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Business Valuations:

Adler-Cottino Case Study

Co-Sponsored by: National Association of Certified Valuators and Analysts

Institute of Business Appraisers

© 1995–2013 by National Association of Certified Valuators and Analysts (NACVA). All rights reserved. Used by Institute of Business Appraisers with permission of NACVA for limited purpose of collaborative training. 2013.v1

Business Valuation Report

CONTROLLING OWNERSHIP INTEREST IN THE ISSUED & OUTSTANDING COMMON STOCK

OF

ADLER-COTTINO WOOD FURNITURE, INC.

FAIR MARKET VALUE STANDARD

DATE OF VALUATION: DECEMBER 31, 2000 REPORT DATE: AUGUST 31, 2001

NACVA/IBA Training Use Only 6/13/03

This report is for illustration purposes only to show participants what a valuation report could look like and is not intended to be an example for duplication. Each valuation is unique and valuators need to use their own judgment in interpreting

and communicating their conclusions.

Lewis, Jones & Company, LLC 1111 Maple Road, Atlanta, GA 30309

Mailing Address: PO Box 1111, Atlanta, GA 30309 (678) 111-1111 • Fax (678) 111-1112

E-mail: [email protected] Web site: http://www.certifiedva.com/JLEWIS

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August 31, 2001 David B. Harrison, Executor c/o Raymond C. Harrison Estate 1111 So. Birch Highway Atlanta, GA 30309 RE: Adler-Cottino Wood Furniture, Inc. Fair Market Value of a Controlling, Non-Marketable Interest at December 31, 2000 Dear Mr. Harrison: We have performed a valuation engagement, as that term is defined in the Statement on Standards for Valuation Services (SSVS) of the American Institute of Certified Public Accountants. This valuation was performed solely to assist in the preparation of an estate tax return for Raymond C. Harrison (deceased); the resulting estimate of value should not be used for any other purpose or by any other party for any purpose. This valuation engagement was conducted in accordance with the SSVS. The estimate of value that results from a valuation engagement is expressed as a conclusion of value. Based on our analysis, as described in this valuation report, the estimate of value of 100% of the common stock of Adler-Cottino Wood Furniture, Inc. as of December 31, 2000 is: $6,412,000 or $64.12 Per Share (100,000 Shares Issued & Outstanding). This conclusion is subject to the Statement of Assumptions and Limiting Condition found in Appendix B and to the Valuation Analyst’s Representation found in Appendix A. We have no obligation to update this report or our conclusion of value for information that comes to our attention after the date of this report. James Lewis, CPA, CVA James Lewis, CPA, CVA Lewis, Jones & Company, LLC Atlanta, GA

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E X E C U T I V E S U M M A R Y

Except for 1998, the Company’s historical performance showed a steady increase in revenue to hit an all time high in 2000 of $24.1 million. Income from operations dropped slightly from $1.2 million in 1996 to $1.1 million in 1997, dropping even more so to $868,462 in 1998, before significantly rising again to $1.4 million in 1999 and $2.1 million in 2000:

ADLER-COTTINO WOOD FURNITURE, INC. Historical Performance, 1996-2000, As Reported on Books/Accrual Basisa

Tax Year (FYE 12/31) 1996 1997 1998 1999 2000 Gross Revenue $ 14,770,000 $ 18,998,000 $ 18,784,400 $ 21,988,800 $ 24,127,600 Less: Cost of Sales 10,952,500 14,572,480 14,282,612 16,413,380 17,535,276 Gross Profit 3,817,500 4,425,520 4,501,788 5,575,420 6,592,324 Less: Operating Expenses 2,645,528 3,282,432 3,633,326 4,209,450 4,464,910 Income (Loss) From Operations 1,171,972 1,143,088 868,462 1,365,970 2,127,414 Other Income (Expense) (154,539) (152,665) (174,612) (171,855) (99,660) Income (Loss) Before Taxes 1,017,433 990,423 693,850 1,194,115 2,027,754 Less: Income Taxes 386,625 361,504 242,848 441,823 689,436 Net Income (Loss) $ 630,808 $ 628,919 $ 451,002 $ 752,292 $ 1,338,318

Background. Adler-Cottino Wood Furniture, Inc. (“Adler-Cottino” or “Company”), a Georgia C Corporation, located in Atlanta, Georgia, is a long-time family-owned business, whose roots can be traced back to German and Italian woodworking immigrants. It was originally formed in 1870 under the name of Adler-Cottino Cabinetmaking in Atlanta, Georgia. Raymond Cottino Harrison—sole owner and great, great, great grandson of the original founders of the Company, incorporated the Company more than 100 years later in 1980. Adler-Cottino manufactures primarily high quality wood furniture products for homes and also a few lines of office furniture. It began marketing its products through retail furniture outlets in Atlanta, Georgia, but has since developed many national distributors of its products. Its wooden furniture for the home feature bedroom and dining suites, as well as home office pieces. Office furniture includes desks, conference tables, and bookcases. The Company also recently introduced ready-to-assemble (“RTA”) furniture (desks and other office furniture, entertainment centers, and storage units). Raymond C. Harrison passed away on December 31, 2000. The purpose of this valuation is to determine the fair market value of Mr. Harrison’s 100% ownership equity interest in the Company, on a non-marketable basis at the date of his death, December 31, 2000, to be used in conjunction with the filing of his estate tax return.

Financial Analysis. Except for a slight downturn in 1998, revenue steadily increased from $14.8 million in 1996 to $24.1 million in 2000, growing at an annual compounded growth rate of 13.1%. Similarly, income before taxes, with the exceptions of 1997 and especially 1998, grew from $1.0 million to $2.1 million, which represented a compounded annual growth rate of 18.8%. Problems and delays in the expansion of the manufacturing facility that was completed in January 1999 caused reductions in sales and operating profits for 1998. Otherwise, the Company has appeared to control its operating costs, and it has managed to generate rates of return in excess of its industry peers. Adler-Cottino is solvent with assets totaling about $8.7 million and reported shareholders’ equity of about $5.1 million at December 31, 2000. The Company’s short-term liquidity is excellent. Although the expansion of the manufacturing facility in 1999 increased third party debt, this debt was significantly reduced in 2000 as a result of increased revenues during that same year.

Forecasts. Generally, revenues and earnings grew consistently, except in 1998, when they dropped as a result of problems and delays during the expansion of the manufacturing facility. However, once the expansion was completed in January 1999, revenue and earnings soared. Nonetheless, the Company began to see the effects of negative signs in the economy during the fourth quarter of 2000, as

a The summarized Income Statements are presented on an accrual/book basis for each year.

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incoming orders began to drop compared to historical levels. It saw the decline accelerate in December affecting numerous furniture manufacturers, forcing other competitors to let go employees and/or shut down several production lines to better balance incoming orders and production capacity. For these reasons, we determined that a simple average of the last two years (1999 and 2000) of net cash flow to equity (normalized and adjusted for expenses associated with non-operating assets) represented an excellent proxy for expected future cash flows. We projected a forecasted growth rate for Adler-Cottino of 2.0%. This rate is below the composite industry growth rate estimate over the next several years of about 3.5%, and below the past performance for the Company. It’s anticipated that the slowdown in the economy, including reductions in forecasted construction, will affect the household furniture industry, in general, and Adler-Cottino’s projected growth, in particular.

Valuation. The primary indication of value for the Company was the capitalization of earnings method based on a normalized cash flow income stream that we believe should be available to the owner(s) of the business. We also determined an indicated value using the Adjusted Net Asset Method, but this method is most appropriate for holding companies not operating companies. The Guideline Public Company and the Merger and Acquisition Methods were also investigated. However, the subject company was too small in size for the appropriate use of the Guideline Public Company Method; furthermore, the subject company was too large as compared to the businesses sold and the number of comparable companies was too small to use the Merger and Acquisition Method.

An indication of value under the capitalization of earnings method was $6,750,000, which included non-operating asset values for excess cash ($200,000), a town home ($400,000), and artwork ($50,000), or a total of $650,000. A small discount for lack of marketability of 5% was applied to this indicated control value to arrive at a $6,412,000 (rounded), non-marketable value. Consequently, the total fair market value of the 100% ownership equity interest in Adler-Cottino Wood Furniture, Inc. under the capitalization of earnings method is $6,412,000.

BUSINESS VALUATION OF ADLER-COTTINO WOOD FURNITURE, INC. TABLE OF CONTENTS

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Valuation Report Cover Letter Valuer’s Certification Executive Summary

1 Description of Assignment .................................................................................................................. 1 1.1 SUBJECT OF THE VALUATION ENGAGEMENT ............................................................................... 1 1.2 SUMMARY DESCRIPTION OF THE SUBJECT .................................................................................. 1 1.3 PURPOSE AND USE OF THIS VALUATION REPORT ....................................................................... 1 1.4 STANDARD OF VALUE ................................................................................................................. 1

1.4.1 Hypothetical Buyer ................................................................................................................ 2 1.4.2 Hypothetical Seller ................................................................................................................. 2

1.5 APPROPRIATE MARKET SECTOR ................................................................................................... 2 1.6 DATE OF VALUATION .................................................................................................................. 3 1.7 OWNERSHIP AND CONTROL ......................................................................................................... 3 1.8 SCOPE OF THE ENGAGEMENT ...................................................................................................... 3 1.9 DEFINITIONS ................................................................................................................................ 4 1.10 PRINCIPAL SOURCES OF INFORMATION ........................................................................................ 4 1.11 ASSUMPTIONS AND LIMITING CONDITIONS ................................................................................. 4

2 Survey of the Subject Company ........................................................................................................ 6 2.1 DESCRIPTION OF SUBJECT COMPANY .......................................................................................... 6 2.2 HISTORY ...................................................................................................................................... 6 2.3 FORM OF ORGANIZATION ............................................................................................................ 6 2.4 RESTRICTIONS ON SALE OF SUBJECT INTEREST ........................................................................... 7 2.5 PRIOR OWNERSHIP TRANSACTIONS .............................................................................................. 7 2.6 SUBSIDIARIES AND AFFILIATES ................................................................................................... 7 2.7 MANAGEMENT ............................................................................................................................. 7 2.8 EMPLOYEES .................................................................................................................................. 8 2.9 PRODUCTS OR SERVICES .............................................................................................................. 8 2.10 SUPPLIERS .................................................................................................................................... 8 2.11 CUSTOMER BASE ......................................................................................................................... 8 2.12 COMPETITION ............................................................................................................................... 9 2.13 LOCATION .................................................................................................................................... 9

3 Economic Conditions and Industry Data ........................................................................................ 10 3.1 OVERVIEW OF THE NATIONAL ECONOMY ................................................................................. 10

3.1.1 Gross Domestic Product ...................................................................................................... 10 3.1.2 Consumer Spending ............................................................................................................. 10 3.1.3 Government Spending ......................................................................................................... 11 3.1.4 Real Estate And Construction ............................................................................................. 11 3.1.5 Manufacturing ..................................................................................................................... 11 3.1.6 Inflation ............................................................................................................................... 11 3.1.7 Labor Markets ...................................................................................................................... 11 3.1.8 Stock Market ........................................................................................................................ 11 3.1.9 Outlook ................................................................................................................................. 12

3.2 ECONOMIC OUTLOOK—ATLANTA, GEORGIA ............................................................................ 12 3.3 STATE OF THE INDUSTRY .......................................................................................................... 13

3.3.1 Furniture Market By Region ............................................................................................... 13 3.3.2 Geographic Trends In The Furniture/Home Furnishings Market .................................... 14 3.3.3 Imports Within The Furniture Industry ............................................................................. 14 3.3.4 Top Furniture Manufacturers ............................................................................................. 15

3.4 IMPLICATIONS FOR THE COMPANY ............................................................................................ 15


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4 Financial Performance of the Company ......................................................................................... 17 4.1 FINANCIAL STATEMENTS ........................................................................................................... 17 4.2 FINANCIAL INFORMATION PROVIDED BY THE COMPANY OR OTHERS ....................................... 17 4.3 FINANCIAL-STATEMENT ANALYSIS............................................................................................ 17

4.3.1 Historical Financial Statements .......................................................................................... 17 4.3.2 Financial Ratio Analysis ..................................................................................................... 21 4.3.3 Comparison To Industry Averages ...................................................................................... 21 4.3.4 Balance Sheet Analysis ........................................................................................................ 22 4.3.5 Income Statement Analysis ................................................................................................. 24 4.3.6 Industry Comparison Ratio Analysis .................................................................................. 25

4.4 SUMMARY OF ANALYSIS ........................................................................................................... 31 4.5 ADJUSTMENTS TO FINANCIAL STATEMENTS .............................................................................. 31

4.5.1 Balance Sheet Adjustments ................................................................................................. 32 4.5.2 Normalized Operating Tangible Equity .............................................................................. 33 4.5.3 Income Statement Adjustments ........................................................................................... 35 4.5.4 Normalized Income Statement ............................................................................................ 35

5 Valuation of the Subject ................................................................................................................... 37 5.1 THE SEARCH FOR COMPARABLE TRANSACTIONAL MARKET DATA ........................................... 37

5.1.1 Minority Interest Transactions ............................................................................................ 40 5.1.2 Controlling Interest Transactions ....................................................................................... 41

5.2 VALUATION METHODS CONSIDERED BUT REJECTED ................................................................. 44 5.2.1 Prior Transactions In Subject Interest ................................................................................ 44 5.2.2 Dividend Paying Capacity ................................................................................................... 45 5.2.3 Liquidation Value ................................................................................................................ 45 5.2.4 Discounted Cash Flow Method ........................................................................................... 45

5.3 SELECTION OF MOST SUITABLE METHODS ................................................................................ 45 5.4 INCOME APPROACH .................................................................................................................... 45

5.4.1 Application Of The Capitalization Of Earnings Method .................................................... 46 5.5 ADJUSTED NET ASSET METHOD ................................................................................................ 52

5.5.1 Application Of The Adjusted Net Asset Method ................................................................. 52 5.5.2 Summary And Indication Of Value By This Method ......................................................... 52

5.6 MARKET APPROACH .................................................................................................................. 52 5.6.1 Application Of The Guideline Public Company Method .................................................... 53 5.6.2 Application Of The Merger And Acquisition Method ........................................................ 54

5.7 ADJUSTMENT FOR LACK OF MARKETABILITY ........................................................................... 60 5.7.1 Empirical Studies ................................................................................................................. 60 5.7.2 Adjustment Appropriate For The Subject Interest ............................................................. 62

6 Reconciliation of Indicated Values .................................................................................................. 66 Appendix A Valuation Analyst’s Representations ............................................................................ 68 Appendix B Limiting Conditions ........................................................................................................ 69 Appendix C Marketability Discount – Summary Of Restricted Stock Studies .............................. 71 Appendix D Marketability Discount – Summary Of Public Offering Studies ................................ 72 Appendix E International Glossary Of Business Valuation Terms ................................................. 74 Appendix F Curriculum Vitae ............................................................................................................ 79 Appendix G Atlanta Metropolitan Study ........................................................................................... 80 Appendix H Household Furniture Industry Overview ..................................................................... 87 Appendix I The National Economy ................................................................................................... 92 Appendix J Bibliography .................................................................................................................. 100 Exhibits Exhibit 4-1 Balance Sheet ................................................................................................................... 17


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Exhibit 4-2 Income Statement ........................................................................................................... 18 Exhibit 4-3 Historical Performance .................................................................................................. 19 Exhibit 4-4 Historical Performance - Graph .................................................................................... 19 Exhibit 4-5 Common Size – Balance Sheet ....................................................................................... 22 Exhibit 4-6 Common Size – Income Statement ................................................................................ 24 Exhibit 4-7 Normalized Operating Tangible Equity ........................................................................ 33 Exhibit 4-8 Normalized Income Statements ..................................................................................... 35 Exhibit 5-1 Comparable Publicly Traded Companies (Guideline Companies) ............................. 39 Exhibit 5-2 Transactional Databases – Controlling Interests ......................................................... 42 Exhibit 5-3 Determination of Capitalization Rate ........................................................................... 48 Exhibit 5-4 Capitalization of Earnings Method – Summary Computation ................................... 51 Exhibit 5-5 Development of Price/Earnings from Guideline Companies ...................................... 53 Exhibit 5-6 Value Indicated by Guideline Public Company Method ............................................. 53 Exhibit 5-7 Merger and Acquisition Method – Price/Revenue Market Multiple .......................... 55 Exhibit 6-1 Adjusted Indication of Value Including Non-operating Expenses .............................. 56 Exhibit Summary Reconciliation & Adjustment of Indicated Values ..................................... 66

Lewis, Jones, & Company, LLC August 31, 2001

FAIR MARKET VALUE: CONTROLLING, NON-MARKETABLE INTEREST – ADLER-COTTINO WOOD FURNITURE DECEMBER 31, 2000 1

1 DESCRIPTION OF ASSIGNMENT

1.1 Subject of the Valuation Engagement We have performed a valuation engagement, as that term is defined in the Statement on Standards for Valuation Services (SSVS) of the American Institute of Certified Public Accountants, of 100% ownership equity interest of Adler-Cottino Wood Furniture, Inc. (hereinafter “Adler” or “Adler-Cottino” or “Company”), a Georgia C Corporation. This summary report will provide sufficient information to permit the intended users to understand the data, reasoning, and analyses underlying the valuation analyst’s conclusion of value. Lewis, Jones & Company, LLC has been retained by the David B. Harrison, Executor of the Estate of Raymond C. Harrison (deceased) to estimate the fair market value of Adler-Cottino common stock. Adler-Cottino is a Limited Liability Company located in Atlanta Georgia. A 100% interest is being valued as of December 31, 2000. The appraisal will be used by David B. Harrison for the sole purpose of an estate. The distribution of this report is restricted to Mr. David B. Harrison and Mr. Raymond C. Harrison’s estate proceeding. Any other use of this report is unauthorized and the information included in the report should not be relied upon.

1.2 Summary Description of the Subject

Adler-Cottino manufactures primarily high-quality wood furniture products for homes and also provides a few lines of office furniture. It began marketing its products through retail furniture outlets in Atlanta, Georgia, but has since developed many national distributors of its products. It’s wooden furniture for the home features bedroom and dining suites, as well as home office pieces. Office furniture includes desks, conference tables, and bookcases. The Company also recently introduced ready-to-assemble (“RTA”) furniture (desks and other office furniture, entertainment centers, and storage units).

1.3 Purpose and Use of this Valuation Report

The purpose of this valuation report is to provide an opinion of the fair market value of the issued and outstanding shares of common stock on a controlling, non-marketable basis to be used in conjunction with estate tax issues involving the filing of the United States Estate Tax Return, Form 706.

1.4 Standard of Value

Fair market value is defined as: “The price at which property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as being willing, to trade and to be well informed about the property and concerning the market for such property.”1

To appreciate this standard (or definition) of value, it is important to understand that “fair market value” as defined for this valuation includes the following assumptions: (1) the hypothetical buyer and seller are both willing, and thus interested in the transaction, and are able to enter into this transaction, implying that the hypothetical buyer has sufficient funds to enter into the transaction; (2) the hypothetical buyer is prudent, implying a rational buyer, but is not motivated by any strategic or synergistic influences—the buyer under the fair market value standard is considered to be a “financial” and not a

1 Revenue Ruling 59-60: 1959-1, Cumulative Bulletin 237. Also, Section 20.2031-1(b) of the Estate Tax Regulations (Section 81.10 of the Estate Tax Regulations 105).



“strategic” buyer, where the buyer contributes only capital and management of equivalent competence to that of current management; (3) generally, the business will continue as a going concern and not be liquidated, unless the collection of individual assets is more valuable if put to separate uses; and (4) the hypothetical sale will be for cash.

1.4.1 Hypothetical Buyer

The “Hypothetical Buyer” under the fair- market-value standard of value is generally considered a financial buyer, who brings financial resources to a transaction, but little or no business synergies. This party is interested in the business’s ability to generate future cash flows and often will leverage the acquisition through use of 75% or more of debt to finance the acquisition. While the hypothetical buyer may see the possibility of increased cash flows, he or she will generally not pay for that potential.

Alternatively, a strategic buyer, inherent in the investment value standard, benefits from the synergies of buying a company. These benefits, for example, may include expanding sales territories, adding new products, reducing costs with better purchasing power, and eliminating duplicate functions. Under these circumstances, a strategic buyer may pay a premium over a financial buyer’s offer price to obtain these synergistic benefits.

1.4.2 Hypothetical Seller

The “Hypothetical Seller” under the fair-market-value standard is also not a specific person, although, it is assumed that this seller is prudent and has reasonable knowledge of relevant facts. This hypothetical seller is also rational and can be convinced to sell if the price is right. In addition, the seller is knowledgeable about the market and how it affects the value of his or her business, other business and financial risks specific to the subject company and other investment characteristics associated with the subject’s business interest.

Similar to excluding prospective buyers who have unique strategic advantages under the fair-market-value standard for the hypothetical buyer, the hypothetical seller must have common characteristics with other prospective sellers, including not being under duress or compulsion to sell. Rather, the seller under this standard of value will act rationally and with his or her best interest in mind. Consequently, this prospective seller will only sell if he or she can expect that the sale’s proceeds can be invested in alternative investment opportunities that will generate larger future cash flows than those from its current investment in the subject business. Otherwise, the hypothetical seller would not sell, but rather would continue the investment in the subject company.

1.5 Appropriate Market Sector

In addition, the fair-market-value standard implies that the hypothetical buyer and seller know the market for such property, which means that both parties understand the industry and other economic conditions and their effects on the subject property, on the valuation date, in a sale of the subject property. In addition, even though the willing buyer and willing seller are hypothetical, they are presumed to be dedicated to achieving their individual maximum economic advantage, but absent any compulsion to buy or sell.

In this case, the most appropriate market sector under the fair-market-value standard requires us to measure value based upon a hypothetical sale of a controlling interest to a financial buyer, even though we may be aware that the Company would most likely be acquired by other member(s) of the family. The requirements associated with this engagement were to determine a fair market value of the Company as if were to be sold to an independent third party.



1.6 Date of Valuation

The date of valuation is December 31, 2000. For estate tax purposes, when the owner of a business has died and has left the ownership interest to heirs, the gross estate is valued as of the date of death, or the alternative valuation date under Internal Revenue Code Section 2032. In this case, we were asked to value the business as of the date of death of Raymond C. Harrison, or December 31, 2000. As a consequence, in accordance with Revenue Ruling 59-60, Section 3, Paragraph .03, only information available (known or knowable) as of the valuation date is to be considered in the determination of value. However, subsequent events may be used in determining value to prove the reasonableness of the willing buyer’s and seller’s expectations at the valuation date. If the willing buyer and seller cannot reasonably anticipate the future events, then they are not relevant.2 This report was issued August 31, 2001.

1.7 Ownership and Control

There is only one class of stock in the subject company.

At the date of valuation, the entire ownership interest (100,000 shares of common stock) was owned by Raymond C. Harrison.

1.8 Scope of the Engagement

A business valuation is based on factual information. It is necessary for the business valuer to determine the proper amount of information necessary to competently perform the valuation engagement. This valuation report has been prepared in accordance with the Statement on Standards for Valuation Services (SSVS) of the American Institute of Certified Public Accountants. In accordance with these standards, Assumptions and Limiting Conditions are provided as Appendix B and a Statement of Appraiser Qualifications is included in Appendix F.

The specific valuation methods used in the determination of value were based upon the performance of investigative procedures that we considered necessary under the circumstances. These procedures included a visit to the Company’s office and manufacturing facility; discussions with Company management regarding the history of the business, as well as detailed discussions of the Company’s recent financial performance and operations of the Company; its expected future performance; and other factors we considered relevant.

Both internal and external factors influencing the value of the Company were reviewed, analyzed, and interpreted. Internal factors included the Company’s financial position, results of operations, and the size and marketability of the interest being valued. External factors included—among other things—the status of the industry and the position of the Company relative to the industry. The business valuer must obtain sufficient data about the company’s industry and economic environment, as well as company specific data to make a determination of value.

Lewis, Jones & Company, LLC has relied on the Company’s tax returns and financial statements, as being accurate and a fair representation of the financial status and operations of the Company. We have not applied any independent investigative procedures to assure their accuracy. Rather, we have relied upon management’s representation that this financial information, as well as other information and documentation, provided to us by them or their agents is true and correct to the best of their knowledge and belief. The Company has further assured us that all issues related to litigation, government regulatory requirements, environmental hazards, and other related matters that may impact the value of the Company have been disclosed to Lewis, Jones & Company, LLC.

2 Estate of Jung v. Commissioner, TC Memo No. 1990-5 (1990) and 101 TC 412 (1993).



A business valuation is neither a legal nor a tax opinion. Its purpose is to estimate the fair market value within the meaning of the defined Standard of Value. Lewis, Jones & Company, LLC assumes no responsibility whatsoever for legal or tax matters relative to its findings. Values are stated without reference to legal or tax claims unless so noted. The Company’s compliance with all applicable federal, state, and local laws and regulations is assumed in reliance on management’s representation. The valuation engagement and the resulting report should not be relied upon to disclose errors, irregularities, or illegal acts, including fraud or defalcations.

1.9 Definitions

The terms used in this report are used in the context of the definition of terms located in Appendix E – International Glossary of Business Valuation Terms.

1.10 Principal Sources of Information

The principal sources of information used by us in valuing the Company include the following:

• US Corporation Income Tax Returns (Form 1120) for the years ended December 31, 1996 through December 31, 2000 were prepared by XYZ CPAs3. In addition, XYZ CPAs performed annual reviews of financial statements covering the same years;

• Information provided by David B. Harrison (President and Chief Executive Officer of Adler-Cottino), Paul F. Riddleman (Controller/Chief Financial Officer of Adler-Cottino), and Harry C. White (Vice President of Manufacturing of Adler-Cottino), as well as Gary Anderson (Board Member/Attorney of Andersen, Waldo & Jones) during meetings and telephone conversations before and during the performance of this valuation;

• Lewis, Jones & Company’s standard form questionnaire, supplemental inquiries and document requests;

• Research with respect to the selection of and analysis of the financial performance of other companies in the same or similar industry;

• Industry statistics, studies, and forecasts;

• Economic data as specified.

1.11 Assumptions and Limiting Conditions

The business valuation process requires certain assumptions and limiting conditions, many of which may have significant influence on the valuation conclusion:

• Lewis, Jones & Company, LLC does not purport to be a guarantor of value. Valuation of closely held companies is an imprecise science and reasonable people can differ in their opinions of value. Lewis, Jones & Company, LLC has, however, used conceptually sound and commonly accepted methods and procedures of valuation in determining the conclusion of value included in this report.

• Since Lewis, Jones & Company, LLC is not a law firm, any legal issues that have an impact upon value have been considered from a non-attorney’s viewpoint. Readers of this report should seek proper legal advice if such matters are material in nature.

3 XYZ CPAs, 9843 Peachtree Street, Atlanta, GA 30309.



• As previously indicated, internal and external factors can strongly affect value. The information disclosed in this report is considered to be necessary and relevant to support the value conclusions. We have not knowingly withheld pertinent information in arriving at the conclusion of value.

Additional assumptions and limiting conditions contained in Appendix B – Assumptions Statement of Limiting Conditions may also influence the valuation procedures implemented and the conclusions rendered.



2 SURVEY OF THE SUBJECT COMPANY

2.1 Description of Subject Company

Adler-Cottino Wood Furniture, Inc. is a manufacturer of high quality furniture products. It originally marketed its products through retail furniture outlets in Atlanta, Georgia, but has since developed many national distributors of its products. Its wooden furniture for the home features bedroom and dining suites, as well as home office pieces; office furniture includes desks, conference tables, and bookcases. The Company also recently introduced ready-to-assemble (“RTA”) furniture (desks and other office furniture, entertainment centers, and storage units).

Raymond Cottino Harrison was born in Georgia in 1922. He traces his lineage to the original Adler-Cottino founding fathers. In 1943, he married completed college at Georgia Technical Institute, earning a degree in production management in 1944. He has always worked for his family firm, learning the trade from his father and uncles. He gradually assumed the leadership role and in 1980, at the age of 58, incorporated the Company. He continued as head of the Company until he retired and relinquished operating control of the Company to his son David B. Harrison in 1992, at the age of 70—when he became Chairman of the Board. He died December 31, 2000, at the age of 78.

2.2 History

Adler-Cottino has its roots in German and Italian woodworking immigrants who came to the United States in the 19th century.

Freiderich Harris Adler was a German woodworking craftsman. He immigrated from Freidrichberg to Chicago in 1806. He was skilled in carving and found employment at the Baldwin Piano factory, carving the fancy legs for grand pianos. Although Chicago of the 1800s was a city severely divided by ethnic-centered neighborhoods, while at Baldwin, Adler met Italian wood carver, Alberto Raphael Cottino from Turin, Italy. Cottino specialized in wood carvings used to decorate fancier pianos and other kinds of wood furniture, including chairs, music cabinets, and other related items, for Baldwin’s wealthy clients. The two formed a professional friendship, which included--to a limited extent—the interaction of their respective families. The sons of both men (Freiderich Harris Adler, his son Frederic Harrison Adler, and Raphael Borgia Cottino) learned the trade, and were also employed by Baldwin Piano and Woodcarving.

In 1828, Frederic Harrison Adler married Raphael’s daughter, Maria Isabella Carlotta Cottino. In 1865, searching for a warmer climate with good hardwood forests, the Adler-Cottino family moved to Atlanta. At 58, Harrison was considered a very skilled artisan, and in demand to produce furniture items commissioned by the wealthy of Georgia. Family members followed him to Atlanta, and in 1870, when Harrison—the name by which he was known—was 63, he founded Adler-Cottino Cabinetmaking. The company used a spread eagle tradesman mark burned into a hidden area on the piece of furniture, and senior craftsmen employed by Adler-Cottino wrote their names (or made their marks) just below the eagle mark.

The family business kept its hand-carved furniture tradition until 1980, when Raymond Cottino Harrison—the great, great, great grandson of the original pair—incorporated Adler-Cottino Wood Furniture, Inc. under the auspices and rules of the State of Georgia.

2.3 Form of Organization

Adler-Cottino Wood Furniture, Inc., a Georgia C corporation, was incorporated in the State of Georgia on July 1, 1980.

A C



2.4 Restrictions on Sale of Subject Interest

There are no restrictions on the sale of the subject company stock.

2.5 Prior Ownership Transactions

Management states that there have been no prior changes in ownership since the incorporation of the business.

2.6 Subsidiaries and Affiliates

Adler-Cottino Wood Furniture, Inc. has no subsidiaries, but does have an affiliated company. Adler-Cottino Real Estate Development Company, LLP owns the real estate leased to Adler-Cottino Wood Furniture, Inc. This affiliate was owned by Raymond C. Harrison and other family members.

2.7 Management

Raymond C. Harrison, Chairman of the Board. Raymond Cottino Harrison was born in Georgia in 1922. He traces his lineage to the original Adler-Cottino founding fathers. He married in 1943, and completed college at Georgia Technical Institute, earning a degree in production management in 1944. He has always worked for his family firm, learning the trade from his father and uncles. He gradually assumed the leadership role, and in 1980, at the age of 58, incorporated the Company. He continued as head of the Company until he retired and relinquished operating control of the Company to his son David B. Harrison in 1992, at the age of 70—when he became Chairman of the Board. He died December 31, 2000, at the age of 78.

David B. Harrison, President and Chief Executive Officer. David Borgia Harrison was born in 1943. He graduated with a degree in business from Georgia Technical Institute in 1964 and was married that same year. He has three children. To expand his general business knowledge, with the intent to keep Adler-Cottino competitive, he began his work career (in 1964) outside his family’s company, beginning in sales at Herndon. He left Herndon in 1970 to join Hon Manufacturing as District Manager. In 1977, at age 34, he returned to Georgia and Adler as Vice President for Sales and Marketing. In 1985 he assumed the role of Executive Vice President, and upon Raymond’s retirement, became President and CEO in 1992.

Paul F. Riddleman, Controller and Chief Financial Officer. Paul F. Riddleman, CPA is Controller/Chief Financial Officer. Paul, born in 1947, graduated from the University of Chicago with a degree in accounting in 1968. He earned his CPA in 1970, while employed by Arthur Andersen, LLP in its tax department. Riddleman moved to New York in 1973 with Smith & Jones Consulting Inc. In 1976, Riddleman joined GE Finance as Manager of Tax and Audit. In 1984, Riddleman moved to Georgia, accepting the position of Controller for Adler-Cottino.

John Z. Jones, Vice President of Sales & Marketing. In 1985, David Harrison hired John Z. Jones as his replacement as head of sales and marketing. Jones was born in 1959, and graduated in 1980 from the University at Buffalo with a degree in marketing. He began his business career with Baker’s Marketing Company (an advertising and marketing firm) in Boston. In 1985, he met David at a furniture convention in Washington, DC and agreed to join Adler-Cottino in November of 1985. Jones was named Vice President in 1993.

Harry C. White, Vice President of Manufacturing. Harry Charles White, currently Vice President of Manufacturing for Adler-Cottino, has always worked for the firm in one capacity or another since the fall of 1960. He earned a bachelor’s degree in manufacturing engineering in 1960 from the University of Tennessee. He earned a master’s degree in factory management from the University of Georgia in 1970. His experience within Adler includes purchasing, expediting, line management, factory foreman, union representative, and shop maintenance.



Margaret C. Black, Assistant Vice President, Design and Darian J. Cassidy, Assistant Vice President, Engineering. Both Margaret C. Black and Darian J. Cassidy earned bachelor’s degrees in their respective fields from the University of Georgia and have been with Adler-Cottino for 6 years.

2.8 Employees

In addition to the 7 key personnel listed, Adler-Cottino currently employs 97 full-time individuals, using contract labor as the need arises. Of the full-time staff, 29 are cabinet makers, 25 are mill men, 11 are finishers and glazers in final assembly, two are artists, five are maintenance employees, five are project managers/engineers (drafting personnel), five are estimators, five are responsible for shipping/receiving, six are in the sales and marketing department, and the remaining 10 are office staff. The office staff provides bookkeeping, reception, purchasing, and secretarial support to the Company.

The production/factory personnel are members of the local chapter of the International Brotherhood of Carpenters and Joiners of America, as is White. The current union contract expires January 31, 2005. There has never been a strike or work stoppage (the company founders were themselves active in unions during their lives). Contract labor used by the factory is also union-affiliated.

Management believes morale is good and anticipates no undue personnel problems. Turnover is considered by management to be low, and occurs mostly in maintenance and sales/marketing staffs.

2.9 Products or Services

Adler manufactures primarily high-quality wood furniture products for homes and also provides a few lines of office furniture. Its wooden furniture for the home features bedroom and dining suites, as well as home office pieces. Office furniture includes desks, conference tables, and bookcases. The Company also recently introduced ready-to-assemble (“RTA”) furniture (desks and other office furniture, entertainment centers, and storage units).

Management estimates Adler-Cottino’s production capacity at about $1.2 million per month, or about $14.4 million per year.

2.10 Suppliers

The principal materials used by the Company in manufacturing its products include lumber, veneers, plywood, particleboard, hardware, glue, finishing materials, glass products and fasteners. The Company uses a variety of species of lumber, including cherry, oak, poplar, pine, walnut, ebony and maple. The Company’s five largest suppliers accounted for approximately 14.8% of its purchases in 2000.

The Company believes that its sources of supply for these materials are adequate and that it is not dependent on any one supplier.

2.11 Customer Base

Although the Company initially marketed its products through retail furniture outlets in Atlanta, Georgia, it has since expanded sales of its products through many national distributors.

The general marketing practice followed in the furniture industry is to exhibit products at international and regional furniture markets. In the spring and fall of each year, an eight-day furniture market is held in High Point, North Carolina, which is attended by most buyers and is regarded by the industry as the international market. On several occasions, the Company has utilized a showroom space at the High Point market to introduce new products, increase sales of its existing products, and test ideas for future products.



The Company seeks to establish long-term relationships with its customers in order to continue providing them with quality products. No single customer accounts for more than about 5% of sales.

2.12 Competition

The furniture market is highly competitive, and includes numerous entities; many of whom have substantially greater financial and marketing resources than the Company. The Company believes that the principal competitive factors in the furniture industry marketplace are price, quality, function, innovative product design, style, prompt delivery, and the ability to offer customers a full product line.

Adler believes that its manufacturing processes, its long-standing customer relationships and customer responsiveness, its consistent support of existing product lines that are high quality and good value, and its experienced management are competitive advantages in this large and diverse industry that includes home and office furniture. In trade magazines, the Company is ranked at about 460 of 500 in the top firms for finished wood products, including household furniture, office furniture, and related wood-based products.

Adler-Cottino’s position relative to its competition is that it is part of a small group of firms in the nation that are recognized for the highest quality product.

In their local Georgia market, Adler-Cottino is unique in that it is one of the largest shops of its kind. The machinery and equipment is either unique to the area or the largest of its kind.

2.13 Location

Adler-Cottino Wood Furniture, Inc. operates from its headquarters and manufacturing facility located at 1111 South Birch Highway, Atlanta, GA 30309. The real property is owned by Adler-Cottino’s affiliated limited partnership, Adler-Cottino Real Estate Development, LLP.

The Company, under David B. Harrison’s direction expanded its distribution channels and thereby its operations. In 1996, the Company moved to a new 75,000 square foot manufacturing facility, which was expanded to 110,000 square feet in 1999. This real property is leased on a month-to-month basis.

We compared the lease payments on the real estate to equivalent property rentals within the area and for the type of property leased, including the age of the building, and found them to be comparable to market.



3 ECONOMIC CONDITIONS AND INDUSTRY DATA

In the determination of the value of a closely held company, IRS Revenue Ruling 59-60 requires that an analyst consider “the economic outlook in general and the outlook of the specific industry in particular.” Companies do not operate in a vacuum. Consequently, the fortunes of companies are closely tied to changes in the national, regional, and local economies.

The business analyst must consider relevant economic, industry, and market conditions in estimating a company’s value. It is not possible to develop reasonable expectations about a company’s prospects without an understanding of the economic and industry factors that affect a company’s outlook.

3.1 Overview of the National Economy4

The United States economy had another strong year in 2000. However, it appears that the continuation of the longest economic expansion in the nation’s history may be waning. Success in defending against higher interest rates and energy costs began to fade in the second half of the year. Sector growth was generally positive but several red flags were raised.

The impact of the Federal Reserve’s interest rate increases, OPEC’s decision to push up oil prices, the relatively strong dollar, and the failure of Europe and Japan to grow quickly, have all seemed to conspire to weigh down the US economy.

3.1.1 Gross Domestic Product

Economic growth for 2000 was an impressive 5.0% compared to 4.2% in 1999. However, in 1999 most of the economic growth came in the last two quarters of the year, while in 2000 most of the growth came in the first two quarters. Real Gross Domestic Product (GDP), the output of goods and services produced by labor and property located in the United States, increased on a quarterly basis, beginning with the first quarter of 2000, by 4.8%, 5.6%, 2.2%, and 1.4% respectively. Although volatility in quarterly growth is generally not unusual, the downward trend in 2000 may provide some insight into the future direction of the economy.

3.1.2 Consumer Spending

Personal consumption expenditures, which make up the largest component of GDP, rose by 5.3%, the same growth rate as in 1999. Because personal consumption expenditures make up two-thirds of the economy, the Federal Reserve plays a crucial role in understanding current economic performance.

Despite heavy discounting, nearly all regions reported lackluster growth in retail sales during the fourth quarter of 2000, which were exacerbated through the holiday season. Most of the US reported sales were up only slightly from last year’s holiday season (when very strong gains were experienced). Overall weak sales growth led several national and regional retailers to close some or all of their stores. Many Districts cited diminished consumer confidence as the largest contributing factor to slower activity during the year. Sales of home furnishings, fine jewelry, computers and many other items lagged behind expected forecasts.

4 Excerpted information on the National Economy from the The National Economy – 4th Quarter 2000 and Outlook for 2001 published by CEIR – See Appendix H. Additional information obtained from “National Economic Analysis (2000-2002),” Guide to Business Valuations, Practitioners Publishing Company (January, 2001), Appendix 4H-1.



3.1.3 Government Spending

The Federal government, which grew by 1.5% in 2000, experienced extremely erratic growth quarter by quarter, highlighting the need to consider yearly figures. Quarterly growth ranged from 17.2% to a negative 14.2%. State and local government growth was 3.5% for 2000. The record economic expansion has created substantial surpluses at all levels of government. Surpluses are tempting to politicians who see a need to improve government services and also to win re-election. The use of these surpluses may impact the economy in an important way.

3.1.4 Real Estate and Construction

Non-residential investment grew at 12.5% for 2000, ranging from a high of 21.2% in the first quarter to a low of 1.5% in the fourth quarter. The structures component of this sector grew by 9.1% for the year, with positive growth in each quarter. However, residential investment, which continues to be problematic and quite volatile, experienced a shrinkage of 0.5% in 2000. Marginal growth in the first two quarters was more than offset by shrinkage in the last two quarters of 2000.

3.1.5 Manufacturing

The software and equipment sector grew by 13.6% in 2000, with virtually all of that growth coming in the first two quarters. The slowdown seems to be attributable to weaker demand for personal computers and to reductions of technology-related investment by businesses. High input costs, the strong dollar, and weaker domestic demand were cited most often as reasons for the slowdown in factory activity for other manufactured products.

3.1.6 Inflation

The inflation rate for 2000, as measured by the consumer price index (CPI), was 3.4%, up from 2.2% in 1999. A 3.4% CPI is generally viewed as too high and subject to Federal Reserve concern. However, the core inflation rate, which deducts the volatile energy and food sectors from the CPI, was only 2.4% in 2000, a slight increase from 2.1% in 1999. Most economists favor this core rate as a better gauge of true inflation, and 2.4% is generally seen as an acceptable outcome. The core rate indicates a mildly rising inflation while the general rate shows a stronger inflation bias due mainly to rising energy costs. As late as October, the Federal Reserve continued to believe that inflation was the most important problem for the economy. However, fourth quarter inflation fell close to zero and in its last Federal Open Market Committee Meeting of 2000 the Federal Reserve reversed its bias from inflation to an economic weakening.

3.1.7 Labor Markets

Unemployment rates continue to be quite low, ending the year with an unemployment rate of 4.0%, slightly below the year-end 1999 rate of 4.1%. Generally economists (including the President’s Council of Economic Advisors) believe that 4.0% is a rate too low to support non-inflationary growth. However, the strong dollar, sluggish worldwide economic growth, and strong productivity gains have helped to defy that viewpoint. With the apparent weakening of the economy, policymakers currently appear to be viewing the low unemployment rate as a false signal. In addition, layoffs in a wide variety of industries were announced in most regions during the 4th quarter of 2000.

3.1.8 Stock Market

The stock market had a troubling year. The Standard and Poor’s 500 (S&P 500) performed poorly, falling 10.14% for the year, and falling 13.56% from its high of 1527.46 on March 24th, to close at 1469.25. In addition, the NASDAQ suffered a devastating year, falling 39.29% from its close in 1999 and 51.07% from its high of 5048.62 on March 10, 2000. Shareholders buy future cash flows; that is, their behavior reflects a prediction about the future, not a summation of the past. The poor performance of the



market is a further indication that investors see a poorly performing economy in the future. A weak equity market makes it difficult for entrepreneurs to gain the financing they need to bring their ideas to the market and for the economy to grow.

3.1.9 Outlook

A pronounced decline in forecaster sentiment resulted in widespread downgrades to the outlook for growth in 2001. Profit projections, consumer confidence, and business investment have all appeared to drop. Consequently, the consensus of economists is forecasting a notable decline in GDP growth, with business investment and industrial production representing a more precipitous decline.

However, while the economic slowdown is expected to persist through the first half of 2001, it is expected that by midyear, the US economy should begin to reaccelerate toward a potential growth rate of 3.5%-4.0% of real GDP, especially if there are interest rate cuts and legislative supports through aggressive tax reductions to promote such a recovery.

3.2 Economic Outlook—Atlanta, Georgia5

Adler-Cottino’s headquarters and manufacturing facility is located in Atlanta, Georgia, a fairly large metropolitan statistic area (MSA), overlapping and/or including 20 counties. The founding family of Adler moved to Atlanta to be close to the lumber mills of Tennessee, the Carolinas, Alabama and Georgia, making shipment of hardwoods and wood products less costly than it was in Chicago. Rail and ship transportation (through Savannah) made Atlanta a good choice in the 1860s. High Point, North Carolina—located about 30 minutes south of the Winston-Salem/Greensboro multiplex—has become the current center for furniture makers, and is the location of the US annual furniture manufacture show. Adler continues to concentrate its line of furniture on the upper end of the furniture spectrum; the deceased (Raymond) made no known plans to relocate his company to High Point.

Atlanta, located in the northwest part of Georgia, is the capital of the state of Georgia. Many international firms locate in Atlanta as its proximity to the major multiplexes of the east coast, along with air, rail and cargo services to these areas, essentially means any service is, at most, two air hours away. Home Depot, Coca-Cola, and UPS are three of the major international companies headquartered in Atlanta. Adler-Cottino’s facility is located in the Akers Mill Road area, close to Norfolk Southern Rail and UPS shipping hubs.

Georgia had one of the best rates of population growth in the eastern sector of the country, with a projected rate of 32.7% between 1995 and 2020. The per capita income for construction laborers is $10.15/hour, with managers earning an average of $24.50/hour. Projections from Woods and Poole Economics, a national econometric research firm, show the population of Atlanta will increase 28.9% between 1995 and 2005; employment will increase 31.0% during this same period. Adler has always been able to fill open positions and hasn’t yet experienced a difficult labor market. As its workforce ages, it may be that the wood carvers and finishers will no longer be available, causing Adler to move toward a computerized system of its manufacturing facility. The deceased (Raymond) made no plans for this, and it will be necessary for the new ownership to evaluate this risk and resulting options.

The local economy of Atlanta directly affects the hourly wages paid to employees, both of Adler, its partners, and its competitors. So far, these costs to Adler have been absorbed within the cost of goods sold.

5 Information obtained from Atlanta Metropolitan Area Study published by CEIR (See Appendix G).



3.3 State of the Industry6

The principal categories of furniture products include wood, upholstered and metal furniture products. Of these categories, wood is the largest, representing approximately half of total industry sales, upholstered furniture represents approximately 40% and metal and other products account for the remainder. Within each category, furniture manufacturers generally focus on particular price ranges and styles.

The furniture industry historically has been cyclical, fluctuating with the general economy. The industry is significantly influenced by consumer behavior and confidence, personal disposable income, demographics, housing activity, interest rates, and credit availability. There can be no assurance that an economic downturn would not have a material adverse effect on the industry in general, and the Company, in particular.

The US wood products industry consists of 14 manufacturing sectors that process timber and pulpwood into products such as lumber, panel products, and other basic wood materials. It remains a world leader in the production of and trade in a multitude of products used for residential and light commercial construction, as well as consumer-oriented products. Residential and light commercial construction end uses dominate the market for its products, with more than 81% of softwood and 65% of structural panels used in those activities. Highly skilled labor, access to raw materials, efficient transportation, and strong capital investments in machinery and information technologies make the United States the world’s premier producer of wood products.7

Analysts agree that the boom felt by the nation’s furniture dealers may indeed be slowing and that both sales and shipments of furniture could be lower for the year 2001. Factors leading to the softening of the market are slowdowns in the number of housing starts and home sales and a general slowdown of the national economy. Spending on furniture and home furnishings is also expected to decline from years past. Sales in 2000 were $64.2 billion and in 2001 they are forecast to be $67.4 billion, and $69.5 billion in 2002. The yearly average growth rate is expected to be around 3 %, which is the smallest year-on-year increase since 1991.

It is expected that sales at retail establishments should hold steady, but manufacturers’ shipments will lag and inventories will begin to pile up. Shipments in 2001 will be about 1% behind shipments in 2000, and shipments in 2002 should be about 2% behind what they were in 2000.

New home sales, which play a key role in furniture and home furnishings sales, are expected to slow over the next few years. New home sales in 2000 were about 1.59 million. They are expected to decline to 1.51 million in 2001 and decline further in 2002 to about 2.47 million. In addition, single-family resales are expected to decline in the coming years. There were 4.94 single-family resales in 2000, and they are expected to decline to 4.86 million units in 2001 and 4.59 million units in 2002, according to Furniture Today.

Growth in the GDP will also be slowing down, but still increasing, over the next few years, according to analysts. GDP grew about 4.8% in 2000 and is expected to grow by about 3.5% in 2001, and by 3.3% in 2002.

3.3.1 Furniture Market by Region

The decline of the equity markets in the Northeast will act to slow the growth of the region’s economy, due to the importance of the region’s huge financial service industry. The service industry has already begun to contract and consolidate and layoffs loom in the near future. The furniture and home

6 Excerpted information from Household Furniture and Industry Overview published by CEIR (See Appendix G). 7 “Chapter 7 – Wood Products,” US Industry & Trade Outlook 2000, The McGraw-Hill Companies and US Department of Commerce/International Trade Administration (Copyright 2000), p. 7-1.



furnishings industry could feel a chill in the near future because individuals in the area tend to be high earners.

Furniture and home furnishings retailers in the Southern United States should also feel the contraction in the market, as downturns in other industries ultimately affect the furniture and home furnishings industry. Rapid growth in technology jobs in states such as Virginia, North Carolina, Maryland and Texas has fueled growth in the region for many years, but high technology jobs are beginning to slow. The region also employs many individuals in the automotive industry, which has been slowing recently. Based on these factors, furniture and home furnishings sales gains in the region should be modest for the period from 2000-2002.

The Western United States could feel very little economic slowdown for the time period depending on the fate of the technology sector, which has been a major catalyst in the region in recent years. Other factors that could benefit furniture and home furnishings dealers in the area are strong gains in global trade in aircraft, shipping and agricultural industries.

The Midwestern United States has also benefited from global trade and China’s entry into the World Trade Organization. The large agricultural sector in the region has benefited global trade. However, the tight labor markets that are prevalent in the region have stopped growth in many industries dead in its tracks. The region is beginning to respond with an influx of capital investment in productivity-enhancing equipment that is a key growth factor for the region.

3.3.2 Geographic Trends in the Furniture/Home Furnishings Market

Furniture and bedding sales are expected to increase over all regions of the country through 2005, according to Furniture Today’s 2001 Retail Planning Guide. However, growth will not be occurring as fast as it has in years past, mainly due to a general slowing of the economy as a whole. Sales are forecast to increase by at least 10% in every region in the US for the 2000 to 2005 time period. Sales for the domestic market, as a whole, are expected to increase by about 15 % for the time period.

The largest furniture and bedding market in the country is the Chicago Metropolitan market. Sales in the region have topped all other markets since 1997. New York, Los Angeles, and many other well-established cities top the charts as the largest furniture and bedding markets in the country. Sales growth within each of the 20 largest markets is expected to increase for the time period from 2000 to 2005 by at least 9%, and with some areas growing more than 25%.

The fastest growing furniture and bedding markets are in less traditionally well established cities, where growth is taking place due to a rapid population influx for reasons that are characteristic to the region. Austin-San Marcos, Texas is the fastest growing region in the country, with over $337 million in sales in 2000 and sales projected at over $464 million in 2005—an increase of almost 40%.

Furniture and bedding retailers and wholesalers that are serving these “hot markets” will be less likely to feel the chill of a cooling economy than firms that are serving alternative markets within the country. While the 25 fastest growing regions of the country are still growing faster than all other regions of the country, they are not growing as fast as the previous years top 25 fastest growing markets. In the 1999 Retail Planning Guide the percent change in sales volume ranged from 69% to about 145%, compared to the range of 24% to 38% in the current Retail Planning Guide.

3.3.3 Imports Within the Furniture Industry

Imports have a dramatic effect on manufacturers of furniture and bedding products. Manufacturers have been facing stiff competition from overseas markets that have access to inexpensive means of production and labor. Imports in the furniture industry have increased over 66% since 1997. Looking only at the 1998 to 1999 time period, imports have increased over 20%.



Imports from China alone have increased over 46% for the 1998 to 1999 time period. Over the past few years, Chinese furniture factories have seen large capacity increases, allowing them to pick up the production slack that has been felt in the factories in the United States. The product with the highest demand in the United States that is imported from China is metal outdoor chairs with textile-covered seats. Imports of this product alone have increased over 90% between 1998 and 1999.

The United States exported about $1.6 billion of furniture products in 1999, which was a drop of about 2% from the previous year. Exports also dropped to the following countries:

• Japan, 10% decline • Saudi Arabia, 17% decline • Kuwait, 7% decline • Brazil, 40% decline • Netherlands, 6% decline

3.3.4 Top Furniture Manufacturers

According to Furniture Today, the year 2000 started strong enough, but by the fourth quarter the economic climate with soft orders made it hard for manufacturers to keep their plants running at full speed. As a consequence, the top 25 manufacturers as a group grew a little faster than the rest of the industry—a 4.7% gain in total sales, to $14 billion, which was enough to bump up the leading manufacturers market share by a couple of percentage points. However, this 4.7% gain was down sharply from the 19.5% gain in 1999.

Total shipments of US manufacturers rose by just 2.4% in 2000, according to the American Furniture Manufacturers Association (“AFMA”). The Top 25 accounted for half of the US total for the year, up from 48% in 1999. AFMA’s estimate of US shipments includes imported furniture and components sold by US companies, and so do the sales figures used to rank the Top 25. The market share gain may indicate that the larger companies, as a group, are more active in the import arena than are smaller US producers. Some of the fastest-growing Top 25 companies are active importers.

La-Z-Boy emerged as the largest US furniture manufacturer in 2000 with its January 2000 acquisition of Ladd Furniture, pulling ahead of No. 2 Furniture Brands International. Lifestyle Furnishings International held on to the third spot, while another solid year by Ashley pushed the Wisconsin giant ahead of Klaussner. Like several of their competitors during 2000, Lifestyle and Klaussner had flat sales.

Besides La-Z-Boy, the largest sales growth in 2000 came at Sherrill, Pulaski, and Standard Furniture, all of which posted gains of more than 20%, according to Furniture Today. However, imports played a key role for each of the three companies. Furniture imports to the US grew 19% in 2000, far faster than shipment growth at US factories.

When polled, the top manufacturers stated that they expected the large companies within the industry to get larger through strategic processes such as mergers, acquisitions and partnerships.

3.4 Implications for the Company

There are key influences at the national and local economic levels, as well as within the industry affecting the Company’s operations.

During 2000, a number of events transpired that made it likely that a significant economic downturn will be encountered in 2001. Early in the year, the prices of Internet and technology start-up firm stocks dropped sharply and continued to drop over the remainder of the year. Seeing signs of an overheated economy and fears of inflation, the Federal Reserve began raising interest rates. Energy costs increased, consumer debt levels began rising dramatically, and falling stock prices spread to most sectors of the stock market.



Consumer confidence and consumer spending directly affect the furniture manufacturing industry. Personal spending rose by 5.4% nationally, holding from 1999 through 2000. Much of this growth was sustained through steep discounting and off-price purchasing. In addition, the overall growth in the housing market tapered sharply at the end of 2000, with housing and residential investment being the most volatile.

The Company began to see the effects of the negative signs during the fourth quarter of 2000, as incoming orders began to drop substantially compared to historical levels. The decline accelerated in December, and numerous furniture-manufacturing companies have let go employees and/or shut down several production lines to better balance incoming orders and production capacity.

Based on the foregoing, we expect a slowdown in the economy and the industry that will affect Adler-Cottino’s projected growth. For these reasons, we have forecasted an annual growth rate of 2.0% for the Company, below the expected industry growth of about 3.5%, and below the past performance for the Company.



4 FINANCIAL PERFORMANCE OF THE COMPANY

4.1 Financial Statements

The financial information taken from balance sheets and income statements are analyzed and compared to gathered industry data as a means of monitoring and comparing the financial operating strength of the subject company. By normalizing the balance sheets and income statements, it is possible to make valid comparisons between the subject company and other companies in the same business or profession. Comparison with peers is a useful step in the valuation process. Comparative industry analysis identifies possible financial statement errors of the subject company, as well as strengths and weaknesses of the subject company.

4.2 Financial Information Provided by the Company or Others

The Company’s fiscal year ends on December 31 of each year.

The Company’s accounting firm generally provides a review of the accrual basis financial statements. We were provided with copies of these financial statements, as well as copies of tax returns for the years 1996 through 2000.

In our opinion, the years covered in our review and analysis are adequate to identify any existing financial and operational trends that may affect our conclusion of value. We have included in our report various summaries of financial data (historical and as adjusted) that were generated from our financial review and analysis process.

4.3 Financial-Statement Analysis

Financial-statement analysis is the examination of a company’s financial statements in order to determine how well the company is doing. Has the company’s financial position improved, deteriorated, or stayed the same over a period of time? Here, the valuer is seeking to obtain information on future trends of the company by reviewing relatively recent data (normally the latest five years of historical financial data). In addition, financial analysis requires an analysis of the subject company’s operating performance in comparison to companies within its industry. Comparing the subject company to comparable companies (often referred to as “comparable” or “guideline” companies) within its industry helps the valuer assess whether the subject company is more or less risky than companies within its own industry.

4.3.1 Historical Financial Statements

The detailed historical balance sheets and income statements, on an accrual basis, are presented below as Exhibit 4-1: Balance Sheet and Exhibit 4-2: Income Statement.

Financial Condition. Adler-Cottino is solvent. Its total assets at book value are currently about $8.7 million and reported shareholders’ equity is about $5.1 million at December 31, 2000. Net fixed assets represent about 24.7% of total assets, or about $2.1 million at December 31, 2000, an increase from 20.9% of total assets at December 31, 1996, or $1.2 million. A significant portion of this increase represented an expansion of its manufacturing facility in 1999. Adler-Cottino’s total accounts receivable at December 31, 1996 of $1.2 million increased to about $2.2 million at December 31, 2000, which currently represents about 25.0% of its total assets of $8,671,515. Similarly, the inventory balance of about $2.2 million at December 31, 1996 increased to about $3.0 million at December 31, 2000, but as a percentage of total assets, it decreased from 38.6% to 34.6%. The Company’s third party long-term debt increased from $1.0 million to about $1.3 million and is also attributable to the manufacturing facility expansion. In addition, the Company has an unsecured working capital line of credit with a commercial bank. The line of credit expires September 30, 2001 and bears an interest rate of prime plus ½%. The available credit line is



$1.5 million. However, the Company’s current outstanding debt on this credit line at December 31, 2000 is only $247,800.

EXHIBIT 4-1 ADLER-COTTINO WOOD FURNITURE, INC.

BALANCE SHEET

Source: 1996 Through the Year Ended December 31, 2000: Per Books

12/31/1996 12/31/1997 12/31/1998 12/31/1999 12/31/2000 12/31/1996 12/31/1997 12/31/1998 12/31/1999 12/31/2000ASSETS Percentage of Total AssetsCurrent Assets: Cash 618,400$ 752,979$ 783,736$ 789,050$ 896,406$ 10.84% 11.17% 10.73% 9.54% 10.33% Accounts Receivable 1,198,600 1,722,800 1,833,973 2,090,600 2,166,908 21.01% 25.55% 25.09% 25.28% 24.99% Inventory 2,200,800 2,565,114 2,713,191 2,869,339 2,994,742 38.57% 38.05% 37.11% 34.70% 34.54% Other Current Assets 42,800 44,400 71,800 69,600 88,600 0.75% 0.66% 0.98% 0.84% 1.02% Total Current Assets 4,060,600 5,085,293 5,402,700 5,818,589 6,146,656 71.17% 75.43% 73.91% 70.36% 70.88%

Property & Equipment - Net 1,192,950 1,216,881 1,487,800 2,050,683 2,144,453 20.91% 18.05% 20.35% 24.80% 24.73%Land - - - - - 0.00% 0.00% 0.00% 0.00% 0.00% Total Fixed Assets 1,192,950 1,216,881 1,487,800 2,050,683 2,144,453 20.91% 18.05% 20.35% 24.80% 24.73%

Other Assets: Deposits 102,400 110,000 110,000 110,000 110,000 1.79% 1.63% 1.50% 1.33% 1.27% Other 349,674 329,857 310,040 290,223 270,406 6.13% 4.89% 4.24% 3.51% 3.12% Total Other Assets 452,074 439,857 420,040 400,223 380,406 7.92% 6.52% 5.74% 4.84% 4.39%

Total Assets 5,705,624$ 6,742,031$ 7,310,540$ 8,269,495$ 8,671,515$ 100.00% 100.00% 100.00% 100.00% 100.00%

LIABILITIES & EQUITYCurrent Liabilities: Accounts Payable 1,360,400$ 1,377,800$ 1,496,966$ 1,632,000$ 1,137,600$ 23.84% 20.45% 20.47% 19.73% 13.12% Other Current Liabilities 564,000 544,200 597,400 690,400 769,200 9.88% 8.07% 8.17% 8.35% 8.87% Current Maturity-LTD 85,464 94,413 104,299 167,049 127,285 1.50% 1.40% 1.43% 2.02% 1.47% Notes Payable (Short Term) 718,800 873,000 587,600 306,200 247,800 12.60% 12.95% 8.04% 3.70% 2.86% Total Current Liabilities 2,728,664 2,889,413 2,786,265 2,795,649 2,281,885 47.82% 42.87% 38.11% 33.80% 26.32%

Long Term Liabilities: Long Term Debt 737,173 642,760 538,460 874,906 695,793 12.92% 9.53% 7.37% 10.58% 8.02% Other Long-Term Liabilities 309,740 650,892 975,847 836,680 593,259 5.43% 9.65% 13.35% 10.12% 6.84% Total Long-Term Liabilities 1,046,913 1,293,652 1,514,307 1,711,586 1,289,052 18.35% 19.18% 20.72% 20.70% 14.86%Total Liabilities 3,775,577 4,183,065 4,300,572 4,507,235 3,570,937 66.17% 62.05% 58.83% 54.50% 41.18%

Stockholders' Equity: Capital Stock 1,000 1,000 1,000 1,000 1,000 0.02% 0.01% 0.01% 0.01% 0.01% Paid-In Capital 300,000 300,000 300,000 300,000 300,000 5.26% 4.45% 4.10% 3.63% 3.46% Retained Earnings 1,629,047 2,257,966 2,708,968 3,461,260 4,799,578 28.55% 33.49% 37.06% 41.86% 55.35% Total Stockholders' Equity 1,930,047 2,558,966 3,009,968 3,762,260 5,100,578 33.83% 37.95% 41.17% 45.50% 58.82%

Total Liabilities & Equity 5,705,624$ 6,742,031$ 7,310,540$ 8,269,495$ 8,671,515$ 100.00% 100.00% 100.00% 100.00% 100.00%



EXHIBIT 4-2ADLER-COTTINO WOOD FURNITURE, INC.

INCOME STATEMENT

Source: 1996 Through the Year Ended December 31, 2000: Per Books

12/31/1996 12/31/1997 12/31/1998 12/31/1999 12/31/2000 12/31/1996 12/31/1997 12/31/1998 12/31/1999 12/31/2000Months of Operations in Period 12 12 12 12 12 12 12 12 12 12

Percentage of Total Revenue

Sales 14,770,000$ 18,998,000$ 18,784,400$ 21,988,800$ 24,127,600$ 100.00% 100.00% 100.00% 100.00% 100.00%Cost of Sales 10,952,500 14,572,480 14,282,612 16,413,380 17,535,276 74.15% 76.71% 76.03% 74.64% 72.68%Gross Profit 3,817,500 4,425,520 4,501,788 5,575,420 6,592,324 25.85% 23.29% 23.97% 25.36% 27.32%

Operating Expenses:Officers' Compensation 370,400 422,000 469,200 556,600 617,800 2.51% 2.22% 2.50% 2.53% 2.56%Other Salaries & Wages 1,097,460 1,471,136 1,551,200 1,611,800 1,657,500 7.43% 7.74% 8.26% 7.33% 6.87%Rent 300,000 300,000 300,000 440,000 440,000 2.03% 1.58% 1.60% 2.00% 1.82%Payroll Taxes 133,428 191,060 188,632 191,840 192,724 0.90% 1.01% 1.00% 0.87% 0.80%Auto & Truck Expenses 25,200 25,800 26,960 25,600 28,960 0.17% 0.14% 0.14% 0.12% 0.12%Insurance 58,360 63,000 112,500 175,100 207,520 0.40% 0.33% 0.60% 0.80% 0.86%Selling Expenses 84,420 102,564 139,570 170,490 187,150 0.57% 0.54% 0.74% 0.78% 0.78%Professional Expense 32,000 30,000 52,840 62,800 80,200 0.22% 0.16% 0.28% 0.29% 0.33%Travel & Entertainment 79,600 69,600 71,800 64,800 70,600 0.54% 0.37% 0.38% 0.29% 0.29%Other Operating Expenses 253,260 372,960 467,524 557,920 585,556 1.71% 1.96% 2.49% 2.54% 2.43% Total Operating Exp 2,434,128 3,048,120 3,380,226 3,856,950 4,068,010 16.48% 16.05% 17.99% 17.55% 16.86%

Operating EBITDA (1) 1,383,372 1,377,400 1,121,562 1,718,470 2,524,314 9.37% 7.24% 5.98% 7.81% 10.46%Depreciation & Amortization 211,400 234,312 253,100 352,500 396,900 1.43% 1.23% 1.35% 1.60% 1.65%

Operating Inc (Loss) - EBIT (2) 1,171,972 1,143,088 868,462 1,365,970 2,127,414 7.94% 6.01% 4.63% 6.21% 8.81%Miscellaneous (Inc) Exp 5,126 2,617 39,417 40,817 (5,983) 0.03% 0.01% 0.21% 0.19% -0.02%Interest Expense 149,413 150,048 135,195 131,038 105,643 1.01% 0.79% 0.72% 0.60% 0.44%

Income (Loss) Before Taxes 1,017,433 990,423 693,850 1,194,115 2,027,754 6.90% 5.21% 3.70% 5.42% 8.39%Income Taxes 386,625 361,504 242,848 441,823 689,436 2.62% 1.90% 1.29% 2.01% 2.86%

Net Income (Loss) 630,808 628,919 451,002 752,292 1,338,318 4.28% 3.31% 2.41% 3.41% 5.53%Retained Earnings - Beg. of Yr 998,239 1,629,047 2,257,966 2,708,968 3,461,260 Dividends - - - - -

Retained Earnings - End of Yr 1,629,047$ 2,257,966$ 2,708,968$ 3,461,260$ 4,799,578$

Notes:(1) Operating EBITDA = Operating Earnings, before Interest, Taxes, Depreciation & Amortization. (2) Operating Income (Loss) = Operating Income (Loss) / Earnings Before Interest and Taxes (EBIT)



Financial Performance. A summary of the historical financial performance of the Company is presented in tabular form and graphically below.

Exhibit 4-3 ADLER-COTTINO WOOD FURNITURE, INC.

Historical Performance, 1996-2000, As Reported on Accrual/Book Basis8 Tax Year (FYE 12/31) 1996 1997 1998 1999 2000 Gross Revenue $ 14,770,000 $ 18,998,000 $ 18,784,400 $ 21,988,800 $ 24,127,600 Less: Cost of Sales 10,952,500 14,572,480 14,282,612 16,413,380 17,535,276 Gross Profit 3,817,500 4,425,520 4,501,788 5,575,420 6,592,324 Less: Operating Expenses 2,645,528 3,282,432 3,633,326 4,209,450 4,464,910 Income (Loss) From Operations 1,171,972 1,143,088 868,462 1,365,970 2,127,414 Other Income (Expense) (154,539) (152,665) (174,612) (171,855) (99,660) Income (Loss) Before Taxes 1,017,433 990,423 693,850 1,194,115 2,027,754 Less: Income Taxes 386,625 361,504 242,848 441,823 689,436 Net Income (Loss) $ 630,808 $ 628,919 $ 451,002 $ 752,292 $ 1,338,318

Source: Company financial statements and tax returns.

8 The summarized Income Statements are presented on an accrual/book basis for each year.


Historical Performance, 1996-2000, As Reported

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

1996 1997 1998 1999 2000

Rev

enue

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Prof

it

Revenue Pre-Tax Profit



Except for 1998, the Company’s historical performance showed a steady increase in revenue since 1996—from $14.8 million to hit an all time high in 2000 of $24.1 million, growing at an annual compounded rate of 13.1%. Income from operations dropped slightly from $1.2 million in 1996 to $1.1 million in 1997, dropping even more to $868,462 in 1998, before significantly rising again to $1.4 million in 1999 and $2.1 million in 2000. Similarly, income before taxes (with the exceptions of 1997 and especially 1998) grew from $1.0 million to $2.1 million, which represented a compounded annual growth rate of 18.8%. Problems and delays in the expansion of the manufacturing facility that was completed in January 1999 caused reductions in sales and operating profits for 1998.

Total operating expenses (excluding depreciation) increased from $2.4 million in 1996 to $4.1 million in 2000. However, as a percentage of revenue, this increase only raised the percentage from 16.5% to 16.9%. Similarly, depreciation expense increased from $211,400 to $396,900 during the same time frame, but this was attributable to the expansion of the manufacturing facility.

4.3.2 Financial Ratio Analysis

A commonly used technique for evaluating financial-statement data is ratio analysis. A financial ratio is a fraction expressing a relationship between financial statement items. They can be used for comparison to other companies in the same industry. While no single ratio can tell the whole story, groups of ratios considered together can be revealing.

Analyzing the increases and decreases in a given financial statement item over two or more periods is called horizontal analysis. The changes are shown both in dollar amounts and as a percentage. The percentage change is computed by dividing the dollar amount of the change by the amount of the financial statement item for the earlier period.

Vertical Analysis is usually used to examine the elements of financial statements of a single period; however, when presented for several periods, this analysis is sometimes referred to as Common Size Analysis. For each period, we are comparing a financial amount with some total within the financial statements for that same period. For the balance sheet, each element is shown as a percentage of total assets; for the income statement, each element is shown as a percentage of net sales or revenue.

4.3.3 Comparison to Industry Averages

Comparative financial analysis of the subject company to its peers is a useful step in the valuation process and is helpful in several ways. It can identify errors in the financial information by highlighting discrepancies between the financial performance of the subject company and industry averages. It points out the comparative strengths and weaknesses of the subject company in comparison with its industry peers. It also identifies potential opportunities of and threats to the subject company based upon analysis of comparable industry data and ratios.

Comparable industry data is identified by the Standard Industrial Classification (SIC) code for the subject company’s industry. Since its inception in the 1930s, the system has been periodically revised to reflect the economy’s changing industrial composition and organization. The last revision of the SIC was in 1987. In this case, we used SIC Code 2511 – Wood Household Furniture, Except Upholstered. This SIC Code includes establishments primarily engaged in manufacturing wood household furniture commonly used in dwellings.

A few years ago the United States adopted a new industry classification system named the North American Industry Classification System (NAICS) because of the recent rapid changes in both the US and world economies. The NAICS is currently being used by all US government agencies, but it will take some time before all data has been converted to the NAICS codes. In the meantime, it is necessary to use both industry classification systems in identifying and collecting comparable industry data. The equivalent NAICS code for SIC Code 2511 is 337122 (Non-upholstered Wood Household Furniture Manufacturing).



There are a number of sources available to obtain comparable peer data. We used two sources for comparative data: (1) “Annual Statement Studies” published by the Risk Management Association (formerly known as Robert Morris Associates) hereinafter RMA and (2) The Business Profiler™ developed by Integra Information, Inc.

RMA compiles and publishes financial data on various industries. RMA compiles data from financial information submitted to banks and other financial institutions during the process of obtaining letters of credit, lines of credit, loans and other financial transactions. Even though the data published by RMA may not be totally consistent with the data reported for Adler, it is generally accepted as being representative of the industries on which it reports, and therefore, is a reasonable source of financial data for a comparative analysis of the subject Company.

Business Profiler™ is a financial analysis tool that generates normative financial profiles from the Integra InfoBase™ by industry and sales size for analysis by professionals. A financial profile consists of a balance sheet, income statement, cash flow analysis and financial ratios for a five-year historical period for almost 900 industries based on SIC codes and thirteen sales size ranges. The profiles represent over 3.5 million companies prepared from 31 individual data sources, which include data from the US government and proprietary data sets that incorporate specific private company information.

A summary of the selected data used in our comparative analyses is discussed in the following sections of this report.

4.3.4 Balance Sheet Analysis

The analysis of the balance sheet includes: (1) an analysis of the most recent years of historical balance sheets of the Company to ascertain trends and the nature of any specific assets or liabilities about which comments would be helpful and (2) a comparison of the Company’s balance sheet composition with those of other companies within the same or similar industry. This process is used to understand and communicate the Company’s value and risk drivers. This analysis is presented in Exhibit 4-5: Balance Sheet—Trend and Comparative Industry Analysis.



The balance sheet analysis indicates that as a percentage to total assets the accounts receivable percentages for the Company are generally lower than the industry averages. In addition, accounts payable percentages for the Company declined during the four-year period shown above, matching industry averages in 2000. Consequently, current assets are higher than current liabilities, indicating that Adler should not have liquidity problems. Inventory has generally been in line or below industry averages demonstrating in part the Company’s ability to control its costs. The fixed asset percentages rose during

EXHIBIT 4-5BALANCE SHEET

TREND AND COMPARATIVE INDUSTRY ANALYSISSELECTED ACCOUNTS, COMMON SIZE (UNADJUSTED) AS A PERCENTAGE OF TOTAL ASSETS

1997 1998 1999 2000

SELECTED ITEMS RMA INTEGRA CO RMA INTEGRA CO RMA INTEGRA CO RMA INTEGRA COASSETSCurrent Assets: Cash 3.3% 7.0% 11.2% 6.2% 6.9% 10.7% 6.3% 6.9% 9.5% 2.6% 6.9% 10.3% Marketable Securities 0.0% 0.0% 0.1% 0.0% 0.0% 0.0% 0.1% 0.0% Accounts Receivable 26.1% 27.2% 25.6% 22.9% 26.9% 25.1% 25.0% 26.7% 25.3% 26.9% 26.9% 25.0% Inventory 37.7% 36.1% 38.0% 36.8% 35.7% 37.1% 37.6% 35.5% 34.7% 31.2% 35.8% 34.6% Prepaid Expenses 0.7% 3.1% 0.7% 1.3% 3.0% 1.0% 1.1% 2.9% 0.9% 1.5% 3.0% 1.0% Total Current Assets 67.8% 73.4% 75.5% 67.2% 72.6% 73.9% 70.0% 72.0% 70.4% 62.2% 72.7% 70.9%Property & Equipment - Net 18.0% 20.4% 24.8% 24.7%Land 0.0% 0.0% 0.0% 0.0% Net Fixed Assets 26.3% 21.9% 18.0% 26.7% 22.7% 20.4% 21.4% 23.4% 24.8% 30.6% 23.6% 24.7%Other Assets: Intangible Assets 1.3% 0.8% 0.0% 1.2% 0.8% 0.0% 2.3% 0.9% 0.0% 1.4% 0.0% Investments 2.4% 0.0% 2.4% 0.0% 2.3% 0.0% 2.3% 0.0% Other Assets 4.6% 1.5% 6.5% 4.9% 1.5% 5.7% 6.3% 1.4% 4.8% 5.8% 1.4% 4.4% Total Other Assets 5.9% 4.7% 6.5% 6.1% 4.7% 5.7% 8.6% 4.6% 4.8% 7.2% 3.7% 4.4%

Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

LIAB. & S/Hs EQUITYCurrent Liabilities: Short Term Debt 23.8% 10.8% 14.4% 17.4% 11.0% 9.4% 23.5% 11.0% 5.7% 26.4% 11.0% 4.3% Accounts Payable 11.8% 12.7% 20.4% 12.0% 12.8% 20.5% 12.5% 12.8% 19.7% 15.1% 12.7% 13.1% Other Current Liabilities 7.2% 9.5% 8.1% 10.7% 9.6% 8.2% 9.5% 9.4% 8.4% 8.3% 9.4% 8.9% Total Current Liab 42.8% 33.0% 42.9% 40.1% 33.4% 38.1% 45.5% 33.2% 33.8% 49.8% 33.1% 26.3%Long Term Liabilities: Long Term Debt 14.1% 12.5% 9.5% 13.0% 12.8% 7.4% 13.5% 13.0% 10.6% 19.1% 13.1% 8.0% Loans from Shareholders 7.3% 0.0% 7.6% 0.0% 7.7% 0.0% 7.7% 0.0% Other Liabilities 4.5% 1.2% 9.6% 3.3% 1.2% 13.3% 3.7% 1.3% 10.1% 6.1% 1.2% 6.8% Total LT Liabilities 18.6% 21.0% 19.1% 16.3% 21.6% 20.7% 17.2% 22.0% 20.7% 25.2% 22.0% 14.8%Total Liabilities 61.4% 54.0% 62.0% 56.4% 55.0% 58.8% 62.7% 55.2% 54.5% 75.0% 55.1% 41.1%Shareholders' Equity: Capital Stock 0.1% 0.1% 0.1% 0.1% Additional Paid-In Capital 4.4% 4.0% 3.5% 3.5% Retained Earnings 33.5% 37.1% 41.9% 55.3% Total S/Hs Equity 38.6% 46.0% 38.0% 43.6% 45.0% 41.2% 37.3% 44.8% 45.5% 25.0% 44.9% 58.9%

Total Liab.& S/Hs Equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

SOURCE: Subject's financial statements as prepared by their outside CPA. Calculations byappraiser.

LEGEND FOOTNOTE: SIC code 2511 Annual Statement Studies (RMA). Average of about 32 companies withtotal sales between $10.0 million and $25.0 million.

SIC code 2511 Business Profiler (Integra). 42 companies with total sales between$10.0 million and $25.0 million.



the years shown, but coincided with industry averages. This is most likely a reflection of the recent expansion of the manufacturing facility in 1999. Finally, the Company’s long-term debt percentages were similar to industry averages between 1997 and 1999 before dropping significantly in 2000. The large increase in revenue in 2000 was used to significantly decrease outstanding debt in 2000.

4.3.5 Income Statement Analysis

The purpose and use of the analysis of income statements is similar to the explanation of the analysis of the balance sheets. Using a common-size format, we performed a trend analysis using the Company’s most recent years and a comparative analysis against the previously described comparative industry group. These analyses are presented in Exhibit 4-6: Income Statement—Trend and Comparative Industry Analysis.

The cost of sales percentages for Adler-Cottino decreased from 76.7% in 1997 to 72.7% in 2000. Although this percentage was above the average cost of sales percentage reported by Integra of 70.9%, it remained somewhat below RMA’s average percentage of 78.2%. As a consequence, the gross profit percentages for Adler-Cottino remained above RMA’s average gross profit percentages of 21.9%—ranging between a low of 23.3% in 1997 to a high of 27.3% in 2000. On the other hand, the Company’s gross profit percentage was below the average gross profit percentage of 29.2% for Integra.

Differences in reported operating expenses between the RMA and the Integra industry peer groups narrowed the overall operating income percentages between the two database studies. As a consequence, the operating income percentages as reported by the two industry peer groups ranged from a low of 3.6% to a high of 4.8% for the years 1998 and 2000. Generally, the Company’s operating income percentages were much better—ranging from a low of 6.1% in 1997 to a high of 8.7% in 2000.

Adler-Cottino’s pre-tax earnings percentages ranged from a low of 3.7% (1998) to a high of 8.4% (2000), close to three times the industry norm of about 2.8% to 2.9% for the years 1998 through 2000.

Adler-Cottino appears to be operating more profitably than its industry peers.



4.3.6 Industry Comparison Ratio Analysis

Besides horizontal and vertical ratio analyses, a third type of ratio analysis involves the comparison of one or more elements within financial statements to another element or elements within the financial statements and is called Common Ratio Analysis. Generally, these ratios are concerned with measuring four areas: (1) Liquidity; (2) Activity (or Efficiency); (3) Leverage; and (4) Profitability.

These ratios may be compared with equivalent figures for the same company in earlier years as a means of identifying positive and negative trends affecting the company. In addition, often these ratios for the subject company are compared to companies within the industry group as a means of determining the company’s position with respect to its peers. Is it more or less risky than its peer group? How well does the subject company perform as compared with its peer group?

EXHIBIT 4-6INCOME STATEMENT

TREND AND COMPARATIVE INDUSTRY ANALYSISSELECTED ACCOUNTS, COMMON SIZE (UNADJUSTED) AS A PERCENTAGE OF TOTAL SALES

1997 1998 1999 2000

SELECTED ITEMS RMA INTEGRA CO RMA INTEGRA CO RMA INTEGRA CO RMA INTEGRA COSALES 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%COST OF SALES 78.8% 70.6% 76.7% 78.1% 70.8% 76.1% 79.0% 71.0% 74.6% 76.7% 71.0% 72.7%GROSS PROFIT 21.2% 29.4% 23.3% 21.9% 29.2% 23.9% 21.0% 29.0% 25.4% 23.3% 29.0% 27.3%

OPERATING EXPENSES Selling, General & Adm. 17.1% 11.7% 17.0% 13.2% 16.9% 12.3% 16.9% 11.7% Officers' Compensation 4.1% 2.2% 4.0% 2.5% 4.0% 2.5% 4.0% 2.6% Pension & Benefits 1.2% 0.0% 1.2% 0.0% 1.2% 0.0% 1.2% 0.0% Advertising & Sales 0.5% 0.5% 0.5% 0.7% 0.6% 0.8% 0.6% 0.8% Bad Debts 0.3% 0.0% 0.3% 0.0% 0.3% 0.0% 0.3% 0.0% Rents Paid 1.0% 1.6% 1.0% 1.6% 0.9% 2.0% 0.9% 1.8%Total Operating Expenses 17.0% 24.2% 16.0% 15.9% 24.0% 18.0% 15.0% 23.9% 17.6% 17.5% 23.9% 16.9%Operating EBITDA (1) 4.2% 5.2% 7.3% 6.0% 5.2% 5.9% 6.0% 5.1% 7.8% 5.8% 5.1% 10.4%Depreciation & Amortization 1.2% 1.5% 1.2% 1.2% 1.5% 1.3% 1.6% 1.5% 1.6% 1.8% 1.5% 1.7%Operating Inc (Loss) - EBIT (2) 3.0% 3.7% 6.1% 4.8% 3.7% 4.6% 4.4% 3.6% 6.2% 4.0% 3.6% 8.7%Miscellaneous (Inc) Exp 2.6% -0.5% 0.1% 1.0% 0.2% 0.2% 1.4% -0.1% 0.2% 2.0% -0.1% -0.1%Interest Expense 0.8% 0.8% 0.9% 0.7% 0.9% 0.6% 0.8% 0.4%Income (Loss) Before Taxes 0.4% 3.4% 5.2% 3.8% 2.6% 3.7% 3.0% 2.8% 5.4% 2.0% 2.9% 8.4%Income Taxes 1.3% 1.9% 1.2% 1.3% 1.1% 2.0% 1.1% 2.9%

Net Income (Loss) 0.4% 2.1% 3.3% 3.8% 1.4% 2.4% 3.0% 1.7% 3.4% 2.0% 1.8% 5.5%

SOURCE: Subject's financial statements as prepared by their outside CPA. Calculations byvaluer.

FOOTNOTES: SIC code 2511 Annual Statement Studies (RMA). Average of about 32 companies withtotal sales between $10.0 million and $25.0 million.

LEGEND SIC code 2511 Business Profiler (Integra). 42 companies with total sales between$10.0 million and $25.0 million.

(1) Operating EBITDA = Operating Earnings, before Interest, Taxes, Depreciation &Amortization.

(2) Operating Income (Loss) - EBIT= Operating Income (Loss) / Earnings Before Interest &Taxes.



We similarly compared Company ratios to those of industry groups, as provided from RMA Annual Statement Studies and Integra’s financial information. These included median statistics for businesses whose primary Standard Industrial Classification code were 2511 – Manufacturing-Wood Household Furniture, Except Upholstered. A discussion interpreting theses financial ratios is included. It is important to note that some ratios/percentages are not computed in the same manner between RMA and Integra. Consequently, Company ratios/percentages need to be computed consistently with the respective database in order to provide meaningful comparisons.

Liquidity Ratios: Liquidity ratios measure how well the company can meet its obligations in the short term.

Current Ratio. The current ratio is calculated as current assets divided by current liabilities. This ratio indicates the amount of liquid assets available to liquidate current debt or the company’s ability to meet its current obligations—the higher the ratio, the greater the company’s liquidity.

Peer Group Description 12/31/97 12/31/98 12/31/99 12/31/00

RMA Company 1.8 1.9 2.1 2.7

Industry 1.5 1.5 1.5 1.2

Integra Company 1.8 1.9 2.1 2.7

Industry 2.2 2.2 2.2 2.2

The Company’s current ratio has ranged between a low of 1.8 (1997) and a high of 2.7 (2000). The Company’s present current ratio of 2.7 is above the industry norm for Integra of 2.2 and above RMA’s industry average of 1.4, indicating that the Company should be meeting its current obligations. Quick Ratio. The quick ratio is calculated as the quick assets (those that can be converted quickly to cash—e.g., cash, accounts receivable, and marketable securities) divided by the current liabilities. This is generally considered to be a more conservative estimate of the company’s liquidity.


RMA Company 0.9 0.9 1.0 1.3

Industry 0.7 0.6 0.6 0.5


Industry 1.0 1.0 1.0 1.0 Here, the Company’s ratio ranges from a low of 0.9 (1997-1998) to a high of 1.3 (2000). Its quick ratio for 2000 is 0.9. This is again higher than the industry average of about 0.6 from RMA and higher than Integra’s average of 1.0 for 1999 and 2000. This would indicate that Adler-Cottino should not have a liquidity problem.



Activity (Efficiency) Ratios (Sometimes Called Asset Utilization Ratios): These ratios relate an income-statement variable to a balance-sheet variable and are a measure of how efficiently a company is utilizing various balance sheet components.

Revenue (Sales)-to-Receivables Ratio (Accounts Receivable Turnover). The revenue (sales)9-to-receivables ratio is calculated by dividing net revenue (sales) by accounts receivable. This ratio shows the analyst how much of a company’s sales are reflected in accounts receivable.


RMA Company 11.0 10.2 10.5 11.1

Industry 8.8 9.4 8.0 9.2


Industry N/A 7.7 7.5 7.5

The industry ratios are different because RMA and Integra calculate them differently. As a consequence and to be comparable with its industry counterpart, the Company’s ratios are computed in the same manner as each database.

The Company’s ratio has been above the industry average of 8.9 and 7.6 for RMA and Integra, respectively. This indicates that Adler-Cottino appears to be collecting its receivables on a timely basis. Age of Receivables (Day’s Receivables). This ratio (measured in days) is calculated by dividing the accounts receivable turnover ratio into 365 days. It estimates the average collection period for credit sales. A long collection period (a high number of days) not only puts a strain on the company’s short-term liquidity, but it may also indicate large bad debt losses. Therefore, the lower the collection period the better the company is managing its accounts receivable.


RMA Company 33 36 35 33

Industry 41 39 46 40

Integra Company 28 34 33 32

Industry N/A 47 49 49

The industry day’s receivables are different because RMA and Integra calculate the accounts receivable turnover differently. As a consequence and to be comparable with its industry counterpart, the Company’s ratios are computed in the same manner as each database.

9 Sales in this calculation should represent just credit sales if this figure is available, but often may not be available.



The average collection period for Adler-Cottino ranges from a low of 28 days (1997) to a high of 36 days (1998), while the industry average is 38 days from Integra and 42 days from RMA. Again, this shows that Adler-Cottino seems to be collecting its receivables on a timely basis. Revenue to Working Capital. This ratio is calculated as net sales divided by working capital (current assets minus current liabilities). It indicates the efficiency of the current-asset use.


RMA Company 7.4 6.2 5.8 4.7

Industry 9.9 13.0 8.0 22.8




Although the Company’s ratios for the period 1997 through 2000 have been below the industry average from RMA, the ratios, as computed and compared with Integra’s figures, show that they have exceeded the 5.1 to 5.2 industry averages. Because of this inconsistency between the Company’s ratios and those from each database, we cannot make a conclusive determination from this ratio alone about the Company’s efficiency.

Leverage (Coverage) Ratios: Leverage ratios measure the company’s debt usage and how well it can afford its debt.

Times Interest Earned (EBIT/Interest). This ratio is calculated by dividing earnings before interest and taxes by interest expense. It indicates the Company’s ability to cover interest expense and also serves as an indicator of the Company’s capacity to take on additional debt.


RMA Company 7.6 6.4 10.4 20.1

Industry 2.2 3.7 1.4 2.4


Industry 4.5 4.3 4.2 4.3

The Company’s debt coverage ratios are significantly above the industry averages from both RMA and Integra. The Company’s ratios range from a low of 6.4 (1998) to a high of 20.1 (2000). The revenue increase in 1999 offset any anticipated reduction in this ratio that would have resulted from obtaining a loan for the expansion of the manufacturing facility. Generally, working capital needs have been mostly financed from prior year’s generated cash flows from the business, although the Company has a working capital line of credit with a commercial bank.



Total Debt to Equity (Debt/Tangible Worth). Calculated as total debt divided by stockholder’s/owner’s equity, this ratio determines the extent of non-equity capital used to finance the company’s assets—the smaller the ratio the better.


RMA Company 1.6 1.4 1.2 0.7

Industry 1.5 1.4 1.9 3.0


Industry 1.2 1.2 1.2 1.2

The Company’s average has been below RMA’s industry ratios from 1998 through 2000. In addition, the Company’s ratio has decreased to 0.7 in 2000, which is below Integra’s ratio for that year. It appears that the Company’s Debt/Tangible Worth ratio is in line with the industry ratios.

Profitability Ratios: These ratios are a measure of how profitable a company is relative to its size.

Pretax Earnings (EBT) to Total Equity (Tangible Worth). This percentage is calculated by dividing pretax earnings by stockholder’s/ owner’s equity. This percentage indicates the pretax return on stockholder’s/owner’s equity.


RMA Company 38.7% 23.1% 31.7% 39.8%

Industry 23.8% 24.1% 11.1% 14.2%

Integra Company 38.7% 23.1% 31.7% 39.8%

Industry 14.9% 13.5% 12.1% 12.4%

The Company’s percentage return on its equity investment has been significantly above industry averages from both RMA and Integra, ranging from a low of 23.1% (1998) to a high of 39.8% (2000). However, it should be noted that although the Company’s percentage rate of return dropped between 1997 and 1998, it steadily rose subsequent to 1998. The drop in 1998 was most likely the result of the delays and problems encountered with the expansion of the manufacturing facility during the latter half of 1998. Pretax Earnings (EBT) to Total Assets. This percentage is calculated by dividing pretax earnings by total assets. It indicates how productively the company is using its assets to produce pretax profits. This percentage can also be used to examine trends in efficiency. The use of total assets minimizes the effects of different financing methods on the percentage rate.




RMA Company 14.7% 9.5% 14.4% 23.4%

Industry 6.2% 8.1% 4.9% 5.2%

Integra Company 14.7% 9.5% 14.4% 23.4%

Industry 6.9% 6.1% 5.4% 5.6%

The Company’s percentages for unadjusted pretax earnings to total assets ranged from a low of 9.5% (1998) to high of 23.4% (2000). These returns on asset percentages are more than twice the industry averages. Revenue (Sales) to Net Fixed Assets. This percentage is calculated as net revenue (sales) divided by average net fixed assets. It indicates how efficiently net fixed assets are producing revenue (sales).


RMA Company 15.6 12.6 10.7 11.3

Industry 7.6 7.9 10.5 9.6




Adler-Cottino’s ratios have ranged from a low of 10.7 (1999) to a high of 15.8 (1997). The ratios remained above the industry averages for the entire time frame, indicating the Company has had an excellent return on its fixed assets, although the ratios generally declined between 1997 and 1999 before rising again in 2000 with respect to the RMA ratio. Total Asset Turnover (Revenue/Total Assets). This ratio is calculated by dividing net revenue (sales) by total assets. It is an indication of how efficiently total assets are producing revenue (sales).




RMA Company 2.8 2.6 2.7 2.8

Industry 2.3 2.1 2.1 2.4



Adler-Cottino’s ratios for all the years have been above the industry averages. It appears that the Company is surpassing the industry’s efficiency in using its assets to produce revenue. Industry Growth Ratios. Except for 1998, the Company’s historical performance showed a steady increase in revenue since 1996—from $14.8 million to hit an all time high in 2000 of $24.1 million, growing at an annual compounded rate of 13.1%. Similarly, income before taxes, with the exceptions of 1997 and especially 1998, grew from $1.0 million to $2.1 million, which represented a compounded annual growth rate of 18.8%. Problems and delays in the expansion of the manufacturing facility that was completed in January 1999 caused reductions in sales and operating profits for 1998.

4.4 Summary of Analysis

Except for 1998, revenue grew from $14.8 million in 1996 to $24.1 million in 2000, at a compounded annual growth rate of 13.1%. Similarly, income before taxes, with the exceptions of 1997 and especially 1998, grew from $1.0 million to $2.1 million, which represented a compounded annual growth rate of 18.8%. Problems and delays in the expansion of the manufacturing facility that was completed in January 1999 caused reductions in sales and operating profits for 1998. The Company has appeared to control its operating costs, and it has managed to generate rates of return in excess of its industry peers.

Adler-Cottino is solvent with assets totaling about $8.7 million and reported shareholders’ equity of about $5.1 million at December 31, 2000. The Company’s short-term liquidity is excellent, and its recent increase in third-party debt used to expand the manufacturing facility in 1999 dropped significantly from debt repayments in 2000, which resulted from increased revenues in 1999 and 2000.

Based on the foregoing, it would seem that the Company’s financial performance would warrant a reduction in the Company’s capitalization rate used in the capitalization of earnings method in valuing the business developed later in this report. In addition, the Company’s financial performance is taken into consideration in making adjustments to market multiples under the market approach. However, somewhat mitigating this reduction is the appearance on the horizon of a slowdown in the economy, and in particular, the industry during the next few years. As a consequence, there is some skepticism as to how well this Company will perform if such an economic downturn materializes. Therefore, we believe a downward adjustment in the capitalization rate is indicated, but to a lesser extent.

4.5 Adjustments to Financial Statements

The value of a business often depends upon the extent to which it generates earnings. However, small business owners have a fair amount of latitude in how they report the financial operations of their business. Many small business owners select alternative accounting practices based upon their affect on paying income taxes. Often many small businesses report financial results on a cash basis (where revenue is reported when received and expenses are deducted when paid) versus an accrual basis (where revenues are recorded when earned and expenses are deducted when they are actually incurred).



As a consequence, the valuer frequently needs to adjust the historical financial statements before implementing selected valuation methods. Making these adjustments is often referred to as “normalizing” the financial statements. The effects of normalizing the financial statements is to provide the valuer with a set of financial statements that purport to represent a more economically realistic picture of the value of the assets and the financial operating results of the business.

These adjustments represent estimates and often fall into one of the three categories presented below:

1. Comparability Adjustments–These adjustments are recorded to the subject company’s financial statements in order to make the subject company more comparable to guideline companies or companies within the industry group that were used in comparative ratio analyses (i.e., subject company uses last in, first out (LIFO) inventory method of accounting, while industry group uses first in, first out (FIFO) inventory method, depreciation accounting method differences, etc.)

2. Non-operating/Nonrecurring Adjustments–Non-operating or nonrecurring income or expense adjustments are removed from the income statement because they are either unrelated to the business operations or unlikely to recur in the future. Non-operating assets or liabilities are elements of the balance sheet that are removed so a more appropriate value of the operating company may be determined. The non-operating assets or liabilities are then added or subtracted to the resulting computed value to arrive at the total equity value of the company. An example of these types of adjustments would be the costs associated with discontinuing a portion of the business.

3. Discretionary Adjustments – Discretionary adjustments are those expenses that are usually under the sole discretion of management, or more typically the owners of the business. Often these expenses are between the company and the owners of the company (i.e., related party transactions). These adjustments are most appropriately made when valuing a controlling interest of the company. The adjustments generally represent the difference between the actual recorded book expense and the expense that would be incurred if transacted between the subject company and an independent third party. Examples of these types of adjustments include: officer’s and owner’s compensation, owner’s perquisites, entertainment expenses, automobile expenses (e.g., personal use of company cars), compensation to family members, and other related party transactions.

We are valuing this Company on a controlling-interest basis; therefore, normal adjustments that require control are appropriate.

Adjustments to the balance sheet and income statements are presented in the following sections.

4.5.1 Balance Sheet Adjustments

As of December 31, 2000, the balance sheet items considered for adjustment are presented below in this section. Those items that led to adjustments are numbered and the numbers coincide with the footnote numbers in the following exhibit.

1. Cash in Excess of Operating Needs. The Company has operated with cash in excess of its operating needs. It was found that during the past five years the Company had excess cash of about $200,000.

2. Accounts Receivable. We asked for an aging of the current accounts receivable. An accounts receivable aging report was provided to us. We determined that approximately 15.0% of outstanding accounts receivable were over a 180-days old. The accounts receivable balance at December 31, 2000 was $2,166,908. Based on the foregoing, we considered 15.0% of the



accounts receivable balance, or $325,036, as uncollectible, and reduced the accounts receivable balance by $325,036.

3. Inventory. The Company values inventory at the lower of cost or market using a first-in first-out (FIFO) method. Work in process inventory includes direct labor and allocated overhead cost. Our financial analysis indicated that certain inventory is obsolete. We determined that approximately 25.0% of the inventory is obsolete. The inventory balance at December 31, 2000 was $2,994,742. We reduced the inventory balance by $748,686 (25%) of its book value to arrive at an appropriate proxy for current market value.

4. Fixed Assets. The Company leases its real estate through an affiliated company. The fair market value of the other fixed assets were based upon a machinery and equipment appraisal. A portion of the machinery and equipment difference is attributable to Internal Revenue Code section 179 (i.e., costs of machinery and equipment that were allowed as a tax deduction upon the purchase of the asset). The fair market value of the total fixed assets reported on the books at December 31, 2000 was $2,500,000.

5. Non-operating Asset: Town home. A town home, located in Greensboro, North Carolina, was purchased for cash in January 1996 for $325,000 (not far from High Point). This town home is provided to large potential furniture buyers for their use just prior to and during the High Point Furniture Market held in the Spring and Fall of each year. The home is furnished with newly designed furniture by Adler-Cottino before each High Point show and is decorated with artwork costing $40,000 (also originally purchased in January 1996). The furniture is left in the town home until the next show when it is replaced with newly designed furniture. The artwork is shipped back to Raymond Harrison’s home after each show.

In addition, Raymond and David Harrison are avid golfers. Throughout the year, both of them, including family members and guests, use the town home for golf getaways. The town home is not rented during other times of the year.

Depreciation expense for the town home, as well as the artwork, is recorded in the “Miscellaneous (Income) Expense” category. Depreciation on the town home was $11,326 in 1996 and $11,817 for 1997 through 2000. Depreciation on the artwork was $4,000 in 1996 and $8,000 for 1997 through 2000. Also included in this category of expenses are the town home property taxes. The furniture is inventory and remains on the books until it is sold as used furniture when replaced.

The fair market value of the town home was appraised at $400,000 and the artwork was appraised at $50,000.

6. Trademark, Assembled Workforce, and Other Intangible Property. This balance represents the fair market value of the trademark, assembled workforce, and other intangible property, which we have reported as $1.5 million. The determination of the fair market value of the trademark, assembled workforce, and other intangible property were provided in a separate valuation report.

7. Reconciling Adjustments. These are adjustments made to group totals in order to reconcile the adjustments to specific line items.

4.5.2 Normalized Operating Tangible Equity

The adjustments discussed above are presented in Exhibit 4-7: Normalized Operating Tangible Equity presented below:



EXHIBIT 4-7 SUB- ACCOUNTING NORMALIZEDNORMALIZED OPERATING SEC. BALANCE TANGIBLETANGIBLE EQUITY as of 12-31-00 NO. SHEET ADJUSTMENTS EQUITYASSETSCurrent Assets: Cash 1 896,406$ (200,000)$ 696,406$ Accounts Receivable 2 2,166,908 (325,036) 1,841,872 Inventory 3 2,994,742 (748,686) 2,246,056 Other Current Assets 88,600 88,600 Total Current Assets 6,146,656 (1,273,722) 4,872,934

Land 4 - Property & Equipment - Net 4 2,144,453 Net Fixed Assets 2,144,453 355,547 2,500,000

Other Assets: Deposits 110,000 110,000 Other Assets - Townhome, Etc. 5 270,406 (270,406) - Trademark, Assembled Workforce, and Other Intangible Property 6 1,500,000 1,500,000 Total Other Assets 380,406 1,229,594 1,610,000

Total Assets 8,671,515$ 311,419$ 8,982,934$

LIABILITIES& SHAREHOLDERS' EQUITYCurrent Liabilities: Accounts Payable 1,137,600$ 1,137,600$ Short Term Debt 247,800 247,800 Current Maturity - LTD 127,285 127,285 Other Current Liabilities 769,200 769,200 Total Current Liabilities 2,281,885 - 2,281,885

Long Term Liabilities: Long-Term Debt 695,793 695,793 Other Long-Term Liabilities 593,259 593,259 Total Long Term Liabilities 1,289,052 - 1,289,052 Total Liabilities 3,570,937 - 3,570,937

Shareholders' Equity: Common Stock 1,000 1,000 Paid-in Capital 300,000 300,000 Retained Earnings 7 4,799,578 311,419 5,110,997 Total Shareholders' Equity 5,100,578 311,419 5,411,997

Total Liabilities & Shareholders' Equity 8,671,515$ 311,419$ 8,982,934$

ADJUSTMENTS: THE NUMBERS FOLLOWING CERTAIN ASSETS AND LIABILITIES TRACK TO THE SUBSECTIONNUMBERS IN SECTION 4.5.1 WHERE AN EXPLANATION OF THE ADJUSTMENT CAN BE FOUND.



4.5.3 Income Statement Adjustments

The specific income or expense items considered for adjustment are explained below.

1. Depreciation Expense. Depreciation expense is added back here because it is a non-cash expense.

2. Other Salaries and Wages. During the valuation process it was discovered the other salary of R. Harrison was included in other salaries and wages. Based on information obtained from EM Recruiters of Atlanta, his salary is neither reasonable nor necessary. Therefore, a reduction in other salaries and wages paid to him in the amount of $305,000 per year is in order. In addition, 26,500 in related payroll taxes should also be eliminated, as well as insurance expense of $3,500 per year was attributable to his benefit. Therefore, a total of $335,000 is required to be added back each year to income for these discretionary expenditures.

3. Elimination of Town Home Expenses. Depreciation expense for the town home, as well as the artwork, is recorded in the “Miscellaneous (Income) Expense” category. Depreciation on the town home was $11,326 in 1996 and $11,817 for 1997 through 2000. Depreciation on the artwork was $4,000 in 1996 and $8,000 for 1997 through 2000. In addition, real estate taxes on the town home were $3,000 (1996); $3,200 (1997); $3,400 (1998); $3,600 (1999); and $3,800 (2000), which were also recorded to the same miscellaneous expense account.

4. Other Adjustments. Management provided other forecasted cash flow outlays, including working capital increases, fixed-asset additions, and debt repayments (net of new loans). These along with other computations are presented in Exhibit 4-8: Normalized Income Statements.

4.5.4 Normalized Income Statement

A summary of normalized income is presented below in Exhibit 4-8: Normalized Income Statements.

Weighting. The weights applied in the following exhibit use only the two previous years (1999-2000). It is expected that the earnings of these last two years represent a good proxy for the future earnings of Adler-Cottino. When weights in excess of one are applied to a particular year (or years), the valuer is taking the position that the particular year (or years) is a more reliable indicator of future performance than the year (or years) weighted less. A weighted average from the most recent two years was used. The anticipated slowdown in the economy and the furniture industry indicated that a simple average of the last two years of financial results would be more appropriate than a greater weighting on the most recent year. Revenues were averaged in the same manner.

Similarly, normalized EBIT and EBITDA were computed in the same manner. In deriving normalized earnings before interest, taxes, and officer compensation (EBIT before officer’s compensation), and seller’s discretionary earnings (EBITDA before officer’s compensation) to be used in the Merger and Acquisition Method of valuation, David B. Harrison’s (President & CEO) compensation of $175,000 was used in each computation.

We did consider using a several year forecast of future earnings, but management was uncomfortable providing any meaningful revenue forecasts.



12/31/1996 12/31/1997 12/31/1998 12/31/1999 12/31/2000 Months of Operations in Period 12 12 12 12 12Revenues 14,770,000$ 18,998,000$ 18,784,400$ 21,988,800$ 24,127,600$ Cost of Sales 10,952,500 14,572,480 14,282,612 16,413,380 17,535,276Gross Profit 3,817,500 4,425,520 4,501,788 5,575,420 6,592,324Operating Expenses 2,063,728 2,626,120 2,911,026 3,300,350 3,450,210Officers' Compensation 370,400 422,000 469,200 556,600 617,800Operating EBITDA 1,383,372 1,377,400 1,121,562 1,718,470 2,524,314Depreciation & Amortization 211,400 234,312 253,100 352,500 396,900Operating Income (Loss) - EBIT 1,171,972 1,143,088 868,462 1,365,970 2,127,414Miscellaneous (Income) Expenses 5,126 2,617 39,417 40,817 (5,983)Interest Expense 149,413 150,048 135,195 131,038 105,643Pre-Tax Income (Loss) 1,017,433 990,423 693,850 1,194,115 2,027,754APPRAISAL ADJUSTMENTSDepreciation & Amortization - See BelowOfficers' Compensation & Benefits - R. Harrison (Incl. Payroll Taxes (8.5% of Compensation)/Ins. Exp. ($3,500/Yr) 335,000 335,000 335,000 335,000 335,000Non-Operating Expenses for Town Home, Art, Property Taxes 18,326 23,017 23,217 23,417 23,617Total Adjustments 353,326 358,017 358,217 358,417 358,617Normalized Pre-Tax Income (Loss) 1,370,759 1,348,440 1,052,067 1,552,532 2,386,371Weightings Applied - - - 1 2Weighted Pre-Tax Income (Loss) $ - $ - $ - 1,552,532$ 4,772,742$ Aggregate Pre-Tax Income (Loss) 6,325,274$ Divide by Aggregate Weights Applied 3Average Weighted Normalized Pre-Tax Income (Loss) 2,108,425Income Taxes (Combined Federal and State--Estimated) 842,541Average Weighted Normalized After Tax Income (Loss) 1,265,884Depreciation & Amortization (Average of 1999 & 2000 - Rounded) 375,000Average Weighted Normalized Gross Cash Flow 1,640,884Less: Expected Additions to Working Capital (Avg. W/C % to Sales-11.8% Over Past 5 Years-Based on 4% Sales Growth) (100,000)Less: Expected Capital Expenditures - Per Management's Expectations (234,000)Less: Expected Loan Principal Repayments-Net of New Loan Principal - Per Management's Expectations (100,000)Average Weighted Normalized Net Cash Flow to Equity (rounded) 1,207,000$

Operating Income (Loss) - EBIT 1,171,972$ 1,143,088$ 868,462$ 1,365,970$ 2,127,414$ Weightings Applied - - - 1 2Weighted EBIT $ - $ - $ - 1,365,970$ 4,254,828$ Aggregate EBIT 5,620,798$ Divide by Aggregate Weights Applied 3Average Weighted Normalized EBIT 1,873,599Add: Officer's Compensation (One Officer Only) 175,000Average Weighted Normalized EBIT Before Officer's Compensation (rounded) 2,049,000$

Operating Income (Loss) - EBITDA 1,383,372$ 1,377,400$ 1,121,562$ 1,718,470$ 2,524,314$ Weightings Applied - - - 1 2Weighted EBITDA $ - $ - $ - 1,718,470$ 5,048,628$ Aggregate EBITDA 6,767,098$ Divide by Aggregate Weights Applied 3Average Weighted Normalized EBITDA 2,255,699Add: Officer's Compensation - Normalized Estimate (One Officer Only) 175,000Average Weighted Normalized EBITDA Before Officer's Compensation (rounded) 2,431,000$

Computation of Average Weighted Normalized Sales:Revenues 14,770,000$ 18,998,000$ 18,784,400$ 21,988,800$ 24,127,600$ Weightings Applied - - - 1 2Weighted Revenues $ - $ - $ - 21,988,800$ 48,255,200$ Aggregate Normalized Sales 70,244,000$ Divide by Aggregate Weights Applied 3Average Weighted Normalized Sales (rounded) 23,415,000$

Source:The company's financial statements and tax returns. Calculations by valuer.

Definitions:EBITDA: Earnings before interest, taxes, depreciation and amortization.EBIT: Earnings before interest and taxes.

Qualification:The financial information above has incorporated normalization adjustments made solely to assist in the development of the value conclusion presented in this report. Normalization adjustments are hypothetical in nature and are not intended to present restated historical results or forecasts of the future. This information should not be used to obtain credit or for purposes other than to assist in this valuation.

EXHIBIT 4-8 NORMALIZED INCOME STATEMENTS



5 VALUATION OF THE SUBJECT

The choice of the appropriate valuation approach (or approaches) to be used in a given valuation project is based on the judgment of the valuer. The valuer’s choice of methods is determined by the characteristics of the business to be valued, the purpose and use of the valuation and its report, the pattern of historical performance and earnings of the subject company, the company’s competitive market position, experience and quality of management, the availability of reliable information requisite to the various valuation methods, the marketability of equity ownership interest to be valued, and others. These factors are embraced by the Internal Revenue Services’ Revenue Ruling 59-60, which outlines relevant considerations when determining value of a closely held business:

• History and nature of the business (Sections 1 and 2); • Industry and general economic outlook (Section 3); • Book value and financial condition (Section 4); • Earning capacity (Section 4); • Dividend-paying capacity (Sections 4 and 5); • Existence of goodwill or other intangible value (Sections 4 and 5); • Prior sales and size of the block of stock (Sections 1 and 2); and • Comparisons to similar publicly traded guideline companies (Section 5).

This Revenue Ruling also states that common sense, informed judgment, and reasonableness are required by the valuer in determining a proper value in addition to the fundamental considerations described above.

5.1 The Search for Comparable Transactional Market Data

Transactional market data can be found in transactions consisting of either minority or controlling interests in either publicly traded or closely held companies. There are basic considerations that will provide useful guidelines in the selection of comparative publicly traded companies or acquisitions. Some of the more important considerations include the availability of adequate financial and price information; the company’s line of business, location, quality, and depth of management; the size of the comparative company; trading activity in the stock; and the specific block of stock or equity ownership interest that is the subject of the valuation assignment.

More specifically, the factors to consider in determining the similarity of a particular guideline company would include: size, financial position, liquidity, years in business, financial-market environment, quality of earnings, marketability of shares, operating efficiency, geographical diversification, past growth of sales and earnings, rate of return on invested capital, stability of past earnings, dividend rate and record, quality of management, nature and prospects of the industry, competitive position and individual prospects of the company, basic nature of the activity, general types of goods or service produced, relative amounts of labor and capital employed, extent of material conversion, amount of investment in plant and equipment, amount of investment in inventory, level of technology employed, and the level of skill required to perform the operation.

In general, the market for public companies has the following characteristics: (1) financial data readily availability and prepared in conformity with generally accepted accounting principles and SEC filing requirements; (2) companies are substantially larger; and (3) fundamental differences cause distortions between publicly traded and closely held companies.

In contrast, the market for closely held companies has the following characteristics: (1) limited access to data where financial data is often prepared for tax purposes; (2) closely held companies are typically similar in size; and (3) there are more fundamental similarities between closely held companies because of their common interests (see below) and because they do not benefit from the relatively easy liquidity of the public market.



There are other fundamental differences between public companies and closely held businesses. Closely held companies have one or more of the following risk attributes that are not inherent in their public company counterparts:

• Lack of management depth or key person dependence

• Dependence upon a single product or service line

• Dependence upon a few customers

• Limited geographic market

• Relatively small market share

• Limited buying power or supplier dependence

• Unstable margins and/or highly volatile earnings

• Investment motivation is to acquire a job and the investment is less liquid

• High financial leverage and sources of debt financing is limited

The criteria used to search for comparative market data of both publicly traded and closely held sales transaction data to be compared to Adler-Cottino is presented below.



Criteria for The Search10

Public Guideline Companies

Industry: Standard Industrial Classification (“SIC”) codes: 2511: Wood Household Furniture, Except Upholstered, including a business description similar to Adler-Cottino, although SIC codes 243x – Millwork, Veneer, Plywood, and Structural Wood Members and 25xx – Furniture and Fixtures may also be comparative to Adler-Cottino.

Size: Sales of companies with revenue between $250,000 and $600 Million.

Types of Transaction: Controlling or minority interests.

Time: Control transactions since January 1, 1990; minority transactions as of the valuation date.

Standard of Value: Fair market value transactions in which the buyers were financial buyers and not strategic buyers.

Domicile: US corporations.

Status: Companies with positive earnings and not in financial difficulty.

Closely Held Companies

Industry: Same SIC codes, etc. as above.

Size: Sales transactions of more than $250,000 or less than $600 million.

Types of Transaction: Controlling interests. Little or no market for non-controlling interests in closely held companies.

Time: Transactions closed between January 1, 1990 and the date of the valuation.

Standard of Value: Fair market value transactions in which the buyers were financial buyers and not strategic buyers.

Domicile: US corporations.

Status: It can be difficult to determine whether a closely held business is in financial trouble. The reason is that there is a limited quantity of information available on sales of closely held businesses. To a certain extent it is possible to eliminate the influence of distress sales and non-arm’s length transactions. This can be done by either rejecting certain individual sales transactions at market multiples that are significantly higher or lower than the bulk of the transactions or by using median multiples.

10 You will note that the criteria for size used for sales transactions in this case is $250,000 to $600 million. This is too wide a range and is only used here for pedagogical purposes. Normally, a factor of ten is used in practice, but it can be more. Therefore, a more appropriate sales range would be between $2,500,000 and $250 million, although one may argue that $250 million may still be considered too high for this size company.



5.1.1 Minority Interest Transactions 5.1.1.1 Publicly Traded Companies

The purpose of gathering guideline company information is to develop value measures based on prices at which stocks of similar companies are trading in a public market. The value measures developed will be applied to the Company’s fundamental data and correlated to reach a conclusion of value for Adler-Cottino. Our search of the Electronic Data Gathering, Analysis, and Retrieval system (EDGAR) to identify possible comparable guideline companies produced six companies with SIC codes of 2511 and/or equivalent SIC code that met the minimum criteria requirements, and are presented below in Exhibit 5-1: Comparable Publicly Traded Companies (Guideline Companies).

5.1.1.2 Closely Held Companies

There is no established marketplace for minority interests in closely held companies.


Comparable Publicly Traded Companies (Guideline Companies)

Revenue (2000) Net Income AfterComparable Company Line of Business (In Millions) Taxes (2000)

Bush Industries, Inc. The company operates its business in two reportable 451,197,000$ 22,777,000$ segments: Furniture and Surface Technologies. Furnitureis the design, manufacture and sale of both ready-to-assemble (RTA) and set-up furniture for the home andoffice. Surface Technologies provides finishing, design anddecorating services utilizing "surface technologies" indiverse applications.

Bassett Furniture Industries Bassett Furniture Industries makes wooden and 367,444,000$ 10,396,000$ upholstered furniture for the home, featuring bedroomand dining suites, home office furniture, and upholsteredsofas, chairs, and love seats. Bassett sells its furniturethrough department and furniture stores, as well asthrough certain franchise outlets.

The Rowe Companies Through subsidiaries Rowe Furniture and The Mitchell Gold 348,398,000$ 8,934,000$ Company, The Rowe Companies makes upholstered andleather sofas, love seats, and chairs in traditional,contemporary, and country styles. The firm supplies morethan 1,100 retailers and also runs a 60-store retail furniturechain.

Stanley Furniture Leading designer and manufacturer of residential wood 283,092,000$ 19,540,000$ furniture targeted at the upper-medium price range. Allmajor product designs including dining room, bedroom,tables and entertainment units, youth bedroom, and homeoffice furniture.

Chromcraft Revington Under the Peters-Revington name, the company sells 259,402,000$ 15,450,000$ mid-priced wood furniture such as bookcases, tables,and home office pieces. Its dining and commercialfurniture (office chairs, conference tables) are soldunder the Chromcraft name. Its Cochrane Furniture andSumter Cabinet lines include bedroom and dining furniture,as well as upholstered sofas and ottomans. The companysells to US and Canadian retailers.

Hooker Furniture Corporation Hooker Furniture Corporation is a leading manufacturer and 250,800,000$ 14,914,000$ importer of residential furniture, primarily targeted at theupper-medium price range. The company offers diversifiedproducts, consisting primarily of home office, entertainmentcenters, imported occasional, bedroom and wall systems,across many style categories within this price range.



5.1.2 Controlling Interest Transactions

5.1.2.1 Publicly Traded Companies

Screening with the criteria designated above, a similar search of the EDGAR database of companies required to file annual reports with the Securities Exchange Commission, found no transactions involving comparable companies engaged in the subject’s business. Any public companies found were too diversified and too large to provide meaningful market statistics.

5.1.2.2 Closely Held Companies

This valuation method uses databases of sales of controlling interests in closely held businesses. Databases reviewed for this valuation assignment included Bizcomps, Done Deals, Pratt’s Stats, and the IBA Market Comparison Database. The sales price for each reported sales transaction in each of these databases is used to derive separately calculated price-to-sales and price-to-earnings (assuming earnings are positive) multiples for each given transaction. Each multiple represents a ratio that is calculated based on the sales price to the net sales (revenue) or the net profit from the property, which is then either applied against the subject company’s sales or net profit to arrive at a value. Two components of this method are the sales or the net profit11 and the appropriate multiple to be used.

Bizcomps is a database produced by Jack R. Sanders, an active business broker in San Diego. The Bizcomps database is published in a series of four editions with each edition published on an annual basis. There are three geographical editions: Western, Central, and Eastern. In addition, larger transactions obtained from the other three editions are published in a National Industrial Edition. The information is gathered from about 20 business brokers in each region and includes sales information by Standard Industrial Classification (“SIC”) category. It currently reports information related to the sales of over 5,500 businesses throughout the United States. The reported sales price does not include inventory, but does include an estimate of value for furniture, fixtures and equipment. The estimated value for inventory and furniture, fixtures and equipment are reported separately. We found three transactions under SIC code 2511, which met our criteria.

The Done Deals data are collected from public documents rather than from business brokers and Merger & Acquisition intermediaries. Currently there are over 5,100 completed transactions in this database. About 50% of the companies sold in the Done Deals database are privately owned. Most of the Done Deals data comes from company financial reports filed with the Securities and Exchange Commission with financial data subject to GAAP. Done Deals focuses on the smallest acquisitions reported by the SEC, generally transactions valued at $1 million to $100 million plus emerging growth companies on track to soon reach this range. Similarly to Bizcomps, we found three companies under SIC code 2511 meeting our criteria.

Another database used to obtain relevant market data was Pratt’s Stats. Pratt’s Stats is the newest entrant that provides market sales data. Business Valuation Resources has joined with the International Business Brokers Association in developing it. Pratt’s Stats includes the M&A Source Gold Company Database (which had been started around 1993, but was never completed). The M&A Source is a subsidiary of the International Business Brokers Association and is composed of intermediaries involved in transactions priced primarily in the $500,000 to $50 million range. Information for the Pratt’s Stats database is gathered from transactions completed by M&A intermediaries and business brokers. The database currently has over 5,200 transactions. We found five companies that met all are criteria.

The last database we reviewed is maintained in a market data file by the Institute of Business Appraisers, Inc. (“IBA”) a professional organization, which maintains a proprietary database of actual 11 Net profit may be defined as the amount available to the owner after normal business expenses but before taxes, loan payments, and owner’s compensation; this is sometimes called seller’s (owner’s) discretionary cash flow. It also may be defined in several alternative ways: (1) EBT = Earnings Before Taxes, (2) EBIT = Earnings Before Interest and Taxes; (3) EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization; and (4) Cash Flow.



transactions of closely held businesses and professional practices all over the United States. This database is the largest known source of market transactions of small closely held businesses. It includes over 19,000 transactions. We found seven transactions that met our criteria.

Although we did not obtain a large sample of transactions for each database, we believe that there are a sufficient number of transactions to provide us with a basis for determining an indication of value for Alder-Cottino. A summary of the transactions by database is presented below in Exhibit 5-2: Transactional Databases.



Date SIC Code T.D. Revenue Earnings Sales Price P/R Ratio P/E Ratio E/R Ratio (%)

10/01/88 2511 I 4,150,000 347,000 1,900,000 0.46 5.48 8.4%03/01/97 2511 I/B 2,500,000 210,000 1,050,000 0.42 5.00 8.4%05/01/96 2511 I/B 1,496,000 80,000 169,000 0.11 2.11 5.3%10/01/83 2511 I 570,000 4,000 72,000 0.13 18.00 0.7%08/01/97 2511 I 469,000 105,000 100,000 0.21 0.95 22.4%07/01/97 2511 I 320,000 106,000 140,000 0.44 1.32 33.1%08/01/91 2511 I 254,000 33,000 84,000 0.33 2.55 13.0%

Range of Ratios (Excluding Outliers [*]) 0.11 to 0.42 0.95 to 18.00 0.7% to 33.1%Mean Ratio (Excluding Outliers [*]) 0.30 5.06 6.9%Median Ratio (Excluding Outliers [*]) 0.33 2.55 6.9%Coefficient of Variation (Excluding Outliers [*]) 0.49 1.18

IBA Multiple Selected: 0.30

Adler-Cottino Norm Rev/Earnings 23,415,000 2,049,000 Value Derived: 7,024,500$ 8.8%


09/02/99 2511 DD 54,700,000 (4,200,000) 7,400,000 a 0.14 (1.76) -7.7%02/28/99 2511 DD 19,300,000 1,700,000 14,800,000 0.77 8.71 8.8%06/15/99 2521 DD 165,900,000 3,500,000 24,600,000 * 0.15 7.03 2.1%

Range of Ratios (Excluding Outliers [*]) 0.14 to 0.77 -1.76 to 8.71 -7.7% to 8.8%Mean Ratio (Excluding Outliers [*]) 0.35 4.66 0.6%Median Ratio (Excluding Outliers [*]) 0.15 7.03 0.5%Coefficient of Variation (Excluding Outliers [*]) 1.03 1.21

Done Deals Multiple Selected: 0.35

Adler-Cottino Norm Rev/Earnings 23,415,000 1,266,000 Value Derived: 8,195,250 5.4%

Date SIC Code T.D. Revenue Earnings Sales Price P/R Ratio P/E Ratio E/R Ratio (%)12/28/01 2511 P 503,912,000 7,173,000 122,000,000 * 0.24 17.01 1.4%05/08/01 2511 P 149,665,000 8,132,000 75,000,000 0.50 9.22 5.4%04/30/99 2511 P 3,566,000 426,000 1,200,000 0.34 2.82 11.9%10/31/01 2511 P 2,780,000 295,000 1,000,000 0.36 3.39 10.6%12/31/99 2511 P 674,634 74,763 555,000 0.82 7.40 11.1%


Pratts Stats Multiple Selected: 0.36



10/31/97 2511 B 3,702,000 485,000 1,750,000 0.47 3.61 13.1%03/31/97 2511 I/B 2,500,000 210,000 1,310,000 0.52 6.24 8.4%05/10/96 2511 I/B 1,496,000 80,000 169,000 0.11 2.11 5.3%


BizComps Multiple Selected: 0.37


Source: = Transactional Databases ("T.D.")-IBA ("I")/Done Deals ("DD")/Pratt's Stats ("P")/Bizcomps ("B")Definitions E/R Ratio (%) = Earnings as a Percentage of Revenue (Earnings divided by Revenue)

T.D. means Transactional Database

IBA DATA

DONE DEALS DATA

PRATTS STATS DATA

BIZCOMPS DATA

EXHIBIT 5-2TRANSACTIONAL DATABASES

CONTROLLING INTERESTSSALES OF CLOSELY HELD COMPANIES



IBA Database. The Price-to-Revenue Multiple ranges from a low of 0.11 to a high of 0.84 (excluding outliers) with a mean (average) of 0.26 and a median of 0.23. The Price-to-Earnings12 Multiple ranges from a low of 0.95 to a high of 18.00 (excluding outliers) with a mean of 7.04 and a median of 4.02.

Done Deals Database. The Price-to-Revenue Multiple ranges from a low of 0.14 to a high of 0.77 (excluding outliers) with a mean (average) and a median of 0.46. The Price-to-Earnings13 Multiple ranges from a low of –1.76 to a high of 8.71 (excluding outliers) with a mean and a median of 3.48.

Pratt’s Stats Database. The Price-to-Revenue Multiple ranges from a low of 0.56 to a high of 0.84 (excluding outliers) with a mean (average) of 0.72 and a median of 0.75. The Price-to-Earnings14 Multiple ranges from a low of 0.4.69 to a high of 15.37 (excluding outliers) with a mean of 8.46 and a median of 6.88.

Bizcomps Database. The Price-to-Revenue Multiple ranges from a low of 0.11 to a high of 0.84 (excluding outliers) with a mean (average) and a median of 0.47. The Price-to-Earnings15 Multiple ranges from a low of 2.11 to a high of 10.02 (excluding outliers) with a mean of 5.25 and a median of 3.61.

We computed the Coefficient of Variation for each price multiple per database. The coefficient of variation allows one to compare the variability of different variables. The coefficient of variation is equal to the standard deviation divided by the mean.16 The resulting ratio can be expressed as a percentage by multiplying it by 100. The coefficient of variation equals 100% if the standard deviation equals the mean.

For all the transactions listed and for each database, the price-to-revenue’s coefficient of variation ratio was lower than the respective price-to-earnings ratio. Compared to their mean values, the price-to-revenue multiple varies less than the price-to-earnings multiple. Consequently, it is reasonable to conclude that using a price-to-revenue ratio as a basis to derive an indication of value for Adler-Cottino under the Merger and Acquisition Method would be more appropriate than using a price-to-earnings multiple based upon the transactions listed (excluding outliers) for each database.

In addition, many valuers suggest that the price-to-revenue multiple is a more reliable indicator of value than the price-to-earnings multiple because the owners of relatively small businesses are afforded the discretion to manipulate net income.

5.2 Valuation Methods Considered but Rejected

We considered and rejected several valuation methods; the following methods were rejected:

5.2.1 Prior Transactions in Subject Interest

Arm’s-length transactions in a company’s stock can provide a good indication of value and must be considered when valuing a company. However, Adler-Cottino has had no such arm’s-length transaction since its incorporation. Therefore, this method of valuation is not applicable for this engagement.

12 Earnings within the IBA database are defined as the reported annual earnings for the last full year before the date of sale before owner’s compensation (one owner’s compensation only), interest, and taxes. 13 Earnings within the Done Deals database are defined as after tax net income. 14 Because some of the companies are non-taxable entities, we have reported earnings in the above schedule, as earnings before income taxes for all entities to derive consistent multiples. 15 Earnings within the Bizcomps database is defined as seller’s or owner’s discretionary cash flow (net profit before taxes, interest, depreciation and amortization, and one officer’s compensation). 16 Take the absolute value of the mean if it is negative.



5.2.2 Dividend Paying Capacity

Revenue Ruling 59-60, Section 4(e) states:

Primary consideration should be given to the dividend-paying capacity of the company rather than to the dividends actually paid in the past… Where an actual or effective controlling interest in a corporation is to be valued, the dividend factor is not a material element, since the payment of such dividends is discretionary with the controlling stockholders. The individual or group in control can substitute salaries and bonuses for dividends, thus reducing net income and understating the dividend-paying capacity of the company. It follows, therefore, that dividends are less reliable criteria of fair market value than other applicable factors.

The Company has not paid dividends in past years and does not intend to pay dividends in future years. Consequently, this method of valuation is not be applicable.

5.2.3 Liquidation Value

Liquidation value is generally defined to mean the net proceeds that could be reasonably expected to be realized if the assets of a business were sold off piecemeal or in bulk, all liabilities extinguished, and all business activity terminated. It assumes the discontinuance of the business as a going concern. This assumption is not consistent with the terms of this engagement to estimate fair market value of a controlling interest as a going concern. Based on management’s intentions, Adler-Cottino is going to continue to operate in the foreseeable future. In addition, the value of Adler-Cottino based on a going-concern basis is greater than if the company were to be liquidated.

5.2.4 Discounted Cash Flow Method

The Discounted Cash Flow Method utilizes the concept that the worth of a business is best represented by the present value of the estimated cash flow streams it can generate in the future. The estimated cash flow streams of the business enterprise are adjusted to reflect the time value of money as well as the associated business and economic risks of the enterprise.

While this method is a theoretically valid approach, it relies on the ability of the valuer and management to forecast earnings or cash flows with reasonable accuracy and assess the risk associated with those earnings or cash flows. As with any forecast, there is an element of uncertainty involved. This method is most suitable when current and historical performance do not provide a reasonable proxy for future performance or an unsustainable rate of growth is expected for some years. We did not employ this valuation method for the Company because management did not indicate any major changes in future growth over the near term, but rather anticipated a rather constant rate of growth during the next several years.

5.3 Selection of Most Suitable Methods

After considering the methods rejected, as described in the previous section, we selected the capitalization of earnings method, adjusted net asset method, the guideline public company method, and the merger and acquisition method as the most appropriate for this valuation engagement. The following sections will describe these methods, as well as deriving an indicated value under each method.

5.4 Income Approach

The income approach is income-based rather than an asset- or a market-based approach. This approach assumes that an investor whose objective is return on investment will invest in a property with similar investment characteristics, but not necessarily the same business. This approach derives the value of the business by discounting the expected future income streams of the business by the expected rate of return of the business. This discounted present value methodology evolves into a capitalization of earnings



method when the expected future income streams are constant (i.e. a single period stream of benefits). The capitalization of earnings method is merely the procedure of converting a single period stream of future benefits into value.

Historical data because of its availability is generally used as a starting point for estimating the future income of a business, but it is the future that cannot be ignored. Appraisers will often value larger businesses using a discounted future earnings method because larger companies generally tend to more easily develop reliable economic income projections. On the other hand, because smaller businesses may not be able to develop such reliable economic income forecasts, appraisers will more often use the capitalization of earnings method in determining value of such smaller companies. However, there can be exceptions to these generalities because of the facts and circumstances of each specific valuation engagement.

5.4.1 Application of the Capitalization of Earnings Method

5.4.1.1 Conceptual Basis

The capitalization of earnings method is most appropriate when it appears that a company’s current and historical earnings can reasonably be considered indicative of its future operations—that is stable earnings and a long-term sustainable growth rate. Under this method, a normalized future benefit stream is divided by a capitalization rate17 to arrive at a conclusion of value. Based on the foregoing, the application of this method requires the selection of the following factors used in the formula to estimate value:

a. The selection of a benefits stream (usually earnings, cash flow, or dividends) to capitalize;

b. Whether the benefits stream base is applicable to equity or invested capital; and

c. The selection of a capitalization rate appropriate to the level of the benefit stream selected.

5.4.1.2 Benefits to be Capitalized

The selection of the level of benefits to be used in this method should be the one that represents the most probable expectation of future returns for the interest being valued. The selection process requires determining the following:

a. The type of benefits (e.g., earnings, cash flow, or dividends);

b. The number of years to be used. Under the capitalization of earnings method, a single benefit stream is used to represent future earnings into perpetuity.

c. If more than one year is used in the determination of the expected future benefit stream, then it is necessary to determine whether any special weighting favoring some years over others is appropriate.

We selected for the subject company net cash flow after taxes because it is the level of benefits that is the best proxy for the return available to the owner of the company—a return that could be removed without impairing the ability of the business to meet its obligations and fund its future. Refer to Section 4.5.4 – Normalized Income Statement and Exhibit 4-8 for the computation of the normalized net cash flow to equity ($1,206,884).

17 Any divisor (usually expressed as a percentage) used to convert anticipated benefits into value. A capitalization rate for a company is equal to the discount rate less the long-term annually compounded sustainable growth rate of the company into perpetuity.



5.4.1.3 Equity or Invested Capital

Should an equity ownership interest be valued using a direct or indirect method? If equity is valued using a direct method, then an income or cash flow, which relates to the equity (shareholders) must be capitalized or discounted using a capitalization or discount rate related to the equity holders. Common benefit streams used when valuing equity directly include earnings (net of interest expense) before taxes (“EBT”), earnings (net of interest expense) after taxes (“EAT”), and equity net cash flows.18

If equity is valued using an indirect method, then an income or cash flow, which relates to both equity and debt holders, must be capitalized or discounted using a capitalization or discount rate related to both the equity and debt holders. The rate is defined as a weighted average cost of capital or a “WACC.” Common benefit streams used when valuing equity indirectly include earnings before interest and taxes (“EBIT”), earnings before interest, taxes, depreciation and amortization (“EBITDA”), discretionary earnings (sometimes called “seller’s discretionary cash flow” (“SDCF”), or earnings before owner’s compensation, depreciation, interest, and taxes),19 or invested capital net cash flows.20 This approach results in a total market value for all invested capital (value to the equity holders and debt holders). The market value of the debt is subtracted from the market value of all invested capital to arrive at the market value of the equity.

Valuers most often value equity directly. However, there are certain instances where valuing equity indirectly should be considered. These instances include: (1) mergers and acquisitions of mid-size and large closely held companies;21 (2) those instances where the subject company has a capital structure that is likely to change during the forecast period;22 and (3) situations where the subject company has an atypical capital structure.23

18 Those cash flows available to pay out to equity holders (in the form of dividends) after funding operations of the business enterprise, making necessary capital investments, and reflecting increases or decreases in debt financing—normally, computed by taking net income (after taxes), adding noncash charges (depreciation, amortization, deferred revenue, and deferred taxes), less capital expenditures (net of changes in fixed and other noncurrent assets), less additions in working capital, and plus or minus changes in long-term debt. 19 In October 1996, the International Business Brokers Association created a Business Brokerage Glossary that included the term discretionary earnings, defined as “The earnings of a business enterprise prior to income taxes, nonoperating income and expenses, nonrecurring income and expenses, depreciation and amortization, interest expense or income, and owner’s total compensation for those services which could be provided by a sole owner/manager.” 20 Those cash flows available to pay out to equity holders (in the form of dividends) and debt investors (in the form of principal and interest) after funding operations of the business enterprise and making necessary capital investments—normally, computed by taking net income (after taxes), adding noncash charges (depreciation, amortization, deferred revenue, and deferred taxes), less capital expenditures (net of changes in fixed and other noncurrent assets), less additions in working capital, and plus interest expense (net of the tax deduction resulting from interest as a tax-deductible expense). 21 A buyer will often forecast a target business’ earnings or cash flow and capitalize and/or discount these future benefit streams to a present value at a customary market weighted average cost of capital (“WACC”) or at the buyer’s WACC. The reason behind this procedure is that the buyer can determine a range of value for the targeted company’s equity assuming applicable financing structures and related capital costs. This procedure allows the buyer to estimate the value of acquisition synergies. 22 In those instances where the company’s capital structure is likely to change in the foreseeable future, the financial risk associated with realizing annual forecasted income or cash flow will change on an annual basis. To avoid the problem related with deriving an equity discount rate under these circumstances, a valuer can use an invested capital measure of income discounted by an applicable WACC to derive the appropriate value of invested capital, and then deduct the anticipated market value of debt to arrive at the market value of equity. 23 In instances where the subject company has an atypical capital structure, the subject company will have an atypical financial risk (i.e., the risk associated with the use of leverage and the ability of the company to cover its debts), which is unrelated to business risk (the risk associated with the business, such as the company’s sales and growth volatility) and liquidity risk (the risk associated with the company’s sources and uses of cash). Under these circumstances, if the direct method of valuing equity is used then the capitalization rate or discount rate must not only be adjusted for business risk, but also needs to be adjusted for the atypical financial risk of the subject company. Alternatively, using the indirect method of valuing equity, the capitalization rate or discount rate needs to only be adjusted for the business risk of the subject company. However, from our financial analysis of Adler-Cottino, we found that the capital structure of the subject company was similar to other industry peers.



Conclusion. In this case, the earnings stream we selected to be capitalized is net (after tax) cash flow to equity, which is a measure of net cash flow after interest expense. This means that the return to the debt holders (interest expense) has been eliminated, and the income to be capitalized is the income to the equity owner(s) only. Therefore, this income stream, when capitalized, arrives at a value directly to the equity owner(s) of the Company.

5.4.1.4 Selection of an Appropriate Capitalization Rate

A critical step in the development of the fair market value of an equity ownership interest under the capitalization of earnings method is the determination of a capitalization rate for the appropriate definition of economic income forecasted.

The capitalization rate is any divisor (usually expressed as a percentage) used to convert anticipated benefits into value. Alternatively, the discount rate is a rate of return (cost of capital) used to convert a monetary sum, payable or receivable in the future, into present value and also must be appropriate to the forecasted income streams. The discount rate represents the total rate of return that an investor would demand on the purchase of an investment given the level of risk associated with the investment. Basically, the difference between the two rates is the capitalization rate equals the discount rate less the expected growth rate.

The expected rate of return for an investment in the subject company is based on the risk associated with that investment and the rates of return available on alternative investments. The expected rate of return determined, or the capitalization rate plus the expected growth rate, must combine to meet the expectations of the hypothetical buyer (investor) under the fair market value standard, as required in this valuation assignment. In addition, this rate of return must also be one that is acceptable to the “willing seller,” as also inherently embedded in the definition of the fair market value. In accordance with this definition of value, the valuation analyst must determine an acceptable rate of return that both a hypothetical willing buyer and a hypothetical willing seller would deem acceptable without compulsion and with knowledge of relevant information.

Furthermore, as explained in Section 1.4 – Standard of Value, the buyer is a financial and not a strategic buyer. Therefore, the buyer is not motivated by any synergy or other strategic advantage. It also is important to note that an investor will require a higher rate of return, as expected returns are perceived to contain more risk. Empirical studies have indicated that investors of publicly traded firms have required rates of return of above prevailing risk-free rates of return. Naturally, investors of private firms would require substantially higher rates of return because of the additional risk associated with private firms. For example, closely held firms have limited access to public capital markets increasing the inherent risk and thus the required rate of return.

Given the philosophy as previously cited in Revenue Ruling 59-60, we looked to the public marketplace in determining our estimate of the capitalization rate. The capitalization rate, as developed in Exhibit 5-3 – Determination of Capitalization Rate is presented below.



EXHIBIT 5-3 ADLER-COTTINO WOOD FURNITURE, INC. DETERMINATION OF CAPITALIZATION RATE

Schematic Diagram of the Elements of a Discount/Capitalization Rate Applicable to Expected Net Cash Flow Available to Ownership Interest

COMPONENTMATH EXPLANATION OF COMPONENT VALUE SOURCE

20-Year U.S. Treasury Bond Yield as "RISK FREE" Available 20-Year U.S. Treasury of December 31, 2000. Source:

+ RATE Bill Rate at or Near the Valuation Date 5.6% H-15 - 20-Year Constant MaturityEstimated By Treasury Department& Ibbotson SBBI 2001 YearbookValuation Edition, Pg.244.

EQUITY RISK Long Horizon Expected Equity Risk+ PREMIUM Data Available from Ibbotson Associates Represents 7.8% Premium.

(REFLECTING Equity Return (S&P 500) Over U.S. Treasury Source For Long-Horizon EquitySYSTEMATIC Instrument Rates (12.98% Less 5.22% = 7.76%) Premium:

RISK) Ibbotson SBBI 2001 YearbookValuation Edition, Pg. 56

IMPACT OF Incremental Addition to the Discount Rate: Additional Expected Small Stock Premium+ "SIZE EFFECT" Return to Stocks of Companies < S&P 500. 4.6% Source:

ON RISK Ibbotson's "10th Decile" Cap Rate is Appropriate for Ibbotson SBBI 2001 YearbookStocks with a Market Value < $84.5 Million. The Valuation Edition, Pg. 115 - 4.63%Small Stock Premium-Beta Adjusted is 4.63% for the is the Small Stock Premium BetaReturn on the "10th Decile" Size Company. Adjusted for the "10th Decile" - See

Table 6-5.

INDUSTRY Incremental Adjustment to the Discount Rate that Industry Risk Premium Source:+ RISK Applies to the Characteristics of the Industry in which -0.8% Ibbotson SBBI 2001 Yearbook

PREMIUM the Subject Company Participates - Standard Valuation Edition, Pg. 34 - Table 2-5Industrial Classification (SIC) Code 251 (SIC Code 251)

Matter of Appraiser's Judgment: Compare SubjectCompany to Industry Averages or Specific Guideline

+ SPECIFIC Companies and/or Qualitative Factors of SubjectRISK Company. 5.0%

There is No Widely Accepted Model or Set of Formulasto Convert the Results of these Analyses into an ExactQuantified Effect on the Discount Rate.

= NET CASH FLOW (NCF) DISCOUNT RATE 22.2% Applicable to After-Tax Cash Flow- LESS: Long Term Sustainable Growth Rate 2.0%= NET CASH FLOW CAPITALIZATION RATE FOR NEXT YEAR 20.2% Applicable to Future Net Cash Flow/ DIVIDE BY: Time Adjustment (Make Appl. To Current Year Net Cash Flow)

(Note: Divide by 1 + Growth Rate) 1.02= NET AFTER-TAX CASH FLOW CAPITALIZATION RATE - CURRENT 19.8% Applicable to Current Net Cash Flow

SOURCE: Shannon P. Pratt, Robert F. Reilly, and Robert P. Schweihs,Valuing a Business, The Analysis and Appraisal of Closely Held Companies,4th Edition, 2000, p. 163.



Risk free rate. The risk-free rate of return is generally the rate of return an investor can obtain without taking on market risk (i.e., free of the risk of default). The consensus of financial analysts today use the 20-year US Treasury yield to maturity as of the effective date of the valuation for the risk-free rate of return. In addition, Ibbotson Associates, which is often used in the development of discount and capitalization rates, uses this rate of return in its calculations of equity risk premiums because its data goes back to 1926 and 20 years was the longest period US Treasury obligations were issued during the earlier years of that time period.

The estimated 20-year US Treasury bond yield as of December 31, 2000 was 5.6%.

Equity Risk Premium (Reflecting Systematic Risk). The equity risk premium (“ERP”) is the reward required by investors to accept uncertain outcomes associated with owning equity securities and is measured by distributions (dividends and withdrawals), the reinvestment of dividends in the market, and the capital gain or loss in the value of the investment. It represents the extra return that equity holders expect to achieve over risk-free assets on average. The ERP is calculated by Ibbotson Associates using the arithmetic average returns on the Standard & Poor’s 500 from 1926 to December 31, 2000 over the income return for the same period on the 20-year US Treasury bond as the benchmark for the risk-free rate.

The ERP as of December 31, 2000 is equal to 7.76% (7.8% - rounded), or the total market return for the period 1926 through 2000, or 12.98%, less the risk free rate for the same time period, or 5.22%.

Small Company Risk Premium. This added-risk element is associated with the additional risk inherent in the development of equity risk premiums for smaller companies as compared to larger companies. The need for this size premium adjustment is the result of the fact that small companies generally are more risky than larger companies. Empirical studies have shown that stocks of small companies tend to generally outperform stocks of larger companies. The greater risks inherent in smaller companies are the results from limited access to capital markets, dependence upon limited products and geographic market with relatively small customer bases, reliance on few suppliers, limited management depth and/or key person dependence, etc.

The risk premium for size is again obtained from Ibbotson Associates Annual Studies. The realized return in excess of the riskless rate for the 10th decile, or 15.7%,24 less the ERP of 7.8% would normally equal the risk premium for size, or 7.9%. However, because an industry risk premium is incorporated in this build-up capitalization rate computation, Ibbotson Associates notes that the proper size premium to be used should be the beta-adjusted size premium found in Table 6-5, not the simple difference in returns of large and small company stocks. In this case, 4.6% is the beta-adjusted size premium for the 10th decile.25 According to Ibbotson Associates, using the simple difference in returns of large and small company stocks in conjunction with the industry risk premium would most likely overestimate the cost of equity.

Industry Risk Premium. Analysts will often add to the build-up approach an industry risk premium based on the aspects and characteristics of the industry in which the subject company participates. This risk premium until recently was based on a qualitative analysis methodology and was included in the specific company risk premium. Ibbotson Associates has developed an industry premium methodology that, if applicable, we can now reference. This methodology arrives at a risk index for each industry by using data from companies participating in that industry.

24 Stocks, Bonds, Bills & Inflation, Valuation Edition, 2001 Yearbook, (Chicago: Ibbotson Associates, 2001), Table 6-5: “Long-Term Returns in Excess of CAPM Estimation for Decile Portfolios of the NYSE/AMEX/NASDAQ,” page 115. 25 Stocks, Bonds, Bills & Inflation, Valuation Edition, 2001 Yearbook, (Chicago: Ibbotson Associates, 2001), page 30 and Table 6-5: “Long-Term Returns in Excess of CAPM Estimation for Decile Portfolios of the NYSE/AMEX/NASDAQ,” page 115.



The industry risk premium appropriate for Adler-Cottino is classified under three separate Standard Industrial Classification System (SIC) codes of 251 – Household Furniture. We used this industry code to arrive at an industry premium percentage of negative 0.83 (-0.8 - rounded).

Specific Company Risk Premium. This last increment relates to other factors specific to the subject company and is based on the valuer’s professional judgment, as no empirical data or evidence presently exists to measure these specific risk drivers. The valuer not only needs to identify these specific risk drivers applicable to the subject company, but must also determine their incremental magnitude to the rate of return.

Operating History, Consistent Earnings Growth. Exhibits 4-3 and 4-4 show a consistent increase in the Company’s historical revenue and earnings before taxes from 1996 through 2000 (with the exception of a small decrease in earnings before taxes in 1997). Because of this consistent past growth in the operating history of the Company, we have slightly decreased the potential specific risk premium that was to be added for this factor.

Reliance on Key Personnel. The Company’s management is somewhat thinner than that of the public companies from which the base components of our rate were derived. The concentration of management is predominantly in the hands of one decision-maker—David B. Harrison, President and CEO. He is experienced in this business. In addition, Adler-Cottino’s key personnel seem very capable based on their experience. For this reason, we have mitigated any adjustment we would make normally under these circumstances. We did not provide any additional specific risk premium for this factor.

Financial Risk. We noted that the Company’s balance sheet has consistently shown current assets in excess of current liabilities that were above the industry averages, and the Company has a relatively short collection period for its receivables. In addition, the Company recently expanded its manufacturing facilities requiring the addition of new debt. However, its interest coverage is above the industry averages. For these reasons, we decided not to add any additional specific risk premium for financial risk.

Diversification. Adler-Cottino seems adequately diversified in its markets, which are nationwide and international. In addition, it did not indicate any potential difficulty in obtaining wood materials in its manufacturing processes. As a consequence, we did not add any additional specific risk premium for this factor.

Based upon the foregoing, we only added 1% as an additional company specific risk premium.

Long-term Sustainable Growth. We selected 2.0% as our long-term sustainable growth rate for the Company. This rate is below a composite industry growth rate estimate over the next several years of about 3.5%. It’s anticipated that the slowdown in the economy, included reductions in forecasted construction, will affect the household furniture industry, and in particular Adler-Cottino’s projected growth. Based on the foregoing, we believe that a 2.0% rate is a reasonable growth proxy.

5.4.1.5 Summary and Indication of Value by this Method

By dividing the selected normalized net earnings by the capitalization rate, we arrive at the value indicated under this method, which is presented below in Exhibit 5-4 – Capitalization of Earnings Method.



EXHIBIT 5-4

CAPITALIZATION OF EARNINGS METHOD VALUATION OF EQUITY

DESCRIPTION SOURCES AMOUNTS

AVERAGE WEIGHTED NORMALIZED NET CASH FLOW TO EQUITY EXHIBIT 4-8 1,207,000

CAPITALIZATION RATE APPLICABLE TO NET CASH FLOW TO EQUITY EXHIBIT 5-3 19.8%

FAIR MARKET VALUE OF 100% EQUITY, AS IF FREELY TRADED 6,095,372

ROUNDED 6,100,000

The value indicated is a control value because the normalizing adjustments to arrive at the average adjusted net cash flows represented those that were solely at the discretion of the controlling owners. To the extent any discount for lack of marketability (liquidity) is necessary will be explained and applied in a later section.

5.5 Adjusted Net Asset Method

We considered the determination of fair market value by using an asset-based approach (i.e., separately identifying and valuing all tangible and intangible assets of the business and then deducting the fair market value of all liabilities). This method is generally applicable only in valuing control ownership interests, where such owners possess the authority to access the values locked in the assets. This is true because the assets are owned by the corporation not by the shareholders—who own only shares in the corporation.

5.5.1 Application of the Adjusted Net Asset Method

In Exhibit 4-7: Normalized Operating Tangible Equity as of December 31, 2000, we adjusted the book values of the tangible and intangible assets to their fair market values based upon an analysis of each balance sheet account, including obtaining an independent appraisal of the machinery and equipment. We also determined the fair market value of the Trademark, assembled workforce, and other intangible property. The non-operating asset values are ignored at this point.

5.5.2 Summary and Indication of Value by this Method

As shown in Exhibit 4-7, the indicated value under this method is:

$5,411,997, or $5,410,000 (Rounded)

The value indicated by this method is on a “control” and “marketable” basis with respect to the net tangible assets. The value is a control value because the individual assets (tangible and intangible) were valued based upon the assumption that the controlling owner of the individual assets had the right to liquidate them without obtaining approval from any other owner. It is considered to be marketable for the net tangible assets because the real estate and machinery and equipment valuers valued the net tangible assets at their fair market value, free from restrictions or alienation. However, a discount for lack of marketability may be applicable to the intangible assets.

5.6 Market Approach

The market approach is the most direct approach for establishing the market value of a business. Using this approach, we try to locate guideline businesses that are comparable and are traded on a public market or have actually been sold. Generally, this approach is difficult to use for relatively small, closely



held businesses because comparable guideline companies are scarce and reliable information is difficult to obtain.

5.6.1 Application of the Guideline Public Company Method


The initial value determined under the Guideline Public Company Method is often called a publicly traded equivalent value or “as if freely traded” value—that is, the price at which the stock would be expected to trade if it were traded publicly. This valuation method relies on value measures derived from prices of publicly traded stocks of companies that are sufficiently similar to the subject company to be classified as a “guideline” or “comparable” company. The value measure is usually some multiple computed by dividing the price of the guideline company’s stock as of the valuation date by some relevant economic variable (earnings, revenue, book value, etc.) observed or calculated from the guideline company’s financial statements, which results in multiples such as price/earnings, price/revenue, price/book value, etc. The appropriate multiple, adjusted to be more comparable with the subject company, is then multiplied by the applicable economic variable of the subject company (earnings, price, book value, etc.) to derive the initial indicated value, before adjustment for shareholder-level factors such as size of the block and degree of marketability.

Generally, the economic factors that drive this guideline company should be comparable to those driving the subject company. However, it is important to note that larger, guideline companies will sell for higher multiples than the smaller subject company. This is because larger companies tend to have greater management depth, stronger market positions, more diversified customers and products, easier access to capital and, due to the greater financial resources, are generally viewed as less risky than the smaller subject company.

This guideline company method is most useful when valuing other minority interests. When valuing controlling interests, it is more appropriate to value these equity interests by using only guideline controlling-interest transactions. Because guideline companies are publicly traded, there is an assumption that they will continue as a going concern. Therefore, this method is expected to produce a value under the premise that the subject company is expected to operate on a going concern basis. The number of guideline companies that are sufficiently comparable to the subject company and the extent to which the quantity and quality of data for other valuation methods will affect the determination of whether this method is suitable for the given valuation assignment.

In this case, we are using guideline public companies that have similar operational characteristics and meet the subject criteria to Adler-Cottino.

5.6.1.2 Guideline Companies Selected

As stated in Revenue Ruling 59-60, we looked for companies in “the same or similar line of business” as the subject company. As presented in Exhibit 5-1: Comparable Publicly Traded Companies (Guideline Companies), we found six public companies with characteristics similar to Adler-Cottino and provided in this exhibit a description of each. However, these companies are much larger than the subject, with sales ranging from $250.8 million to $451.2 million. These publicly traded stocks represent alternative investments to the stock of the subject Company.

For each of these guideline publicly traded companies, we have analyzed the price-to-earnings multiple, based upon the high and low stock price for the quarter ended December 31, 2000. We calculated an average and median for the price-to-earnings multiple for the group. The results are shown in Exhibit 5-5: Development of Price/Earnings from Guideline Companies presented below:



We selected the lowest price/earnings multiple because of the size differential between the public

company and the subject company and because Hooker Furniture appears to be a better match to the subject company.

5.6.1.3 Summary and Indication of Valuation by this Method

The multiplier is applied to the normalized earnings from Exhibit 4-8 and is shown below:

EXHIBIT 5-6

VALUE INDICATED BY GUIDELINE PUBLIC COMPANY METHOD VALUATION OF EQUITY

DESCRIPTION SOURCES AMOUNTS

LATEST YEAR’S BOOK NET EARNINGS EXHIBIT 4-2 1,338,318

MEDIAN DERIVED MULTIPLIER EXHIBIT 5-5 4.1

FAIR MARKET VALUE ON A MINORITY, AS IF FREELY TRADED, BASIS 5,487,103

ROUNDED 5,500,000

The value indicated represents a minority interest valuation because the price multiples were determined from the sales of minority interests of publicly traded stock, and the net earnings figure was an unadjusted net earnings amount. Therefore, in order to derive a controlling interest value, it will be necessary to apply a control premium to this indicated value.

5.6.2 Application of the Merger and Acquisition Method


The Merger and Acquisition Method, although similar to the Guideline Company Method in its use of price multiples, focuses on the transactions involving the sales of entire companies, rather than sales of minority interests of publicly traded stock. Since the transactions comprise sales of entire companies, any derived value for the subject company using this method results in a control value.

EXHIBIT 5-5ADLER-COTTINO WOOD FURNITURE, INC.

Development of Price/Earnings from Guideline Companies

Revenue (2000) Net Income After Price/EarningsComparable Company (In Millions) Taxes (2000) High Low Average

Bush Industries, Inc. 451,197,000$ 22,777,000$ 5.8 4.6 5.2 Bassett Furniture Industries 367,444,000$ 10,396,000$ 17.8 12.9 15.4 The Rowe Companies 348,398,000$ 8,934,000$ 8.6 5.2 6.9 Stanley Furniture 283,092,000$ 19,540,000$ 8.7 6.8 7.8 Chromcraft Revington 259,402,000$ 15,450,000$ 7.1 4.8 6.0 Hooker Furniture Corporation 250,800,000$ 14,914,000$ 6.4 4.1 5.2

Mean: 7.8

Median: 6.5

Used - Low P/E 4.1



In addition, this method generally can be applied by using both public company and private company data. However, multiples derived from public company data result in control, marketable values, while multiples determined from private company data result in control, non-marketable values. Public company data is more readily available, but because of the size of public companies, they are often not comparable to the subject company. On the other hand, private company data, obtained more often than not from business brokers, is frequently available but with limited amounts of detail. In fact, the most often used multiples (ratios) available from these private databases are the selling price to the annual gross revenue and the selling price to some form of earnings (in most cases, some form of discretionary earnings). Almost all the databases provide only limited information about the business—a short description about its line of business, annual revenue, selling price, and some form of earnings.

The multiples derived from using the Merger and Acquisition Method may be averaged and/or modified to arrive at a single price-to-revenue and/or a price-to-earnings multiple that is most similar to the subject company. This appropriate multiple(s) is (are) then applied against the subject company’s revenue (sales) and/or net income to derive a value for the subject company.

In Section 5.1.3.2 – Closely Held Companies, we found several transactions from each database that met our criteria for comparability with Adler-Cottino. We also found that for each database the Price-to-Revenue Multiple, as shown in Exhibit 5-2, was the more appropriate measure to use in determining an indication of value for Adler-Cottino. The price-to-revenue multiples included for each database were calculated using the sold businesses’ most recent year’s revenue. We used a weighted average of revenues for the last two years (1999 and 2000), or $23,415,000 (rounded). (See Exhibit 4-8 for details)

Adler-Cottino is an incorporated business and, assuming that the Company would be sold to a buyer in a stock sale, all assets and liabilities of the subject business must be taken into account in the final conclusion of value. We are told that all sales listed in the IBA and the Bizcomps databases are asset sales, as contrasted to stock sales, and that the sales price is total reported consideration, including cash, notes, liabilities assumed by the buyer, but excludes the value of real estate. Therefore, the transactions in these databases are believed to include the fixed assets (excluding real estate) but not certain debt or any cash or accounts receivables. This means that adjustments will be required to recognize those assets and liabilities that are recorded on the Company’s books, but would not be included in a typical sale as reported in the IBA and Bizcomps databases. Similarly, we discovered that the sales transactions used in our computations that were reported in Pratt’s Stats and Done Deals were also asset sales.

In Exhibit 5-2, we determined the multiples based upon the percentage of earnings-to-revenue for the sales transactions and how these percentages compared to Adler-Cottino’s normalized earnings-to-revenue percentage. The results showed that we used price-to-revenue multiples that ranged from 0.30 to 0.37. IBA (0.30) had the most sales transactions (7), while Pratt’s Stats (0.36) was the second with four (excludes one outlier). Bizcomps (0.37) had three transactions, while Done Deals (0.35) had two transactions.

Adler-Cottino’s total normalized revenue is a little less than 6 times more than the highest reported revenue of the sales transactions selected from the IBA database of $4,150,000. However, its earnings as a percentage of revenue is about 10.5%, as compared to the IBA’s mean and median percentages of 6.9% each. Therefore, we used the IBA database multiple in our evaluation of Adler-Cottino.

The following Exhibit presents the indication of value by this method:



EXHIBIT 5-7 MARKET COMPARABLE METHOD

PRICE/REVENUE MARKET MULTIPLE (CONTROL BASIS)

ITEM MULTIPLE AMOUNT

WEIGHTED AVERAGE – ANNUAL SALES (EXHIBIT 4-8) x P/R MULTIPLE $23,415,000 .30 $ 7,024,500

ADJUSTMENTS FOR ASSETS AND LIABILITIES NOT INCLUDED IN TYPICAL SALE1

CASH (EXCLUDES EXCESS CASH OF $200,000) $ 696,406

ACCOUNTS RECEIVABLE (LESS NON-COLLECTIBLE) 1,841,872

ACCOUNTS PAYABLE (1,137,600)

ACCRUED LIABILITIES (769,200)

TOTAL ADJUSTMENTS FOR ASSETS AND LIABILITIES NOT INCLUDED IN TYPICAL SALE 631,478

FAIR MARKET VALUE ON A CONTROL MARKETABLE BASIS $ 7,655,978

ROUNDED $ 7,656,000

Footnote 1: IT IS ASSUMED THE TRANSACTIONS USED IN THIS METHOD DID NOT INCLUDE THE BUYERS RECEIVING THE ACQUIRED COMPANY’S CASH, RECEIVABLES, REAL ESTATE OR CERTAIN LIABILITIES.



6 ADJUSTMENTS 6.1 Non-Operating Assets Non-operating assets include excess cash of $200,000, the town home valued at $400,000, and artwork valued at $50,000. The total of $650,000 represents an adjustment to the indicated enterprise value and is included below in Exhibit 6-1: Adjusted Indication of Value Including Non-Operating Assets:


ADJUSTED INDICATION OF VALUE INCLUDING NON-OPERATING ASSETS

Description

Capitalization of Earnings Method

Adjusted Net Asset

Method

Guideline Public

Company Method

Market Comparable

Method Reference Exhibit 5-4 Sec. 5.5.2 Exhibit 5-6 Exhibit 5-7

Minority Interest, As if Freely Traded Value

$5,500,000

Control Premium Of 26.5% (See Sec. 6.2.2)

1,457,500

Enterprise Indication of Value, As If Freely Traded (1) $6,100,000 $5,410,000 6,957,500 7,656,000

Non-Operating Assets 650,000 650,000 650,000 650,000

Control Value, As If Freely Traded, Including Non-Operating Assets $6,750,000 $6,060,000 $7,607,500 $8,306,000 Note: (1) The control indication of value does not include values attributed to the non-operating assets.

6.2 Adjustment for Control The purpose of our engagement is to value a controlling ownership interest of the issued and outstanding shares of common stock of Adler-Cottino on a non-marketable basis. 6.2.1 Conceptual Basis Minority shareholdings or ownership interests that lack the ability to control a business enterprise are considered to be worth less on a pro rata basis than similar control of a major interest, and are adjusted accordingly. A minority adjustment, or adjustment for lack of control, takes into account the inability of an owner of a fractional interest in a closely held business to control the operation and management of the business. In particular, a security interest lacking control is unable to compel distribution of profits (absent judicial remedies), to force liquidation, or to effect any significant business change. Because of the limitations inherent in owning a non-controlling interest in a closely held business, a willing buyer will presumably purchase such an interest only at a price that takes into account such limitations. 6.2.2 Adjustment Appropriate for the Subject Interest However, in this case, we are required to determine the value of a controlling ownership interest. While a control premium may be applicable in those instances where the derived value represents a minority interest, any derived control value requires no control adjustment in determining the value of a controlling ownership interest. For the foregoing reasons, if the determined indicated value for Adler-Cottino is on a control basis, no control premium or discount is applicable.



The determination of whether a derived value is on a control or minority basis is based on the valuation methodology utilized. Under the income valuation method, the key to determining whether a derived value is a control or a minority value depends on the determination of economic income. Shannon Pratt, a noted authority on business valuations, states in his book entitled Valuing A Business that “almost all the difference in control versus minority value in the income approach is found in the numerator—the expected economic income—rather than in the denominator—the discount or capitalization rate.”26 This means that to the extent the normalizing adjustments represent those that are solely at the discretion of the controlling owners, the resulting indicated value represents a control value. Alternatively, if a minority value is required, then it is inappropriate to record a controlling adjustment.

Capitalization of Earnings Method. The normalizing adjustments we made to arrive at expected economic income to be capitalized under the capitalization of earnings method are those adjustments within the discretion of a controlling owner. We added depreciation expense, as a non-cash expense, and then offset this adjustment by anticipated capital expenditures. We also made adjustments for working capital and long-term debt. Similar normalizing adjustments within the discretion of a controlling owner would include officer’s compensation and related payroll expenses, and such adjustments. In addition, adjustments were made for the expenses related to the non-operating assets (e.g., town home located Greensboro, North Carolina). The derived indication of value based upon these adjustments represents a control value, requiring no further control adjustment to value.

Adjusted Net Asset Method. As indicated earlier, this method initially derives a controlling interest value. Therefore, no control premium or lack of control discount is appropriate.

Guideline Public Company Method. The value indicated represents a minority interest valuation because the price multiples were determined from the sales of minority interests of publicly traded stock. In addition, the price/earnings multiple was applied to the unadjusted earnings (i.e., earnings that would be attributable to a minority shareholder) of the Company for the year ended December 31, 2000. Therefore, in order to derive a controlling interest value, it will be necessary to apply an acquisition premium to this indicated value.

One of the most objective and established methods of obtaining acquisition price premiums is the study of cash-tender offers. By looking at acquisition price premiums offered during a tender for control of a publicly traded company, one can approximate the difference between the value of controlling and non-controlling shares.

Such studies indicate that acquisition price premia vary widely with the median being approximately 30% to 40% over the average public market price in the months prior to the tender announcement. The high end of the range has been a price premium of over 100% and the low has been a price discount of about 10%—both clearly indicating special factors were involved.

According to Mergerstat Review, the median acquisition price premium paid in publicly traded company acquisitions was 41.1% in 2000.

26 Shannon P. Pratt, with Robert F. Reilly, and Robert P. Schweihs, Valuing A Business, The Analysis and Appraisal of Closely Held Companies, (Irwin Professional Publishing, 1996), p. 304.



Year

Acquisition Price Premium Indicated Discount For Lack of Control

Mean Median Base Mean Median

1992 41.0% 34.7% 142 29.1% 25.8%

1993 38.7% 33.0% 173 27.9% 24.8%

1994 41.9% 35.0% 260 29.5% 25.9%

1995 44.7% 29.2% 324 30.9% 22.6%

1996 36.6% 27.3% 381 26.8% 21.4%

1997 35.7% 27.5% 487 26.3% 21.6%

1998 40.7% 30.1% 512 28.9% 23.1%

1999 43.3% 34.6% 723 30.2% 25.7%

2000 49.2% 41.1% 574 33.0% 29.1%

As shown above, Mergerstat Review examined 574 tender offers in 2000 and calculated the median acquisition premium to be approximately 41.1%.

Mergerstat Review also segregates acquisition price premia data by the industry classification of the selling company. There were four transactions recorded in the Furniture segment in 2000 with an acquisition price premium of 26.5%. In 1999, Mergerstat Review calculated an acquisition price premium of 39.7% based on six transactions in the furniture segment. The average acquisition price premia paid in the furniture segment during the past five years is presented below:

Year

Acquisition Price

Premium Base

Discount For Lack

of Control

1996 62.5% 1 38.5%

1997 0.0% 0 0.0%

1998 46.9% 2 31.9%

1999 39.7% 6 28.4%

2000 26.5% 4 20.9%

As shown above, the acquisition price premiums paid in the furniture segment during the past five years has steadily decreased. We believe the 26.5% premium seems appropriate for the subject company and applied it to the indicated value determined under the Guideline Public Company Method.



Merger and Acquisition Method. The Merger and Acquisition Method used transactions in which controlling interests were sold. For this reason, the resulting value is a control value and no discount for control or premium for control is warranted.

5.7 Adjustment for Lack of Marketability

Since Adler-Cottino is a closely held company (100% of the ownership equity interest is owned by family members), its ownership interest is not readily marketable. A lack-of-marketability discount may be appropriate under these circumstances. Such an adjustment reflects similar marketability differences between closely held securities and publicly traded securities. An owner of publicly traded securities can know at all times the market value of his holding. He can sell that holding at virtually a moment’s notice and receive cash net of brokerage fees within three working days. Because closely held securities lack the inherent liquidity of traded securities and they are less attractive for investment purposes, it is accepted valuation practice to adjust the value to reflect this disparity.

5.7.1 Empirical Studies

Business valuers generally cite four sources of evidence when determining the magnitude of marketability discounts:

1. Restricted stock studies 2. Pre-IPO studies 3. Tax Court cases 4. Cost of “flotation” studies

Restricted Stock Studies. Restricted stock studies examine the issuance of restricted common stock of companies, which have active public markets for their shares. The restricted shares issued are identical to the freely trading common stock of the identified public companies in every respect except marketability. Restricted shares have some form of agreed-upon or legal restriction related to their marketability.

During the late 1960s and early 1970s, investment companies often purchased restricted shares of public companies for their portfolios. The shares were restricted from immediate marketability under Rule 144 of the Securities and Exchange Act of 1934. Such restricted shares are often referred to as “letter stock.”

Under SEC Rule 144, holders of restricted shares had no access to marketability for a pre-defined holding period, normally two years.27 At the end of the holding period, the restrictions were eased, and the formerly restricted shares would become tradable, but subject to the volume restrictions SEC Rule 144 might still impose that upon the shares. Nevertheless, purchasers of restricted shares had a reasonably definable holding period until their investments became marketable.

These restricted stock studies from the late 1960s and early 1970s were the most productive in terms of providing data for analysis. More recent studies tend to identify only a small number of transactions. The studies provided average discounts from freely traded values of issuing companies ranging from 20% to 45% (excluding the Columbia Financial Advisors Study for the period May, 1997 through December, 1998). At least until 1990, the average or median discounts hovered very close to the 33-35% area. The Columbia Financial Advisors Study for the period May 1997 through December 1998 is the first study that covers a period subsequent to the reduction in holding period from two years to one year pursuant to Rule 144. This reduction in required holding period significantly increased the liquidity of restricted securities and resulted in a significant reduction in the average discount from 21.0% to 13.0% (Refer to Appendix C – Marketability Discount: Summary of Restricted Stock Studies).

27 Currently, it is now one year.



Pre-IPO Studies. With the reduction in the number of restricted stock issuances after the mid-1970s, valuers turned to another area of the public markets in an effort to estimate the impact of lack of marketability. While there was a shortage of restricted stock issues of existing public companies, there was a steady stream of initial public offerings (“IPOs”) to examine for valuation evidence.

The first business valuer to analyze the IPO market systematically for evidence regarding the value of marketability was John D. Emory, ASA, of Robert W. Baird & Company. Emory published an article in the September 1985 issue of Business Valuation News (which in December 1986 was renamed Business Valuation Review) with the title, “The Value of Marketability as Illustrated in Initial Public Offerings of Common Stock.”28 Emory has since issued similarly entitled studies through 2000.29

The median and mean discounts for Emory’s analysis of transactions during the 1985-1997 time frame are 43% and 44%, respectively (See Appendix D – Marketability Discounts – Summary of Public Offering Studies (Robert W. Baird & Co.)) The standard deviation of the observations in Emory’s studies is 21%. This calculation suggests that two-thirds of the observations lie between 23% and 65% (the mean of 44%, plus or minus one standard deviation of 21%). However, the studies indicate a consistently wide range between the largest and smallest discounts.

John Emory’s latest study is a specialized study on dot-com stocks. This study indicated an average discount of 54%, somewhat higher than the long-term average covering stocks of all types (See Appendix D – Marketability Discounts – Summary of Public Offering Studies (Robert W. Baird & Co.)).

Willamette Management Associates performed pre-IPO studies between 1975-1995. The studies through 1993 are summarized in Shannon Pratt’s Valuing Small Businesses & Professional Practices (See Appendix D – “Marketability Discounts – Summary of Public Offering Studies (Willamette Management Associates)”).30 However, unlike the Emory research, the Willamette studies do not provide the underlying transactional data for independent study. Also, there are differences between the two studies. One important difference is that the source documents for the Willamette studies were complete SEC registration statements, primarily on Form S-1 and Form S-18, whereas the source documents for the Emory studies were prospectuses. Form S-1 and Form S-18 registration statements require disclosure of all private transactions of stock within the three years prior to the public offering. Prospectuses disclose only transactions with affiliated parties.

The average discount of the Willamette Management Associates Study has exceeded 35% for all but five of the 16 periods studied and the overall average was 40.3%. When the samples eliminated the highest and lowest deciles of indicated discounts, the sample average increased all but in one year. This suggests that the impact of smaller discounts is greater than larger discounts and that there were, generally, a number of quite small discounts. This adjusted overall average was 45.7%. The median discounts exceeded 40% in all but one year and the overall average of the medians was 51.7%. The overall average of the standard deviations was 42.9%. Like the Emory studies, the underlying data indicates, by inference, substantial variability.

Z. Christopher Mercer, in his book entitled Quantifying Marketability Discounts, suggests that the pre-IPO discounts indicated by the Emory and Willamette studies are increased by:31

• The marketability discount implicit in pre-IPO transactions;

28 John D. Emory, “The Value of Marketability as Illustrated in Initial Public Offerings of Common Stock,” Business Valuation News, September, 1985, pp. 21-24. 29 Business Valuation Review, December, 1986, pp. 12-15; June, 1989, pp. 55-57; December, 1990, pp. 114-116; December, 1992, pp. 208-212; March, 1994, pp. 3-7; December, 1995, pp. 155-160, September, 1997, pp. 123-131. John D. Emory, Sr., F.R. Dengel, III and John D. Emory, Jr., “The Value of Marketability as Illustrated in Dot.Com IPOs: May 1997-March 2000, Shannon Pratt’s Business Valuation Update, vol. 6, no. 7 (July 2000): pp. 1-2. 30 Shannon P. Pratt, with Robert F. Reilly, and Robert P. Schweihs, Valuing Small Businesses & Professional Practices. Third Edition. Chicago, Illinois: Irwin Professional Publishing, 1998, pp. 459-462. 31 Z. Christopher Mercer, ASA, CFA, Quantifying Marketability Discounts, (Peabody Publishing , LP, 1997), p. 90.



• The pre-IPO multiple itself; • Earnings on the new capital raised; • Any multiple pick-up experienced as a result of the IPO; • The discounts are tempered by new capital raised (and new shares issued) as a percent of

(post-IPO) market capitalization.

Consequently, the pre-IPO studies capture the net effect of lack of marketability in combination with other factors that are specific to each initial public offering.

Tax Court Cases. Additional guidance and insight into the determination of the discount for lack of marketability can be found in various court decisions. It is not the size of the discount allowed in the case that is important in the appraiser’s review of various court decisions. Rather, the appraiser’s focus is on the court’s interpretation of the objective evidence presented and the relevance of the factors the courts use in arriving at a discount for lack of marketability, or if a lack of marketability discount is appropriate.

For example, in Mandelbaum,32 the Tax Court delineated nine factors to consider in ascertaining the appropriate marketability discount in a gift tax case, where several gifts were made over a period of time:33

1. Financial statement analysis. 2. Company’s dividend policy. 3. Nature of the company, its history, its position in the industry and its economic outlook. 4. Company’s management. 5. Amount of control in transferred shares. 6. Restrictions on transferability of stock. 7. Holding period for the stock. 8. Company’s redemption policy. 9. Costs associated with making a public offering.

There has been some criticism about the factors and how they were utilized in this Tax Court case by certain authorities within the business valuation community.34

Cost of “Flotation” Studies. Since a controlling stockholder has the right to cause its company to register its stock for a public offering, the “cost of flotation” (cost of selling stock to the public, called “floating an issue” in securities trade jargon) often is used as a benchmark for quantifying the discount for lack of marketability for controlling interests. These flotation costs usually include underwriting, legal, accounting, and printing expenditures. The most comprehensive and still most often quoted study on the cost of flotation is one published by the SEC in December 1974, which covered 1,599 public offerings. However, costs of public flotation today are considerably greater than those at that time. Costs today can range anywhere from 15% of expected proceeds for smaller companies to 20% or more for companies the size of a few million dollars.

5.7.2 Adjustment Appropriate for the Subject Interest

Applicability of Lack-of-Marketability Discount to Adler-Cottino – Capitalization of Earnings Method. It is important to note that the valuation discount for lack of marketability is not black or white. Rather, there are degrees of marketability, or lack of it, which are dependent on the facts and circumstances of each engagement. Based on the foregoing, it is necessary to apply a discount for lack of marketability to 32 Mandelbaum v. Commissioner, 69 T.C.M. (CCH) 2852 (1995). 33 The decision lists ten factors; however, the first factor, “Private versus public sales of the stock,” is the development of the “benchmark range” of marketability discounts to which each of the remaining nine factors is compared. 34 Z. Christopher Mercer presents an excellent analysis of the Mandelbaum case in his book Quantifying Marketability Discounts, pp. 126-154. In fact, he arrives at a 52% marketability discount, as compared to the 30% discount decided by the Court. The IRS business valuation expert determined a 30% marketability discount, while the taxpayer’s expert determined marketability discounts of 70% for the first four valuation dates and 75% for the last two dates.



the enterprise value of Adler-Cottino under the capitalization of earnings method. The following factors were taken into consideration in determining the percentage rate for the lack-of-marketability discount of Adler-Cottino under this valuation method:

• The Existence of “Put Rights.” In general, the most powerful factor that could reduce or eliminate a valuation discount for lack of marketability would be the existence of a “put” right. A put is a contractual right that entitles the holder, at his option, to sell the stock to a specified party at some time or under some specified circumstances, at the price or mechanism for determining the price specified in the contract. As a consequence, a put guarantees a market under specified circumstances. Puts are found most commonly in connection with Employee Stock Ownership Plan stock. There is no existence of any put rights associated with Adler-Cottino; therefore, this factor would increase the discount for lack of marketability.

• The Likelihood of Dividend Payments. The price for stock with no (or low) dividends suffers much more from lack of marketability than stocks with high dividends. Besides being empirically demonstrable, this makes common sense. If the stock pays no dividend, the holder is dependent entirely on some future ability to sell the stock to realize any return at all. Adler-Cottino has not paid any dividends on its common stock. However, we are valuing a controlling interest, and for this reason, a controlling ownership interest can authorize the payment (or payments) of a dividend (or of dividends). Under these circumstances, we would expect the controlling ownership factor to decrease the discount for lack of marketability that would be associated with the likelihood of dividend payments.

• The Universe of Potential Buyers. The existence of a reasonable number of potential buyers, or even one strong potential buyer (often as demonstrated by past activity in the stock) could decrease the valuation discount for lack of marketability. Here, we would expect that the potential buyer (or buyers) of a family-owned business to be other relatives and/or beneficiaries of the estate. For these restrictive reasons, we would expect an increase in the valuation discount for lack of marketability.

• The Size of the Company. Several empirical studies note that companies, which trade OTC, have historically exhibited greater discounts than companies trading on the AMEX or NYSE. This factor indicates that smaller firms may deserve higher discounts for lack of marketability. Consequently, it would seem that a larger discount for lack of marketability would be appropriate for Adler-Cottino, but this factor may be somewhat mitigated based upon this Company’s larger size as compared to very small closely held businesses.

• The Size of the Subject Block. Strictly from a marketability viewpoint, the empirical evidence cited earlier suggests that larger blocks may tend to have larger discounts for lack of marketability than smaller blocks. There may be fewer potential buyers for a large block, and a large block transaction may be more difficult to finance. Alternatively, a larger block may have higher value because of the elements of control; however, this is a matter of control rather than a matter of marketability. Even so, we consider a 100% ownership equity interest, as a factor that would slightly increase or not affect the discount for lack of marketability.

• The Prospect of Public Offering or Sale of Company. If a public offering or sale of the company is imminent, this could decrease any valuation discount for lack of marketability. However, such prospects are almost always never certain, and the degree of offset to the discount for lack of marketability is problematic. It is not anticipated that the company will make a public offering and there is no anticipated sale of the company. Therefore, the discount for lack of marketability would be pushed up slightly.

• Restrictions on Sale of Business. Many closely held stocks are subject to provisions, which severely restrict the right of the holder to transfer the stock. Any provision which limits the



right of the holder to transfer the stock tend to increase the amount of the valuation discount for lack of marketability. If there are no restrictions on the transfer of the equity interest being valued, this is a positive factor. However, any restrictions that reduce the ability to sell the ownership equity interest would have a negative impact on value. Since there are no restrictions on the transfer of Adler-Cottino’s outstanding common stock, the discount for lack of marketability would decrease.

• Seller is Unwilling to Sign a Covenant Not to Compete. If the seller is unwilling to sign a covenant not to compete, this would mean that the buyer would need to still compete with the seller for the company’s business. Under these circumstances, a buyer would not pay a higher price for the company, knowing that the seller after the sale would be a competitor and could detrimentally affect the new owner’s future business. Since there is no indication that Adler-Cottino’s shareholder(s) would not agree to a covenant not to compete, this would reduce the discount.

• Controlling Equity Owner’s Honesty. Adler-Cottino’s current shareholder(s)/officers have been involved with the business for a number of years, and this business has operated prior to the 1900s. We have not been given any indication that they are not honest in their business dealings, which would lower the discount.

• Prospects for the Business. It is expected that the business will continue as usual. Consequently, the discount for lack of marketability would decrease.

• Prospects for the Industry. It is anticipated that there may be a slowdown in the economy, including reductions in forecasted construction, which may affect the household furniture industry. As a consequence, the discount for lack of marketability would increase.

The foregoing studies seem to indicate that a lack-of-marketability discount generally can range from 25% to 45%, although the discounts are quite variable, and can be somewhat higher. However, all these restricted stock and pre-IPO studies represent sales transactions of minority ownership interests. In Adler-Cottino, we are valuing a controlling ownership interest. Currently, there are no empirical studies of market data that measure the discount for lack of marketability for sales of controlling ownership interests. But, it is recognized within the business valuation profession that if a marketability discount upon the acquisition of a controlling interest were appropriate, it would be expected to be much lower than a similar discount on a minority ownership interest, possibly ranging from 0% to 25%. Based on our review of Adler-Cottino and the factors indicated above, it is our opinion that a 5.0% discount for lack of marketability is justified for the determination of value under the capitalization of earnings method.

Applicability of Lack-of-Marketability Discount to Adler-Cottino – Adjusted Net Asset Method. With respect to the Adjusted Net Asset Method, no reduction of value for lack of marketability is appropriate to the tangible assets. The indicated values are considered marketable because the real estate and machinery and equipment appraisers valued the net tangible assets at their fair market value, free from restrictions or alienation. However, we believe that there would be a lack of marketability attributable to the intangible assets. A 5% discount for a lack of marketability is appropriate.

Applicability of Lack-of-Marketability Discount to Adler-Cottino – Guideline Public Company Method. With respect to the Guideline Public Company Method, a reduction of value for lack of marketability is appropriate because the multiple was derived from sales of stock in the public market and represents a marketable ownership interest. Therefore, to arrive at a non-marketable fair market value, it is appropriate to apply the 5% discount for lack of marketability.

Applicability of Lack-of-Marketability Discount to Adler-Cottino – Merger and Acquisition Method. With respect to the Merger and Acquisition Method, no reduction of value for lack of marketability is appropriate because the multiple was derived from sales of other similarly illiquid investments in other similar businesses. This means that any reduction in value applicable to these non-



publicly traded investments was reflected in the prices at which these businesses were sold. The derived multiple used in determining Adler-Cottino’s indicated value under this method would already reflect this lack of marketability.



6 RECONCILIATION OF INDICATED VALUES

At this point in the process of valuing a company, we must select the level of confidence or weighting we have in the values indicated by the various methods and procedures employed. The confidence-level weight is applied not to mechanize the valuation process through the application of a formula, but rather to assist the reader in understanding our informed judgment with respect to the issue of greater and lesser appropriateness of the methods employed.

The Capitalization of Earnings Method. This method treats the business as a pure investment activity and stresses the measurement of such investment on the financial return generated. We believe that this method is the most appropriate method for valuing the subject company because the earnings of an operating business are paramount to its financial success.

The Adjusted Net Asset Method. This method treats the business as a collection of assets, and in effect, values the business asset-by-asset, net of the liabilities. This method is often used to value holding companies. We believed that this method was not appropriate for valuing an operating company under the circumstances.

The Guideline Public Company Method. We indicated earlier that this method would not have been contemplated based upon the significant size of the public companies in relationship to the subject company. In addition, it is not anticipated that the subject company will go public. For these reasons, this method does not seem appropriate.

The Merger and Acquisition Method. This method is appealing because the value determination is based on evidence from the market of the amount at which similar companies have sold. However, there are limitations on the data known about these private transactions and their comparability and similarity to the subject company. In addition, we would have liked companies more similar in size and a larger number of comparable companies to Adler-Cottino in our sample. For this reason, we did not use this method in valuing the subject company.




RECONCILIATION AND ADJUSTMENT OF INDICATED VALUES CONTROLLING OWNERSHIP INTEREST IN ISSUED & OUTSTANDING COMMON STOCK

BLOCK ADJUSTMENTS

VALUATION

METHOD

VALUATION

APPROACH

VALUE

INDICATED

BY

METHOD

(EXHIBIT 6-1)

CONTROL

PREMIUM

LACK OF

MARKETABILITY

DISCOUNT

ADJUSTED

VALUE

DETERMINED

VALUE

CAPITALIZATION OF EARNINGS METHOD

INCOME

6,750,000 0.0% 5.0% 6,412,000 6,412,000

ADJUSTED NET ASSET METHOD

ASSET

6,060,000 0.0% 5.0% 5,757,000 N/A

GUIDELINE PUBLIC COMPANY METHOD (1)

MARKET

5,500,000 26.5% 5.0% 7,227,000 N/A

MARKET COMPARABLE METHOD

MARKET

8,306,000 0.0% 0.0% 8,306,000 N/A

TOTAL 6,412,000

FAIR MARKET VALUE OF 100% OF OUTSTANDING COMMON STOCK ON A CONTROL, NON-MARKETABLE BASIS

100% INTEREST

6,412,000

ROUND TO 6,412,000

NOTE: (1) ADJUSTED VALUE FOR GUIDELINE PUBLIC COMPANY METHOD INCLUDES ADDITION OF NON-OPERATING ASSETS (EXCESS CASH, TOWN HOME, AND ARTWORK) VALUED AT $650,000 (SEE SECTION 6.1) AFTER ADJUSTMENT FOR CONTROL PREMIUM. A DISCOUNT OF 5% FOR LACK OF MARKETABILITY WAS THEN APPLIED TO $7,607,500 (SEE EXHIBIT 6-1) TO ARRIVE AT THE ADJUSTED VALUE OF $7,227,125.

NOTE: (2) THE VALUE INDICATED BY METHOD INCLUDES ADDITION OF NON-OPERATING ASSETS (EXCESS CASH, TOWN HOME, AND ARTWORK) VALUED AT $650,000 (SEE TABLES 5.7 & 6.1)

8 CONCLUSION OF VALUE

We have performed a valuation engagement, as that term is defined in the Statement on Standards for Valuation Services (SSVS) of the American Institute of Certified Public Accountants, of Adler-Cottino Wood Furniture, Inc. This valuation was performed solely to assist in the matter of an estate; the resulting estimate of value should not be used for any other purpose or by any other party for any purpose. This valuation engagement was conducted in accordance with the SSVS. The estimate of value that results from a valuation engagement is expressed as a conclusion of value.

Based on our analysis, as described in this valuation report, the estimate of value of 100% of the stock of Adler-Cottino Wood Furniture is six million four hundred twelve thousand dollars ($6,412,000 or $64.12 Per Share (100,000 Shares Issued & Outstanding)).

This conclusion is subject to the Statement of Assumptions and Limiting Condition found in Appendix B and to the Valuation Analyst’s Representation found in Appendix A. We have no obligation to update this report or our conclusion of value for information that comes to our attention after the date of this report. August 31, 2001

James Lewis, CPA, CVA James Lewis, CPA, CVA Lewis, Jones & Company, LLC Atlanta, GA



Appendix A VALUATION ANALYST’S REPRESENTATIONS

The analyses, opinions, and conclusion of value included in the valuation report are subject to the specified assumptions and limiting conditions (see Appendix B), and they are the personal analyses, opinions, and conclusion of value of the valuation analyst. The economic and industry data included in the valuation report have been obtained from various printed or electronic reference sources that the valuation analyst believes to be reliable. The valuation analyst has not performed any corroborating procedures to substantiate that data. The valuation engagement was performed in accordance with the American Institute of Certified Public Accountants Statement on Standards for Valuation Services. The parties for which the information and use of the valuation report is restricted are identified; the valuation report is not intended to be and should not be used by anyone other than such parties. The analyst’s compensation is fee-based and is not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the estimate of value or the attainment of a stipulated result. The valuation analyst did not use the work of one or more outside specialists to assist during the valuation engagement. The valuation analyst has no obligation to update the report or the opinion of value for information that comes to his or her attention after the date of the report. Signature of the Analyst: James Lewis, CPA, CVA James Lewis, CPA, CVA Lewis, Jones & Company, LLC Atlanta, GA



Appendix B

LIMITING CONDITIONS

1. The conclusion of value arrived at herein is valid only for the stated purpose as of the date of the valuation.

2. Financial statements and other related information provided by Adler-Cottino Wood Furniture, Inc.

or its representatives, in the course of this engagement, have been accepted without any verification as fully and correctly reflecting the enterprise’s business conditions and operating results for the respective periods, except as specifically noted herein. Lewis, Jones & Company LLC has not audited, reviewed, or compiled the financial information provided to us and, accordingly, we express no audit opinion or any other form of assurance on this information.

3. Public information and industry and statistical information have been obtained from sources we

believe to be reliable. However, we make no representation as to the accuracy or completeness of such information and have performed no procedures to corroborate the information.

4. We do not provide assurance on the achievability of the results forecasted by Adler-Cottino Wood

Furniture, Inc. because events and circumstances frequently do not occur as expected; differences between actual and expected results may be material; and achievement of the forecasted results is dependent on actions, plans, and assumptions of management.

5. The conclusion of value arrived at herein is based on the assumption that the current level of

management expertise and effectiveness would continue to be maintained, and that the character and integrity of the enterprise through any sale, reorganization, exchange, or diminution of the owners’ participation would not be materially or significantly changed.

6. This report and the conclusion of value arrived at herein are for the exclusive use of our client for the

sole and specific purposes as noted herein. They may not be used for any other purpose or by any other party for any purpose. Furthermore the report and conclusion of value are not intended by the author and should not be construed by the reader to be investment advice in any manner whatsoever. The conclusion of value represents the considered opinion of Lewis, Jones & Company LLC, based on information furnished to them by Adler-Cottino Wood Furniture, Inc. and other sources.

7. Neither all nor any part of the contents of this report (especially the conclusion of value, the identity

of any valuation specialist(s), or the firm with which such valuation specialists are connected or any reference to any of their professional designations) should be disseminated to the public through advertising media, public relations, news media, sales media, mail, direct transmittal, or any other means of communication without the prior written consent and approval of Lewis, Jones & Company LLC.

8. Future services regarding the subject matter of this report, including, but not limited to testimony or

attendance in court, shall not be required of Lewis, Jones & Company LLC unless previous arrangements have been made in writing.

9. Lewis, Jones & Company LLC is not an environmental consultant or auditor, and it takes no

responsibility for any actual or potential environmental liabilities. Any person entitled to rely on this report, wishing to know whether such liabilities exist, or the scope and their effect on the value of the property, is encouraged to obtain a professional environmental assessment. Lewis, Jones & Company LLC does not conduct or provide environmental assessments and has not performed one for the subject property.



10. Lewis, Jones & Company LLC has not determined independently whether Adler-Cottino Wood Furniture, Inc. is subject to any present or future liability relating to environmental matters (including, but not limited to CERCLA/Superfund liability) nor the scope of any such liabilities. Lewis, Jones & Company LLC’s valuation takes no such liabilities into account, except as they have been reported to Lewis, Jones & Company LLC by Adler-Cottino Wood Furniture, Inc. or by an environmental consultant working for Adler-Cottino Wood Furniture, Inc., and then only to the extent that the liability was reported to us in an actual or estimated dollar amount. Such matters, if any, are noted in the report. To the extent such information has been reported to us , Lewis, Jones & Company LLC has relied on it without verification and offers no warranty or representation as to its accuracy or completeness.

11. Lewis, Jones & Company LLC has not made a specific compliance survey or analysis of the subject

property to determine whether it is subject to, or in compliance with, the American Disabilities Act of 1990, and this valuation does not consider the effect, if any, of noncompliance.

12. No change of any item in this appraisal report shall be made by anyone other than Lewis, Jones &

Company LLC, and we shall have no responsibility for any such unauthorized change. 13. Unless otherwise stated, no effort has been made to determine the possible effect, if any, on the

subject business due to future Federal, state, or local legislation, including any environmental or ecological matters or interpretations thereof.

14. If prospective financial information approved by management has been used in our work, we have

not examined or compiled the prospective financial information and therefore, do not express an audit opinion or any other form of assurance on the prospective financial information or the related assumptions. Events and circumstances frequently do not occur as expected and there will usually be differences between prospective financial information and actual results, and those differences may be material.

15. We have conducted interviews with the current management of Adler-Cottino Wood Furniture, Inc.

concerning the past, present, and prospective operating results of the company. 16. Except as noted, we have relied on the representations of the owners, management, and other third

parties concerning the value and useful condition of all equipment, real estate, investments used in the business, and any other assets or liabilities, except as specifically stated to the contrary in this report. We have not attempted to confirm whether or not all assets of the business are free and clear of liens and encumbrances or that the entity has good title to all assets.



Appendix C

MARKETABILITY DISCOUNT – SUMMARY OF RESTRICTED STOCK STUDIES1

Years Covered Average Empirical Study in Study Discount (%) SEC Overall Averagea 1966 – 1969 25.8% SEC Non-reporting OTC Companiesa 1966 – 1969 32.6 Gelmanb 1968 – 1970 33.0 Troutc 1968 – 1972 33.5n

Moroneyd k 35.6 Mahere 1969 – 1973 35.4 Standard Research Consultantsf 1978 – 1982 45.0n

Willamette Management Associatesg 1981 – 1984 31.2n

Silberh 1981 – 1988 33.8 FMV Opinions, Inc.i 1979 – Apr. 1992 23.0 Management Planning, Inc.j 1980 – 1995 27.7 Bruce Johnsonl Jan. 1991 – Dec. 1995 20.0 Columbia Financial Advisorsm Jan. 1996 – Apr. 1997 21.0o

Columbia Financial Advisorsm May 1997 – Dec. 1998 13.0p

Notes: a. From “Discounts Involved in Purchases of Common Stock (1966-1969),” Institutional Investor Study Report of

the Securities and Exchange Commission, H.R. Doc. No. 64, Part 5, 92nd Congress, 1st Session, 1971, pp. 2444-2456.

b. From Milton Gelman, “An Economist-Financial Analyst’s Approach to Valuing Stock of a Closely Held Company,” Journal of Taxation, June 1972, pp. 353-354.

c. From Robert R. Trout, “Estimation of the Discount Associated with the Transfer of Restricted Securities,” Taxes, June 1977, pp. 381-385.

d. From Robert E. Moroney, “Most Courts Overvalue Closely Held Stocks,” Taxes, March 1973, pp. 144-154. e. From J. Michael Maher, “Discounts for Lack of Marketability for Closely Held Business Interests,” Taxes,

September 1976, pp. 562-571. f. From “Revenue Ruling 77-287 Revisited,” SRC Quarterly Reports, Spring 1983, pp. 1-3. g. From Willamette Management Associates study (unpublished). h. From William L. Silber, “Discounts on Restricted Stock: The Impact of Illiquidity on Stock Prices,” Financial

Analysts Journal, July-August 1991, pp. 60-64. i. From Lance S. Hall and Timothy C. Polacek, “Strategies for Obtaining the Largest Valuation Discounts,” Estate

Planning, January/February 1994, pp. 38-44. j. From Z. Christopher Mercer, Quantifying Marketability Discounts (Memphis, TN: Peabody Publishing, 1997), pp.

345-67. Also available on Business Valuation Update Online, www.nvst.com/bvu. k. Although the years covered in this study are likely to be 1969-1972, no specific years were given in the published

account. l. From Bruce Johnson, “Restricted Stock Discounts, 1991-95,” Business Valuation Update, March 1997, pp. 1-3. m. From Kathryn F. Aschwald, “Restricted Stock Discounts Decline as Result of 1-Year Holding Period,” Business

Valuation Update, May 2000, pp. 1-5. n. Median discounts. o. Median was 14.0. p. Median was 9.0

1 Exhibit 25-5: “Summary of Restricted Stock Empirical Studies,” Shannon P. Pratt, Robert F. Reilly, and Robert P. Schweihs, Valuing Small Businesses and Professional Practices (McGraw-Hill, 1998), p. 457.



Appendix D

MARKETABILITY DISCOUNT – SUMMARY OF PUBLIC OFFERING STUDIES1

Robert W. Baird & Co., under the direction of John D. Emory, has conducted nine (9) studies over time periods ranging from 1980 through March of 2000 comparing the prices of closely held stock transactions, when no public market existed, with prices of subsequent IPOs in the same stocks. The discounts in the Baird studies range from 5% to 90% depending upon the degree of risk associated with a particular stock. The results of these studies are summarized below: Number of IPO Number of Prospectus Qualifying Discount Study Reviewed Transactions Mean Median 1995-97 732 91 43% 42% 1994-95 318 46 45% 45% 1991-93 443 54 45% 44% 1990-92 266 35 42% 40% 1989-90 157 23 45% 40% 1987-89 98 27 45% 45% 1985-86 130 21 43% 43% 1980-81 97 13 60% 66% 8 Studies 2,241 310 44% 43% *1997-00 92 53 54% 54% *1997-2000 study was for dot-com IPOs—not comparable to other studies. SOURCE: John D. Emory, “The Value of Marketability as Illustrated in Initial Public Offerings of Common Stock, November 1995 through April 1997,” Business Valuation Review, September 1997, p. 125, John D. Emory, Sr., F. R. Dengel, III and John D. Emory Jr., “The Value of Marketability as Illustrated in Dot.com IPOs: May 1997-March 2000, Shannon Pratt’s Business Valuation Update, vol. 6, no. 7 (July 2000): 1-2.

1 Exhibit 25-6: “The Value of Marketability as Illustrated in Initial Public Offerings of Common Stocks,” Shannon P. Pratt, Robert F. Reilly, and Robert P. Schweihs, Valuing Small Businesses and Professional Practices (McGraw-Hill, 1998), p. 460.



MARKETABILITY DISCOUNT – SUMMARY OF PUBLIC OFFERING STUDIES1

Willamette Management Associates over the past several years, under the direction of Shannon Pratt, has conducted a series of studies comparing prices of private stock transactions to subsequent public offerings of stock in the same companies. The results of these studies are presented below: Number of Number of Trimmed Time Companies Transactions Mean Mean Median Standard Period Analyzed Analyzed Discount Discounta Discount Deviation 1975-1978 17 31 34.0% 43.4% 52.5% 58.6% 1979 9 17 55.6% 56.8% 62.7% 30.2% 1980-1982 58 113 48.0% 51.9% 56.5% 29.8% 1983 85 214 50.1% 55.2% 60.7% 34.7% 1984 20 33 43.2% 52.9% 73.1% 63.9% 1985 18 25 41.3% 47.3% 42.6% 43.5% 1986 47 74 38.5% 44.7% 47.4% 44.2% 1987 25 40 36.9% 44.9% 43.8% 49.9% 1988 13 19 41.5% 42.5% 51.8% 29.5% 1989 9 19 47.3% 46.9% 50.3% 18.6% 1990 17 23 30.5% 33.0% 48.5% 42.7% 1991 27 34 24.2% 28.9% 31.8% 37.7% 1992 36 75 41.9% 47.0% 51.7% 42.6% 1993 51 110 46.9% 49.9% 53.3% 33.9% 1994 31 48 31.9% 38.4% 42.0% 49.6% 1995 42 66 32.2% 47.4% 58.7% 76.4% aExcludes the highest and lowest deciles of indicated discounts. SOURCE: Willamette Management Associates

1 Exhibit 25-7: “Summary of Discounts for Private Transactions P/E Multiples Compared to Public Offering P/E Multiples Adjusted for Changes in Industry P/E Multiples,” Shannon P. Pratt, Robert F. Reilly, and Robert P. Schweihs, Valuing Small Businesses and Professional Practices (McGraw-Hill, 1998), p. 462.



Appendix E

INTERNATIONAL GLOSSARY OF BUSINESS VALUATION TERMS June 08, 2001 To enhance and sustain the quality of business valuations for the benefit of the profession and its clientele, the below identified societies and organizations have adopted the definitions for the terms included in this glossary. The performance of business valuation services requires a high degree of skill and imposes upon the valuation professional a duty to communicate the valuation process and conclusion, in a manner that is clear and not misleading. This duty is advanced through the use of terms whose meanings are clearly established and consistently applied throughout the profession. If, in the opinion of the business valuation professional, one or more of these terms needs to be used in a manner that materially departs from the enclosed definitions, it is recommended that the term be defined as used within that valuation engagement. This glossary has been developed to provide guidance to business valuation practitioners by further memorializing the body of knowledge that constitutes the competent and careful determination of value and, more particularly, the communication of how that value was determined. Departure from this glossary is not intended to provide a basis for civil liability and should not be presumed to create evidence that any duty has been breached. American Institute of Certified Public Accountants American Society of Appraisers Canadian Institute of Chartered Business Valuators National Association of Certified Valuators and Analysts The Institute of Business Appraisers Adjusted Book Value Method—a method within the asset approach whereby all assets and liabilities (including off-balance sheet, intangible, and contingent) are adjusted to their fair market values (NOTE: In Canada on a going concern basis). Adjusted Net Asset Method—see Adjusted Book Value Method. Appraisal—see Valuation. Appraisal Approach—see Valuation Approach. Appraisal Date—see Valuation Date. Appraisal Method—see Valuation Method. Appraisal Procedure—see Valuation Procedure. Arbitrage Pricing Theory—a multivariate model for estimating the cost of equity capital, which incorporates several systematic risk factors. Asset (Asset-Based) Approach—a general way of determining a value indication of a business, business ownership interest, or security using one or more methods based on the value of the assets net of liabilities. Beta—a measure of systematic risk of a stock; the tendency of a stock’s price to correlate with changes in a specific index. Blockage Discount—an amount or percentage deducted from the current market price of a publicly traded stock to reflect the decrease in the per share value of a block of stock that is of a size that could not be sold in a reasonable period of time given normal trading volume.



Book Value—see Net Book Value. Business—see Business Enterprise. Business Enterprise—a commercial, industrial, service, or investment entity (or a combination thereof) pursuing an economic activity. Business Risk—the degree of uncertainty of realizing expected future returns of the business resulting from factors other than financial leverage. See Financial Risk. Business Valuation—the act or process of determining the value of a business enterprise or ownership interest therein. Capital Asset Pricing Model (CAPM)—a model in which the cost of capital for any stock or portfolio of stocks equals a risk-free rate plus a risk premium that is proportionate to the systematic risk of the stock or portfolio. Capital ization—a conversion of a single period of economic benefits into value. Capital ization Factor—any multiple or divisor used to convert anticipated economic benefits of a single period into value. Capital ization of Earnings Method—a method within the income approach whereby economic benefits for a representative single period are converted to value through division by a capitalization rate. Capital ization Rate—any divisor (usually expressed as a percentage) used to convert anticipated economic benefits of a single period into value. Capital Structure—the composition of the invested capital of a business enterprise, the mix of debt and equity financing. Cash Flow—cash that is generated over a period of time by an asset, group of assets, or business enterprise. It may be used in a general sense to encompass various levels of specifically defined cash flows. When the term is used, it should be supplemented by a qualifier (for example, “discretionary” or “operating”) and a specific definition in the given valuation context. Common Size Statements—financial statements in which each line is expressed as a percentage of the total. On the balance sheet, each line item is shown as a percentage of total assets, and on the income statement, each item is expressed as a percentage of sales. Control—the power to direct the management and policies of a business enterprise. Control Premium—an amount or a percentage by which the pro rata value of a controlling interest exceeds the pro rata value of a non-controlling interest in a business enterprise, to reflect the power of control. Cost Approach—a general way of determining a value indication of an individual asset by quantifying the amount of money required to replace the future service capability of that asset. Cost of Capital—the expected rate of return that the market requires in order to attract funds to a particular investment. Debt-Free—we discourage the use of this term. See Invested Capital. Discount for Lack of Control—an amount or percentage deducted from the pro rata share of value of 100% of an equity interest in a business to reflect the absence of some or all of the powers of control. Discount for Lack of Marketabil i ty—an amount or percentage deducted from the value of an ownership interest to reflect the relative absence of marketability. Discount for Lack of Voting Rights—an amount or percentage deducted from the per share value of a minority interest voting share to reflect the absence of voting rights. Discount Rate—a rate of return used to convert a future monetary sum into present value. Discounted Cash Flow Method—a method within the income approach whereby the present value of future expected net cash flows is calculated using a discount rate. Discounted Future Earnings Method—a method within the income approach whereby the present value of future expected economic benefits is calculated using a discount rate. Economic Benefits—inflows such as revenues, net income, net cash flows, etc. Economic Life—the period of time over which property may generate economic benefits. Effect ive Date—see Valuation Date. Enterprise—see Business Enterprise. Equity—the owner’s interest in property after deduction of all liabilities. Equity Net Cash Flows—those cash flows available to pay out to equity holders (in the form of dividends) after funding operations of the business enterprise, making necessary capital investments, and increasing or decreasing debt financing.



Equity Risk Premium—a rate of return added to a risk-free rate to reflect the additional risk of equity instruments over risk free instruments (a component of the cost of equity capital or equity discount rate). Excess Earnings—that amount of anticipated economic benefits that exceeds an appropriate rate of return on the value of a selected asset base (often net tangible assets) used to generate those anticipated economic benefits. Excess Earnings Method—a specific way of determining a value indication of a business, business ownership interest, or security determined as the sum of a) the value of the assets derived by capitalizing excess earnings and b) the value of the selected asset base. Also frequently used to value intangible assets. See Excess Earnings. Fair Market Value—the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts. {NOTE: In Canada, the term “price” should be replaced with the term “highest price”} Fairness Opinion—an opinion as to whether or not the consideration in a transaction is fair from a financial point of view. Financial Risk—the degree of uncertainty of realizing expected future returns of the business resulting from financial leverage. See Business Risk. Forced Liquidation Value—liquidation value, at which the asset or assets are sold as quickly as possible, such as at an auction. Free Cash Flow—we discourage the use of this term. See Net Cash Flow. Going Concern—an ongoing operating business enterprise. Going Concern Value—the value of a business enterprise that is expected to continue to operate into the future. The intangible elements of Going Concern Value result from factors such as having a trained work force, an operational plant, and the necessary licenses, systems, and procedures in place. Goodwil l—that intangible asset arising as a result of name, reputation, customer loyalty, location, products, and similar factors not separately identified. Goodwil l Value—the value attributable to goodwill. Guidel ine Public Company Method—a method within the market approach whereby market multiples are derived from market prices of stocks of companies that are engaged in the same or similar lines of business, and that are actively traded on a free and open market. Income (Income-Based) Approach—a general way of determining a value indication of a business, business ownership interest, security, or intangible asset using one or more methods that convert anticipated economic benefits into a present single amount. Intangible Assets—non-physical assets such as franchises, trademarks, patents, copyrights, goodwill, equities, mineral rights, securities and contracts (as distinguished from physical assets) that grant rights and privileges, and have value for the owner. Internal Rate of Return—a discount rate at which the present value of the future cash flows of the investment equals the cost of the investment. Intrinsic Value—the value that an investor considers, on the basis of an evaluation or available facts, to be the “true” or “real” value that will become the market value when other investors reach the same conclusion. When the term applies to options, it is the difference between the exercise price or strike price of an option and the market value of the underlying security. Invested Capital—the sum of equity and debt in a business enterprise. Debt is typically a) all interest bearing debt or b) long-term interest-bearing debt. When the term is used, it should be supplemented by a specific definition in the given valuation context. Invested Capital Net Cash Flows—those cash flows available to pay out to equity holders (in the form of dividends) and debt investors (in the form of principal and interest) after funding operations of the business enterprise and making necessary capital investments. Investment Risk—the degree of uncertainty as to the realization of expected returns. Investment Value—the value to a particular investor based on individual investment requirements and expectations. {NOTE: in Canada, the term used is “Value to the Owner”}. Key Person Discount—an amount or percentage deducted from the value of an ownership interest to reflect the reduction in value resulting from the actual or potential loss of a key person in a business enterprise. Levered Beta—the beta reflecting a capital structure that includes debt.



Limited Appraisal—the act or process of determining the value of a business, business ownership interest, security, or intangible asset with limitations in analyses, procedures, or scope. Liquidity—the ability to quickly convert property to cash or pay a liability. Liquidation Value—the net amount that would be realized if the business is terminated and the assets are sold piecemeal. Liquidation can be either “orderly” or “forced.” Majority Control—the degree of control provided by a majority position. Majority Interest—an ownership interest greater than 50% of the voting interest in a business enterprise. Market (Market-Based) Approach—a general way of determining a value indication of a business, business ownership interest, security, or intangible asset by using one or more methods that compare the subject to similar businesses, business ownership interests, securities, or intangible assets that have been sold. Market Capital izat ion of Equity—the share price of a publicly traded stock multiplied by the number of shares outstanding. Market Capital izat ion of Invested Capital—the market capitalization of equity plus the market value of the debt component of invested capital. Market Mult iple—the market value of a company’s stock or invested capital divided by a company measure (such as economic benefits, number of customers). Marketabil i ty—the ability to quickly convert property to cash at minimal cost. Marketabil i ty Discount—see Discount for Lack of Marketability. Merger and Acquisit ion Method—a method within the market approach whereby pricing multiples are derived from transactions of significant interests in companies engaged in the same or similar lines of business. Mid-Year Discounting—a convention used in the Discounted Future Earnings Method that reflects economic benefits being generated at midyear, approximating the effect of economic benefits being generated evenly throughout the year. Minority Discount—a discount for lack of control applicable to a minority interest. Minority Interest—an ownership interest less than 50% of the voting interest in a business enterprise. Multiple—the inverse of the capitalization rate. Net Book Value—with respect to a business enterprise, the difference between total assets (net of accumulated depreciation, depletion, and amortization) and total liabilities as they appear on the balance sheet (synonymous with Shareholder’s Equity). With respect to a specific asset, the capitalized cost less accumulated amortization or depreciation as it appears on the books of account of the business enterprise. Net Cash Flows—when the term is used, it should be supplemented by a qualifier. See Equity Net Cash Flows and Invested Capital Net Cash Flows. Net Present Value—the value, as of a specified date, of future cash inflows less all cash outflows (including the cost of investment) calculated using an appropriate discount rate. Net Tangible Asset Value—the value of the business enterprise’s tangible assets (excluding excess assets and non-operating assets) minus the value of its liabilities. Non-Operat ing Assets—assets not necessary to ongoing operations of the business enterprise. {NOTE: in Canada, the term used is “Redundant Assets”}. Normalized Earnings—economic benefits adjusted for nonrecurring, non-economic, or other unusual items to eliminate anomalies and/or facilitate comparisons. Normalized Financial Statements—financial statements adjusted for non-operating assets and liabilities and/or for nonrecurring, non-economic, or other unusual items to eliminate anomalies and/or facilitate comparisons. Orderly Liquidation Value—liquidation value at which the asset or assets are sold over a reasonable period of time to maximize proceeds received. Premise of Value—an assumption regarding the most likely set of transactional circumstances that may be applicable to the subject valuation; e.g., going concern, liquidation. Present Value—the value, as of a specified date, of future economic benefits and/or proceeds from sale, calculated using an appropriate discount rate. Portfol io Discount—an amount or percentage deducted from the value of a business enterprise to reflect the fact that it owns dissimilar operations or assets that do not fit well together. Price/Earnings Mult iple—the price of a share of stock divided by its earnings per share.



Rate of Return—an amount of income (loss) and/or change in value realized or anticipated on an investment, expressed as a percentage of that investment. Redundant Assets—see Non-Operating Assets. Report Date—the date conclusions are transmitted to the client. Replacement Cost New—the current cost of a similar new property having the nearest equivalent utility to the property being valued. Reproduction Cost New—the current cost of an identical new property. Required Rate of Return—the minimum rate of return acceptable by investors before they will commit money to an investment at a given level of risk. Residual Value—the value as of the end of the discrete projection period in a discounted future earnings model. Return on Equity—the amount, expressed as a percentage, earned on a company’s common equity for a given period. Return on Investment—see Return on Invested Capital and Return on Equity. Return on Invested Capital—the amount, expressed as a percentage, earned on a company’s total capital for a given period. Risk-Free Rate—the rate of return available in the market on an investment free of default risk. Risk Premium—a rate of return added to a risk-free rate to reflect risk. Rule of Thumb—a mathematical formula developed from the relationship between price and certain variables based on experience, observation, hearsay, or a combination of these; usually industry specific. Special Interest Purchasers—acquirers who believe they can enjoy post-acquisition economies of scale, synergies, or strategic advantages by combining the acquired business interest with their own. Standard of Value—the identification of the type of value being used in a specific engagement; e.g. fair market value, fair value, investment value. Sustaining Capital Reinvestment—the periodic capital outlay required to maintain operations at existing levels, net of the tax shield available from such outlays. Systematic Risk—the risk that is common to all risky securities and cannot be eliminated through diversification. The measure of systematic risk in stocks is the beta coefficient. Tangible Assets—physical assets (such as cash, accounts receivable, inventory, property, plant and equipment, etc.). Terminal Value—see Residual Value. Transaction Method—see Merger and Acquisition Method. Unlevered Beta—the beta reflecting a capital structure without debt. Unsystematic Risk—the risk specific to an individual security that can be avoided through diversification. Valuation—the act or process of determining the value of a business, business ownership interest, security, or intangible asset. Valuation Approach—a general way of determining a value indication of a business, business ownership interest, security, or intangible asset using one or more valuation methods. Valuation Date—the specific point in time as of which the valuator’s conclusion of value applies (also referred to as “Effective Date” or “Appraisal Date”). Valuation Method—within approaches, a specific way to determine value. Valuation Procedure—the act, manner, and technique of performing the steps of an appraisal method. Valuation Ratio—a fraction in which a value or price serves as the numerator and financial, operating, or physical data serves as the denominator. Value to the Owner—see Investment Value. Voting Control—de jure control of a business enterprise. Weighted Average Cost of Capital (WACC)—the cost of capital (discount rate) determined by the weighted average, at market value, of the cost of all financing sources in the business enterprise’s capital structure.



Appendix F

CURRICULUM VITAE JAMES LEWIS, CPA, CVA

BACKGROUND Graduated from the University of Georgia in 1968 with a B.S. in Business Administration, with an accounting focus; Certified Public Accountant, state of Georgia, 1970; Certified Valuation Analyst, National Association of Certified Valuators and Analysts, 1993; recertified 1996, 1999; Worked in the audit department of Peters & Davis, CPAs in Atlanta, Georgia from June 1968 through 1975. Opened own practice 1976. Merged with the firm Cowlers, Filtch & Drake in 1986 to form the firm Cowlers, Lewis, Filtch & Drake. In 1999, formed a valuation practice with Barclay Jones, CPA, CVA, concentrating on valuation of businesses for estate, gift, sale, acquisition, and divorce. CONTINUING EDUCATION, PROFESSIONAL ASSOCIATIONS AND CIVIC ACTIVITIES

• Member AICPA (American Institute of Certified Public Accountants) • Member GACPA (Georgia Association of Certified Public Accountants) • Member IBA (Institute of Business Appraisers) • Member NACVA (National Association of Certified Valuators and Analysts) and the Georgia

State chapter of NACVA, serving as president in 1999-2000. • Active member of Atlanta Chamber, speaking at least once each year on matters related to

accounting, marketing of businesses and business valuations. • Acted as court appointed administrator in issues related to bankruptcy. • Currently working on the certificate to be a State of Georgia mediator in administrative court. • Attended NACVA’s CVA Training Center, 1993 • Passed Certified Valuation Analyst Exam, 1993 • Attended 1990 and 1992 AICPA conference on Litigation Support • Attended 1994 NACVA Conference on Litigation Support • Continuing education and NACVA Career Development Institutes in 1996, 1998, and 2000 • Recertify every three years as required by NACVA to maintain current knowledge in valuations.

Types of Businesses Valued: Farming corporation Jewelry store Farm Supply business Screen print business Wholesale supplier Home construction company Medical practices Convenience store Trucking company – cargo Fiberglass manufacturer Trucking Company - sand, gravel, etc. Used auto dealership Restaurant Video production company Furniture manufacturer Lumber company



Appendix G ATLANTA METROPOLITAN AREA STUDY

Introduction A metropolitan/economic study is a straightforward, matter-of-fact look at the economy in a specific geographic area. Data from a wide variety of reliable sources is used to ensure a realistic view of the economy. The studies look at the key economic factors of an area, including population, total personal income, per capita personal income, earnings and employment for the major industries, and unemployment rates. The numerous tables and graphs that accompany this report show how the major industries are doing relative to the overall economy and their respective share of the economy. The graphs provide a good snapshot of the recent trends and offer a well-delineated representation of what is discussed in this report, such as how one industry compares to other industries, as well as changes in population, income, earnings, and employment. Any economic trends that are taking place can be seen with a quick glance at the graphs and reviewed more closely with the specific data on the tables. The direction and rate of change from year-to-year for each major economic factor is clearly indicated. Having good economic information for a geographic area can be useful in a variety of ways. Whether a business has done well or not, a metropolitan/economic study can be utilized when making a correlation between the performance of the business and the overall state of the economy. A metropolitan study can help to show what type of trend or the amount of growth a business in a particular industry might be expected to have during certain years. Other purposes include being utilized by local Chambers of Commerce, developers, companies deciding whether to expand or relocate, and anyone needing comprehensive economic information on an area. Atlanta, GA MSA The Atlanta, GA, Metropolitan Statistical Area (MSA) includes the counties of Barrow, Bartow, Carroll, Cherokee, Clayton, Cobb, Coweta, De Kalb, Douglas, Fayette, Forsyth, Fulton, Gwinnett, Henry, Newton, Paulding, Pickens, Rockdale, Spalding, and Walton. There are enough economic and social attachments between the city for which the economic area is named and the geographic area covered by the twenty counties for them to be grouped together as one economic unit. Atlanta is the state capital of Georgia. A mayor and a managing 15-member city council govern the city of Atlanta. Located in northwestern Georgia, the area is well served by an abundance of major roadways, including interstates, national highways and state highways. This allows for good access to other areas of the state and nation, making it easy to get raw materials and finished goods in and out of the area. The Atlanta area is a major east-west and north-south crossroads for the state as well as that region of the United States. Atlanta has the world’s largest inter-modal passenger terminal complex, and 80 percent of the population of the United States lives within a two-hour flight of Atlanta. Figure 1 shows Atlanta’s location in comparison to the rest of the country.



Figure 1-Location of Atlanta, GA

Atlanta is the home to many national and international firms. Atlanta is the headquarters of soft drink manufacturer Coca-Cola, home improvement retailer Home Depot, shipping giant UPS, and media suppliers such as HBO, CNN, and TNT. Atlanta is also home to many professional sports teams, such as Baseball’s Braves, Football’s Falcons, Basketball’s Hawks, and Hockey’s Thrashers. Atlanta was also the host of the 1996 Olympic Summer Games. Atlanta is also home to three symphonies: the Atlanta Community Orchestra, the Atlanta Pops Orchestra, and the Atlanta Symphony Orchestra, in addition to the Atlanta Opera, and the Atlanta Ballet Company. Population The population of the Atlanta, GA MSA totaled 4,112,198 in 2000 according to the US Department of Commerce/US Census Bureau. Table 1 shows the age breakdown of the Atlanta, GA MSA in 2000.

Table 1-Age Breakdown of the Atlanta, GA MSA (2000) Age Number Percentage

Under 5 years 308,723 7.55 to 9 years 314,712 7.710 to 14 years 302,816 7.415 to 19 years 279,509 6.820 to 24 years 280,979 6.825 to 34 years 725,452 17.635 to 44 years 732,661 17.845 to 54 years 553,932 13.555 to 59 years 178,431 4.360 to 64 years 124,280 3.065 to 74 years 174,590 4.275 to 84 years 101,754 2.585 years and over 34,359 0.8Source: US Department of Commerce/US Census Bureau



The US Census Bureau reported the median age of the Atlanta, GA MSA was 32.9 years old in 2000, younger than the state median age of 33.4 years old. The bureau also reported 26.6 % of the total population of the MSA was under the age of 18 in 2000, while only 7.6 % of the population was over the age of 65. The state of Georgia had one of the best rates of growth for population of any state east of the Rocky Mountains during the 1990s. The Atlanta MSA grew at an even better rate than the already strong growth rate of the 1980s. The population growth in Georgia has been centered mostly in the Atlanta area. By 1998, almost 50% of the state’s total population resided in the twenty-county MSA. More than half of the remarkable population growth of the 1990s is due to people moving to the Atlanta area from other areas of the United States. Natural increase (births minus deaths) accounted for about 40% of the population gain, while about 8% was due to immigration from abroad. The state is projected to grow by 32.7 % between 1995 and 2020. The US Census Bureau reported academic institutional enrollment in the Atlanta, GA MSA totaled 1,112,254 in 2000, including enrollees in nursery school, preschool and college and graduate school. High school enrollment totaled 226,370 in 2000, while college and graduate school enrollment totaled 221,819. Of the population 25 and over, 5.4 % had less than a 9th-grade education, 10.6 % had attended 9th to 12 grade and received no diploma, and 24.4 % had a high school diploma or high school equivalency. Of the population 25 and over, 21.6 % had a bachelor’s degree and 10.4 % had a graduate or professional degree. Total Personal Income The US Department of Commerce’s Bureau of Economic Analysis reported the Total Personal Income of the Atlanta, GA MSA reached $136.8 billion in 2000, an increase of 52.4 % from $89.8 billion in 1995. Total Personal Income consists of Net Earnings, Transfer Payments, and Dividends, Interest and Rent. In 2000, Net Earnings accounted for 77 % of Total Personal Income in the Atlanta, GA MSA, as compared to 68.8 % nationally. As of June 30, 2000 FDIC insured bank deposits totaled $54.6 billion in 115 bank institutions. Deposits in commercial banks totaled $51.73 billion, while deposits in savings institutions totaled $2.88 billion. Per Capita Personal Income Per Capita Personal Income increased 29.1 % from $25,571 in 1995 to $33,013 in 2000. Table 2 shows median hourly and mean annual wages of select occupations in the Atlanta, GA MSA in 2000.

Table 2-Wages of Select Occupations in the Atlanta, GA MSA (2000) Occupation Median Hourly Mean Annual Farmworkers, Farm and Ranch Animals $8.73 $20,560 Earth Drillers, Except Oil and Gas $14.21 $29,460 Construction Laborers $10.15 $21,800 Molders, Shapers, and Casters, Except Metal and Plastic $11.11 $23,730 Bus Drivers, School $6.35 $14,550 First-Line Supervisors/Managers of Non-Retail Sales Workers $24.50 $53,970 Retail Salespersons $8.29 $21,090 Securities, Commodities, and Financial Services Sales Agents $20.32 $56,270 Pediatricians, General $63.64 $121,520 Fire Fighters $17.04 $33,890

Source: US Department of Labor/Bureau of Labor Statistics The cost of living in the Atlanta metropolitan area was more expensive than national average according to ACCRA Cost of Living Index during 2000. ACCRA examines the cost of living in specific areas based upon several factors that determine the composite cost of living. The areas are given a score based on the



cost of living in the area compared with the national average, which equals 100. Table 3 shows the cost of living of several metropolitan areas for the third quarter 2000.

Table 3-ACCRA Cost of Living Comparison (3rd Quarter 2000)

Composite Groceries Housing Utilities Transport Health Care Misc.

New York, NY 241.0 143.9 485.3 199.3 121.2 176.3 137.0

San Diego, CA 120.8 119.9 142.6 122.0 117.5 123.6 103.0

Denver, CO 110.0 113.1 123.4 82.9 107.0 128.5 101.7

Cleveland, OH 109.8 104.4 108.0 140.5 108.8 115.0 106.1

Minneapolis, MN 109.2 101.9 108.5 111.2 112.2 127.6 109.1

Tampa, FL 102.6 107.1 99.2 96.6 102.2 102.9 104.9

Atlanta, GA 102.0 102.2 103.8 90.4 108.3 104.0 101.0

Dallas, TX 99.9 97.0 98.8 95.0 105.6 101.4 101.4

Provo-Orem, UT 99.2 110.3 94.7 82.6 100.8 90.9 102.4

Houston, TX 94.3 93.5 84.0 95.9 108.8 109.1 96.4Source: Utah Department of Workforce Services The most expensive aspect of the cost of living in the Atlanta, GA MSA during the third quarter 2000 was transportation. In June 2000, the Metropolitan Atlanta Rapid Transit Authority (MARTA) approved a 25-cent increase in fares to help offset an expected deficit in the 2001 fiscal year. The increase will raise the rate to ride MARTA to $1.75. Earnings The US Department of Commerce’s Bureau of Economic Analysis reported the construction sector had the largest percentage increase in earnings among major sectors between 1995 and 2000. Table 4 shows the percentage change in earnings of key non-farm sectors between 1995 and 2000. The table also shows the percentage of earnings each sector contributes to the non-farm total earnings in 2000.

Table 4-Earnings by Key Non-Farm Sector 1995 - 2000 Total % Change 1995-2000 % of 2000 Non-farm Total Construction 74.5% 6.2%Manufacturing 32.1% 10.7%Transportation, Public Utilities 63.2% 12.5%Wholesale Trade 60.9% 11.1%Retail Trade 50.7% 8.5%Finance, Insurance, Real Estate 66.1% 9.3%Services 70.8% 30.6%Government 31.6% 10.6%Source: US Department of Commerce/Bureau of Economic Analysis A rapid growth in disposable income and population in the Southeastern United States in the 1990s has led to an increased demand for retail shopping centers and restaurants. However, higher fuel costs, weakened consumer confidence and lower stock returns have curtailed consumer spending. Many consumers have become more price conscious, leading to higher market share of discount retailers. The Federal Reserve Board reported that 2000-holiday spending in the Atlanta Federal Reserve District was low as compared to



the 1999 holiday season. Discount retail stores fared better than did the department stores and mall retailers. The strongest sellers throughout the district were toys and apparel, while jewelry and home related products sales were sluggish. Atlanta’s hotel occupancy rates posted little growth in 2000 due to a decline in the number of large conventions being held in the city. The Federal Reserve Bank of Atlanta reported 26 Atlanta citywide conventions were planned for 2001 based on bookings at the end of 2000, rivaling 1999’s figure, which was the biggest year for conventions in two decades. Lackluster demand for the Ford Taurus and Mercury Sable helped to bring the Ford Motor Co. plant in Hapeville to a standstill during the fourth quarter of 2000. The General Motors plant in Doraville was also idle due to slackened demand for the minivans produced at the plant. High-tech and communication equipment production are expected to play a strong role in Atlanta’s economy in the near future, as Lucent Technologies and Motorola Corp. are planning to make significant investments in plants just north of Atlanta. Lucent plans to invest $150 million in its Norcross, GA optical fiber plant, and Motorola plans to build a new corporate campus in Sewanee, GA. Scientific Atlanta, the second largest manufacturer of television set-top boxes for cable, has had strong sales due to healthy demand of the product. The company continues to increase production as it expects strong demand in the future. Atlanta accounts for nearly two-thirds of Georgia’s single-family construction activity. During the first half of 2000, single-family permits were nearly equal to year earlier levels, but in the third quarter of 2000, building permits declined 7 % year-on-year for single-family homes. Private housing permits totaled 4,475 in the Atlanta, GA MSA in December 2000, an decrease of 6.4 % from December 1999 permits of 4,780. Year to date housing permits totaled 64,007 in December 2000, an increase of 5.8 % from the year to date housing permits issued the previous year. Employment The Atlanta, GA MSA civilian labor force increased 1.6 % from 2,268,589 in December 1999 to 2,305,445. The number unemployed fell 9.4 % to 60,248 in December 2000 from 66,514 in December 1999, leading to an unemployment rate of 2.6 % in December 2000 from 2.9 % in December 1999. Table 5 shows the percentage change in employment by key non-farm sector. The table also shows the percentage of workers each sector contributed to the non-farm total work force in 2000.

Table 5-Employment by Key Non-farm Sector (# of jobs, f/t & p/t) 1995 - 2000 Total % Change 1995-2000 % of 2000 Non-Farm Total Construction 35.9% 6.5%Manufacturing 3.6% 8.4%Transportation, Public Utilities 30.2% 7.9%Wholesale Trade 19.3% 7.5%Retail Trade 17.6% 16.6%Finance, Insurance, Real Estate 31.5% 8.6%Services 31.6% 33.0%Government 7.2% 10.4%US Department of Commerce/Bureau of Economic Analysis Table 5 shows the services sector accounted for nearly one-third of total non-farm employment in 2000. The largest sub-sector in the services sector was the business services sub-sector, totaling 230,950 workers in 2000 according to the US Department of Labor/Bureau of Labor Statistics. Business services establishments totaled 11,737 in 2000. The health services sub-sector employment totaled 124,392 in



2000, an increase of 11.2 % from 1997 employment of 111,874. The engineering services sub-sector increased employment 21.6 % from 54,773 in 1997 to 66,600 in 2000. The retail sector was the second largest non-farm sector in 2000, according to the US Department of Commerce/Bureau of Economic Analysis. The eating and drinking places sub-sector totaled 141,430 workers, an increase of 9.2 % from 129,500 in 1997, according to the US Department of Labor/Bureau of Labor Statistics. The automotive dealers and service stations sub-sector saw a 6.6 percentage increase from 34.234 in 1997 to 36,483, while food stores increased employment 3.1 % to 55,464 in 2000 from 53,815 in 1997. The total number of retail establishments increased 1.3 % from 19,127 in 1997 to 19,374 in 2000, according to the Bureau of Labor Statistics. The Federal Reserve Bank of Atlanta reported that several businesses in the Atlanta, GA MSA announced job cuts as the year ended. Some of the companies looking to eliminate jobs included AT&T Broadband, CNN, Amazon.com, Sony and Cypress Express, an Atlanta based telecommunications company. Lockheed Martin plans to outsource some parts production from its Marietta plant, which will cost 675 jobs. The plant assembles F-22 fighter planes and C-130J cargo planes. Projections Woods and Poole Economics, a national econometric research firm, projects the population of Atlanta will increase 28.9 % between 1995 and 2005. The 55 to 59 age group is projected to have the greatest percentage increase, increasing 89.9 % between 1995 and 2005. However, the 50 to 54 and the 60 to 64 age groups are each projected to increase over 60 %. Total employment is projected to increase 31% between 1995 and 2005, with the greatest percentage increase in the agricultural services sector, which is projected to increase 42.3 %. The construction sector is projected to increase 40.3 % between 1995 and 2005. Total earnings are projected to increase 57.3 % between 1995 and 2005, according to Woods and Poole. The agricultural services sector is projected to increase 81.9 % between 1995 and 2005, exhibiting the largest projected percentage increases in earnings. In the short term, economic growth in the Southeast should match the slower rate found in the second half of 2000, due to higher oil prices, slowing stock market, and the move of interest rates to historical norms. The outlook for Georgia’s factory sector is mixed as the slowing housing market will adversely affect companies tied to the construction industry, such as lumber and carpets. Also, companies working in the apparel industry will have to cut employment as international competition drives down the cost of apparel.

January 2003 ©2003 NACVA and the Center for Economic and Industry Research (CEIR)

1111 Brickyard Road, Suite 200 Salt Lake City, Utah 84106

ALL RIGHTS RESERVED Information contained in this report was obtained by CEIR from sources believed to be reliable. CEIR can neither guarantee the accuracy or completeness of this information nor can NACVA/CEIR be responsible for any errors, omissions or damages arising from the use of this information.



Bibliography and Resources Atlanta, Georgia, MSA Metro Atlanta Chamber of Commerce; Atlanta Chamber of Commerce; www.metroatlantachamber.com; Regional Economic Information System (REIS); US Department of Commerce/Bureau of Economic Analysis; http://fisher.lib.virginia.edu; 2002 Geographic Names Information System (GNIS); US Geological Survey/US Department of the Interior; http://geonames.usgs.gov; November 1, 2001 2000 Metropolitan Area Occupational Employment and Wage Estimates; US Department of Labor/Bureau of Labor Statistics; http://www.bls.gov/oes/2000/oes_0520.htm; November 1, 2001 State and County Employment and Wages from Covered Employment and Wages, 1997-2000; US Department of Labor/Bureau of Labor Statistics; http://data.bls.gov/labjava/outside.jsp?survey=ew; 2001 ACCRA Cost of Living Comparisons, Third Quarter 2000; Utah Department of Workforce Services; http://jobs.utah.gov/wi/pubs/CostofLiving/accra300.pdf; 2001 FDIC/OTS Summary of Deposits as of June 30, 2000; Federal Deposits Insurance Corporation; http://www3.fdic.gov/sod/sodSumReport.asp?barItem=3&sInfoAsOf=2000; November 26, 2002 Summary of Commentary on Current Economic Conditions by Federal Reserve District; Federal Reserve Board; http://www.federalreserve.gov/FOMC/BeigeBook/2001/20010117/6.htm; January 17, 2001 New Privately Owned Housing Units Authorized-Unadjusted Units by Metropolitan Area; US Department of Commerce/US Census Bureau; http://www.census.gov/const/C40/Table3/tb3u0012.txt; “Southeast Stays on Course for 2001: Slower but Steady”; EconSouth; Federal Reserve Bank of Atlanta; Fourth Quarter 2000 “MARTA Approves 25-Cent Fare Hike”; Atlanta Business Chronicle; http://atlanta.bizjournals.com/atlanta/stories/2000/06/26/daily12.html; June 28, 2000



Appendix H

HOUSEHOLD FURNITURE INDUSTRY OVERVIEW Analysts agree that the boom felt by the nation’s furniture dealers may indeed be slowing and that both sales and shipments of furniture could be lower for the year 2001. Factors leading to the softening of the market are slowdowns in the number of housing starts and home sales, and a general slowdown of the national economy. Spending on furniture and home furnishings is also expected to decline from years past. Sales in 2000 were $64.2 billion and in 2001 they are forecast to be $67.4 billion, and $69.5 billion in 2002. The yearly average growth rate is expected to be around 3 %, which is the smallest year-on-year increase since 1991. Sales of furniture and home furnishings, according to the Census Bureau, have increased faster than have retail sales for the 1998 to 1999 time period. For the time period from 1992 to 1999 sales of furniture and household products have grown faster than have retail sales for the time period. Sales at retail establishments should hold steady, but manufacturers shipments will lag and inventories will begin to pile up. 2001 shipments will be about 1 % behind shipments in 2000, and shipments in 2002 should be about 2 % behind what they were in 2000. This phenomenon is mainly due to a trend of continued growth in imports that has occurred over the last few years. Manufacturer shipments, in the first quarter of 2001 have slowed, and inventories have begun to build up, according to Furniture Today. New home sales, which play a large role in furniture and home furnishings sales, are expected to slow over the next few years. New home sales in 2000 were about 1.59 million; they were expected to decline to 1.51 million in 2001 and decline further in 2002 to about 2.47 million. Not only are new home expected to decline in the coming years, but so too are single-family resale’s. There were about 4.94 single-family resales in 2000, and they are expected to decline to 4.86 million units in 2001 and 4.59 million units in 2002, according to Furniture Today. Growth in the Gross Domestic Product will also be slowing down, but still increasing, over the next couple of years, according to analysts. GDP grew about 4.8 % in 2000 and is expected to grow by about 3.5 % in 2001, and by 3.3 % in 2002. Furniture Market By Region The decline of the equity markets in the Northeast will act to slow the growth of the region’s economy, due to the importance of the region’s huge financial service industry. The service industry has already begun to contract and consolidate and layoffs loom in the near future. The furniture and home furnishings industry could feel a chill in the near future because individuals in the area tend to be high earners. Furniture and home furnishings retailers in the Southern United States should also feel the contraction in the market, as downturns in other industries ultimately affect the furniture and home furnishings industry. Rapid growth in technology jobs in states such as Virginia, North Carolina, Maryland and Texas has fueled growth in the region for many years, but high technology jobs are beginning to slow. The region also employs many individuals in the automotive industry, which has been slowing recently. Based on these factors, furniture and home furnishings sales gains in the region should be modest for the period from 2000-2002. The Western United States could feel very little economic slowdown for the time period depending on the fate of the technology sector, which has been a major catalyst in the region in recent



years. Other factors that could benefit furniture and home furnishings dealers in the area are strong gains in global trade in aircraft, shipping and agricultural industries. The Midwestern United States has also benefited from global trade and China’s entry into the World Trade Organization. The large agricultural sector in the region is benefited global trade. However, the tight labor markets that are prevalent in the region have stopped growth in many industries dead in its tracks. The region is beginning to respond with an influx of capital investment in productivity-enhancing equipment that is a key growth factor for the region. Geographic Trends in the Furniture/Home Furnishings Market

Furniture and bedding sales are expected to increase over all regions of the country through 2005, according to Furniture Today’s 2001 Retail Planning Guide. However, growth will not be occurring as fast as it has in years past, mainly due to a general slowing of the economy as a whole. Sales are forecast to increase by at least 10 % in every region in the US for the 2000 to 2005 time period. Sales for the domestic market, as a whole, are expected to increase by about 15 % for the time period. The largest furniture and bedding market in the country is the Chicago Metro market. Sales in the region have topped all other markets since 1997. New York, L.A. and many other well-established cities top the charts as the largest furniture and bedding markets in the country. Sales growth within each of the 20 largest markets is expected to increase for the time period from 2000 to 2005 by at least 9 %, with some areas growing more than 25 %. The fastest growing furniture and bedding markets are in less traditionally well established cities, where growth is taking place due to a rapid population influx for reasons that are characteristic to the region. Austin-San Marcos, TX is the fastest growing region in the country, with over $337 million in sales in 2000 and sales projected at over $464 million in 2005, an increase of almost 40 %.

Furniture and bedding retailers and wholesalers that are serving these “hot markets” will be less likely to feel the chill of a cooling economy than firms that are serving alternative markets within the country. While the 25 fastest growing regions of the country are still growing faster than all other regions of the country, they are not growing as fast as the previous years top 25 fastest growing markets. In the 1999 Retail Planning Guide the percent change in sales volume ranged from 69 % to about 145 %, compared to the range of 24 to 38 % in the current Retail Planning Guide. Imports Within the Furniture Industry

Imports have a dramatic effect on manufacturers of furniture and bedding products. As stated earlier, manufacturers are facing stiff competition from overseas markets that have access to inexpensive means of production, and labor. Imports in the furniture industry have increased over 66 % since 1997. Looking only at the 1998 to 1999 time period, imports have increased over 20 %. Imports from China alone have increased over 46 % for the 1998 to 1999 time period. Over the past few years’ Chinese furniture factories have seen large capacity increases that have allowed them to pick up the production slack that has been felt in the factories in the United States. The product with the highest demand in the United States that is imported from China is metal outdoor chairs with textile-covered seats. Imports of this product alone have increased over 90 % during the 1998 to 1999 time period. The United States exported about $1.6 billion of furniture products in 1999, which was a drop of about 2 % from the previous year. Exports also dropped to the following countries:

• Japan,10 % decline • Saudi Arabia, 17 % decline • Kuwait, 7 % decline • Brazil, 40 % decline • Netherlands, 6 % decline



Top Manufacturers Collectively the top 25 furniture manufacturers in the United States have had increased sales of over 19 % for the 1998 to 1999 time period, as compared to sales increases of only 7 % for the top 25 firms analyzed for the 1996 to 1997 time period. When polled, the top manufacturers stated that they expect the large companies within the industry to get larger through strategic processes such as mergers, acquisitions and partnerships. Outlook

The merchant wholesale industry is forecast to achieve annual sales increases averaging 5% from 1998 to decade’s end, and at a declining pace through 2003, according to the US Department of Commerce’s Bureau of Economic Analysts. The primary brakes on sales should be competition from alternative distribution sources and the price-sensitivity of customers toward value-added services. Those alternative channels have increased, luring business that traditionally identified with Wholesale. Among these channels are wholesale clubs, super centers, catalog sales, discount centers and electronic commerce/direct mail. Beginning in the early 1980s, wholesale clubs and super centers provided competition mainly for the durable goods wholesaler. In the mid-1990s growth for the former slowed, as they reached the mature stage of the industry life cycle, while super centers still have significant room for expansion. A 1997 report by Degen & Co. cited by the US Department of Commerce identified super centers as reaching an estimated $34 billion in sales in 1996, and forecast those sales to surpass $80 billion by 2000. By comparison, wholesale club sales should grow at a slower pace, as 1996 levels reached $44 billion, forecast to approach $57 billion by 2000. These two challenging channels pressure distributors in two ways: they directly compete for Wholesale customers, and —when the distributor channel cannot be avoided due to contractual arrangements of certain manufacturers— they all but dictate the terms of sale to the distributor. This is the greatest threat to already tight gross margins. The outlook for certain segments of the furniture industry also looks strong. Looking ahead to 2001, the infant and juvenile products are in for a year of strong sales, according to Furniture Today’s Retail Planning Guide. Sales have been up in this market every year since 1998, partly due to the increased number of births, which increased by over 2 % from 1997. The birth rate (number of births per 1,000 of population) is also slightly increased in 1998. Births of twins increased about 6 % in 1998 according to the National Center for Health Statistics. Sales within this market in 1999 were $5.39 billion, up from $4.86 billion in 1998. The upholstery industry has been unsettled for the last couple of years, but executives of upholstery firms are using tactics such as brand power or personalization to stave off the expected slowdown. Furniture Today polled several industry executives about how they felt business would be in the upcoming year. Many felt that business would be better, even if consumer spending decreases. They felt that if money were tight consumers would spend their dollars at businesses that they have had good experiences with in the past. Other firms are opting to use improved textile designs to “up the game” and appeal to the upper-end of the market. Fabric makers are looking to 2001 with three issues on their mind: flammability of fabrics, imports, and the general economy. Flammability is an issue because consumers demand fabrics that are extremely soft, but in order to be fireproof fabrics usually feel firm and stiff. Imports, mainly from China, will also be on the mind of many fabric manufacturers in the coming year. Chinese imports are mainly facing only the lower markets now, but in the future, they will have fabrics in all price levels. Furniture Today reports that five years after China joined the WTO quotas will be a thing of the past and the United States market will be wide open. This will diminish the number of American manufacturing jobs. Manufacturing jobs pay more than service jobs, so the disposable income of all of the former employees will be diminished considerably, ultimately affecting the furniture industry.



Most fabric manufacturers reported that 2000 was a fair to good year, and that the softened retail climate hurt their sales. The retail sector was softened, in part, by gasoline prices, interest rates, and the jumpy stock market. Most firms see business picking up in 2001; because of new product lines; others see business picking up because of new national accounts that they have landed in the past few months. The bedding market has never been an industry characterized by tremendous growth, but rather it has been characterized by slow steady growth year after year. The International Sleep Products Association estimates that sales increases for the year 2001 will be about 4 %. Several factors are to blame for the dismal outlook for the upcoming year. Those being the shifty stock market, sluggish corporate earnings that consistently have failed to meet analysts’ earnings, high-energy prices, and interest rates. While analysts are predicting that 2001 will be a roller-coaster year for the bedding industry, some individual producers are expecting their gains to be in double-digits. Companies such as Simmons, saw 20 % gains in 2000 due to new product introductions that have kept orders rolling in. The furniture and bedding industry, as well as each of the specialty markets contained within the industry will be in for a mixed year of growth, depending on what the general economy does. Things could pan out very differently if the stock market stabilizes, and energy prices lower; rather than if the stock market continues to be jittery and energy prices continue to soar. February 2001 ©2001 NACVA and the Center for Economic and Industry Research 1111 Brickyard Road, Suite 200, Salt Lake City, Utah 84106; ALL RIGHTS RESERVED. Information contained in this report has been obtained by NACVA/CEIR from sources believed to be reliable. NACVA/CEIR can neither guarantee the accuracy or completeness of this information, nor can NACVA/CEIR be responsible for any errors, omissions or damages arising from the use of this information.



Bibliography

Survey of Current Business; US Department of Commerce/Economics & Statistics Administration, Bureau of Economic Analysis; November 1998 Survey of Current Business; US Department of Commerce/Economics & Statistics Administration, Bureau of Economic Analysis; June 1996 US Industry & Trade Outlook 2000; US Department of Commerce/International Trade Administration and DRI/McGraw-Hill/Standard & Poors; 1999 “Furniture Information Market Reports”; Aktrin Furniture Information Center; http://www. aktrin.com “Consumer Market Survey”; Furniture/Today; April 28, 1997 “Consumer Buying Trends”; Furniture/Today; February 16, 1998 “Survey of Top 25 US Furniture Manufacturers”; Furniture/Today; May 11, 1998 “Distributor Survey”; Furniture/Today; May 25, 1998 “Retail Planning Guide”; Furniture/Today; December 28, 1998 “Retail Planning Guide”; Furniture/Today; December 25, 2000 “Import/Export Report”; Furniture/Today; June 12, 2000 “Overreaching for mass retailers”; The McKinsey Quarterly; 1997 Number 4 “Channel Conflict: When is it dangerous?”; The McKinsey Quarterly; 1997 Number 3 Mergerstat Review; Houlihan, Lokey, Howard & Zukin; 1997, 1998, 1999 “CIT’s Furniture Outlook Forecasts Long-Term Growth”; CIT Group; October 9, 2000



Appendix I

THE NATIONAL ECONOMY 4th Quarter 2000 and Outlook for 2001

The following discussion and analysis of the national economy for the fourth quarter of 2000 is based upon a review of current economic statistics, articles in the financial press and economic reviews from current business periodicals. The purpose of the review is to provide a representative “consensus” on the condition of the national economy and its general outlook through 2001. ECONOMIC SECTOR ACTIVITY According to the Federal Reserve Board’s contacts in the field, economic growth slowed as the quarter progressed, helping to ease labor shortages and limit price pressures for finished goods and services. Most Districts reported a further deceleration in growth from the last quarter. The consensus of stateside economists captured by our sources has revealed the extent of the economy’s weakness, following release of the revised fourth quarter GDP report. An already slackening annual pace of 2.2% in the third quarter compared to 5.6% in the second quarter, slowed further to 1.4% in the last three months. The main element in this downturn was business investment— which imploded—on a quarterly basis. The slippage in investment revealed a rapid response by domestic firms to the more uncertain profitability projections, by their restraint of equipment and high technology purchases. This also implies the economy has deteriorated more than expected; the manufacturing sector has especially felt this downturn, as capital spending cuts and slower export growth have contributed to drops in production and employment. The downturn may have been exaggerated, however, by severe weather and media speculation of an imminent recession. Indeed, several key indicators have remained upbeat; consumer demand shown through new home sales (which surged through December, against the weather) and personal consumption propelled notable momentum in this sector. Still, a precipitous drop in consumer confidence could portend further slippage in demand, irrespective of bright spots, especially if the equities markets continue their erratic behavior.

GEOGRAPHICAL DISPERSION OF THE FEDERAL RESERVE BANKING SYSTEM The 12 Federal Reserve Districts are geographically divided, straddling states and regions of the US: DISTRICT # BANKING CENTER REGIONS SERVICED ONE Boston New England TWO New York New York State, Northern New Jersey, Puerto Rico, Virgin

Islands THREE Philadelphia Delaware, Eastern Pennsylvania, Southern New Jersey FOUR Cleveland Ohio, Western Pennsylvania, Eastern Kentucky FIVE Richmond Maryland, Virginia, West Virginia, North Carolina, South

Carolina SIX Atlanta Georgia, Eastern Tennessee, Alabama, Southern Mississippi, Florida, Southern Louisiana



DISTRICT # BANKING CENTER REGIONS SERVICED SEVEN Chicago Illinois, Northern Indiana, Southern Wisconsin, Iowa, Southern Michigan EIGHT St. Louis Missouri, Arkansas, Western Kentucky, Southern Indiana, Western Tennessee, Northern Mississippi NINE Minneapolis Northern Wisconsin, Northern Michigan, North Dakota, South

Dakota, Minnesota, Montana TEN Kansas City Kansas, Nebraska, Oklahoma, Colorado, Northern New

Mexico, Wyoming ELEVEN Dallas Texas, Southern New Mexico, Northern Louisiana TWELVE San Francisco California, Oregon, Washington, Idaho, Nevada, Utah, Alaska, Arizona, Hawaii, Guam, Samoa, other US Pacific territories CONSUMER SPENDING Despite heavy discounting, nearly all regions reported lackluster growth in retail sales during the quarter, which were exacerbated through the holiday season. Most Districts reported sales were up only slightly from last year’s holiday season (when very strong gains were experienced). An exception was the New York District, where sales increases were at or close to plan. Overall weak sales growth led several national and regional retailers to close some or all of their stores. Many Districts cited diminished consumer confidence as the largest contributing factor to slower activity this year; retailers in the Chicago, Dallas, Richmond and St. Louis Districts noted brutally cold weather as further dampening sales. Winter-weather items sold very well in December, as did apparel in most Districts. Sales of home furnishings, fine jewelry, computers and most other items lagged, however. Kansas City and San Francisco reported significant growth in online retailing during the holiday season, although this was below expectations in the broadly-based San Francisco District. Inventory levels were widely “satisfactory” to “slightly excessive” in most Districts, reflecting a growing accumulation. Managers seemed confident, nonetheless, that any surpluses would be trimmed during January clearance sales. Across all regions, automobile sales were characterized as either “weak” or “slowing;” sales of domestic cars and light trucks were reported especially weak in the Chicago and Philadelphia Districts. St. Louis noted used car dealerships experienced the largest decline in sales, while Kansas City dealers had difficulties moving all makes and models of motor vehicles. Inventories of unsold cars were high throughout the country, subduing expectations in coming months before the summer season. SERVICES AND TOURISM Activity in most service industries was generally down; demand for trucking services fell considerably in the Cleveland and New York Districts, and slid somewhat in the Dallas District. Trucking firms’ fuel, insurance and labor costs continued to rise, nonetheless, resulting in an increase in bankruptcies and truck repossessions in the New York District. St. Louis reported a slowdown in barge traffic on the Mississippi River due to low water levels. Dallas and Richmond signaled falling revenues at most business service firms. In the insurance industry, however, revenues were up, according to the Boston District, its hub. In those Districts reporting activity, tourism was better than expected. The combination of unusually cold weather and a good snow base generated a jump in visits to ski resorts in the Minneapolis and Richmond Districts. Atlanta also reported holiday travel to Florida venues was very strong this year, despite the gloomy view expressed by consumers, revealed by confidence surveys. Hotel occupancies were up from a year ago, but some cruise ships out of Miami were sailing at less than full capacity.



REAL ESTATE AND CONSTRUCTION Residential real estate activity cooled in most Districts; single-family construction remained strong in the New York and San Francisco Districts, but it declined in the Dallas, Kansas City and St. Louis Districts and showed signs of slowing elsewhere (after seasonal adjustments). Homebuilders in the Cleveland District reported they have far fewer projects scheduled for coming months than the same time last year. Contrastingly, home sales were mixed across these markets, as New York again reported the most robust activity. Boston and Richmond cited reduced consumer confidence as adversely affecting sales, dampened by continuing purchase delays by potential homebuyers. Unusually cold weather was also noted to have depressed activity in some Districts. Other signs of slowing in commercial real estate activity surfaced nationwide; Atlanta, Dallas and Richmond experienced moderations, while Cleveland and St. Louis described their pace as “mixed.” Commercial construction remained uniquely solid in the Kansas City District. New York and Richmond, however, reported contraction by dot-com enterprises helped free some office space, but the office market in New York remains tight. Shortages of office space were also reported in parts of the Richmond, St. Louis and San Francisco Districts. MANUFACTURING Manufacturing activity weakened in all Districts as the quarter progressed. Steel producers experienced difficulty in many regions; Chicago and Cleveland reported a number of bankruptcy filings among these firms. There were also announcements in several Districts of temporary automobile assembly plant shutdowns ahead in the first quarter. Slower construction activity during the quarter has precipitated a drop off in production of building materials and equipment in the Boston, Dallas and San Francisco Districts. In the energy sector, however, activity at most of the nation’s oil refineries remains solid. Production of computer-related equipment remained strong in the Boston District, but Dallas reported a “sharp fallout” in computer output, driven by weaker consumer demand for personal computers and to reductions of technology-related investment by businesses (year-on-year, related to one-time Y2K activities). High input costs, the strong dollar and weaker domestic demand were cited most often as reasons for the slowdown in factory activity. Boston, Richmond and St. Louis reported higher input costs were squeezing profits for many firms. Half the Districts also mentioned widespread concern among manufacturers about higher energy costs. Some fertilizer, chemical and smelting plants in the Kansas City, Minneapolis, St. Louis and San Francisco Districts have even shut down to resell their electricity or natural gas supplies on the open market. Atlanta, Cleveland, Kansas City, Philadelphia and Richmond noted heavy import competition —due mostly to the Dollar’s strength—was hampering manufacturing sales. Atlanta also reported uncertainty about the US stock market was adversely affecting firms’ capital expenditure plans. BANKING AND FINANCE Loan growth slowed slightly in most Districts between Thanksgiving and year-end. Bankers in Cleveland’s tri-state region cited decisions by manufacturing firms to delay investment projects as reducing demand for business loans; Atlanta and Chicago experienced some slowing in business loan activity. Kansas City, New York and San Francisco reported slightly lower demand for both consumer and business loans, while Dallas saw this across all categories except the energy sector. In the consumer sector, home mortgage demand was mixed, but lenders in several Districts expected refinancing activity to perk up if low mortgage rates persist. Credit quality did not show any notable decreases this quarter, but banks extended their tightening of credit standards, exercising more vigilance over the financial condition of their borrowers. Atlanta, Chicago, Dallas, New York and Philadelphia banks shared that they were continuing to tighten their credit standards, while banks in other Districts said they were monitoring credit quality closely to detect any deterioration.



Close scrutiny of loans to the retail and manufacturing sectors was reported by the Chicago District, and bankers in the Richmond noted they were giving special attention to cyclical industry loans. AGRICULTURE, ENERGY AND NATURAL RESOURCES The beginning of winter weather nationwide had mixed effects on agriculture during the quarter. Minneapolis reported moisture from heavy snowfalls benefited the winter wheat crop, and is expected to lessen the chance of drought conditions in the next growing season. Severe seasonal weather nonetheless contributed to a worsening in pasture conditions for livestock and in increased use of alternative forages in the Dallas, Kansas City, Minneapolis and Richmond Districts. These alternate supplies seem to be generally available, except for some reports of hay shortages in the Dallas District. Expansions continued in the energy sector, despite recent easing in oil prices; contacts in the Dallas, Kansas City and Minneapolis Districts reported oil and natural gas prices remain sufficiently high to justify steady expansion of exploration and production. The pace of industry expansion, however, is subdued by prolonged constraints of worker and equipment shortages, evidenced by Dallas and Kansas City trade reports. Assuming this scenario continues, the recent steep rise in natural gas prices is not expected to produce a further acceleration in drilling activity. In the face of high electricity costs and falling commodity prices, other extraction industries are not performing as well; essential metal mining and processing activity in the Minneapolis District continued to decline, responding to these conditions and slackening in demand downstream. LABOR MARKETS While most Districts identified continuing tightness in their labor markets, there was some easing due to slippages in economic activity over the quarter. Conversely, layoffs in a wide variety of industries were announced, in most regions. Due to the strong pent-up demand for specialized labor in many industries, however, contacts expected laid-off workers to be quickly reabsorbed. Atlanta, Boston, New York and Kansas City all expressed hope that recent dot-com layoffs would alleviate the severe shortage of information technology workers. Businesses still finding it difficult to recruit qualified workers included retailers in the Cleveland and New York Districts, construction firms in the New York and San Francisco Districts, and health care firms in the Atlanta District. The recruiting effort was improving, meanwhile, in Chicagoland, where service firms experienced greater success during December; their counterparts in the St. Louis District reported the slowdown in demand had made it easier to fill vacancies. WAGES The pressures on wages remained level or were relieved somewhat, in tandem with easing in the above labor markets. Some moderation in overall wage increases was noted by Chicago, Dallas, Kansas City and San Francisco. New York characterized wage pressures as “strong, but steady,” while Minneapolis signaled continuing but moderate wage increases. A number of Districts reported strong wage pressures for specific types of workers—including information technology workers in the Boston District, retail workers in the Richmond District, construction workers in the San Francisco District and union labor in the Cleveland District. PRICES Inflationary pressures in the consumer goods sector remained subdued through the quarter, but prices for most manufactured goods were flat-to-down, despite higher input costs. Widespread discounting by retailers during the holiday shopping season contributed to constraints on consumer prices in most regions. Retail prices increased at a slower pace in the Richmond District, held steady in the Boston District and declined slightly in the Dallas and Kansas City Districts. In many Districts, manufacturers reported their



input costs rose in December—particularly for energy—but they were unable to pass these increases to customers due to intense foreign and domestic competition and slowing demand. The most significant signals of downward pressure on selling prices were from steel manufacturers in the Chicago and Cleveland Districts, and for a wide array of manufacturing firms in the Dallas District, including producers of processed metals, cement and concrete, paper and lumber products. This District also reported “rapidly falling” prices in the telecommunications services sector during the quarter. Conversely, contacts in the insurance sector of the Boston District said reduced price competition had enabled them to raise premiums to more profitable levels as the year ended. This portends changes for all business sectors down the road. OUTLOOK A pronounced decline in forecaster sentiment resulted in widespread downgrades to the outlook for growth in 2001at the end of the fourth quarter. While the economic environment is not entirely dour, profit projections and consumer confidence have fallen, along with business investment. Consequently, the consensus of economic prognosticator—dominated by private sector economists—is for a notable decline in GDP growth, while declines in business investment and industrial production are more precipitous. The spillover is a level forecast for growth in pre-tax profits in 2001, following strong gains in 2000. Considering these indicators, several rounds of interest rate cuts and legislative support for more aggressive tax reductions should promote economic recovery later in the year. While the economic slowdown is expected to persist through the first half of 2001, by midyear, the US economy should begin to reaccelerate toward its potential annual growth rate of 3.5%-4.0% of real GDP. Inflation should also begin to decelerate, as producer price drops ripple through distribution channels. Short-term interest rates should be falling faster than long-term rates as the economy slows and the Federal Reserve Board continues its monetary easing process. This also suggests a high probability that the yield curve will resume its positive slope by late 2001. Notably, corporate earnings—when viewed on a year-on-year basis—will begin to improve as the second half of 2001 progresses. For those businesses involved in international commerce, the US dollar may weaken somewhat in the late stages of this economic slowdown, but then resume a long-term trend toward strength later in the year. The bottom line shows projections of a V-shaped economic recovery in the time window of nine months.



CONSENSUS OF ANNUAL ECONOMIC FORECASTS

Average % Change on Previous Calendar Year THIS MONTH'S MEAN LAST QUARTER'S MEAN

CATEGORY 2001 2002 2000 2001

Real Gross Domestic Product 2.0 3.5 5.2 3.4

Real Disposable Personal Income 2.5 3.4 3.0 3.4

Real Personal Consumption 2.7 3.1 5.3 3.4

Real Business Investment 3.5 6.1 13.3 8.5

Industrial Production 0.9 3.5 5.6 3.7

Consumer Prices 2.6 2.4 3.4 2.7

Producer Prices 1.9 1.3 3.6 1.7

Employment Costs 4.1 3.8 4.5 4.5

Nominal Pre-tax Profits 0.0 5.8 12.4 4.5

Absolute Values THIS MONTH'S MEAN LAST QUARTER'S MEAN

CATEGORY 2001 2002 2000 2001

Ann'l Change in Bus. Invent. ($ bn) 29.4 37.0 63.2 50.6

Ann'l Total Auto & Lt Truck Sls (mm units) 15.9 16.1 17.4 16.4

Annual Total Housing Starts (mm units) 1.51 1.51 1.56 1.50

Annual Average Unemployment Rate (%) 4.5 4.6 4.0 4.2

TABLES EXPLAINED: Feb-01

Average % Change on Previous Calendar Year:Shows the mean value of our monthly consensus on the % movement of Indicators over the next two years

Absolute Values:Shows the mean value of our monthly consensus on the magnitude of Indicators over the next two years

Source: Consensus Forecasts - USA



February 2001 Information contained in this report has been obtained by CEIR from sources believed to be reliable. CEIR can not guarantee the accuracy or completeness of this information, nor can CEIR be responsible for any errors, omissions or damages arising from the use of this information. ©2001 NACVA and Center for Economic & Industry Research™, 1111 Brickyard Road, Salt Lake City, Utah 84106; ALL RIGHTS RESERVED.

QUARTERLY ECONOMIC PERFORMANCE TRENDS

Year-on-Year Percentage Change Trend

1999a 1999a 2000a 2000a 2000a 2000e 2001f 2001f 2001f 2001f3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr

CATEGORY

Real Gross Dom Prod 4.3 5.0 5.3 6.1 5.2 3.5 2.5 1.6 1.8 2.3

Real Disp Pers Inc 3.7 3.1 2.9 3.1 3.2 2.3 2.3 2.1 2.2 2.9

Real Pers Consump 5.3 5.6 6.0 5.4 5.3 4.5 3.1 2.9 2.5 2.5

Real Bus Invest 11.0 10.1 12.9 14.1 13.1 10.1 5.5 2.6 1.8 3.6

Indust Production 3.7 4.2 5.8 6.5 5.9 4.2 2.0 0.3 0.0 1.0

Consumer Prices 2.3 2.6 3.2 3.3 3.5 3.4 3.0 2.6 2.4 2.3

Producer Prices 2.3 2.8 3.7 3.9 3.6 3.6 2.9 2.2 1.7 1.1

Absolute Values

1999a 1999a 2000a 2000a 2000a 2000e 2001f 2001f 2001f 2001fOther Indicators 3Q(end) 4Q(end) 1Q(end) 2Q(end) 3Q(end) 4Q(end) 1Q(end) 2Q(end) 3Q(end) 4Q(end)

Change in Bus Invent ($bn)* 39.1 80.9 36.6 78.6 72.5 67.1 35.1 25.5 27.3 30.2

Unemployment Rate (%) 4.2 4.1 4.1 4.0 4.0 4.0 4.3 4.4 4.5 4.6

3 mo Treas Bill Rate (%) 4.8 5.5 5.9 5.9 6.2 5.9 5.4 5.2 5.2 5.2

10 yr Treas Bond Yld (%) 6.0 6.4 6.0 6.0 5.8 5.1 5.0 5.1 5.1 5.2

*chained 1996 prices; annual rate

TABLES EXPLAINED: Feb-01

Year-on Year Percentage Change Trend:Shows the past actual and mean values of our consensus on quarterly movement of Indicators over a two-year period (a=actual, e=estimate, f=forecast)

Absolute Values:Shows the past actual and mean values of our consensus on quarterly movement of Indicators over a two-year period (a=actual, e=estimate, f=forecast)

Source: Consensus Forecasts - USA



Bibliography for “The National Economy: 4th Quarter 2000”

Summary of Commentary on Current Economic Conditions by Federal Reserve District; Board of Governors of the Federal Reserve System; January 17, 2001 “One More Time”; Tea leaf; Thredgold Economic Associates; February 7, 2001 Insight; Volume 4 No. 1; Zions First National Bank; Winter 2001 Consensus Forecasts – USA; Consensus Economics, Inc.; February 12, 2001 “Dr. Robert Goodman’s Economic Commentary”; Informed Investor; Putnam Investments; Winter 2000 “NABE Panel Sees Sustainable Growth Continuing”; NABE Outlook; National Association for Business Economics; November 2000 “With or Without a Recession, Profits are Under Threat”; Jonathan Fuerbringer; The New York Times; January 14, 2001 “Demand Slows Sharply in Fourth Quarter, NABE Panel Reports”; NABE Industry Survey; National Association for Business Economics; January 2001 “Economic Growth at Four-Year Low as Boom Dies”; Martin Crutsinger; The Associated Press; December 22, 2000 “Consumer Prices Take Largest Leap in a Decade”; The Associated Press; January 23, 2001 “Private-sector employment up modestly in December”; Monthly Labor Review; US Department of Labor/Bureau of Labor Statistics; January 8, 2001 “US Economy hits the brakes”; The Associated Press; January 31, 2001 “Treasury: Slowing Economy Is a Big Concern”; The New York Times; January 30, 2001 “Consumer Price Index: December 2000”; US Department of Labor/Bureau of Labor Statistics; February 16, 2001



Appendix J

BIBLIOGRAPHY

• BIZCOMPS for transactional data, San Diego, CA (obtained through CEIR) • Business Valuations: Fundamentals, Techniques and Theory, NACVA, Salt Lake City, UT • Center for Economic and Industry Research, Salt Lake City, UT – for economic and industry

information. • Done Deals, www.nvst.com, for transactional data • EDGAR ONLINE, The SEC database: www.edgar-online.com • IBA Transactional Database, Institute Business Appraisers, Plantation, FL • Pratt, Shannon; Reilly, Robert F and Schweihs, Robert P; Valuing Small Businesses and

Professional Practices, McGraw-Hill, 1998. • Pratt’s Stats; Willamette Management, Portland, OR • “Stocks, Bonds, Bills & Inflation,” Valuation Edition, 2001 Yearbook, Ibbotson Associates of

Chicago, IL.

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