inc. for Mr. Robert Fong s 41.66% minority common stock interest.

Transcription

1 10/3/2002 Mr. Robert Fong President Auto Company, Inc. 368 South Tustin Avenue Tustin, California 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, 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,

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, 2002, 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 2

3 VALUATION METHODOLOGY The valuation methodology used in this analysis is the Market Method. 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 1 and 2) 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 3) 3

4 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: Year Average Premium All Companies Control Premiums Median Premium All Companies Median Premium Purchase Price - $25 million or less % 27.3% 32.2% % 27.5% 36.9% % 30.1% 39.8% % 34.6% 35.5% % 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) 4

5 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% 5

6 VALUE SUMMARY Below is a summary of the results of the value methods herein. Value Summary Ballpark Value Summary Book Value of Minority Interest June 30, 2001 $ 157,532 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 $ 1,232,207 Median $ 1,263,498 Min $ 738,500 Max $ 1,688,593 Estimated Value of Equity Interest $ 1,200,000 6

7 SCHEDULE 1 Minority Interest Value Lack of Marketability Discount Peer Group Comparables Min Max Average Median Input Base Value % of Ownership Minority Interest Discounts Indicated Value Price/Sales ,370,100 6,090, % 0.00% 2,537, % 1,688,593 Price/Earnings ,282 3,765, % 0.00% 1,568, % 1,043,843 Price/Cash Flow ,514 2,663, % 0.00% 1,109, % 738,500 7

8 SCHEDULE 2 Minority Interest Discounts Minority Interest Value Lack of Marketability Discount Comparable Transactions Min Max Average Median Input Base Value % of Ownership Indicated Value Price/Sales ,370,100 3,841, % 26.95% 1,169, % 778,022 Price/EBIT ,002 7,323, % 26.95% 2,228, % 1,483,152 Price/EBITDA ,046,224 8,202, % 26.95% 2,496, % 1,661,134 8

9 SCHEDULE 3 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 9

10 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, Conversations and correspondence with Mr. Robert Fong, President of Auto Company, Inc. 3. Company information obtained from Auto Company, Inc. website ( 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, Damodaran, Aswath. Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. New York, NY: Wiley, Fowler, Bradley A. How Do You Handle It? Business Valuation Review, December 1993: Plummer, James L. QED on Venture Capital Financial Analysis. QED Research, Inc. Palo Alto, CA: Pratt, Shannon P., Robert F. Reilly and Robert P. Schweihs. Valuing a Business: The Analysis and Appraisal of Closely Held Companies 3 rd edition. New York, NY: McGraw-Hill, 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: Houlihan Lokey Howard & Zukin Mergerstat Review. 14. Valuation data and research. 10

11 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, 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 Companyspecific 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. 11

12 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, 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 12