BV2 Full Valu SM Detail

Business
Valuation
TRUGMAN VALUATION ASSOCIATES, INC. 2007
JOHN JOHNSON SALES COMPANY, INC.
VALUATION REPORT
JANUARY 31, 2006

1776 N Pine Island Rd, Suite 314, Plantation, FL 33322 T 954-424-4343 F 954-424-1416
2001 Rte 46, Suite 310, Parsippany, NJ 07054 T 973-983-9790 F 973-983-6686

www.trugmanvaluation.com
July 18, 2007

Mr. John Johnson
1234 NW 98th Street
Macon, FL 44444

Re: John Johnson Sales Company, Inc.

Dear Mr. Johnson:

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 the common stock of John Johnson Sales Company, Inc. as of January 31,
2006. This valuation was performed solely to assist in the matter of Johnson v. Johnson; 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, as well
as the standards promulgated by The Appraisal Foundation, the American Society of
Appraisers, and The Institute of Business Appraisers, Inc. 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, which must be signed in blue ink
by the valuation analyst to be authentic, the estimate of value of John Johnson Sales
Company, Inc. as of January 31, 2006 was:

FIVE HUNDRED THOUSAND DOLLARS ($500,000)

This conclusion is subject to the Statement of Assumptions and Limiting Conditions found in
Appendix 2 and to the Valuation Analysts Representation found in Appendix 3. 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.

Respectfully submitted,

TRUGMAN VALUATION ASSOCIATES, INC.

Gary R. Trugman
CPA*/ABV, MCBA, ASA, MVS
GRT/kag
Attachment
*Regulated by the State of Florida
TABLE OF CONTENTS
Page
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Description of the Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Definition of Fair Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Valuation Methodologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Going Concern Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Market Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Asset Based Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Income Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Liquidation Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Revenue Ruling 59-60 - Valuation of Closely-Held Stocks . . . . . . . . . . . . . . . 5
HISTORY OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ECONOMY/INDUSTRY INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
FINANCIAL ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
VALUATION CALCULATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
The Market Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Guideline Public Company Method . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Merger and Acquisition Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
The Asset Based Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
The Income Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Capitalization of Benefits Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Reconciliation of Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
DISCOUNT AND CAPITALIZATION RATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
PREMIUMS AND DISCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Valuation Premiums and Discounts in General . . . . . . . . . . . . . . . . . . . . . . . 78
Control Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Minority Discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Discount for Lack of Marketability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
SCHEDULES
Schedule 1 - John Johnson Sales, Inc. Balance Sheet as of December 31, 2000
through 2006.
Schedule 2 - John Johnson Sales, Inc. Income Statement for the Years Ended
December 31, 2000 through 2006.
APPENDICES
Sources of Information Utilized
Contingent and Limiting Conditions
Valuation Analysts Certification
Professional Qualifications of Valuation Analyst
Trugman Valuation Associates, Inc. 800-330-VALU
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Thompson v. Thompson, 576 So.2d 267 (Fla. 1991).
1
INTRODUCTION
DESCRIPTION OF THE ASSIGNMENT
Trugman Valuation Associates, Inc. was retained by John Johnson to determine the fair
market value of 100 percent of the common stock of John Johnson Sales Company, Inc.
(John Johnson Sales or The Company) as of January 31, 2006, the date of the filing of
the divorce complaint in the matter of Johnson v Johnson.
The purpose of this appraisal is to determine the fair market value of The Company to be
used for equitable distribution purposes. The scope of work for this appraisal is a complete
appraisal, and all relevant data and methodologies have been considered. This
assignment meets all of the requirements under Statement on Standards for Valuation
Services No. 1 promulgated by the American Institute of Certified Public Accountants.
DEFINITION OF FAIR MARKET VALUE
The most commonly used definition of fair market value is located in Revenue Ruling 59-
60. This revenue ruling defines fair market value as
...the price at which the 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.
This concept is consistent with the directive of the Florida Supreme Court in Thompson v.
Thompson indicating that the clearest method would be the fair market value approach,
1
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which is best described as what would a willing buyer pay, and what would a willing seller
accept, neither acting under duress for a sale of the business.
VALUATION METHODOLOGIES
There are two fundamental bases on which a company may be valued:
1. As a going concern, and
2. As if in liquidation.
The value of a company is deemed to be the higher of the two values determined under a
going concern or a liquidation premise. This approach is consistent with the appraisal
concept of highest and best use, which requires an appraiser to consider the optimal use
of the assets being appraised under current market conditions. If a business will command
a higher price as a going concern then it should be valued as such. Conversely, if a
business will command a higher price if it is liquidated, then it should be valued as if in
orderly liquidation.
GOING CONCERN VALUATION
Going concern value assumes that the company will continue in business, and looks to the
enterprise's earnings power and cash generation capabilities as indicators of its fair market
value. There are many acceptable methods used in business valuation today. The
foundation for business valuation arises from what has been used in valuing real estate for
many years. The three basic approaches that must be considered by the appraiser are:
1. The Market Approach,
2. The Asset Based Approach, and
3. The Income Approach.
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Within each of these approaches there are many acceptable valuation methods available
for use by the appraiser. Appraisal standards suggest that an appraiser test as many
methods as may be applicable to the facts and circumstances of the property being
appraised. It is then up to the appraiser's informed judgment as to how these values will
be reconciled in deriving a final estimate of value.
THE MARKET APPROACH
The market approach is fundamental to valuation as fair market value is determined by the
market. Under this approach, the appraiser attempts to find guideline companies traded
on a public stock exchange, in a same or similar industry as the appraisal subject that
provides the appraiser with the ability to make a comparison between the pricing multiples
that the public company trades at and the multiple that is deemed appropriate for the
appraisal subject.
Another common variation of this approach is to locate entire companies that have been
bought and sold in the marketplace, publicly traded or closely-held, that provides the
appraiser with the ability to determine the multiples that resulted from the transaction.
These multiples can then be applied to the appraisal subject, with or without adjustment,
depending on the circumstances.
THE ASSET BASED APPROACH
The asset based approach, sometimes referred to as the cost approach, is an asset
oriented approach rather than a market oriented approach. Each component of a business
is valued separately, and summed up to derive the total value of the enterprise.
The appraiser estimates value, using this approach, by estimating the cost of duplicating
or replacing the individual elements of the business property being appraised, item by item,
asset by asset.
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The tangible assets of the business are valued using this approach, although it cannot be
used alone as many businesses have intangible value as well, to which this approach
cannot easily be applied.
THE INCOME APPROACH
The income approach, sometimes referred to as the investment value approach, is an
income oriented approach rather than an asset or market oriented approach. This
approach assumes that an investor could invest in a property with similar investment
characteristics, although not necessarily the same business.
The computations, using the income approach determine that the value of the business is
equal to the present value of the future benefit stream to the owners. This is accomplished
by either capitalizing a single period income stream or by discounting a series of income
streams based on a multi-period forecast.
Since estimating the future income of a business is considered to be speculative, historic
data is generally used as a starting point in several of the acceptable methods under the
premise that history will repeat itself. The future cannot be ignored, however, since
valuation is a prophecy of the future.
LIQUIDATION VALUATION
Liquidation value assumes that a business has greater value if its individual assets are sold
to the highest bidder and the company ceases to be a going concern.
Shannon Pratt, a well known authority in business appraisal states
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Shannon Pratt, Valuing a Business: The Analysis and Appraisal of Closely Held Companies,
2
2 edition (Illinois: Dow Jones-Irwin, 1989): 29.
nd
Ibid.
3
Ibid.
4
[l]iquidation value is, in essence, the antithesis of going-concern value.
Liquidation value means the net amount the owner can realize if the business
is terminated and the assets sold off in piecemeal.
2
He adds,
...it is essential to recognize all costs associated with the enterprise's
liquidation. These costs normally include commissions, the administrative
cost of keeping the company alive until the liquidation is completed, taxes
and legal and accounting costs. Also, in computing the present value of a
business on a liquidation basis, it is necessary to discount the estimated net
proceeds at a rate reflecting the risk involved, from the time the net proceeds
are expected to be received, back to the valuation date.
3
Pratt concludes by stating:
For these reasons, the liquidation value of the business as a whole normally
is less than the sum of the liquidation proceeds of the underlying assets.
4
REVENUE RULING 59-60 - VALUATION OF CLOSELY-HELD STOCKS
Among other factors, this appraiser considered all elements listed in Internal Revenue
Service Ruling 59-60 which provides guidelines for the valuation of closely-held stocks.
Revenue Ruling 59-60 states that all relevant factors should be taken into consideration,
including the following:
1. The nature of the business and the history of the enterprise from its
inception.
2. The economic outlook in general and the condition and outlook of the
specific industry in particular.
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3. The book value of the stock and financial condition of the business.
4. The earning capacity of the company.
5. The dividend paying capacity of the company.
6. Whether or not the enterprise has goodwill or other intangible value.
7. Sales of the stock and the size of the block of stock to be valued.
8. The market price of stocks of corporations engaged in the same or
similar line of business having their stocks actively traded in a free
and open market either on an exchange or over the counter.
Since determining the fair market value of a business is the question at issue, one must
understand the circumstances of this particular business. There is no set formula to the
approach to be used that will be applicable to the different valuation issues that arise.
Often, an appraiser will find wide differences of opinion as to the fair market value of a
particular business or business interest. In resolving such differences, one should
recognize that valuation is not an exact science. Revenue Ruling 59-60 states that "a
sound valuation will be based on all relevant facts, but the elements of common sense,
informed judgment and reasonableness must enter into the process of weighing those facts
and determining their aggregate significance."
The fair market value of specific shares of stock in an unlisted corporation will vary as
general economic conditions change. Uncertainty as to the stability or continuity of the
future income from the business decreases its value by increasing the risk of loss in the
future. The valuation of shares of stock of a company with uncertain future prospects is a
highly speculative procedure. The judgment must be related to all of the factors affecting
the value.
There is no single formula acceptable for determining the fair market value of a closely-held
business, and therefore, the appraiser must look to all relevant factors in order to establish
the fair market value of the business as of a given date.
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HISTORY OF THE COMPANY
John Johnson Sales Co., Inc. was incorporated in the State of Florida on July 13, 1974, for
the purpose of exporting American goods to South and Central America, and The
Caribbean. In the early 1980s, The Company almost went out of business because of the
devaluation of the Venezuelan currency. This is when The Company transitioned to
becoming an importer; specifically textiles from Brazil, Peru and Guatemala. The Company
credits much of its success today to suppliers from Brazil (Broler S.A.) and Guatemala
(Horray Industries), who extended payment terms and were very responsive to delivery
deadlines.
The Company has been operated based on John Johnsons idea to give retailers another
option in their purchasing of textiles for the home. Mr. Johnson decided that he would do
the things that big companies cannot do, such as provide stellar service, listen to the
customers and ultimately find a niche that works. The niche that was eventually
established was the production of woven terry loop and velour products. The Company
started with a few products that it bought from manufacturers in South America and sold
to retailers in the United States. Over the years, the product line grew to meet the
demands of customers. Below is a list of products sold by The Company today.
Towels
Bath sheets
Bath towels
Embroidered bath, hand and wash
Bath, hand and wash
Tub Mats
Pima loop
Ringspun loop
Fingertips
Hand towels
Washcloths
Golf towels
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Beach towels
Printed fiber reactive
Yarn dyed stripes
Solid velour
Double jacquards
Single jacquards
Licensed fiber reactive corona
Embroidered bath sheets
Robes
Shawl collar terry velour
Kimono style terry velour
Shawl collar waffle
Kids velour cover-ups
Shower Wraps
Ladies shower wrap sets
Ladies shower wraps
Mens shower wraps
Robe sales volume primarily occurs in the fourth quarter. Shower wraps peak during back
to school and the fourth quarter, when they are purchased as gift items for under $20.
Towels sell steadily throughout the year, except beach towels, which sell from January to
August, with the largest shipping months running from March to July.
The service that John Johnson Sales provides to the retailers is from stocking products and
filling each retailers specified needs, either daily, weekly, or monthly depending on the
retailers reorder schedule. This is accomplished by speaking with customers early in the
buying season to learn about those products that the customer anticipates needing. This
could relate to a particular product, color or size. John Johnson Sales attempts to meet
these customers needs by ordering an adequate supply necessary to fulfill the anticipated
orders. The downside to providing this specialized service is that when a retailer decides
to cancel a color, or terminate a program, The Company continues to own the inventory
and often must then liquidate the inventory at a reduced price. In addition, if there is a
custom label on the product, The Company has to cover the cost of removing or changing
the label and repackaging the goods for a new customer. This can cause the profitability
of these items to vary considerably. This is discussed further later in this report.
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Over the years, The Company has been able to identify inventory items that fit into the
product lines of the various retailers that it does business with at a reasonable price. The
Companys target market includes the following:
Specialty Stores
Bed Bath & Beyond
Linens n Things
Large Discount Stores
TJ Maxx
Marshalls
Home Goods
Ross
Mid-Tier Stores
Boscovs
Shopko
Pamida
Steinmart
Small Discount Stores
Conway
Century
Value City
Catalog/Supermarkets
LTD
Aldis
Beach Stores
Wings
Surf Style
Marco Destin
Retailers in the current business environment are continuously looking for ways to increase
their profit margin. One way to do this is to go directly to the manufacturers, bypassing the
middleman, which is essentially what John Johnson Sales is. Technological
advancements, such as the internet, and the ability to travel to any part of the world has
opened the eyes of the retailer to buy direct. A good example of this trend can be seen
at the New York Textiles show, which is held twice a year, where countries are actually
setting up pavilions that demonstrate all of the different products their countries can
produce. The Company also faces increased competition from direct competitors. Some
- 10 -
of these companies have design staffs, and the ability to sell a greater variety of products,
making them more valuable to the retailer.
In the last three years, The Companys largest customers were as follows:
TABLE 1
LARGEST CUSTOMERS
2003 2004 2005
Customer $ % $ % $ %
Bed Bath & Beyond $ 330,179 3.72% $ 1,628,375 14.06% $ 3,227,199 29.02%
Burlington Coat Factory 244,819 2.76% - 0.00% - 0.00%
Linens n Things 3,581,744 40.35% 4,275,435 36.92% 3,187,092 28.66%
Macy's Home Stores - 0.00% 352,004 3.04% 252,858 2.27%
Ron Jon Surf Shop 273,808 3.08% 243,615 2.10% 214,459 1.93%
Shopko Stores Inc. 295,162 3.32% 412,771 3.56% 313,724 2.82%
All Others 4,151,765 46.77% 4,667,455 40.31% 3,926,784 35.31%
TOTAL REVENUES $ 8,877,477 100.00% $ 11,579,655 100.00% $ 11,122,116 100.00%
The customer mix for these three years is shown graphically below.
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In 2005, Bed Bath & Beyond, and Linens n Things made up about 58 percent of The
Companys revenues. In 2004 and 2003, sales were 51 percent and 44 percent,
- 12 -
respectively. Prior to 2003, John Johnson Sales lost Bed Bath & Beyond as a customer
due to the action of a salesman for The Company. John Johnson worked hard to regain
this customer, and it is now The Companys largest account. John Johnson makes certain
that he stays personally involved with this customer, as their performance has a direct
impact on John Johnson Sales.
The Company competes with companies such as Baltic Industries, Thomas OBrien
Revere, Springs Industries, Inc. and Cobra Trading Corporation. In some cases, John
Johnson Sales actually competes with the same mills that are supplying The Companys
goods. The barriers to entry into this market consists of being able to build up an initial
inventory of products to sell, developing supplier relationships and building customer
loyalty. However, this industry is extremely price competitive.
All of The Companys products are sold on a direct basis, either from internal sales
personnel or outside sales staff, consisting of seven to 10 manufacturers representatives
across the United States. John Johnson Sales has a website, produces catalogs, attends
trade shows, and works with the Advertising Specialty Institute (ASI) and the Promotional
Products Association International (PPAI) on mailings, as well as creating links to its
website.
Like most businesses, The Company is susceptible to certain economic factors, such as
consumer confidence. However, more direct factors include the success of the world
cotton crop, currency valuations, energy costs, trade agreements and the changing global
marketplace. The Chinese manufacturing sector has also contributed to the challenges
that confront John Johnson Sales, as well as all other manufacturers in this industry.
The Company purchases from various parts of the world, therefore strong banking
relationships are crucial in order to get open letters of credit with suppliers. Currency
valuations have caused John Johnson Sales to stop purchasing from some of its suppliers,
particularly in South and Central America, while forcing The Company to purchase from
new markets, such as India and Pakistan.
- 13 -
These types of events cause price volatility, which has a direct impact on sales and profit
margins. Losing the Brazilian supplier, with whom The Company had worked with for
decades, caused severe damage as it imperiled the relationships with The Companys two
largest customers. These companies expect a level of quality they are not yet receiving
from the new suppliers, and while The Company works to train these suppliers in the
expectations of the U.S. marketplace, profit margins are down because The Company has
to contend with additional chargebacks, customer dissatisfaction, and delayed shipments.
Chargebacks are discussed further in the Industry section of this report.
The relationship with suppliers is one of the many responsibilities of John Johnson. One
of the most important relationships is with Broler, S.A. This relationship goes back almost
25 years, when Mr. Johnson literally knocked on the door of the assistant to the assistant
at Broler, Aldo Tannenbaum. The relationship between Messrs. Johnson and Tannenbaum
has become one of good friends. Visits to each other result in staying at each others
houses.
Aldo Tannenbaum has become one of the most important contacts to The Company. John
Johnson Sales has become one of the largest customers of Broler, S.A. Early on, Mr.
Tannenbaum arranged for payment terms of up to six months for John Johnson Sales to
pay for goods. Mr. Tannenbaum has also been instrumental to The Company as the
person who sources merchandise from all over Brazil, in addition to other places in the
world, such as India. This relationship could not easily be transferred to a buyer, if at all.
The Company currently has three locations:
1234 NW 98th Street, Macon, FL 44444: This location is the main office, embroidery
department, and houses the main warehouse. It consists of approximately 20,000 square
feet.
1234 NW 98th Street, Macon, FL 44444: This location is a warehouse. The Company
houses its inventory and processes orders for Bed Bath & Beyond and Linens n Things at
this location. It is also approximately 20,000 square feet.
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235 Fourteenth Street, New York, New York 10000: This location is a showroom. It is
approximately 1,300 square feet.
The Company currently has 17 employees; the management team consists of the following:
John Johnson - Chief Executive Officer and President
Perry Smith - Vice President
Elaine Adams - Controller
JOHN JOHNSON
John Johnson is the founder and namesake of John Johnson Sales. Over the years, Mr.
Johnson has done everything from unload trucks to take out the garbage. He does 100
percent of the purchasing of inventory for resale, and has sales responsibilities for the
following customers:
Linens n Things
Bed Bath & Beyond (team effort with Perry Smith)
TJ Maxx
Marshalls
Homegoods
Ross Stores
Conway
Century
Mr. Johnson makes all major decisions about the strategy of The Company and has been
the driving force behind The Company. As he says, my name is on the door.
PERRY SMITH
Mr. Smith started as an independent sales representative for The Company in 1994. In
December 1995, he became an employee of The Company and continued in sales. Mr.
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Smith soon became Vice President of Sales. In this capacity, he manages the day-to-day
operations of the sales force and travels extensively. Mr. Smith also oversees the
production of catalogs, manages website development, and creates or manages other
promotional or marketing programs.
ELAINE ADAMS
Ms. Adams joined The Company in October 2004 as a financial analyst and was appointed
the Controller in June 2005. As Controller, Ms. Adams is responsible for the accounting
department, the order entry department, as well as maintenance, security and upgrading
of the computer system.
The remaining personnel are non-union and consist of three warehouse employees, two
embroidery machine operators with the balance being clerical and sales staff.
Andrew Johnson was originally hired to provide him with health insurance. He eventually
began taking a few pictures that were used in The Companys catalogs, and soon was
responsible for all of the pictures in the catalog.
As part of the management interview process, we asked management what other issues
they were facing as of the valuation date. Mr. Johnson believes that as a small company,
John Johnson Sales cannot take advantage of the same technologies as its large
competitors. The Companys accounting system is old and difficult to use, while the
warehousing function is still a manual process.
Many of The Companys larger competitors have full-time designers, allowing them to
respond to very specific customer needs. The Company does not have a designer and
must rely on the designs created by the supplier. In the past, this was not an issue, since
both Broler and Horray Industries were so responsive. However, the new suppliers in Asia
are unable to adapt as quickly.
- 16 -
Management indicated that the slowing retail environment, privatization of Burlington Coat
Factory and Linens n Things, and the declining credit rating of other large customers has
also had an impact on The Companys performance. The Company uses a factoring
company to collect is receivables and BOSCOVS, Six Flags, Smart Bargains and
Overstock.com are four customers whose declining credit ratings have precipitated the
need for surcharge payments on The Companys accounts receivable insurance.
Management anticipates credit problems with some additional customers.
Many of The Companys employees are paid at, or around, the minimum wage. While in
early 2005, two proposals were made to increase the Federal minimum wage, in 2004,
Florida voters decided Floridas minimum wage would increase annually to account for
increases in the cost of living. This will continually increase payroll and will have long-term
implications for The Company.
According to company documents, John Johnson owns 100 percent of the outstanding
stock of The Company as of the valuation date.
The Company believes that its reputation in the industry is that of a supplier who delivers
on time. The Companys service relies on its ability to work with suppliers to meet
consistent quality standards over time (i.e. always matching the color so that bath, hand
and wash sets all look standard on the retailers selling floor even if they were produced six
months apart) and to deliver in a timely manner. The Company assumes the risk of the
import for the retailers. This saves a considerable amount of time, money and worry for
customers. The greatest challenge for The Company is to find a working partner in an
emerging market such as China that will keep The Company competitive over the long-
term.
The suppliers in South and Central America that were relied on for more than 20 years are
suffering as lower-priced goods come from Southeast Asia. The Company expects a
downturn in sales as more customers purchase directly from overseas manufacturers, at
least in the short and medium term. Unless, and until, retailers decide to spin off the risk
again, the market will continue to shrink. The Company is seeking to adapt its business
- 17 -
This section has been paraphrased from Form 10-Q, for the third quarter ended November
5
26, 2005, filed with the Securities and Exchange Commission.
to the new reality by focusing attention on high-quality goods with a larger markup. But as
volume decreases, historical growth patterns may not be sustainable in the future.
MAJOR CUSTOMERS
In 2005, The Company signed vendor agreements with both Bed Bath & Beyond (BBB) and
Linens n Things (LNT). In order to continue doing business with LNT, The Company
agreed to two different discounts, in addition to paying all of the shipping costs to the
various stores. The first discount is a Damage Expense Offset and is equal to 1 percent
of gross receipts. The second discount is for Markdowns and Advertising Expenses, and
is equal to 3 percent of the cost of the merchandise purchased by LNT. For BBB, the
discounts are referred to as rebate agreements and are more straightforward. The rebate
agreement is tiered as follows:
$0 - $4M 2%
$4M - $6M 3%
$6M - $10M 4%
In addition to its discounts, LNT has payment terms of net 60 days and net 90 days, along
with a 10 percent discount for new stores. In reviewing LNTs chargebacks in 2005, it
appears that in addition to the stated discounts, The Company also receives chargebacks
from quality control audits. These audits reveal such things as errors in electronic data
submission, incorrect quantities, colors or styles shipped, incorrect purchase order
numbers, etc. These errors result in penalties that are charged back to The Company, and
are non-negotiable.
Bed Bath & Beyond: Bed Bath & Beyond, Inc. and its subsidiaries operate as a national
5
chain of retail stores in the United States. It operates stores under the Bed Bath & Beyond
- 18 -
(BBB), Christmas Tree Shops (CTS), and Harmon trade names. The company sells an
assortment of merchandise, primarily domestic merchandise, such as bed linens and
related items, bath items, kitchen textiles, and home furnishings, including kitchen and
tabletop items, fine tabletop, basic housewares, and general home furnishings, as well as
food, giftware, and health and beauty care items.
Operating in the highly competitive retail industry, BBB, along with other retail companies,
is influenced by a number of factors including consumer preferences and spending habits,
general economic conditions, unusual weather patterns, competition from existing and
potential competitors, and the ability to find suitable locations at acceptable occupancy
costs to support its expansion program.
For the three and nine months ended November 26, 2005, the companys consolidated net
sales increased by 11.0 percent and 12.1 percent, respectively, as compared to the
corresponding periods last year. These increases in net sales were primarily attributable
to the continuing BBB store expansion program and an increase in comparable store sales.
Comparable store sales for the fiscal three and nine months of 2005 increased by
approximately 3.1 percent and 4.0 percent, respectively, as compared with an increase of
approximately 3.1 percent and 4.2 percent for the comparable periods last year. The
increases in comparable store sales reflected a number of factors, including but not limited
to, the continued consumer acceptance of the companys merchandise offerings and a
strong focus on customer service with an emphasis on responding to customer feedback.
For the three and nine months ended November 26, 2005, the companys consolidated net
earnings increased by 10.4 percent and 15.7 percent, respectively, as compared to the
corresponding periods last year. These increases were primarily a result of relative
increases in gross profit as a percentage of net sales.
The company is engaged in an ongoing expansion program involving the opening of new
stores in both new and existing markets and the expansion or relocation of existing stores.
As a result of this program, the company operated 726 BBB stores, 29 CTS stores and 38
Harmon stores at the end of the fiscal third quarter of 2005, compared with 640 BBB stores,
26 CTS stores and 32 Harmon stores at the end of the corresponding quarter last year.
- 19 -
This section was paraphrased from the Form 10-Q for the period ended October 1, 2005 filed
6
with the Securities and Exchange Commission.
Linens n Things, About Us, <http://www.lnt.com/comp/index.jsp> (accessed December 18,
7
2006).
At November 26, 2005, company-wide total store square footage was approximately 25.0
million square feet.
The company opened 40 BBB stores during the third quarter of fiscal 2005 which brought
the total to 66 BBB stores opened in the first three quarters of fiscal 2005. The company
expects the number of new BBB stores for all of fiscal 2005 to be approximately 83,
including the 66 stores opened in the first three quarters of fiscal 2005. Including the one
additional Harmon store opened in the fiscal fourth quarter, the company expects the
number of new CTS and Harmon stores for all of fiscal 2005 to be approximately 3 and 4,
respectively. For fiscal 2005, the company believes that its current operating cash flow,
working capital and cash and cash equivalents on hand should be sufficient to meet its
obligations in the ordinary course of business, including capital expenditures and new store
openings.
Linens n Things: Linens n Things, Inc. is one of the leading, national large-format
6
retailers of home textiles, housewares and decorative home accessories. They operate
over 500 stores in 47 states and six Canadian provinces. Its business strategy is to offer
a broad selection of high quality, brand name home furnishings merchandise at exceptional
everyday values, provide superior guest service, and maintain low operating costs.
7
Net sales decreased 0.7 percent to $1,773.5 million for the 39 weeks ended October 1,
2005, down from $1,785.7 million for the same period last year, primarily as a result of
weakness in customer traffic. During the 39 weeks ended October 1, 2005, LNT opened
39 stores and closed four stores, compared with opening 41 stores and closing two stores
during the same period last year.
Gross profit for the 39 weeks ended October 1, 2005 was $731.7 million, or 41.3 percent
of net sales, compared with $723.0 million, or 40.5 percent of net sales, for the same period
last year. During that period, gross profit was impacted by improved markup through lower
- 20 -
Christopher Robertson, Linens n Things, The Value Line Investment Survey (November
8
11, 2005): 1747.
merchandise acquisition costs largely offset by an increase in markdowns associated with
the acceleration of LNTs transition to newer assortments.
Selling, general and administrative expenses were up, as was interest expense. As a
result, net loss for the 39 weeks ended October 1, 2005 was $9.0 million compared with
net income of $16.2 million for the same period last year.
LNTs financing requirements are primarily for new store expenditures, new store inventory
purchases and working capital. These requirements are expected to be funded through
a combination of internally generated cash flows from operations, credit extended by
suppliers and short-term borrowings.
LNT plans to address these shortcomings by shifting its focus from textiles to housewares
and home entertainment. The company was also expecting to price aggressively in order
to drive sales during the 2005 holiday season. Although reduced prices may increase
patronage, it should also pinch fourth-quarter profit margins.
8
None of this is welcoming news for John Johnson Sales. In the short term, price reductions
by LNT would result in more competitive pricing from all LNT suppliers, including John
Johnson Sales. The long-term repercussions are also not good if LNT shifts its focus away
from textiles. For John Johnson Sales, LNT is a very risky customer. Adding to that risk
is also the fact that LNT was taken private by an investment group that is promoting many
of the anticipated changes. It is unclear at the valuation date exactly what the impact will
be on John Johnson Sales.
- 21 -
IMF Expects Global Economy Growth of 4.3 Percent (September 21, 2005)
9
<http://worldeconomies.co.uk/index.php/2005/09/21/imf_expects_global_economy_growth
_of_4_3>.
ECONOMY/INDUSTRY INFORMATION
Generally, business performance varies in relationship to the economy. Just as a strong
economy can improve overall business performance and value, a declining economy can
have the opposite effect. Businesses can be affected by global, national, and local events.
Changes in regulatory environments, political climate, and market and competitive forces
can also have a significant impact on business. For these reasons, it is important to
analyze and understand the prevailing economic environment when valuing a closely-held
business. Since the appraisal process is a prophecy of the future, it is imperative that the
appraiser review the economic outlook as it would impact the appraisal subject.
GLOBAL ECONOMY
The International Monetary Fund (IMF) in its semi-annual World Economic Outlook, expects
global economic growth of 4.3 percent, which is above the 10-year average of 3.9 percent.
9
The IMF also states that global headline inflation has picked up slightly in response to
higher oil prices, but remains at moderate levels. Among the major industrial countries, core
inflation appears generally contained.
Long-term interest rates continue to be unusually low around the world and global equity
markets have remained durable, supported by strong corporate profits and increasingly
solid balance sheets. This is further supported by expected increases in GDP for nearly
all industrialized nations. Credit spreads remain moderate despite some rise in high yield
spreads. Emerging market financing conditions are very favorable, in part reflecting
- 22 -
Economic Prospects and Policy Issues, International Monetary Fund, World Economic
10
Outlook Chapter One (September 2005): 4-5.<http://www.imf.org/external/pbs/ft/weo/2005/
02/pdf/chapter1.pdf> (accessed February 9, 2007).
U.S., Council of Economic Advisors, The Annual Report of the Council of Economic Advisors,
11
Transmitted to Congress, February 2005 (Washington, D.C.: United States Government
Printing Office, 2005): 17-18.
U.S. Department of Commerce, Bureau of Economic Analysis News Release (January 27,
12
2006).
improved economic fundamentals and the increased presence of long-term investors, but
also the continued search for yield.
10
NATIONAL ECONOMY
The U.S. economy began the millennium with an array of negative events. In 2000, the
economy was moving towards a recession due to the burst of the high-tech bubble of the
1990s, combined with the effects of ethical issues like corporate fraud, a decline in value
of the equity markets, a reduction in capital spending, and the terrorist attacks of
September 11, which increased geopolitical risks. In the following two years, the U.S.
economy remained soft, but began recovering by posting moderate economic growth due
to factors, including monetary and fiscal policies implemented by the government. Real
gross domestic product (GDP) expanded during the four quarters of 2004 by 3.7 percent,
and by 4.4 percent for the year as a whole in comparison with 2003. This expansion was
supported by gains in consumer spending, business fixed investment, and government
spending.
11
According to advanced estimates released by the Department of Commerces Bureau of
Economic Analysis, Real Gross Domestic Product (GDP), the output of goods and
services produced by labor and property located in the United States, increased at an
annualized rate of 1.1 percent during the fourth quarter of 2005. This is the 17
th
consecutive quarterly rise in GDP subsequent to the 2001 recession. However, the fourth
quarter represented the smallest increase in three years. Based on these preliminary
figures, real GDP grew approximately 3.5 percent during 2005.
12
- 23 -
Mercer Capital, National Economic Review, Fourth Quarter 2005.
13
Ibid.
14
Ibid.
15
The growth in real GDP in the fourth quarter reflected increases in private inventory
investment, personal consumption expenditures (PCE), equipment and software, exports,
and residential fixed investment. The deceleration in real GDP growth in the fourth quarter
primarily reflected decelerations of PCE, equipment and software, and residential fixed
investment. Other negative factors included a downturn in federal government spending
and an acceleration of imports. These unfavorable changes were partly offset by an
increase in private inventory investment.
13
GDP estimates for 2006 are currently in the range of 3.1 to 3.5 percent. While these are
considered respectable growth rates, they would represent declines from the average of
the past two and a half years. Growth in 2006 is expected to be led by strong business
spending and is expected to be at least partially offset by a weaker housing market in 2006.
A weak housing market can hurt the overall economy in several ways. Declining home
values would potentially dampen home-equity financed consumer spending, and reduced
construction activity would lead to reduced spending on housing-related products, as well
as construction job loss. Pessimism on the consumer front is expected to also be driven
by rising oil prices, which could further dampen consumer spending in 2006.
14
At its December meeting, the Federal Reserve (Fed) raised the Federal Funds rate and
the discount rate by 25 basis points to 4.25 and 5.25 percent, respectively, after similar
increases of 25 basis points at its November meeting. Following a deliberate period of rate
increases to achieve a more neutral policy position, the Fed has continued to increase rates
based on inflationary pressures arising from high energy prices and continuing economic
growth.
15
According to the Bureau of Labor Statistics, the Consumer Price Index (CPI) declined 0.4
percent in December. For the 12 month period ended in December 2005, inflation rose 3.4
- 24 -
Ibid.
16
Ibid.
17
Ibid.
18
percent compared to a 3.3 percent rise in 2004 and a 1.9 percent rise in 2003. The 3.4
percent increase in 2005 represents the largest increase in consumer prices in five years.
16
Personal consumption spending represents approximately two-thirds of total economic
activity and is a primary component of overall economic growth. Real personal
consumption spending increased 1.1 percent in the fourth quarter of 2005, compared to a
4.1 percent increase in the third quarter, and a 3.3 percent increase in the second quarter
(all figures recently revised). According to the Bureau of Economic Analysis, durable goods
purchases were down 17.5 percent in the fourth quarter after increases of 7.9 and 9.3
percent in the second and third quarters, respectively. The large decrease in durable
goods expenditures in the fourth quarter can be attributed to the large decline in motor
vehicle and parts sales.
17
The Dow closed the fourth quarter at 10717.50, up 1.4 percent for the quarter but down 0.6
percent for the year. The S&P 500 index rose 1.6 percent during the quarter to close at
1248.29 and was up 3.0 percent for the year. The NASDAQ Composite Index increased
2.5 percent during the fourth quarter to close at 2205.32, and rose 1.4 percent for the year.
The broad market Wilshire 5000 index closed at 12517.70, and reflected a gain of 4.6
percent for 2005. At the end of 2003, stocks finished with their first year-to-year advance
since 1999. 2004 and 2005 represented a continuation (albeit more modest) of this trend.
18
Home building is generally representative of overall economic activity because new home
construction stimulates a broad range of industrial, commercial, and consumer spending
and investment. According to the U.S. Commerce Departments Bureau of the Census, an
estimated 2.065 million privately owned housing units were started in 2005, 5.6 percent
higher than in 2004, marking the highest construction volume since 1978. The overall
housing market has remained relatively strong, despite rising interest rates through 2004
and 2005. However, signs of a dampening housing market are beginning to surface. While
the housing market has slowed somewhat from its record-breaking pace, many home
- 25 -
Ibid.
19
Ibid.
20
builders predict that rising interest rates will not completely quash a generally healthy
housing market for the foreseeable future. Some weakening of the housing market is
expected in 2006, however, Gulf Coast reconstruction efforts will continue to provide
housing demand.
19
According to the Labor Departments Bureau of Labor Statistics (BLS), the unemployment
rate was at 4.9 percent in December, slightly below third quarter levels and estimates. The
unemployment rate has remained in the 4.9 to 5.1 percent range since March. The
downward trend in unemployment is expected to slow as the unemployment rate is
expected to hold near 4.9 percent.
20
Overall, private economists suggest lower, but still solid, growth for 2006 and 2007. First
quarter 2006 growth is expected to be more favorable than the remainder of 2006 due to
hurricane reconstruction efforts. Inflation was relatively subdued in the fourth quarter given
the recent surge in fuel prices, and inflation is not expected to be a major problem in 2006.
Stock market trends are not expected to dramatically improve overall; however, modest
gains in 2006 are expected. The Fed is expected to discontinue raising the target for the
Federal Funds rate sometime around March 2006. The goal is for interest rates to be at
a low enough level to continue to spur expansion, while keeping inflation fears low.
INDUSTRY
On the supply-side of the textile industry, there are manufacturers and importers, both
wanting to supply the retailers. In an effort to maximize profits and increase market share,
manufacturers want higher tariffs, import limits and generally more restrictions on importing,
while importers want exactly the opposite. It is no secret that manufacturing in the U.S. has
been on the decline for some time now, and textile manufacturers are no exception as
- 26 -
Don Hogsett Tough Year for Tougher Trade, Home Textiles Today (January 30, 2006)
21
<http://www.hometextiletoday.com/article/CA6303896.html?stt=001&text=tough+year+for
+tougher+trade (accessed November 13, 2006).
Jennifer Marks, Tough Year, Tough Choices, Home Textiles Today (January 9, 2006)
22
<http://www.hometextilestoday.com/article/CA6298522.htm?stt=001&text=tough+year+to
ugh+choices (accessed November 13, 2006).
James A. Morrissey, Trade Liberalization Talks Get New Life, Textile World, Washington
23
Outlook, November/December 2005 <http://www.textileworld.com/news.htm?CD=3255&ID=
10391 (accessed November 13, 2006):1.
Ibid: 2.
24
Office of the U.S. Trade Representative, Executive Office of the President, United States,
25
Peru Conclude Free-Trade Agreement (December 7, 2005) <http://usinfo.state.gov/wh/
Archive/2005/Dec/08-625986.html (accessed November 13, 2006): 3.
evidenced by more plant closings and job losses in 2005. Manufacturers simply cannot
21
compete with low cost imports. However, some of the more savvy manufacturers are
simultaneously moving from manufacturing to importing in an effort to stay in business.
Companies like Spring Maid and Dan River have done this successfully to varying
degrees and have now become direct competitors to John Johnson Sales.
22
In December 2005, the trade ministers from the 148-member World Trade Organization
(WTO) met in Hong Kong for the Doha Round of trade liberalization talks. Textile and
apparel manufacturers, importers, farmers and their governments throughout the world
were all staking out their positions. In a recent speech, President George W. Bush said,
The United States is ready to eliminate tariffs, subsidies and other barriers to free flow of
goods and services as other nations do the same. While the importers liked the part about
eliminating tariffs, subsidies and other barriers, the manufacturers focused on the part
about other nations doing the same.
23
While China represents the biggest threat to U.S. manufacturers, it has no real bearing
24
on importers who can just as easily go to other Asian countries for its products. The U.S.
currently has completed free trade agreements with 13 countries and is in negotiations with
10 others. This will continue to give importers more supply choices as the world slowly
becomes a more unified and free-flowing marketplace.
25
- 27 -
Leticia Leizens, Annas Linens Opens Milestone Store In Las Vegas, Home Furnishing
26
Network (August 8, 2005) <http://www.highbeam.com/doc/1G1-135006046.html (accessed
February 12, 2007).
Tough Year, Tough Choices.
27
Scott Krugman and Kathleen Grannis, NRF Forecasts 4.7% Growth for 2006 Retail Sales,
28
National Retail Federation, News Release (January 16, 2006) <http://www.nrf/content/
default.asp?folder=press/release2006&file=sales06.htm (accessed November 13, 2006): 1.
Ibid.
29
New Year Wont Get Any Easier, Home Textiles Today (January 2, 2006)
30
<http: //www.homet extilestoday.com/article/CA6297036.html?stt=001&text=new+year
(accessed November 14, 2006).
The retailers whom the importers are supplying had a tough year in 2005. So much so that
Annas Linens, which opened its 200 store on July 28, 2005, decided to withdraw its
th 26
initial public offering planned for early 2006. At Federated, home textile sales dropped at
Bloomingdales, Macys Home unit and May Company. In the specialty sector, MarMaxx,
Pier 1 and Linens n Things all hit the skids in 2005. Even mega-retailers like Target and
Wal-Mart reported difficulties in the home textile category. So while overall retail sales
27
increased by 6.1 percent in 2005, the home textiles sector apparently did not contribute
much to this growth.
28
The National Retail Federation (NRF) predicts that retail industry sales, which exclude
automobiles, gas stations and restaurants, will increase 4.7 percent in 2006. While the
NRF is more cautious about the 2006 outlook, several categories of specialty retailing are
expected to achieve solid sales growth. Unfortunately, home textiles is not one of them.
29
Home Textiles Today, a business and fashion newspaper of the home textiles industry,
conducted an informal survey among supplier executives and found optimism slim and
mixed. More prevalent were their concerns about the impact on the industry from retailer
consolidations, supplier shakeouts, raw materials price increases, high interest rates, and
reduced spending by consumers.
30
As consolidating brick-and-mortar stores spur ever-more cutthroat competition among
suppliers for shrinking shelf space, online retailers are expanding their offerings in home
textiles. According to Forrester Research, Inc., internet retail sales for 2005 are expected
to be $1.4 billion for linens, and are expected to grow to $1.8 billion by 2010. Amazon.com
- 28 -
Cecile B. Corral, Home Textiles Finding Shelf Space Online, Home Textiles Today
31
(November 28, 2005) <http://www.hometextilestoday.com/article/CA6287176.html?stt=
001&text=finding+shelf+space (acessed November 14, 2006).
Attention Shoppers: Great Deals in Retail Mergers, Knowledge@Warton (March 30, 2005)
32
<http://knowledge.wharton.upenn.edu (accessed November 14, 2006: 7.
N a t h a n N o y , W a l M a r t s O t h e r D i r t y L i t t l e S e c r e t ,
33
<http://www.noyforcongress.com/files/chargebacks.doc> (accessed November 15, 2006).
launched its home and garden division in early 2004. Its bedding and bath sections came
soon after and since then have really ramped up, according to Chris Nielsen, Director of
Home and Garden for Amazon.com. U.K.-based Ebid auction site added room-specific
things for the bedroom and bathroom categories after numerous requests to do so by both
customers and retailers. Overall, with the expected slowdown in the economy and
31
consumer spending, retailers are expecting to feel the pinch, especially those with large
overhead.
It has long been the practice of retailers to squeeze as much as they can from their
suppliers. And the bigger the retailer, the more they squeeze. According to Wharton
School of Business marketing professor, Z. John Zhang, People have learned from Wal-
Mart that size does matter. Bigger is better simply because you can squeeze the suppliers
and take advantage of the synergies. The first thing that comes to mind when talking
about squeezing a supplier is price concessions. However, that is just the tip of the
32
iceberg. Things like chargebacks, post-audit deductions, vendor compliance penalties,
reverse auctions and retailer expense offsets for advertising, systems or changes in
merchandising strategy are all tactics used to varying degrees by retailers to maintain or
increase their profitability at the expense of the supplier. These practices are not a new
phenomenon, nor are they isolated. Rather, they are so common that most vendors,
although not happy with these practices, consider them to be the price of doing business.
33
The entire subject of auctions and chargebacks remains the most contentious issue
between suppliers and their customers, a fact discussed in Home Furnishings News (HFN)
original surveys on these subjects in 2001 and 2002. Little has changed since then, on
either side of the equation. Arthur Stark, chief merchandising officer and senior vice
president of Bed Bath & Beyond, said reverse auctions are a fact of life in a competitive
market. People are fighting for the same piece of business, Stark said. Frankly, reverse
- 29 -
Retailers: It All Comes Down to Survival of The Fittest, Home Furnishing News (November
34
17, 2003) <http://www.highbeam.com/doc/1G1-110370041.html (accessed November 13,
2006).
Ibid.
35
Barbara Thau, Saks Move Shows SEC Scrutinizing Chargeback Abuse, Home Furnishing
36
News (May 16, 2005) <http://www.highbeam.com/doc/1G1-132539747.html (accessed
November 13, 2006).
auctions have just taken something that has existed since the time of Abraham and
automated it.
34
According to HFNs survey, the top five worst chargeback offenders in 2005 were:
35
1. Federated Department Stores
2. Bed Bath & Beyond
3. Linens n Things
4. Target
5. K-Mart
Companies like Saks Fifth Avenue (Saks) and Federated have been sued for abusive
chargeback practices. In 2005, Saks was under investigation by the Securities and
Exchange Commission (SEC) for improper markdown allowances of about $20 million
between 1993 and 2003. I would be extremely surprised if Saks is the only one [with
improper chargeback practices.], says Maggie Gilliam, President of Gilliam and Company,
a business advertising firm. Three sales executives were fired and the CEO fined as a
result of this.
36
The following excerpt in Home Textiles Today discussed how chargebacks impacted
Linens n Things bottom line.
Underlining the crucial importance of chargebacks and allowances to a
retailers bottom line - as they become a profit center in themselves - Linens
n Things took in $4.1 million in the form of vendor allowances during the
quarter, [second quarter 2004] but made only $879,000 from the act of selling
merchandise. Putting it another way - more than 82 percent of the retailers
- 30 -
Accounting Change Shreds LNT Profits, Home Textiles Today (July 21, 2004)
37
<http://www.hometextilestoday.com/article/CA438029.html (accessed February 9, 2007).
real second quarter profit came from the substantial sums of cash it siphons
out of its suppliers.
37
The implications of these practices for John Johnson Sales is obviously not good. The
continued threat of retailers chargebacks is an increased risk that must be considered in
the valuation of The Company.
- 31 -
FINANCIAL ANALYSIS
A financial analysis of The Company was performed utilizing the historical balance sheets
and income statements that appear as Schedules 1 and 2 at the end of this report.
Stockholders equity of The Company has increased over the period analyzed from $1.089
million in 2000 to $1.326 million in 2005, a 22 percent rise. However, the most recent year
experienced a decrease of 2 percent.
The Companys current assets have increased by $2.2 million over the period, largely due
to accounts receivable and inventory. At the same time, current liabilities have risen each
year except for 2005, which showed a slight drop over 2004. This is largely attributable to
an increase in accounts payable and the addition of new debt in 2004.
The Companys cash position has gradually deteriorated. The current level of cash is not
sufficient for a company this size, although historically, The Company has been run with
little cash. A slowdown in collections of accounts receivable could cause a significant
problem for The Company. The largest asset on The Companys balance sheet is its
inventory. As of December 31, 2005, inventory was about $2.2 million, an increase of 10
percent from 2004.
In 2004, The Company took on about $657,000 debt in the form of a stockholder loan and
a bank line of credit. This money was used to fund The Companys 30 percent growth in
2004. In 2005, debt increased by another $375,000.
Overall, The Companys balance sheet shows mixed signals. Shareholders equity is
increasing, meaning that assets are growing faster than liabilities. However, the two largest
assets, accounts receivable and inventory, are at least partially funded by new debt instead
of cash reserves.
A financial analysis tool used to look at a companys financial picture is common size
financial statements. A common size balance sheet depicts each value as a percentage
- 32 -
of total assets. Common size statements are used to look at trends in a companys
financial position, as well as to compare the company with industry data. This is also a
useful tool to compare companies of different sizes.
In order to compare John Johnson Sales to industry data, we had to determine the
appropriate Standard Industrial Classification (SIC) Code for The Company. A description
of The Company and the services it provides was included in an earlier section of this
report. Based on this description, we determined that The Company is best described by
the following SIC code:
5023 Home Furnishings
Establishments primarily engaged in the wholesale distribution of home
furnishings and housewares, including antiques; china; glassware and
earthenware; lamps (including electric); curtains and draperies; linens and
towels; and carpets, linoleum, and all other types of hard and soft surface
floor coverings. Establishments primarily engaged in the wholesale
distribution of other electrical household goods are classified in Industry
5064, and those distributing precious metal flatware are classified in Industry
5094.
# Aluminum ware-wholesale
# Bedspreads-wholesale
# Blankets-wholesale
# Carpets-wholesale
# China-wholesale
# Crockery-wholesale
# Curtains-wholesale
# Draperies-wholesale
# Floor coverings-wholesale
# Glassware, household-wholesale
# Home furnishings-wholesale
# Kitchen tools and utensils, except precious metal flatware-wholesale
# Lamps: floor, boudoir, desk-wholesale
# Linens-wholesale
# Linoleum-wholesale
# Pillow cases-wholesale
# Rugs-wholesale
# Sheets, textile-wholesale
# Slipcovers, furniture-wholesale
# Table linens-wholesale
The corresponding North American Industry Classification System (NAICS) Code is as
follows:
- 33 -
423220
Corresponding
Index Entries
# Antique homefurnishing merchant wholesalers
# Antique houseware merchant wholesalers
# Bathroom accessories merchant wholesalers
# Blankets (except electric) merchant wholesalers
# Blinds and shades, window, merchant wholesalers
# Brooms and brushes, household-type, merchant wholesalers
# Carpet merchant wholesalers
# Chinaware, household-type, merchant wholesalers
# Cooking utensils, household-type merchant wholesalers
# Cups, plastic (except disposable), merchant wholesalers
# Curtains merchant wholesalers
# Dishes, household-type (except disposable plastics, paper) merchant
wholesalers
# Draperies merchant wholesalers
# Flatware (except electric) merchant wholesalers
# Kitchen utensils, household-type merchant wholesalers
# Lamps (i.e., lighting fixtures) merchant wholesalers
# Linens (e.g., bath, bed, table) merchant wholesalers
# Mirrors (except automotive) merchant wholesalers
# Napkins (except paper) merchant wholesalers
# Rugs merchant wholesalers
# Slipcovers merchant wholesalers
# Tableware (except disposable, plated, precious) merchant wholesalers
# Towels and washcloths merchant wholesalers
# Window shades and blinds merchant wholesalers
While John Johnson Sales falls into both of the SIC and NAICS codes above, there are a
broad range of other products included into these classification codes. Many, it not all, of
these other products can cause companies to have different capital structures and profit
margins. Proof of this can be seen when comparing profit margins from databases
maintained by Integra Information, Inc. and the Risk Management Association. The gross
profit margin in these two sources are almost 15 percentage points apart. This shows the
significance of the mix, resulting in a low degree of confidence in either database for this
assignment. As a result, any comparison of John Johnson Sales to such a diverse industry
group would not result in a meaningful analysis.
Table 2 presents the common size balance sheet for John Johnson Sales without an
industry comparison.
- 34 -
TABLE 2
COMMON SIZE BALANCE SHEET
AS OF DECEMBER 31,
2000 2001 2002 2003 2004 2005
Current Assets
Cash 3.66% 8.52% 7.61% 3.03% 0.82% 2.17%
Marketable Securities 0.00% 0.00% 12.47% 0.00% 0.00% 0.00%
Accounts Receivable 26.85% 31.94% 29.13% 44.86% 49.02% 38.17%
Inventories 61.42% 50.32% 41.55% 43.27% 44.23% 51.78%
Prepaid Expenses 2.94% 3.95% 5.00% 3.52% 1.60% 1.05%
Prepaid Taxes 0.00% 0.53% 0.00% 0.86% 0.00% 1.16%
Other Receivables 0.66% 1.01% 0.62% 0.16% 0.14% 0.15%
Related Party Receivable 0.99% 0.82% 0.64% 0.65% 0.63% 0.07%
Total Current Assets 96.53% 97.08% 97.01% 96.35% 96.43% 94.55%
Fixed Assets
Building & Improvements 2.96% 3.08% 2.24% 0.50% 0.36% 0.22%
Machinery & Equipment 8.09% 9.34% 7.51% 6.30% 4.57% 6.97%
Furniture & Fixtures 1.33% 1.38% 2.00% 2.09% 1.84% 1.95%
Vehicles 0.00% 0.00% 0.00% 0.00% 0.86% 0.92%
Gross Fixed Assets 12.38% 13.80% 11.75% 8.90% 7.63% 10.06%
Accumulated Depreciation 9.48% 11.44% 9.89% 5.86% 4.67% 5.82%
Net Fixed Assets 2.90% 2.37% 1.86% 3.03% 2.96% 4.24%
Other Assets
Security Deposits 0.57% 0.55% 1.13% 0.61% 0.61% 0.79%
Deferred Income Taxes 0.00% 0.00% 0.00% 0.00% 0.00% 0.41%
Total Other Assets 0.57% 0.55% 1.13% 0.61% 0.61% 1.20%
TOTAL ASSETS 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
- 35 -
TABLE 2
COMMON SIZE BALANCE SHEET
AS OF DECEMBER 31,
2000 2001 2002 2003 2004 2005
Current Liabilities
Accounts Payable 13.98% 30.92% 42.84% 48.94% 46.15% 33.90%
Long-Term Debt Current Portion 21.22% 0.00% 0.00% 0.00% 0.13% 0.14%
Credit Line Payable 0.00% 0.00% 0.00% 0.00% 11.67% 21.47%
Accrued Expenses 2.52% 1.47% 2.44% 6.12% 3.99% 7.50%
Income Taxes Payable 0.19% 0.00% 2.00% 0.00% 0.45% 0.00%
Pension Plan Payable 1.15% 3.47% 2.39% 2.10% 1.70% 0.00%
Current Portion of Capital Lease 0.49% 0.53% 0.15% 0.32% 0.24% 0.27%
Total Current Liabilities 39.55% 36.39% 49.82% 57.48% 64.33% 63.29%
Long-Term Liabilities
Long-Term Debt 0.00% 0.00% 0.00% 0.00% 0.48% 0.36%
Loans from Stockholders 0.00% 0.00% 0.00% 0.00% 3.23% 3.44%
Deferred Taxes 0.00% 0.00% 0.00% 0.45% 0.19% 0.00%
Long-Term Portion of Capital Lease 0.75% 0.26% 0.00% 1.04% 0.50% 0.26%
Total Long-Term Liabilities 0.75% 0.26% 0.00% 1.49% 4.39% 4.06%
Total Liabilities 40.30% 36.65% 49.82% 58.97% 68.72% 67.34%
Stockholders Equity
Common Stock 0.05% 0.06% 0.04% 0.03% 0.02% 0.02%
Paid - In Capital 1.45% 1.51% 1.10% 0.84% 0.60% 0.64%
Retained Earnings 58.19% 61.78% 49.04% 40.15% 30.66% 31.99%
Total Stockholders Equity 59.70% 63.35% 50.18% 41.03% 31.28% 32.66%
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Note: Figures may not add due to rounding.
An analysis of the common size balance sheet indicates that The Companys cash position
as a percentage of total assets has fluctuated. However, over the latest three years, cash
has been a smaller part of total assets than in previous years. The Companys current
assets as a percentage of total assets has remained in the 94 to 97 percent range over the
period and is largely made up of accounts receivable and inventory. The Companys long-
term assets are relatively insignificant.
On the liability side of the balance sheet, accounts payable, as a percentage of total assets
reached its highest level in 2003, but then dropped in the next two years to reach near
2001 levels. Total current liabilities jumped during the last two years because The
Company began using its credit line. The Company also took on some long-term debt, as
well as borrowing money from the shareholder.
- 36 -
Total stockholders equity has been erratic, but leveled off in the latest two years at its
lowest level as a percentage of total assets. This indicates that The Company is using
more debt financing than equity financing to fund its growth.
The next step in the analysis was to look at The Companys historic income statements for
2000 to 2005. The Companys revenues have grown significantly during this period, from
$5.932 million to $11.122 million, a compound annual growth rate of 11.04 percent. In the
most recent year, however, revenues dropped about 4 percent.
The Company experienced two main increases in revenue, first from 2000 and then from
2003. In 2004, The Companys two largest customers, Bed Bath & Beyond, and Linens n
Things, increased its purchases from $330,179 and $3,581,744, respectively, to $1,628,375
and $4,275,435, respectively. This almost $2 million increase made up almost the entire
increase in The Companys sales. In 2005, however, while Bed Bath & Beyond increased
from $1.6 million to $3.2 million, Linens n Things fell from $4.3 million to $3.2 million.
Despite the large increase in sales to Bed Bath & Beyond, The Companys overall sales
fell during this year.
The reported operating income has been erratic, going from a low of $53,631 in 2001 to a
high of $164,553 in 2004, and ending 2005 with a loss of $9,661. Net income has shown
a similar pattern with a $20,785 low in 2001, high of $89,662 in 2004, and ending 2005 with
a loss of $26,315.
The Companys common size income statement is presented in Table 3.
- 37 -
TABLE 3
COMMON SIZE INCOME STATEMENT
FOR THE YEARS ENDED DECEMBER 31,
2000 2001 2002 2003 2004 2005
TotaRl evenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Total Cost of Sales 76.26% 80.33% 76.61% 78.06% 84.68% 80.24%
Gross Profit 23.74% 19.67% 23.39% 21.94% 15.32% 19.76%
Total Operating Expenses 21.20% 18.95% 21.46% 20.27% 13.90% 19.85%
Operating Income (Loss) 2.54% 0.72% 1.93% 1.67% 1.42% -0.09%
Interest Expense 1.42% 0.31% 0.05% 0.03% 0.29% 0.38%
Total Other Income (Expenses) 0.00% 0.00% 0.07% -0.23% 0.00% 0.00%
Income (Loss) Before Taxes 1.12% 0.41% 1.94% 1.41% 1.13% -0.46%
Income Taxes 0.41% 0.13% 0.72% 0.49% 0.36% -0.23%
NET INCOME (LOSS) 0.72% 0.28% 1.22% 0.93% 0.77% -0.24%
Note: Figures may not add due to rounding.
On a common size basis, The Companys gross profit was maintained at about the normal
level that The Company wanted to achieve from 2000 through 2003. However, in 2004,
John Johnson Sales had an inventory error, causing the gross profit percentage to be
approximately 2.5 percent lower than it should have been. A correction to the accounting
records will cause the 2005 gross profit percentage to be overstated by about the same
amount. Correcting this error, results in the most recent two years gross profit being about
17.5 percent. The tightening of margins by its retail customers caused The Companys
gross profit percentage to fall.
Profitability fluctuated during this time period, indicating marginal profitability overall.
One of the major items impacting John Johnson Sales profitability is the chargebacks that
it must accept from its customers. These chargebacks are done for a variety of reasons,
including store discounts, quality issues, color issues, advertising, and customer
markdowns.
- 38 -
The retailer charges an arbitrary discount back to The Company for having to discount the
retail price. This is done so that the retailer can discount its merchandise without a loss in
its profits. In essence, the retailer makes a decision that will have a negative financial
impact on profitability, then forces its loss onto the suppliers in order to remain profitable.
Another problem is that the retailer provides The Company with what it wishes to sell but
does not guarantee that it will purchase the inventory. Frequently, the promotion is
discontinued.
A sampling of five products that were discontinued by BBB and LNT were analyzed to
understand the financial impact on John Johnson Sales gross margin. To move these
products, The Company discounts the prices as much as is necessary to make the sale,
even if it means selling the products for less than was paid. Our final analysis of the five
discontinued products is below:
DISCONTINUED PRODUCTS ANALYSIS
Product
Landed
Cost
Regular
Sales
Price
Gross
Profit
Reduced
Sales
Price
Gross
Profit /
(Loss)
Reduction in
Gross Profit
36x72 Khaki Bath Sheet (LNT) $ 3.00 $ 6.00 $ 3.00 $ 4.50 $ 1.50 -50%
Pima Natural Towel (BBB) 3.79 4.75 0.96 3.47 (0.32) -133%
Circles Bath Towel (LNT) 4.26 5.00 0.74 4.00 (0.26) -135%
Kimono robe (BBB) 9.28 13.50 4.22 10.50 1.22 -71%
Tile Hand Towel (LNT) 0.75 3.00 2.25 2.00 1.25 -44%
Average Reduction in Gross Profit -87%
This analysis reflects gross profits ranging from $0.74 to $4.22 when these products are
sold at regular prices. However, when the prices were reduced, gross margins fell to a
range from a high of $1.50 to a low of negative $0.32. This translates into a reduction of
gross margins ranging from 44 to 135 percent. The dollar amount of these particular
samples was relatively insignificant in relation to The Companys total revenues. A larger,
or more directed, sampling might have produced results that are more material. However,
in light of the fact that BBB and LNT make up almost 60 percent of The Companys
- 39 -
revenues and that both regularly discontinue products, this certainly has some impact on
profitability. At the very least, it increases the risk of doing business with these two
customers.
As discussed previously, there are many other types of chargebacks that retailers impose
on suppliers. For John Johnson Sales, these chargebacks have had an increasingly
negative impact. The total chargebacks to The Company have been as follows:
2001 2002 2003 2004 2005
Chargebacks $ 51,293 $ 16,772 $ 26,487 $ 69,920 $ 135,015
Percent Change
From Previous Year -67% 58% 163% 94%
While chargebacks were increasing dramatically, growth in The Companys revenues was
not at the same pace. The following shows The Companys revenues and the percent
change from year to year.
2001 2002 2003 2004 2005
Revenues (M) $ 7.44 $ 8.07 $ 8.87 $ 11.59 $ 11.15
Percent Change
From Previous Year 8% 10% 30% -4%
The tables above show two things; that revenues did not grow as much as chargebacks
and that despite lower revenues in 2005, chargebacks almost doubled in that year.
For a company whose pre-tax net income, as a percentage of revenue, ranges from 1.94
percent to negative 0.46 percent historically, the relationship between chargebacks and
revenue becomes increasingly important. The following table shows revenues,
chargebacks and chargebacks as a percentage of revenue.
2001 2002 2003 2004 2005
Revenues (M) $ 7.44 $ 8.07 $ 8.89 $ 11.59 $ 11.15
Chargebacks 51,293 16,772 26,487 69,920 135,015
Chargebacks as a
Percentage of Revenues 0.69% 0.21% 0.30% 0.60% 1.21%
- 40 -
At first, these percentages may seem insignificantly low. However, pre-tax net income as
a percentage of revenues went from 1.13 percent in 2004 to negative 0.46 percent in 2005.
The increase in chargebacks, therefore, accounted for 38 percent of the decrease in pre-
tax income in the most recent period. In other words, over one-third of the drop in pre-tax
net income was attributable solely to chargebacks. This helps quantify, at least partially,
the cost of doing business with specialty-retailers such as BBB and LNT, whose profitability
sometimes relies almost entirely on its chargebacks.
The next portion of the financial analysis is usually a business ratio analysis, which is used
to help the appraiser determine trends that have taken place in the business financial
performance. However, we believe that there are several adjustments that need to be
made before this analysis can be meaningful.
Therefore, the next step in our analysis is the normalization of the financial statements.
The process of normalization is intended to reflect The Companys financial statements on
an economic level; to reflect those items that a willing buyer would expect to see as a result
of normal operations. A review of the balance sheet indicates that certain accounts need
to be normalized for valuation purposes.
The Companys balance sheet has been adjusted to reflect the correction of the 2004
ending inventory and to remove a shareholder loan. The shareholder loan has been
considered to be an equity adjustment.
As a result of our analysis, the adjusted book value of the net assets of The Company,
excluding any intangible value, amounts to $1,496,312.
The next step in the valuation process is to normalize the income statement. Table 4
reflects this normalization.
- 41 -
TABLE 4
NORMALIZATION OF INCOME
2002 2003 2004 2005
Historic Net Income (Schedule 2) $ 98,550 $ 82,213 $ 89,662 $ (26,315)
Adjustments
Revenues 16,308 7,119 27,648
1
Inventory Adjustment - - 292,272 (292,272)
2
Suzy Manufacturing 46,741 42,715 70,555 34,723
3
Interest Expense - - 10,600 10,686
4
Officers' Compensation - Addback 148,400 215,700 86,400 158,400
5
Officers' Compensation - Reasonable (205,351) (211,703) (218,250) (225,000)
6
Professional Fees 81,115 - - 21,399
7
Moving 14,671 1,500 - -
8
Auto Expenses - Addback 23,433 28,045 18,611 35,042
9
Insurance - Automobiles 3,515 4,703 4,824 4,658
10
Insurance - Other 10,380 11,890 10,350 15,381
11
Credit Cards 56,007 72,755 62,496 51,036
12
Payments to Jessica & Andrew Johnson 44,194 25,474 15,941 21,339
13
Health & Company Life Insurance 6,754 7,907 9,478 10,351
14
Telephone 4,441 4,942 2,593 2,636
15
Miscellaneous 7,100 11,895 8,455 8,501
16
Loss on Sale of Assets - 24,264 - -
17
Historic Income Taxes 58,286 43,263 41,615 (25,140)
18
ADJUSTED PRETAX NET INCOME $ 398,236 $ 381,871 $ 512,721 $ (166,926)
Income Taxes 149,856 143,698 192,937 (53,952)
18
ADJUSTED HISTORIC NET INCOME $ 248,380 $ 238,173 $ 319,784 $ (112,975)
1. John Johnson received monies as part of a loan repayment, and deposited these
monies into his personal account. This adjustment is intended to reflect these
monies as company revenues.
2. In 2004, an outside inventory service was hired to take a physical inventory.
However, they missed some inventory that was written off in 2004. The amount of
the error was $292,272 and was corrected in early 2005. As a result of this error,
2004 net income was understated, and 2005 net income was overstated.
3. Suzy Manufacturing was set up to do embroidery work for The Company until May
2005 when it was merged into The Company. During conversations with Mr.
- 42 -
Johnson, he indicated that while the market rate was about $0.10 per piece for
embroidery, The Company was paying between $0.15 and $0.25 per piece. A
hypothetical willing buyer would not incur this additional expense over the market
rate. Therefore, this overage must be added back to bring this expense back to a
fair market rate.
We were provided with a report showing all payments to Suzy Manufacturing for the
period 2002 through 2005. We applied a market rate percentage to the amounts
based on the difference between what The Company was paying compared to what
the market was paying. This was calculated as follows:
Market Piece Price $ 0.10
What The Company Paid $ 0.20
(average of $0.15 and $0.25)
Market Rate Percentage 0.10 0.20 = 50%
This market rate percentage was then applied as follows:
2002 2003 2004 2005
Net Payments to Suzy Manufacturing $ 93,482 $ 85,429 $ 91,111 $ 69,446
Market Rate Percentage 50% 50% 50% 50%
Adjustment $ 46,741 $ 41,715 $ 45,555 $ 34,723
In 2004, there was an unidentified payment of $25,000 made by The Company to
Suzy Manufacturing. With no support for this payment, it has been added back in
its entirety. This brings the net adjustment in 2004 to $70,555.
4. This is the interest associated with the non-operating shareholder loan. It is added
back as a hypothetical buyer would not incur this expense.
5. Officers compensation has been added back in its entirety as a reasonable level of
compensation has been determined in number 6 below.
- 43 -
6. In order to estimate the amount of reasonable compensation, several sources were
reviewed. Executive Compensation Assessor, a database available from Economic
Research Institute (ERI) was the first source. We searched this survey for
companies classified under SIC Code 5023 in Macon, Florida, with sales between
$5,000,000 and $20,000,000. We did not find any usable data in this database.
We then looked at the National Compensation Survey - December 2005 published
by the U.S. Department of Labor. We reviewed data for private industry workers:
mean hourly earnings for full-time and part-time workers by experience levels in the
same part of Florida as the subject company. Within this group is a subset called
Management Occupations, with the highest work level in this subject being level 12.
The hourly rate given was converted to an annual figure using 2,080 hours and is
shown below.
$ 96.92 per hour
x 2,080 hours
$ 201,594
We also reviewed salary information located at salary.com. This database provided
total compensation (salary, bonus and benefits) for a Top Operations Executive.
The complete package amounted to $349,701, consisting of salary of $217,416,
bonus of $65,065, with the balance representing other fringe benefits.
Finally, we reviewed Integras Business Profiler, which provides officers
compensation by SIC Code as a percentage of sales. Officers compensation for
businesses operating in SIC Code 5023 with sales between $10 and $25 million,
reflected an average compensation from 295 businesses at 2.2 percent in 2005.
Using The Companys 2005 revenues results in the following:
- 44 -
2005 Revenues $ 11,122,116
Officers Compensation as % of Revenues 2.2%
Officers Compensation $ 244,687
Recognizing that this SIC Code is extremely broad, we believe that compensation
can be considered from this data since it includes 295 businesses within the sales
range of John Johnson Sales. It is also within the range of the other sources we
reviewed.
As a result of our analysis, we believe that reasonable compensation should be
estimated at $225,000 with prior years being deflated by 3 percent.
7. Professional fees were materially higher in 2002 and 2005 compared to the other
years. An adjustment was made to reflect a more normal level of expense based
on an average of the other years. These calculations are as follows:
2000 $ 26,913
2001 27,228
2003 30,173
2004 20,320
Total 104,634
4
Average Expense $ 26,159
This average expense was then subtracted from the actual expense in 2002 and
2005 to arrive at the adjustment amount. This is shown below:
2002 2005
Actual Expense $ 107,274 $ 47,558
Average Expense 26,159 26,159
Adjustment Amount $ 81,115 $ 21,399
- 45 -
8. Moving expenses are considered non-recurring in nature and are therefore added
back.
9. Auto expenses include car payments and other auto related expenses for the
Johnson family, as well as other employees. Legitimate business expenses were
considered to be all expenses paid for Perry Smith and one car for John Johnson.
Our addback is calculated as follows:
2002 2003 2004 2005
Total Auto Expense $ 46,122 $ 45,861 $ 35,959 $ 53,111
Less: Auto Leases
Perry Smith 5,868 5,868 6,265 6,464
John Johnson 7,365 8,635 10,412 10,123
Less: Auto Expenses
Perry Smith 106 - - -
Net Auto Expense $ 32,784 $ 31,358 $ 19,282 $ 36,524
Other Lease Payments 14,083 24,732 17,941 33,559
A
Net Operating Auto Expenses $ 18,701 $ 6,626 $ 1,341 $ 2,965
Allowable Portion (50%) 9,350 3,313 671 1,483
Disallowed Portion $ 9,350 $ 3,313 $ 671 $ 1,483
B
Add Back $ 23,433 $ 28,045 $ 18,611 $ 35,042
A + B
Total lease payments from the general ledger less the leases listed above.
A
Since most of the remaining expenses pertain to Ben and Suzy Johnson, we have considered only
B
one-half to be a necessary business expense.
10. Included in insurance expense are premiums related to the vehicles that were
adjusted for above.
11. Various other insurance policies were paid by The Company on behalf of the
Johnsons. These expenses are summarized as follows:
- 46 -
2002 2003 2004 2005
Homeowners, Flood & Disability $ 3,983 $ 4,040 $ 1,137 $ 1,909
Officers Life 6,397 7,010 9,213 13,472
Auto - Andrew Johnson - 840 - -
Totals $ 10,380 $ 11,890 $ 10,350 $ 15,381
12. Credit card statements were reviewed and non-business related expenses were
added back, as these monies would be available to a willing buyer. The summary
of our analysis is as follows:
2002 2003 2004 2005
Specifically Identified $ 44,574 $ 43,598 $ 41,545 $ 35,599
A
Estimated Items 398 455 - -
B
Unidentified Payments - 15,133 - -
C
Costco 7,645 9,446 14,546 12,165
D
Sams Club 3,206 4,074 6,405 3,251
D
Lands End 183 48 - 22
E
Total Adjustment $ 56,007 $ 72,755 $ 62,496 $ 51,036
A. These items were specifically identified as being personal in nature. We
reviewed every available credit card statement with management for the
years 2002 through 2005. Some of the items that were considered as non-
business related were:
Restaurants around the family residence
CVS Pharmacy
Nail salon
Animal hospital
Various clothing stores
Grocery stores near the family residence
Trips to Aruba
- 47 -
B. Over 230 credit card payments and the accompanying statements were
analyzed to separate personal from business expenses. Only two
statements are missing in the amounts of $478 and $628. We estimated the
personal amount by the relationship between business and personal charges
in those particular years.
C. The unidentified amount consists of three payments made to credit cards that
were not identified as business cards.
D. In our discussion with management, it was indicated that a majority of
charges at Costco and Sams Club were personal in nature. After further
discussion with management, 80 percent of charges were considered to be
personal.
E. Some items purchased at Lands End (towels) were business related. In
order to account for this, 50 percent was added back. Overall, this amount
was immaterial.
13. Wages paid to family members would likely not be incurred by a hypothetical buyer
of The Company. As a result, wages paid to Jessica and Andrew Johnson have
been added back, along with the associated payroll taxes.
We were provided with W-2 Forms for Jessica, representing gross wages. Payroll
taxes were estimated to be 8 percent of gross wages. This is calculated below.
Jessica 2002 2003 2004 2005
Payroll
Gross from W-2's $ 12,000 $ 12,000 $ 3,840 $ 9,555
Taxes (8%) 960 960 307 764
Total Payroll $ 12,960 $ 12,960 $ 4,147 $ 10,319
In addition, in 2003 there were checks payable to Jessica in the amount of $720 that
were also added back.
- 48 -
We were also provided with W-2 Forms for Andrew, and again, estimated payroll
taxes at 8 percent of gross wages. This is calculated below.
Andrew 2002 2003 2004 2005
Payroll
Gross from W-2's $ 28,920 $ 10,920 $ 10,920 $ 10,203
Taxes (8%) 2,314 874 874 816
Total Payroll $ 31,234 $ 11,794 $ 11,794 $ 11,019
It was discussed earlier that Andrew received paychecks in order to receive health
insurance. In addition to this, Andrew received payments as a vendor for his actual
services rendered. These amounts were not added back since The Company would
have had to pay someone else to do what Andrew did.
The total adjustment is calculated as follows:
2002 2003 $ 2,004 2005
Total Jessica $ 12,960 $ 13,680 $ 4,147 $ 10,319
Total Andrew 31,234 11,794 11,794 11,019
GRAND TOTAL $ 44,194 $ 25,474 $ 15,941 $ 21,339
14. Health insurance and company sponsored life insurance for Mrs. Johnson, Jessica
and Andrew were added back.
The 2003 and 2005 health insurance invoices were analyzed; the 2004 paid invoices
could not be found. The actual premiums for Mrs. Johnson, Andrew and Jessica for
2003 and 2005, along with the observed pattern of increases were used to estimate
the 2004 amount. This is shown below:
- 49 -
Neighborhood Health Insurance
2003
Suzy +
Jessica Andrew
Jan $ 449.37 $ 155.80
Feb 449.37 155.80
Mar 449.37 155.80
Apr 449.37 155.80
May 449.37 155.80
Jun 449.37 155.80
Jul 449.37 155.80
Aug 449.37 155.80
Sep 449.37 155.80
Oct 554.04 192.09
Nov 554.04 192.09
Dec 554.04 192.09
2003 Totals $ 5,706.00 $ 1,978.00 $ 7,685.00
2004
Suzy +
Jessica Andrew
Jan $ 554.04 $ 192.09
Feb 554.04 192.09
Mar 554.04 192.09
Apr 554.04 192.09
May 554.04 192.09
Jun 554.04 192.09
Jul 554.04 192.09
Aug 554.04 192.09
Sep 554.04 192.09
Oct 628.82 218.03
Nov 628.82 218.03
Dec 628.82 218.03
2004 Totals $ 6,873.00 $ 2,383.00 $ 9,256.00
2005
Suzy +
Jessica Andrew
Jan $ 628.82 $ 218.03
Feb 628.82 218.03
Mar 628.82 218.03
Apr 628.82 218.03
May 628.82 218.03
Jun 628.82 218.03
Jul 628.82 218.03
Aug 628.82 218.03
Sep 628.82 218.03
Oct 689.27 236.67
Nov 580.87 209.92
Dec 580.87 209.92
2005 Totals $ 7,510.00 $ 2,619.00 $ 10,129.00
- 50 -
An estimate was made for 2002 using the average change in premiums from 2003
to 2005, which was 15 percent.
The Company-sponsored life insurance plan only showed premiums for Mrs.
Johnson and Andrew of $9.25 per month for the years 2003 and 2004. The annual
amount is $222, and is assumed to be the same in 2002 and 2005. This amount is
added to the health insurance expense to arrive at a total adjustment as follows:
2002 2003 2004 2005
Health Insurance $ 6,532 $ 7,685 $ 9,256 $ 10,129
Life Insurance 222 222 222 222
Total Adjustment $ 6,754 $ 7,907 $ 9,478 $ 10,351
15. This adjustment reflects payments made by The Company on behalf of the
Johnsons. These are non-operating expenses and are therefore added back. The
amounts are as follows:
2002 2003 2004 2005
BellSouth $ 1,993 $ 2,558 $ 2,198 $ 2,479
T-Mobile 1,106 2,076 $ 395 158
Voicestream 1,342 - - -
Direct TV - 308 - -
Total $ 4,441 $ 4,942 $ 2,593 $ 2,636
16. The miscellaneous adjustments are as follows:
- 51 -
2002 2003 2004 2005
Camp Arrowhead $ - $ - $ 1,705 $ -
A
Checks to Suzy Johnson - 3,744 - -
B
Checks to John Johnson & Cash
for Travel Expenses (50%) 7,100 8,151 $ 3,750 $ 8,501
C
Checks to Cash in 2004 - - $ 3,000 -
D
Totals $ 7,100 $ 11,895 $ 8,455 $ 8,501
A. This is a non-operating expense and therefore added back.
B. Checks written to Suzy Johnson were considered personal in nature and
have been added back.
C. The checks written to John Johnson are largely travel related. However, The
Companys records are relatively poor, and therefore, we have added back
50 percent as being non-business related.
D. In 2004, there was a $3,000 check made out to cash that was signed by
Suzy Johnson and charged to warehouse expense. Since no support for this
check has been provided, the entire amount has been considered
discretionary and has been added back.
17. Losses sustained from selling assets are considered to be non-recurring and have
been added back to better reflect the operating income of The Company.
18. Historic income taxes have been added back and corporate taxes have been
recalculated based on the adjusted net income.
After the normalization adjustments, it can be seen that The Companys profitability has
declined sharply in 2005. A good portion of this swing in profitability is attributable to lower
margins and significant chargebacks from Linens n Things and Bed Bath & Beyond.
The next step is to analyze the financial ratios on an adjusted basis. This is presented in
Table 5.
- 52 -
TABLE 5
ADJUSTED FINANCIAL RATIOS
December 31,
2002 2003 2004 2005
LIQUIDITY / SOLVENCY
Quick Ratio 0.99 0.83 0.77 0.64
Current Ratio 1.95 1.68 1.60 1.49
Days Accounts Receivables Outstanding 28.51 43.35 56.29 61.31
Days Accounts Payable 46.79 68.13 69.11 68.40
Days Working Capital 51.39 50.18 53.83 42.44
Days Inventory Sales 55.97 62.58 69.67 87.27
TURNOVER
Receivables Turnover 12.80 8.42 6.48 5.95
Cash Turnover 48.55 63.89 176.49 177.06
Inventory Turnover 6.52 5.83 5.24 4.18
Current Asset Turnover 4.00 3.31 3.06 2.63
Working Capital Turnover 7.10 7.27 6.78 8.60
Fixed Asset Turnover 187.25 126.86 102.51 72.75
Total Asset Turnover 3.88 3.20 2.95 2.52
Payables Turnover 7.80 5.36 5.28 5.34
DEBT
Times Interest Earned 91.96 71.63 23.57 (4.37)
Total Liabilities to Total Assets 0.50 0.59 0.61 0.64
Total Liabilities to Equity 0.99 1.44 1.59 1.77
PROFITABILITY
Aftertax Return on Assets 10.32% 7.57% 6.80% -2.73%
Aftertax Return on Equity 20.56% 18.46% 17.62% -7.55%
Aftertax Return on Net Sales 3.08% 2.68% 2.76% -1.01%
Return on Invested Capital 20.56% 18.46% 13.57% -4.69%
Liquidity or solvency ratios are intended to allow the appraiser to measure the quality and
adequacy of current assets to meet current obligations as they come due. According to our
analysis, the current and quick ratios have been trending down since 2002. These ratios
also indicate that The Company relies on inventory to cover its current liabilities.
The days of accounts receivable outstanding has grown each year. This can lead to cash
flow problems if this situation continues. The days of accounts payable ratio has been
increasing as well; when The Company has to wait longer to collect from its customers, its
vendors have to wait longer to get paid. Suppliers are paid with letters of credit, causing
a cash flow issue for the other vendors.
Days inventory sales, which shows the average number of days goods are in inventory, has
been increasing each year, including a large increase in 2005.
- 53 -
Turnover ratios assist the appraiser in assessing how frequently the assets are moving,
providing more information about the liquidity of a company. The turnover ratios for The
Company have the same implications as the liquidity ratios; that The Companys solvency
position is weakening.
Debt ratios are an indication of a companys ability to service its debt. The Company
carries little debt on its balance sheet and therefore should have the ability to meet its debt
obligations. However, in 2005 The Companys income on an adjusted basis was not
enough to service its debt.
Profitability ratios are an indication of how effectively management is conducting the
operations of the business. On an adjusted basis, The Companys profitability has been
relatively stable in 2002, 2003 and 2004. In 2005, losses caused the performance to be
negative.
- 54 -
VALUATION CALCULATIONS
As indicated previously in this report, the three approaches of valuation to be considered
in an appraisal are:
1. The Market Approach,
2. The Asset Based Approach, and
3. The Income Approach.
The narrative that follows discusses the appraisal methods employed within each
approach.
THE MARKET APPROACH
GUIDELINE PUBLIC COMPANY METHOD
In accordance with Revenue Ruling 59-60, we considered the market price of stocks of
companies that are actively traded in a same or similar industry as John Johnson Sales.
In order to look for these companies, we searched the Alacra database of public
companies. The search criteria was as follows:
1. SIC Code = 5023
2. Country = United States
3. Revenues = not to exceed $110 million
The search located no companies that could be utilized in this methodology.
- 55 -
MERGER AND ACQUISITION METHOD
Similar to the concept behind the guideline public company method, the appraiser searched
for transactions. This method uses pricing multiples derived from sales of companies, both
public and private.
We searched the Pratts Stats and Done Deals databases for transactions where the selling
company was classified in SIC Code 5023 or NAICS Code 423220.
The appraiser located three transactions in the Done Deals database. However, based on
the company descriptions, none of the target companies were dealing in linens. This left
the appraiser with no transactions that could be used.
A search of the Pratts Stats database located 21 transactions. However, the business
descriptions included companies selling ceramics, bedding, garden accessories,
barbecues, decorative accessories, home furnishings, cabinets, countertops, windows,
doors, and acoustical products. Only two of the companies listed included linens as part
of their description, and only one that specifically identified towels. One transaction is not
enough data from which to draw any meaningful conclusions.
Therefore, the merger and acquisition method could not be used.
THE ASSET BASED APPROACH
The adjusted book value of John Johnson Sales without intangible assets was previously
determined to be $1.496 million rounded without intangible value. We believe that any
value attributable to goodwill or any other intangible assets can best be determined by
application of the income approach.
- 56 -
THE INCOME APPROACH
CAPITALIZATION OF BENEFITS METHOD
The capitalization of benefits method is premised on the concept that value is based on a
stabilized benefit stream that is capitalized by an appropriate capitalization rate to reflect
the risk associated with the income stream. Mathematically, this is presented in the
following formula:
V = I R
Where
V = Value
I = Benefit Stream
R = Capitalization Rate
The use of this formula requires an estimate of the appropriate benefit stream to be made
for the subject business that would be representative of probable future earnings.
We analyzed both net cash flow and net income to determine which benefit stream
appeared to be more stable, and therefore more predictable. The results were as follows:
Net Cash Flow Net Income
2002 $ 149,830 $ 248,380
2003 223,759 238,173
2004 (204,628) 319,784
2005 205,612 (112,975)
- 57 -
Net cash flow appears to be more erratic and therefore, less predictable. Part of the
reason for this was the inventory error, which would impact working capital and net cash
flow. Overall, we believe that net income, as adjusted, is more stable despite the most
recent year declining.
As a result of our analysis, we believe that a weighted average of the past four years is the
best proxy for the future, placing twice as much weight on 2005 as the other years. The
reason for the emphasis on 2005 is two fold; first, it is the most recent period; and second,
we do not believe that margins will rebound, nor do we believe that the vendor chargebacks
are likely to stop in the foreseeable future. This means that 2005 may be the most
representative year for the willing buyer to consider.
The next step in the application of this method requires the determination of the appropriate
capitalization rate to be used for this level of income. Due to the risk of the business and
the risk of the income stream going forward (as explained in the section of this report
entitled Discount and Capitalization Rates), we selected a capitalization rate of 23.8
percent. Therefore, capitalizing the income stream by 23.8 percent results in an estimate
of value as shown in Table 6.
TABLE 6
CAPITALIZATION OF 4 YEAR WEIGHTED AVERAGE NET INCOME
2002 2003 2004 2005
Net Income (Loss) $ 248,380 $ 238,173 $ 319,784 $ (112,975)
Weights 1 1 1 2
Weighted Net Income $ 248,380 $ 238,173 $ 319,784 $ (225,949)
4 Year Weighted Average Net Income $ 116,077
One Plus the Long-Term Rate of Growth x 1.02
Net Income for Capitalization $ 118,399
Capitalization Rate 23.80%
Indication of Value $ 497,478
Rounded $ 500,000
- 58 -
RECONCILIATION OF VALUES
The value derived in this valuation indicates that there is no intangible value to John
Johnson Sales. While The Company may have some goodwill, in order for that goodwill
to have value, it must be able to generate a return in excess of its net tangible asset value.
That is clearly not the case here. The Company has not been profitable enough to
generate the excess earnings that would be used to measure goodwill value.
We also believe that if goodwill value was to exist, it would be personal in nature, clearly
attributable to John Johnson. He is the namesake, the moving force, the individual with the
relationships, and he could compete directly with a willing buyer.
The issue in this valuation is that as of January 31, 2006, we have determined the value
of John Johnson Sales to be as follows:
Asset Approach $ 1,496,000
Income Approach 500,000
If a willing buyer was to purchase this business for its asset value of $1,496,000, the
question to be asked is, how does she/he get a return on her investment when the
business does not generate enough of a profit to provide a return that is commensurate
with the risk of the investment?
As indicated early in this report, a prudent investor must decide whether a greater return
can be available in liquidation, rather than valuing the business as a going concern.
According to the Uniform Standards of Professional Appraisal Practice, Standards Rule 9-3
states:
In developing an appraisal of an equity interest in a business enterprise with
the ability to cause liquidation, an appraiser must investigate the possibility
that the business enterprise may have a higher value by liquidation of all or
part of the enterprise than by continued operation as is.
- 59 -
We tested this premise by assuming that a hypothetical willing buyer would purchase this
business for the adjusted book value of $1.496 million, and then immediately liquidate the
balance sheet. During an orderly liquidation, the business would have liquidation costs,
such as operating expenses that would continue until everything is liquidated. The
assumptions used to arrive at a value in liquidation are as follows:
Orderly liquidation will take three months.
Accounts receivable factored at 80 percent.
Inventory sold off at 60 percent.
Fixed assets sold at 50 percent of carrying cost.
Liabilities would have to be satisfied.
Based on these assumption, the liquidation balance sheet is shown in Table 7.
TABLE 7
LIQUIDATION BALANCE SHEET
Adjusted Liquidation
December Liquidation Value
2005 Adjustments 2005
Current Assets
Cash $ 89,816 $ - $ 89,816
Accounts Receivable 1,582,543 (316,509) 1,266,034
Inventories 2,146,824 (858,730) 1,288,094
Prepaid Expenses 43,411 - 43,411
Prepaid Taxes 48,200 - 48,200
Other Receivables 6,214 - 6,214
Related Party Receivable 3,056 (3,056) -
Total Current Assets $ 3,920,064 $ (1,178,294) $ 2,741,770
Net Fixed Assets $ 175,906 $ (87,953) $ 87,953
Other Assets
Security Deposits $ 32,901 $ - $ 32,901
Deferred Income Taxes 16,945 - 16,945
Total Other Assets $ 49,846 $ - $ 49,846
TOTAL ASSETS $ 4,145,816 $ (1,266,247) $ 2,879,569
TOTAL LIABILITIES $ 2,649,504 $ - $ 2,649,504
NET WORTH $ 1,496,312 $ (1,266,247) $ 230,065
As a result of liquidating the balance sheet, stockholders equity is $230,065.
- 60 -
Liquidation expenses are those operating expenses that the business would incur in order
to effectuate the liquidation. These are shown in Table 8.
TABLE 8
LIQUIDATION EXPENSES
Liquidation
Expenses
Rent $ 53,272
Personnel Qty. Salary
Office 1 $ 40,000 10,000
Warehouse 2 20,000 10,000
Insurance 25,000
Utilities 4,738
Professional Fees 10,000
3 MONTH LIQUIDATION EXPENSES $ 113,010
As a result of these expenses, the total liquidation value is as follows:
Fair Market Value of Balance Sheet in Liquidation $ 230,065
Liquidation Expenses (113,010)
TOTAL LIQUIDATION VALUE $ 117,055
This analysis shows that The Company has greater value as a going concern than it does
if it was liquidated.
However, the next question is, how much weight should be assigned to the results from the
two approaches performed in this valuation? We must look at a weighting that will allow
the willing buyer to obtain a return while recognizing that the willing seller does not want
to give away the business. Despite the willing sellers desire to get as much as possible
for the business, it just may not be worth that amount.
For guidance, we turned to Revenue Ruling 59-60, Section 5, which is titled Weight To Be
Accorded Various Factors. According to this section:
- 61 -
(a) Earnings may be the most important criterion of value in some cases
whereas asset value will receive primary consideration in others. In general,
the appraiser will accord primary consideration to earnings when valuing
stocks of companies which sell products or services to the public; conversely,
in the investment or holding type of company, the appraiser may accord the
greatest weight to the assets underlying the security to be valued.
(b) The value of the stock of a closely-held investment or real estate holding
company, whether or not family owned, is closely related to the value of the
assets underlying the stock. For companies of this type the appraiser should
determine the fair market values of the assets of the company. Operating
expenses of such a company and the cost of liquidating it, if any, merit
consideration when appraising the relative values of the stock and the
underlying assets. The market values of the underlying assets give due
weight to potential earnings and dividends of the particular items of property
underlying the stock, capitalized at rates deemed proper by the investing
public at the date of appraisal. A current appraisal by the investing public
should be superior to the retrospective opinion of an individual. For these
reasons, adjusted net worth should be accorded greater weight in valuing the
stock of a closely-held investment or real estate holding company, whether
or not family owned, than any of the other customary yardsticks of appraisal,
such as earnings and dividend paying capacity.
Another source we reviewed was the course material taught by the American Society of
Appraisers (ASA). Here, the ASA provided guidance on the application of the asset
approach as follows:
Likely applications of the asset approach:
1. Holding or investment companies
2. Capital-intensive manufacturing companies
3. Poorly performing companies, where liquidation may be a reasonable
means of maximizing value.
4. Not-for-profit organizations
Less likely applications of the asset approach:
1. Service businesses
2. Many distribution companies
3. Labor-intensive manufacturing companies with little investment in
fixed assets.
4. Minority interests
John Johnson Sales is not a holding or investment company, it is not a manufacturing
company and it is not a not-for-profit company. Although The Company is performing
- 62 -
poorly, liquidation is not a reasonable means to maximizing values. Instead, The Company
is a distributor and the asset approach is less likely to apply.
According to Revenue Ruling 59-60, as well as the professional literature, more weight
should be given to the income approach for companies such as John Johnson Sales. But
how much? In this case, the income generated as a going concern does not support the
value reached under the asset approach. The value reached using the income approach
is commensurate with the risk involved in owning a 100 percent interest in John Johnson
Sales. The willing buyer will not pay more for the stream of income generated by The
Company than the present value of the future benefits. Therefore, all of the weight should
be placed on the income stream. In our opinion, the value of John Johnson Sales at
January 31, 2006, was approximately $500,000.
- 63 -
DISCOUNT AND CAPITALIZATION RATES
Section 6 of Revenue Ruling 59-60 states:
In the application of certain fundamental valuation factors, such as earnings
and dividends, it is necessary to capitalize the average or current results at
some appropriate rate. A determination of the proper capitalization rate
presents one of the most difficult problems in valuation.
In the text of Revenue Ruling 68-609, capitalization rates of 15 to 20 percent were
mentioned as an example. Many appraisers are under the misconception that the
capitalization rate must stay within this range. In reality, the capitalization rate must be
consistent with the rate of return currently needed to attract capital to the type of investment
in question.
There are various methods of determining discount and capitalization rates. Using the build
up method of determining these rates results in the following:
Risk Free Rate 4.74%
1
Size-Adjusted Equity Risk Premium 17.04%
2
Company Specific Risk Premium 3.00%
3
Discount Rate for Net Cash Flow 24.78%
Increment for Using Net Income 1.00%
Discount Rate for Net Income 25.78%
Long-Term Sustainable Growth 2.00%
4
Capitalization Rate 23.78%
Rounded 23.80%
1. Federal Reserve Yield on a 20-year U.S. Treasury Bond for January 31, 2006
<http://www.federalreserve.gov/releases/h15/data.htm>.
2. See explanation below.
- 64 -
3. Appraisers judgment based on the analysis discussed throughout the report.
4. The additional risk factor relating to the need to reinvest cash flow of The Company,
based on documented work as performed by Joseph Agiato, CPA, CBA, ASA, as
part of a culminating project at Lindenwood College. This adjustment accounts for
the additional risk of capitalizing net income, rather than net cash flow. Net income
is more risky to the investor as it does not reflect the amount of cash available for
distribution.
Every discount rate, regardless of how it is derived, includes the following basic
components: (1) the risk -free rate of return, (2) the equity risk premium, and (3) the specific
company risk premium.
Risk-Free Rate of Return. The risk-free rate of return is sometimes known as the safe
rate or the cost of money. In theory, this is the minimum return that an investor would
accept for an investment that is virtually risk-free. It is the pure cost of money plus the rate
of inflation anticipated by those who deal in these types of transactions. What this really
represents is the minimum rate of return that an investor should accept, since he or she
can earn this amount with reasonable safety instead of risking an investment in a closely-
held company.
Sources of risk-free rates of return most commonly include U.S. Treasury bonds. More
often than not, long-term rates are used to simulate the long-term holding period of a
closely-held business. The 20-year bond (actually it is a composite rate for bonds that have
20 years to maturity) is frequently used. The 20-year bond has become popular among
appraisers because of the fact that many appraisers use the equity risk premium data
provided by Ibbotson Associates and these are based on 20-year bonds.
Equity Risk Premium (ERP). This component of the discount rate takes into
consideration market perceptions and the expectations of a broad measure of the market.
For example, if the appraisal subjects industry is returning 17 percent on equity, an
investor in the subject company would expect to receive the same 17 percent, all other
factors being equal. After all, why would someone be willing to accept less than what they
could get from an equally desirable substitute?
- 65 -
The equity risk premium for corporate equity securities can be obtained from various
sources. Historically, the most commonly used source was Stocks, Bonds, Bills and
Inflation Annual Yearbook (the SBBI Yearbook), published by Ibbotson Associates.
Ibbotson data is a compilation of investment returns for several types of financial assets
since 1926. Business appraisers are generally interested in the information relating to risk-
free returns, market equity returns, small company stock premiums, and the calculated
differentials between them.
The Ibbotson studies have been considered to be a comprehensive compilation of data
relating to the equity risk premium. In addition to the overall equity risk premium, a type of
premium that is generally considered by the appraiser is the small company risk premium.
This is frequently considered as part of the specific company risk premium, but very often
separately stated. The Ibbotson data provides information about returns for small company
stocks. Ibbotson breaks down the premium based on the market capitalization of public
companies.
The Ibbotson data indicates that the returns for these smaller companies have been higher
than those of the larger companies. This means that an investor who makes an investment
in a smaller company should look for a higher return based on this market data. Size may
have something to do with it. Obviously, there are many other factors that also cause
smaller companies to be at greater risk than larger companies.
Another study that has gained in popularity over the past several years is the Duff & Phelps
Study (D&P). The D&P studies have expanded the Ibbotson analysis into more subsets
of the market.
- 66 -
Comparison of the Ibbotson and Duff & Phelps Study
Ibbotson Duff & Phelps
Addresses returns on investments in
publicly traded securities based on size
Addresses returns on investments in
publicly traded securities based on size.
Segments NYSE securities into deciles
1
based on equity capitalization.
25 size groups.
Analyzes arithmetic returns, betas, and
real returns in excess of risk-free rate.
D&P utilizes NYSE, AMEX and NASDAQ
data starting in 1963.
2
High financial risk securities analyzed in
a separate portfolio.
Seven size metrics in addition to equity
capitalization.
NYSE Companies back to 1926 excluding closed-end mutual funds, American Depository Notes, unit
1
investment trusts and Americus Trusts.
Excludes American Depository Notes and non-operating holding companies.
2
According to the D&P study, high financial risk has been defined as companies
1. in bankruptcy or liquidation,
2. that have 5-year average net income of less than zero,
3. that have negative book value of equity, or
4. that have debt to total capital greater than 80 percent.
D&P segregates the returns from this group of companies in an attempt to better reflect the
market.
Rather than solely relying on market capitalization as Ibbotson does, D&P breaks down its
analysis by the following metrics:
1. Book value of invested capital,
2. Five-year average EBITDA,
3. Sales,
4. Number of employees,
5. Market value of equity,
- 67 -
6. Book value of equity,
7. Five-year average net income, and
8. Market value of invested capital.
The trend line of the Ibbotson and D&P equity risk premiums look fairly similar. They
clearly move in the same direction, indicating that smaller companies have larger
premiums. Even if all of the other metrics in the D&P study are graphed, the trend is in the
same direction.
In order to properly use the data, the authors of the D&P study recommend using the
smoothed average equity risk premium. The smoothing process uses the arithmetic equity
risk premium, and through mathematical regression, takes the noise out. Using 25 data
points in the smoothing provides statistically reliable results. With these results, we are
able to regress the data for companies smaller than the ones presented in the data. This
allows us to calculate an equity risk premium specific to John Johnson Sales, which is
smaller than the companies in the D&P study.
When using the D&P study, it is recommended to obtain data for as many of the metrics
as possible and simply average them to determine the results. This becomes the size-
adjusted equity risk premium for the subject company.
Recognizing that even those companies that are in the lowest 25 percentile of the market
th
are still larger than John Johnson Sales, we performed the mathematical calculations to
use the D&P data and make it specifically relevant to The Company.
Tables 9 through 16 show summary data for companies ranked by the eight measures
discussed earlier, along with the regressed equity risk premium specific to John Johnson
Sales. Table 9 shows companies ranked by market value of equity.
- 68 -
TABLE 9
COMPANIES RANKED BY MARKET VALUE OF EQUITY
Average Smoothed
Portfolio Market Arithmetic Arithmetic Average
Rank Value Average Equity Risk Equity Risk
By Size ($Mils.) Return Premium Premium
1 96,796.0 11.87% 4.67% 2.35%
2 26,818.0 12.13% 4.93% 4.40%
3 14,912.0 10.83% 3.63% 5.33%
4 10,930.0 12.84% 5.64% 5.83%
5 8,014.0 13.28% 6.08% 6.32%
6 5,996.0 14.19% 6.99% 6.79%
7 4,872.0 14.93% 7.73% 7.12%
8 3,745.0 14.34% 7.14% 7.54%
9 3,185.0 15.28% 8.08% 7.80%
10 2,758.0 14.52% 7.32% 8.02%
11 2,441.0 15.33% 8.13% 8.22%
12 2,121.0 15.07% 7.87% 8.44%
13 1,845.0 13.84% 6.64% 8.67%
14 1,588.0 16.08% 8.88% 8.90%
15 1,382.0 15.65% 8.45% 9.13%
16 1,117.0 17.56% 10.36% 9.47%
17 1,025.0 17.47% 10.27% 9.60%
18 870.0 16.88% 9.68% 9.86%
19 736.0 16.81% 9.61% 10.13%
20 626.0 17.80% 10.60% 10.39%
21 541.0 18.03% 10.83% 10.62%
22 436.0 17.64% 10.44% 10.97%
23 326.0 18.04% 10.84% 11.43%
24 225.0 19.37% 12.17% 12.02%
25 76.0 23.32% 16.12% 13.74%
John Johnson Sales 1.5 20.00%
In order to calculate an equity risk premium specific to John Johnson Sales using the
market value of equity, we would first need to know what the market value of equity is.
Since market value of equity is what we are trying to determine, the process could be
considered circular. In order to compensate for this point, we used an estimate of value
reached under a different approach, namely the asset approach. Using 1.5 million as an
indicator of the market value of equity, the smoothed ERP specific to John Johnson Sales
equals 20 percent.
Table 10 depicts companies ranked by book value of equity.
- 69 -
TABLE 10
COMPANIES RANKED BY BOOK VALUE OF EQUITY
Average Smoothed
Portfolio Book Arithmetic Arithmetic Average
Rank Value Average Equity Risk Equity Risk
1 26,924.0 12.32% 5.12% 3.85%
2 8,688.0 12.34% 5.14% 5.38%
3 5,700.0 14.50% 7.30% 5.95%
4 4,019.0 13.21% 6.01% 6.42%
5 2,828.0 13.67% 6.47% 6.90%
6 2,177.0 13.90% 6.70% 7.25%
7 1,854.0 13.92% 6.72% 7.47%
8 1,533.0 14.44% 7.24% 7.73%
9 1,236.0 15.54% 8.34% 8.02%
10 1,123.0 15.05% 7.85% 8.15%
11 995.0 14.58% 7.38% 8.31%
12 890.0 16.49% 9.29% 8.46%
13 760.0 15.25% 8.05% 8.68%
14 687.0 15.59% 8.39% 8.81%
15 562.0 16.39% 9.19% 9.09%
16 529.0 16.57% 9.37% 9.17%
17 441.0 16.96% 9.76% 9.41%
18 402.0 15.73% 8.53% 9.54%
19 347.0 16.65% 9.45% 9.74%
20 302.0 17.63% 10.43% 9.93%
21 248.0 16.66% 9.46% 10.19%
22 206.0 18.92% 11.72% 10.45%
23 169.0 17.76% 10.56% 10.71%
24 123.0 18.02% 10.82% 11.14%
25 51.0 20.98% 13.78% 12.34%
The book value of John Johnson Sales was used to extrapolate an equity risk premium of
17.20 percent.
The companies in Table 11 are ranked by 5-year average net income.
- 70 -
TABLE 11
COMPANIES RANKED BY 5-YEAR AVERAGE NET INCOME
Average Smoothed
Portfolio Net Arithmetic Arithmetic Average
Rank Income Average Equity Risk Equity Risk
1 4,003.00 12.78% 5.58% 3.96%
2 954.00 13.03% 5.83% 5.77%
3 592.00 13.67% 6.47% 6.37%
4 443.00 14.11% 6.91% 6.73%
5 313.00 13.16% 5.96% 7.17%
6 237.00 14.28% 7.08% 7.52%
7 195.00 14.63% 7.43% 7.77%
8 149.00 15.54% 8.34% 8.10%
9 127.00 14.39% 7.19% 8.30%
10 107.00 15.08% 7.88% 8.51%
11 96.00 15.48% 8.28% 8.66%
12 84.00 16.25% 9.05% 8.83%
13 69.00 16.13% 8.93% 9.07%
14 60.00 16.27% 9.07% 9.25%
15 53.00 15.48% 8.28% 9.40%
16 45.00 18.32% 11.12% 9.60%
17 41.00 16.38% 9.18% 9.72%
18 36.00 17.93% 10.73% 9.90%
19 31.00 17.31% 10.11% 10.07%
20 25.00 18.03% 10.83% 10.33%
21 20.00 18.08% 10.88% 10.63%
22 15.00 18.33% 11.13% 10.96%
23 12.00 18.60% 11.40% 11.32%
24 8.00 17.94% 10.74% 11.86%
25 3.00 21.66% 14.46% 13.10%
By using The Companys 5-year weighted average net income of $116,077, the resulting
equity risk premium using this metric is 17.11 percent.
Table 12 ranks the companies by the market value of invested capital (MVIC).
- 71 -
TABLE 12
COMPANIES RANKED BY MARKET VALUE OF INVESTED CAPITAL
Smoothed
Portfolio Average Arithmetic Arithmetic Average
Rank MVIC Average Equity Risk Equity Risk
1 115,321.0 11.84% 4.64% 2.90%
2 34,173.0 11.76% 4.56% 4.71%
3 21,484.0 12.07% 4.87% 5.40%
4 15,040.0 12.99% 5.79% 5.93%
5 11,667.0 13.69% 6.49% 6.31%
6 8,561.0 14.37% 7.17% 6.77%
7 6,473.0 14.93% 7.73% 7.18%
8 4,908.0 15.04% 7.84% 7.59%
9 4,208.0 13.45% 6.25% 7.82%
10 3,714.0 15.63% 8.43% 8.00%
11 3,309.0 14.62% 7.42% 8.18%
12 2,770.0 15.08% 7.88% 8.44%
13 2,462.0 15.13% 7.93% 8.62%
14 2,132.0 16.07% 8.87% 8.83%
15 1,781.0 15.91% 8.71% 9.10%
16 1,479.0 16.87% 9.67% 9.37%
17 1,320.0 16.30% 9.10% 9.54%
18 1,146.0 17.36% 10.16% 9.75%
19 1,005.0 16.66% 9.46% 9.94%
20 851.0 17.22% 10.02% 10.19%
21 725.0 17.83% 10.63% 10.43%
22 565.0 17.28% 10.08% 10.80%
23 415.0 18.88% 11.68% 11.26%
24 274.0 18.35% 11.15% 11.87%
25 101.0 22.95% 15.75% 13.36%
MVIC is equal to the market value of equity plus the market value of The Companys debt.
Here again, we used the estimate of value reached under the asset approach and added
The Companys debt to arrive at an estimate of MVIC of $2.4 million. The resulting equity
risk premium specific to John Johnson Sales using this metric, is 18.91 percent.
Table 13 used total assets as its sorting metric.
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TABLE 13
COMPANIES RANKED BY TOTAL ASSETS
Smoothed
Rank Assets Average Equity Risk Equity Risk
1 75,555.0 12.84% 5.64% 4.37%
2 26,896.0 12.37% 5.17% 5.64%
3 18,068.0 13.62% 6.42% 6.13%
4 12,839.0 13.99% 6.79% 6.55%
5 9,054.0 14.81% 7.61% 6.98%
6 6,061.0 14.30% 7.10% 7.47%
7 4,678.0 14.91% 7.71% 7.79%
8 3,950.0 14.39% 7.19% 8.00%
9 3,398.0 14.21% 7.01% 8.19%
10 2,909.0 14.77% 7.57% 8.38%
11 2,325.0 16.46% 9.26% 8.66%
12 2,069.0 14.93% 7.73% 8.80%
13 1,780.0 16.27% 9.07% 8.98%
14 1,585.0 16.81% 9.61% 9.13%
15 1,385.0 16.28% 9.08% 9.29%
16 1,137.0 17.53% 10.33% 9.54%
17 985.0 18.97% 11.77% 9.71%
18 929.0 16.95% 9.75% 9.78%
19 767.0 15.43% 8.23% 10.02%
20 639.0 17.07% 9.87% 10.25%
21 518.0 17.35% 10.15% 10.51%
22 424.0 17.44% 10.24% 10.75%
23 319.0 18.49% 11.29% 11.10%
24 218.0 18.68% 11.48% 11.57%
25 86.0 21.47% 14.27% 12.72%
Using The Companys total assets of $4.2 million results in an equity risk premium of 16.43
percent, specific to John Johnson Sales.
The metric used to sort companies in Table 14 is the 5-year average EBITDA.
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TABLE 14
COMPANIES RANKED BY 5-YEAR AVERAGE EBITDA
Smoothed
Rank EBITDA Average Equity Risk Equity Risk
1 9,711.00 13.04% 5.84% 4.42%
2 3,086.00 12.36% 5.16% 5.87%
3 2,060.00 14.11% 6.91% 6.37%
4 1,522.00 14.06% 6.86% 6.76%
5 1,017.00 15.15% 7.95% 7.26%
6 752.00 14.16% 6.96% 7.64%
7 629.00 14.20% 7.00% 7.87%
8 494.00 15.21% 8.01% 8.17%
9 397.00 13.33% 6.13% 8.45%
10 353.00 14.78% 7.58% 8.60%
11 294.00 15.85% 8.65% 8.83%
12 263.00 17.25% 10.05% 8.97%
13 220.00 17.67% 10.47% 9.19%
14 189.00 16.37% 9.17% 9.39%
15 170.00 16.38% 9.18% 9.52%
16 147.00 17.46% 10.26% 9.70%
17 125.00 17.88% 10.68% 9.90%
18 111.00 15.99% 8.79% 10.06%
19 99.00 18.47% 11.27% 10.19%
20 84.00 16.72% 9.52% 10.41%
21 74.00 17.41% 10.21% 10.57%
22 56.00 18.40% 11.20% 10.92%
23 43.00 19.25% 12.05% 11.25%
24 29.00 18.73% 11.53% 11.73%
25 11.00 20.74% 13.54% 12.93%
In order to remain consistent, we used the same weighting that was applied to net income.
This resulted in a 5-year EBITDA of $239,000 for John Johnson Sales. Using this figure
in our regression, resulted in an equity risk premium of 17.79 percent.
Table 15 sorts the companies by sales.
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TABLE 15
COMPANIES RANKED BY SALES
Smoothed
Rank Sales Average Equity Risk Equity Risk
1 61,521.0 13.05% 5.85% 5.70%
2 21,343.0 13.80% 6.60% 6.74%
3 13,980.0 14.64% 7.44% 7.16%
4 9,480.0 15.85% 8.65% 7.54%
5 7,821.0 14.28% 7.08% 7.73%
6 5,886.0 15.79% 8.59% 8.01%
7 4,544.0 15.71% 8.51% 8.27%
8 3,953.0 14.16% 6.96% 8.40%
9 3,090.0 14.73% 7.53% 8.65%
10 2,735.0 16.15% 8.95% 8.77%
11 2,170.0 16.41% 9.21% 8.99%
12 1,975.0 18.37% 11.17% 9.09%
13 1,538.0 16.96% 9.76% 9.33%
14 1,479.0 16.63% 9.43% 9.37%
15 1,247.0 16.48% 9.28% 9.54%
16 1,097.0 16.41% 9.21% 9.67%
17 912.0 17.36% 10.16% 9.85%
18 778.0 15.10% 7.90% 10.01%
19 676.0 16.93% 9.73% 10.14%
20 592.0 17.99% 10.79% 10.28%
21 484.0 17.07% 9.87% 10.47%
22 385.0 16.56% 9.36% 10.70%
23 293.0 19.65% 12.45% 10.97%
24 200.0 18.18% 10.98% 11.34%
25 83.0 20.63% 13.43% 12.21%
Using The Companys sales of $11.1 million in 2005 results in an equity risk premium of
$14.19 percent.
The final metric used in the D&P Report is number of employees. This data is shown in
Table 16.
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TABLE 16
COMPANIES RANKED BY EMPLOYEES
Smoothed
Rank Number of Average Equity Risk Equity Risk
By Size Employees Return Premium Premium
1 245,521 12.69% 5.49% 5.86%
2 89,011 13.82% 6.62% 6.80%
3 57,073 14.66% 7.46% 7.21%
4 42,570 14.91% 7.71% 7.48%
5 32,346 16.52% 9.32% 7.73%
6 25,956 15.49% 8.29% 7.94%
7 19,859 13.65% 6.45% 8.19%
8 15,167 15.10% 7.90% 8.44%
9 13,232 17.65% 10.45% 8.56%
10 11,204 15.31% 8.11% 8.72%
11 8,997 16.42% 9.22% 8.92%
12 7,728 18.32% 11.12% 9.06%
13 6,965 15.45% 8.25% 9.16%
14 5,797 16.17% 8.97% 9.33%
15 5,157 15.68% 8.48% 9.43%
16 4,392 17.66% 10.46% 9.58%
17 3,955 15.13% 7.93% 9.68%
18 3,373 15.65% 8.45% 9.83%
19 2,900 16.69% 9.49% 9.97%
20 2,409 18.13% 10.93% 10.14%
21 1,803 17.80% 10.60% 10.41%
22 1,295 18.44% 11.24% 10.71%
23 927 17.78% 10.58% 11.02%
24 511 18.90% 11.70% 11.57%
25 175 20.31% 13.11% 12.57%
John Johnson Sales 17 14.72%
Using this metric results in an equity risk premium, specific to John Johnson Sales, of 14.72
percent.
The total equity risk premium used in the build up of the discount rate reflects the average
premium of those smallest portfolios (Rank #25), plus that portion that is specific to John
Johnson Sales. The equity risk premium is calculated in Table 17.
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TABLE 17
EQUITY RISK PREMIUM
SPECIFIC TO JOHN JOHNSON SALES
Market Value of Equity 20.00%
Book Value 17.20%
Net Income 17.11%
MVIC 18.91%
Assets 16.43%
EBITDA 17.79%
Sales 14.19%
Number of Employees 14.72%
Average 17.04%
As a sanity check, we turned to Stocks, Bonds, Bills and Inflation, Valuation Edition 2006,
published by Ibbotson Associates. The equity risk premium and the size premium included
in this publication amounts to 13.58 percent. However, the equity risk premium published
by Ibbotson is the difference between the total returns on common stocks and long-term
government bonds from 1926 to 2005. Size is not taken into consideration. Ibbotsons size
premium is the difference between the total returns on small company stocks and large
company stocks based on micro-capitalization (micro-cap) sized companies. These micro-
cap stocks include companies with average market capitalizations of about $198,881,980,
which are considerably larger than John Johnson Sales. As a result, Ibbotsons size
premium data does not reflect the added risk associated with an investment in a company
as small as John Johnson Sales.
The difference of about 4 percent in the size-adjusted equity risk premium is the regressed
difference of the average of the 25 percentile and John Johnson Sales equity risk
th
premiums as calculated.
Using the more detailed D&P Report data instead of the Ibbotson data allowed us to drill
down the equity risk premium to a company the size of John Johnson Sales. In light of the
fact that a major difference between the D&P Report and Ibbotson is the ability to
extrapolate these premiums for smaller companies, it is no surprise that without this
company specific equity risk premium, the discount rates are very similar. As such, the
Ibbotson data supports the D&P Report data, rather than rebuts it.
- 77 -
An adjustment has also been made for other risk factors. In this instance, 3 percent has
been added to reflect the added level of risk. High customer concentration, dependence
on John Johnson for purchasing and some sales, deteriorating market conditions, and
similar factors causes John Johnson Sales to have considerably more risk than the overall
market. These factors cannot be captured in the size-adjusted equity risk premium.
Summing all of these items results in the derivation of a discount rate. The mathematical
formula to distinguish between a discount rate and a capitalization rate is the subtraction
of the present value of long-term sustainable growth from the discount rate. The present
value of the long-term sustainable growth has been included at a rate of 2 percent for John
Johnson Sales. This rate of growth reflects the growth of expected future income streams
based on keeping pace slightly below inflation. The industry is declining, John Johnson is
aging, and there is no plan in place to grow The Company. It is highly dependent on its
customers, one of which is transitioning its business.
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PREMIUMS AND DISCOUNTS
VALUATION PREMIUMS AND DISCOUNTS IN GENERAL
The final value reached in the appraisal of a closely-held business may be more or less
than the value that was calculated using the various methods of appraisal that are
available. The type and size of the discount(s) or premium(s) will vary depending on the
starting point. The starting point will depend on which methods of valuation were used
during the appraisal as well as other factors such as the sources of the information used
to derive multiples or discount rates, and normalization adjustments. These premiums and
discounts will also depend on the standard of value applied in the appraisal.
CONTROL PREMIUM
The value of John Johnson Sales was determined on a control level of value. Therefore,
no control premium is necessary.
MINORITY DISCOUNT
The subject of this appraisal is a controlling interest. Therefore, a minority discount is not
applicable.
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DISCOUNT FOR LACK OF MARKETABILITY
A discount for lack of marketability (DLOM) is used to compensate for the difficulty of
selling shares of stock that are not traded on a stock exchange compared with those that
can be traded publicly. If an investor owns shares in a public company, he or she can pick
up the telephone, call a broker, and generally convert the investment into cash within three
days. That is not the case with an investment in a closely-held business. Therefore,
publicly traded stocks have an element of liquidity that closely-held shares do not have.
However, the equity risk premiums of the smaller companies in the 25 portfolio, already
th
reflect some degree of a lack of marketability due to their infrequent trading and difficulty
of converting the investment to cash. Therefore, even though some additional discount for
lack of marketability may be justified, we feel it would be small and that the discount rate
as we constructed it, takes into account the total risk of an investment in John Johnson
Sales. As a result, we are not applying a discount for lack of marketability.
Schedule 1
To be used only in conjunction with valuation report as of January 31, 2006.
JOHN JOHNSON SALES, INC.
BALANCE SHEET
AS OF DECEMBER 31,
2000 2001 2002 2003 2004 2005
Current Assets
Cash $ 66,735 $ 149,240 $ 183,225 $ 95,178 $ 36,128 $ 89,816
Marketable Securities - - 300,197 - - -
Accounts Receivable 489,842 559,431 701,384 1,411,128 2,162,887 1,582,543
Inventories 1,120,267 881,382 1,000,459 1,361,118 1,951,486 2,146,824
Prepaid Expenses 53,692 69,133 120,400 110,801 70,592 43,411
Prepaid Taxes - 9,291 - 26,954 - 48,200
Other Receivables 12,072 17,708 14,839 5,079 5,989 6,214
Related Party Receivable 18,091 14,325 15,485 20,560 27,654 3,056
Total Current Assets $ 1,760,699 $ 1,700,510 $ 2,335,989 $ 3,030,818 $ 4,254,736 $ 3,920,064
Fixed Assets
Building & Improvements 53,950 53,950 53,950 15,838 15,838 9,189
Machinery & Equipment 147,604 163,661 180,893 198,197 201,792 289,031
Furniture & Fixtures 24,176 24,176 48,049 65,779 81,083 80,985
Vehicles - - - - 38,014 38,014
Gross Fixed Assets $ 225,730 $ 241,787 $ 282,892 $ 279,814 $ 336,727 $ 417,219
Accumulated Depreciation 172,873 200,334 238,139 184,358 206,120 241,313
Net Fixed Assets $ 52,857 $ 41,453 $ 44,753 $ 95,456 $ 130,607 $ 175,906
Other Assets
Security Deposits $ 10,486 $ 9,645 $ 27,146 $ 19,277 $ 26,756 $ 32,901
Deferred Income Taxes - - - - - 16,945
Total Other Assets $ 10,486 $ 9,645 $ 27,146 $ 19,277 $ 26,756 $ 49,846
TOTAL ASSETS $ 1,824,042 $ 1,751,608 $ 2,407,888 $ 3,145,551 $ 4,412,099 $ 4,145,816
Current Liabilities
Accounts Payable $ 255,015 $ 541,560 $ 1,031,633 $ 1,539,431 $ 2,036,055 $ 1,405,448
Long-Term Debt - Current Portion 387,080 - - - 5,764 5,936
Credit Line Payable - - - - 515,000 890,000
Accrued Expenses 45,878 25,828 58,645 192,462 176,115 311,120
Income Taxes Payable 3,425 - 48,166 - 19,762 -
Pension Plan Payable 20,978 60,742 57,524 66,176 75,000 -
Current Portion of Capital Lease 8,973 9,219 3,646 10,136 10,648 11,186
Total Current Liabilities $ 721,349 $ 637,349 $ 1,199,614 $ 1,808,205 $ 2,838,344 $ 2,623,690
Long-Term Liabilities
Long-Term Debt $ - $ - $ - $ - $ 20,998 $ 15,065
Loans from Stockholders - - - - 142,478 142,478
Deferred Taxes - - - 14,277 8,195 -
Long-Term Portion of Capital Lease 13,754 4,535 - 32,582 21,935 10,749
Total Long-Term Liabilities $ 13,754 $ 4,535 $ - $ 46,859 $ 193,606 $ 168,292
Total Liabilities $ 735,103 $ 641,884 $ 1,199,614 $ 1,855,064 $ 3,031,950 $ 2,791,982
Stockholders Equity
Common Stock $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
Paid - In Capital 26,500 26,500 26,500 26,500 26,500 26,500
Retained Earnings 1,061,439 1,082,224 1,180,774 1,262,987 1,352,649 1,326,334
Total Stockholders Equity $ 1,088,939 $ 1,109,724 $ 1,208,274 $ 1,290,487 $ 1,380,149 $ 1,353,834
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY $ 1,824,042 $ 1,751,608 $ 2,407,888 $ 3,145,551 $ 4,412,099 $ 4,145,816
Schedule 2
JOHN JOHNSON SALES, INC.
INCOME STATEMENT
2000 2001 2002 2003 2004 2005
Revenues $ 5,932,527 $ 7,440,017 $ 8,070,880 $ 8,877,477 $ 11,579,655 $ 11,122,116
Cost of Sales 4,524,024 5,976,256 6,183,140 6,929,848 9,805,327 8,924,283
Gross Profit $ 1,408,503 $ 1,463,761 $ 1,887,740 $ 1,947,629 $ 1,774,328 $ 2,197,833
Operating Expenses
Advertising $ 53,923 $ 54,360 $ 78,659 $ 118,053 $ 142,658 $ 259,870
Auto Expense 28,843 31,443 46,122 45,861 35,959 53,111
Bad Debts 114,585 28,818 89,087 28,088 22,953 53,778
Bank Charges 10,902 12,871 11,378 13,758 18,475 19,136
Charitable Contributions 550 1,430 3,619 950 900 901
Commissions 57,460 30,336 47,123 49,979 64,767 67,682
Data Processing 29,534 30,884 45,413 49,532 49,737 60,604
Depreciation 22,755 27,461 37,805 14,018 21,762 35,193
Entertainment 20,130 22,877 28,041 22,730 22,383 6,989
Officers' Compensation 102,900 163,459 148,400 215,700 86,400 158,400
Insurance - General 76,620 93,160 101,284 102,144 86,252 139,810
Licenses & Fees 6,031 6,161 5,903 3,821 5,111 3,709
Office Expenses 12,254 16,007 13,684 27,689 22,412 38,194
Pension , Profit - Sharing Plans 20,978 60,742 57,524 66,176 77,106 -
Postage & Delivery 15,298 13,322 29,856 13,489 18,533 18,350
Professional Fees 26,913 27,228 107,274 30,173 20,320 47,558
Rents 73,405 77,341 79,196 103,828 168,452 213,089
Repairs and Maintenance 17,910 7,117 9,684 6,330 12,337 9,909
Salaries & Wages 283,959 388,731 454,356 547,748 438,553 625,763
Taxes - Payroll 30,433 40,493 48,790 48,666 53,129 58,196
Telephone 32,640 35,381 33,767 30,136 24,478 28,070
Travel 81,261 88,827 101,939 111,255 113,534 149,448
Utilities 7,792 8,500 10,175 8,831 24,007 18,953
Warehouse 46,237 75,097 - - - -
Shows 62,841 42,962 86,055 63,842 43,550 67,760
Selling 19,423 13,434 29,380 72,351 31,591 61,108
Consulting 500 10,000 11,230 1,120 3,868 9,022
Dues and Subscriptions 1,449 1,688 1,572 1,628 548 2,891
Moving - - 14,671 1,500 - -
Total Operating Expenses $ 1,257,526 $ 1,410,130 $ 1,731,987 $ 1,799,396 $ 1,609,775 $ 2,207,494
Operating Income (Loss) $ 150,977 $ 53,631 $ 155,753 $ 148,233 $ 164,553 $ (9,661)
Total Other Income $ - $ 279 $ 5,461 $ 3,745 $ 36 $ -
Other Expenses
Interest Expense $ 84,370 $ 23,256 $ 4,378 $ 2,238 $ 33,312 $ 41,794
Loss on Sale of Assets - - - 24,264 - -
Total Other Expenses $ 84,370 $ 23,256 $ 4,378 $ 26,502 $ 33,312 $ 41,794
Total Other Income (Expenses) $ (84,370) $ (22,977) $ 1,083 $ (22,757) $ (33,276) $ (41,794)
Income (Loss) Before Taxes $ 66,607 $ 30,654 $ 156,836 $ 125,476 $ 131,277 $ (51,455)
Income Taxes 24,176 9,869 58,286 43,263 41,615 (25,140)
NET INCOME (LOSS) $ 42,431 $ 20,785 $ 98,550 $ 82,213 $ 89,662 $ (26,315)
Appendix 1
SOURCES OF INFORMATION UTILIZED
Several sources of information were used to complete this appraisal. These were as
follows:
1. Reviewed financial statements for the year ending December 31, 2005, as prepared
by Melanie and Jane, P.A.
2. Reviewed financial statements for the years ending December 31, 2004 and 2003,
as prepared by Melanie and Jane, P.A.
3. Reviewed financial statements for the years ending December 31, 2002 and 2001,
as prepared by Melanie and Jane, P.A.
4. Form 1120 U.S. Corporation Income Tax Return for year ending December 31,
2005, as prepared by Melanie and Jane, P.A.
5. Form 1120 U.S. Corporation Income Tax Return for years ending December 31,
2004 and 2003, as prepared by Melanie and Jane, P.A.
6. General ledger for the year ending December 31, 2005 prepared by The Company.
11. Vendor agreement with LNT and rebate agreement with BBB for 2005.
12. Diners credit card statements for the years 2002 through 2005.
13. Discover credit card statements for the years 2002 through 2005.
14. American Express credit card statements for the years 2002 through 2004.
15. Bank One credit card statements for the years 2002 through 2005.
16. Chase credit card statements for the years 2002 through 2005.
17. AT&T Universal credit card statements for the years 2002 through 2005.
18. Marriott Rewards credit card statements for the years 2002 through 2005.
Appendix 1
SOURCES OF INFORMATION UTILIZED
19. Payment register of checks written to Suzy Manufacturing, Inc. for the period
January 1, 2001 through February 28, 2007.
20. W-2 Forms for Perry Smith for the years 2002 through 2005.
21. W-2 Forms for Andrew Johnson for the years 2002 through 2005.
22. W-2 Forms for Jessica Johnson for the years 2002 through 2005.
23. Monthly invoices from Neighborhood Health Partnership for the years 2003 and
2005.
24. Monthly invoices from Fortis for the years 2003 and 2004.
25. Payment register of checks written to Bell South, T-Mobile, Voicestream and Direct
TV for the years 2002 through 2005.
26. Other items referenced throughout the report.
In addition to the written documentation provided, a physical inspection of the business
premises was conducted, and a management interview with John Johnson took place.
Information gathered at this interview, along with conversations with Elaine Adams, The
Companys Controller and Judith Jane, CPA, The Companys outside accountant, became
an integral part of this report.
Appendix 2
CONTINGENT AND LIMITING CONDITIONS
This appraisal is subject to the following contingent and limiting conditions:
1. Information, estimates, and opinions contained in this report are obtained from
sources considered reliable; however, Trugman Valuation Associates, Inc. has
not independently verified such information and no liability for such sources is
assumed by this appraiser.
2. All facts and data set forth in the report are true and accurate to the best of the
appraiser's knowledge and belief. We have not knowingly withheld or omitted
anything from our report affecting our value estimate.
3. Possession of this report, or a copy thereof, does not carry with it the right of
publication of all or part of it, nor may it be used for any purpose without the
previous written consent of the appraiser, and in any event only with proper
authorization. Authorized copies of this report will be signed in blue ink by an
officer of Trugman Valuation Associates, Inc. Unsigned copies, or copies not
signed in blue ink, should be considered to be incomplete.
4. None of the contents of this valuation report shall be conveyed to any third party
or to the public through any means without the express written consent of
Trugman Valuation Associates, Inc.
5. No investigation of titles to property or any claims on ownership of the property
by any individuals or company has been undertaken. Unless otherwise stated
in our report, title is assumed to be clear and free of encumbrances and as
provided to the appraiser.
6. Unless otherwise provided for in writing and agreed to by both parties in
advance, the extent of the liability for the completeness or accuracy of the data,
opinions, comments, recommendations and/or conclusions shall not exceed the
amount paid to the appraisers for professional fees and, then, only to the party(s)
for whom this report was originally prepared.
7. The various estimates of value presented in this report apply to this appraisal
only and may not be used out of the context presented herein. Any other use of
this report may lead the user to an incorrect conclusion for which Trugman
Valuation Associates, Inc. assumes no responsibility.
8. The appraisal estimate of fair market value reached in this report is necessarily
based on the definition of fair market value as stated in the Introduction Section.
Appendix 2
CONTINGENT AND LIMITING CONDITIONS
An actual transaction in the shares may be concluded at a higher value or lower
value, depending on the circumstances surrounding the company, the appraised
business interest and/or the motivations and knowledge of both the buyers and
sellers at that time. Trugman Valuation Associates, Inc. makes no guarantees
as to what values individual buyers and sellers may reach in an actual
transaction.
9. It should be specifically noted that the valuation assumes the business will be
competently managed and maintained by financially sound owners, over the
expected period of ownership. This appraisal engagement does not entail an
evaluation of management's effectiveness, nor are we responsible for future
marketing efforts and other management or ownership actions upon which actual
results will depend.
10. No opinion is intended to be expressed for matters that require legal or other
specialized expertise, investigation or knowledge beyond that customarily
employed by appraisers valuing businesses.
11. It is assumed that there are no regulations of any government entity to control
or restrict the use of the underlying assets, unless specifically referred to in the
report and that the underlying assets will not operate in violation of any
applicable government regulations, codes, ordinances or statutes.
12. Valuation reports may contain prospective financial information, estimates or
opinions that represent the view of the appraiser about reasonable expectations
at a particular point in time, but such information, estimates or opinions are not
offered as predictions or as assurances that a particular level of income or profit
will be achieved, or that specific events will occur.
13. We assume that there are no hidden or unexpected conditions of the business
that would adversely affect value, other than as indicated in this report.
14. In some instances, estimates have been used when documentation was missing
and could not be provided by The Company. We do not believe that these
estimates would cause a material change to our opinion of value. However,
readers of this report may draw a different conclusion.
Appendix 3
Appraisal of John Johnson Sales Company, Inc.
VALUATION ANALYSTS REPRESENTATION
We represent that, to the best of our knowledge and belief:
the statements of fact contained in this report are true and correct.
the reported analyses, opinions, and conclusions are limited only by the reported
assumptions and limiting conditions and are our personal, impartial, and unbiased
professional analyses, opinions, and conclusions.
we have no present or prospective interest in the property that is the subject of this
report, and we have no personal interest with respect to the parties involved.
we have no bias with respect to the property that is the subject of this report or to the
parties involved with this assignment.
our engagement in this assignment was not contingent upon developing or reporting
predetermined results.
our compensation for completing this assignment 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 value opinion, the attainment of a stipulated result,
or the occurrence of a subsequent event directly related to the intended use of this
appraisal.
our analyses, opinions, and conclusions were developed and this report has been
prepared in conformity with the standards of The American Institute of CPAs, Uniform
Standards of Professional Appraisal Practice, and the business valuation standards of
The Institute of Business Appraisers Inc., the American Society of Appraisers and the
American Institute of Certified Public Accountants.
The American Society of Appraisers has a mandatory recertification program for all of
its Senior members. All Senior members of our firm are in compliance with that program.
no one provided significant business and/or intangible asset appraisal assistance to the
persons signing this certification.
Appendix 4
GARY R. TRUGMAN, C.P.A.*/A.B.V., M.C.B.A., A.S.A., M.V.S.
PROFESSIONAL QUALIFICATIONS
Experience
President of Trugman Valuation Associates, Inc., a firm specializing in business valuation and
litigation support services. Business valuation experience includes a wide variety of assignments
including closely-held businesses, professional practices and thinly traded public companies.
Industries include but are not limited to security, automotive, funeral homes, health care,
securities brokerage and financial institutions, retail, manufacturing, service, and professional
business establishments. Assignments have also included the valuation of stock options and
various types of intangible assets.
Business valuation and litigation support services have been rendered for a variety of purposes
including, but not limited to family law matters, business damages, lender liability litigation, buy-
sell agreements, shareholder litigation, estate and gift tax matters, buying and selling
businesses, malpractice litigation, wrongful death, sexual discrimination, age discrimination,
wrongful termination, and breach of contract. Representation in litigation includes plaintiff,
defendant, mutual, and court-appointed neutral.
Court Testimony. Has been qualified as an expert witness in State Courts of New Jersey, New
York, Pennsylvania, Connecticut, Florida, Michigan and Federal District Court in Newark, New
Jersey and Hammond, Indiana, and has performed extensive services relating to court testimony.
Testimony has also been provided in arbitration cases before the National Association of
Securities Dealers and the American Stock Exchange, as well as other forms of arbitration.
Court Appearances. Has appeared in the following courts: New Jersey Morris, Atlantic,
Sussex, Bergen, Burlington, Passaic, Mercer, Middlesex, Monmouth, Essex, Hunterdon, Warren,
Hudson, and Union. New York Bronx Westchester. Florida Palm Beach. Polk, Lee and
Broward. Connecticut Fairfield, Milford/Ansonia, Middlesex. Pennsylvania Montgomery,
Lehigh. Massachusetts Middlesex. Indiana Marion. California San Jose. Michigan Ottawa.
Court Appointments. Has been court appointed in New Jerseys Morris, Sussex, Essex, Union,
Hunterdon, Somerset, Monmouth, Middlesex, Passaic, Warren, Bergen, and Hudson counties
by numerous judges, as well as Orange County, Florida.
Mutual Expert. Regularly serves as a mutually-agreed upon expert.
Early Settlement Panel. Has served on the Blue Ribbon Early Settlement Panel in Sussex
County.
Professional Designations
*CPA: Licensed in Florida (1996), New Jersey (1978) and New York (1977).
Appendix 4
Professional Designations
ABV: Accredited in Business Valuation designated by The American Institute of Certified
Public Accountants (1998).
MCBA: Master Certified Business Appraiser designated by The Institute of Business
Appraisers, Inc. (1999). Original certification (CBA) in 1987.
ASA: Accredited Senior Appraiser designated by the American Society of Appraisers
(1991). Reaccredited in 2006.
Education
Masters in Valuation Sciences - Lindenwood College, St. Charles, MO (1990). Thesis
topic: Equitable Distribution Value of Closely-Held Businesses and Professional
Practices.
B.B.A. in Accountancy - Bernard M. Baruch College, New York, NY (1977).
Faculty
National Judicial College, Reno, Nevada since 1997.
Appraisal Education
FICPA Valuation, Accounting and Litigation Services Conference. Ft. Lauderdale, FL,
Florida Institute of Certified Public Accountants, 2007.
AICPA National Business Valuation Conference. Austin, TX, American Institute of
Certified Public Accountants, 2006.
FCG Conference. Austin, TX, Financial Consulting Group, 2006.
Personal Goodwill. BV Resources Telephone Conference, 2006.
FICPA Valuation, Accounting and Litigation Services Conference. Ft. Lauderdale, FL,
Florida Institute of Certified Public Accountants, 2006.
Valuation . Las Vegas, NV, American Institute of Certified Public Accountants and
2.
American Society of Appraisers, 2005.
AICPA National Business Valuation Conference. Orlando, FL, American Institute of
Appendix 4
Appraisal Education
23rd Annual Advanced Business Valuation Conference. San Antonio, TX, American
Society of Appraisers, 2004.
2004 National Business Valuation Conference. Las Vegas, NV, Institute of Business
Appraisers, 2004.
New Jersey Law and Ethics Course. Parsippany, NJ, New Jersey Society of Certified
Public Accountants, 2004.
22 Annual Advanced Business Valuation Conference. Chicago, IL, American Society
nd
of Appraisers, 2003.
AICPA National Business Valuation Conference. New Orleans, LA, American Institute
of Certified Public Accountants, 2002.
Brown v. Brown: The Most Important Equitable Distribution Decision Since Painter.
Fairfield, NJ, New Jersey Institute for Continuing Legal Education, 2002.
2001 National Business Valuation Conference. Las Vegas, NV, American Institute of
2001 Share the Wealth Conference. Orlando, FL, The Institute of Business Appraisers,
2001.
2000 National Conference on Business Valuation, Miami, FL, American Institute of
19 Annual Advanced Business Valuation Conference, Philadelphia, PA, American
th
Hot Issues in Estate and Gift Tax Returns: What do the Auditors Look For? Fairfield, NJ,
New Jersey Institute for Continuing Legal Education, 2000.
Pulling Ahead of the Pack - The Institute of Business Appraisers 2000 National
Conference. Phoenix, AZ, The Institute of Business Appraisers, 2000.
Business Valuation Conference. Las Vegas, NV, American Institute of Certified Public
Accountants, 1999.
1999 International Appraisal Conference. Boston, MA, American Society of Appraisers,
1999
1999 Annual Conference: The Future of Business Valuation. Orlando, FL, The Institute
of Business Appraisers, Inc., 1999.
Appendix 4
Appraisal Education
1998 Joint Business Valuation Conference. Montreal, Canada, American Society of
Appraisers and Canadian Institute of Chartered Business Valuators, 1998.
The Future of Business Valuation Annual Conference. San Antonio, TX, The Institute of
Business Appraisers, Inc., 1998.
Business Valuation Conference. San Diego, CA, American Institute of Certified Public
Accountants, 1997.
16 Annual Advanced Business Valuation Conference. San Francisco, CA, American
th
Quantifying Marketability Discounts. San Francisco, CA, Mercer Capital, 1997.
Introduction to Machinery & Equipment Valuation. Chicago, IL, American Society of
Appraisers, 1997.
National Conference on Appraising Closely-Held Businesses. San Diego, CA, The
Institute of Business Appraisers, Inc., 1997.
Business Valuation Conference. Phoenix, AZ, American Institute of Certified Public
Accountants, 1996.
15th Annual Business Valuation Conference. Memphis, TN, American Society of
Appraisers, 1996.
1996 Business Valuation Conference. Holmdel, NJ, NJ Society of Certified Public
Accountants, 1996.
National Conference on Appraising Closely-Held Businesses. Orlando, FL, The Institute
Business Valuation Conference. New Orleans, LA, American Institute of Certified Public
Accountants, 1995.
14 Annual Business Valuation Conference. Boston, MA, American Society of
th
Appraisers, 1995.
1995 Matrimonial Conference. Holmdel, NJ, New Jersey Society of Certified Public
Accountants, 1995.
Joint Business Valuation Conference. San Diego, CA, American Institute of Certified
Public Accountants - The Institute of Business Appraisers, Inc., 1995.
Appendix 4
Appraisal Education
1995 Business Valuation Conference. Holmdel, NJ, New Jersey Society of Certified
National Conference on Appraising Closely-Held Businesses. Las Vegas, NV, The
Institute of Business Appraisers, Inc., 1995.
1994 International Conference. Chicago, IL., American Society of Appraisers, 1994.
1993 International Conference. Seattle, WA, American Society of Appraisers, 1993.
Uniform Standards of Professional Appraisal Practice and Professional Appraisal Ethics.
Seattle, WA, American Society of Appraisers, 1993.
11th Annual Business Valuation Conference. Atlanta, GA, American Society of
Appraisers, 1992.
1992 International Conference. New Orleans, LA, American Society of Appraisers 1992.
10th Annual Business Valuation Conference. Scotsdale, AZ, American Society of
Appraisers, 1991.
1991 International Conference. Philadelphia, PA, American Society of Appraisers, 1991.
Appraising Closely-Held Businesses. Orlando, FL, The Institute of Business Appraisers,
Inc., 1991.
Principles of Valuation-Business Valuation Case Study. New Orleans, LA, American
Principles of ValuationBusiness Valuation Methodology. New Orleans, LA, American
Divorce Tax Planning. American Institute of Certified Public Accountants, 1988.
Valuation of Closely-Held Businesses. Total Tape Inc., 1987.
Business Valuation for Accountants. Paramus, NJ, The Institute of Business Appraisers,
Inc., 1986.
Appendix 4
Appraisal Education
Valuation of Closely-Held Businesses. American Institute of Certified Public Accountants,
1986.
Has performed extensive reading and research on business valuation and related topics.
Lecturer
Personal Goodwill: Does the Non-Propertied Spouse Really Lose the Battle? Ft.
Lauderdale, FL, Florida Bar Family Law Section, 2007.
Dos and Donts of Expert Testimony, Ft. Lauderdale, FL, FICPA Valuation, Accounting
and Litigation Services Conference, 2007.
Valuing Small Businesses for Divorce, Austin, TX, AICPA National Business Valuation
Conference, 2006.
Ask the Experts, Austin, TX, AICPA National Business Valuation Conference, 2006.
Changes to the 2006 USPAP, Overland Park, KS, Kansas Valuation Conference, 2006.
Tax Effecting S Corporations and Other Flow Through Entities, Overland Park, KS,
Kansas Society of CPAs Valuation Conference, 2006.
Valuation Discounts, Minneapolis, MN, MN Society of CPAs Valuation Conference, 2006.
Malpractice and Business Valuation, Minneapolis, MN, MN Society of CPAs Valuation
Conference, 2006.
Mock Trial - Being an Expert Witness, Woodbridge, NJ, NJ Divorce Conference, 2006.
Expert Reports Used in Divorce, Las Vegas, AICPA Divorce Conference, 2006.
Ask the Expert, Ft. Lauderdale, FL, FICPA Valuation, Accounting and Litigation Services
Conference, 2006.
Valuing the Very Small Company, Las Vegas, NV, Valuation , American Institute of
2
Certified Public Accountants and American Society of Appraisers, 2005.
Being an Effective Witness, Las Vegas, NV, Valuation , American Institute of Certified
2
Public Accountants and American Society of Appraisers, 2005.
Divorce Valuation versus Other Valuations, Richmond, VA, Virginia Society of CPAs
Conference, 2005.
Appendix 4
Lecturer
Hot Topics in Business Valuation, Cleveland, OH, SSG, 2005.
Valuing Small Businesses and Professional Practices. Atlanta, GA, George Society of
CPAs Super Conference, 2005.
Personal Goodwill in a Divorce Setting. Ft. Lauderdale, FL, Florida Institute of Certified
Public Accountants Valuation & Litigation Services Conference, 2005.
The Market Approach: Case Study. Orlando, FL, American Institute of CPAs, 2004.
Valuing Professional Practices, Orlando, FL, American Institute of CPAs, 2004.
How to Develop Discount Rates. Ft. Lauderdale, FL, Florida Institute of CPAs Valuation
and Litigation Conference, 2004; Detroit, Michigan, MI Valuation Conference, 2004.
To Tax or Not to Tax - That is the Question: Tax Effecting S Corporations, Chicago, IL,
Illinois Business Valuation Conference, 2004.
Controversial Topics. Richmond, VA, VA Valuation and Litigation Conference, 2004.
Guideline Company Methods: Levels of Value Issues, Telephone Panel, Business
Valuation Resources, 2004.
Small Business Case Study. Phoenix, AZ, American Institute of Certified Public
Accountants National Business Valuation Conference, 2003; Ft. Lauderdale, FL, Florida
Institute of CPAs, 2004.
Valuation Issues - What You Need to Know. San Antonio, TX, AICPA National Auto
Dealer Conference, 2003.
Professional Practice Valuations. Tampa, FL, The Florida Bar - Family Law Section,
2003.
Business Valuation Basics. Orlando, FL, The Florida Bar Annual Meeting, 2003.
Business Valuation for Divorce. Orlando, FL, The Florida Bar Annual Meeting, 2003.
Business Valuation in a Litigation Setting. Las Vegas, NV, CPAmerica International,
2003.
The Transaction Approach - How Do We Really Use It? Tampa, FL, American Society
of Appraisers International Conference, 2003.
Appendix 4
Lecturer
Advanced Testimony Techniques. Chicago, IL, Illinois Business Valuation Conference,
2003.
To Tax or Not to Tax? Issues Relating to S Corps and Built-In Gains Taxes.
Washington, DC, Internal Revenue Service, 2003.
Issues for CPAs in Business Valuation Reports. New Orleans, LA, American Institute of
Guideline Public Company Method: Minority Versus Control Dueling Experts. New
Orleans, LA, American Institute of Certified Public Accountants, 2002.
To Tax or Not To Tax? - That Is The Question. Minneapolis, MN, Minnesota Society of
Pressing Problems and Savvy Solutions When Retained by the Non-Propertied Spouse.
Las Vegas, NV, American Institute of Certified Public Accountants/American Academy
of Matrimonial Lawyers, 2002.
The Transaction Method - IBA Database. Atlanta, GA, Financial Consulting Group, 2002.
Valuation Landmines - How Not To Get In Trouble. Washington, DC, 2002 Annual
Business Valuation Conference, The Institute of Business Appraisers, 2002.
Guest Lecturer on Business Valuation. New York, NY, Fordham Law School, 2002.
Guideline Company Analysis. Chicago, IL, Illinois CPA Foundation, 2002.
Guideline Company Analysis. Las Vegas, NV, American Institute of Certified Public
Accountants, 2001.
Discount and Capitalization Rates. Bloomington, MN, Minnesota Society of CPAs, 2001.
Valuation Premiums and Discounts. Louisville, KY, Kentucky Tax Institute, 2001.
Business Valuation. St. Louis, MO, Edward Jones, 2001.
Business Valuation for Marital Dissolutions. Dublin, OH, Ohio Supreme Court, 2001.
Testimony Techniques. Chicago, IL, Illinois CPA Society, 2001.
Valuing the Very Small Business. Chicago, IL, Illinois CPA Society, 2001.
Valuations in Divorce. Ft. Lauderdale, FL, Florida Institute of Certified Public
Accountants, 2001.
Appendix 4
Lecturer
Valuation Land Mines To Watch Out For. Miami, FL, American Institute of Certified
Ask the Experts - Discounts and Premia. Miami, FL, American Institute of Certified Public
Accountants, 2000.
Understanding a Financial Report. Columbia, SC, South Carolina Bar Association, 2000.
Business Damages. Columbia, SC, South Carolina Bar Association, 2000.
A Fresh Look at Revenue Rulings 59-60 and 68-609. New Orleans, LA, Practice
Valuation Study Group, 2000.
Business Valuation: Whats It Really All About? New York, NY, New York State Society
of Certified Public Accountants, 1999.
Understanding and Increasing the Value of Your Business. Phoenix, AZ, Inc. Growth
Conference, 1999.
Equitable Distribution of Closely-Held Businesses Fair Market Value or Fair Value?
Atlantic City, NJ, Association of Trial Lawyers of America -- New Jersey, 1999.
Controversial Topics In Business Valuation. Orlando, FL, The Institute of Business
Appraisers, Inc., 1999; Ft. Lauderdale, FL, Florida Institute of Certified Public
Accountants, 1999, 2003.
Discount and Capitalization Rates. San Antonio, TX, The Institute of Business Appraise,
Inc., 1998; Asheville, NC, North Carolina Association of Certified Public Accountants,
1998; Ohio, Ohio Society of Certified Public Accountants, 1998.
Developing a Niche in Business Valuation. Las Vegas, NV, American Institute of Certified
Digesting Business Valuation for Legal Transactions. New Brunswick, NJ, Institute of
Continuing Legal Education, 1997.
The Market Approach to Business Valuation. Baltimore, MD, CPA Associates
International, 1997.
Valuing Accounting Practices for Sale or Merger. New Orleans, LA, American Institute
of Certified Public Accountants Practitioners Symposium, 1997.
The Value of a Deal. New York, NY, Practicing Law Institute, 1997.
Appendix 4
Lecturer
Revenue Ruling 59-60 Revisited . San Diego, CA, The Institute of Business Appraisers,
Inc., 1997.
Capitalization Rates. Greensboro, NC, National Association of Certified Valuation
Analysts, 1996.
Valuation Discounts and Premiums. Greensboro, NC, National Association of Certified
Valuation Analysts, 1996; New York, NY, New York State Society of Certified Public
Accountants, 1999; San Francisco, CA, Accounting Firms Associated, Inc., 1999.
Equitable Distribution Value of Small Closely-Held Businesses and Professional
Practices. Greensboro, NC, North Carolina Association of Certified Public Accountants,
1996.
Does the Market Transaction Method Really Work? Phoenix, AZ, National Business
Valuation Conference, American Institute of Certified Public Accountants, 1996.
Valuation Issues Affecting Transfers of Family Businesses. Princeton, NJ, New Jersey
Society of Certified Public Accountants Financial Planning Conference, 1996.
Crossfire: Why You Should Not Use the Excess Earnings Method. New Orleans, LA,
American Institute of Certified Public Accountants Business Valuation Conference, 1995.
Practice Aid 93-3, What Did We Do? Tampa, FL, Florida Institute of Certified Public
Accountants, 1995.
Revenue Ruling 59-60: What Does It Really Say? East Brunswick, NJ, New Jersey
Society of Certified Public Accountants, 1995.
Preparing and Defending a Business Valuation Report in Litigation. Holmdel, NJ, New
Jersey Society of Certified Public Accountants, 1995.
Using the Market Approach to Value Small and Medium Sized Businesses. San Diego,
CA; Orlando, FL, American Institute of Certified Public Accountants, Institute of Business
Appraisers, Inc., Joint Conference, 1995 - 1996.
CPAs Role in Divorce Litigation. Holmdel, NJ, New Jersey Society of Certified Public
Accountants, 1995.
Business Valuation and Litigation. Reno and Las Vegas, NV, Nevada Society of Certified
Appendix 4
Lecturer
Business Valuation with an Emphasis on Employee Stock Ownership Plans, Mergers and
Acquisitions, and Initial Public Offerings. Phoenix, AZ, National Industry Conference,
American Institute of Certified Public Accountants, 1994.
Business Valuation-There's a Right Way and a Wrong Way to Do It. Dallas, TX, Dallas
Estate Planning Council, 1993, Chattanooga, TN, Chattanooga Estate Planning Council,
1998.
The CPA's Role in Divorce Litigation. Louisville, KY, Kentucky Society of Certified Public
Accountants, 1993.
Valuation of Accounting and Other Professional Practices. West Orange, NJ, Small and
Medium Firm Conference, NJ Society of Certified Public Accountants, 1993.
Information Gathering Strategies for Business Appraisal. San Diego, CA, National
Conference on Appraising Closely-Held Businesses, The Institute of Business
Appraisers, Inc., 1993.
Capitalization Rates. Edison, NJ, Matrimonial Conference, NJ Society of Certified Public
Accountants, 1993.
Measure of Value in Theory and Reality for Marital Dissolutions. Orlando, FL, National
Equitable Distribution Value of Closely-Held Companies and Professional Practices. San
Diego, CA, National Conference on Appraising Closely-Held Businesses, The Institute
Tax Aspects of Divorce. NJ, Institute of Continuing Legal Education, 1989-1990, 1992.
Appraising Closely-Held Businesses: Expert Testimony. Orlando, FL, National
Business Valuation for Accountants. NJ, The Institute of Business Appraisers, Inc., 1988,
1989, 1990.
Using Forecasts and Projections in Business Valuation. Orlando, FL, Valuation Study
Group, 1989.
What You Need to Know About Valuation and Litigation Support Services. East Hanover,
NJ, CPA Club, 1989.
Appendix 4
Lecturer
Valuing Professional Practices. San Diego, CA, National Conference on Appraising
Closely-Held Businesses, The Institute of Business Appraisers, Inc., 1989.
What is Your Business Worth? Wayne, NJ, Dean Witter Reynolds, 1988.
Understanding Business Valuation for the Practice of Law. NJ, Institute of Continuing
Legal Education, 1987.
Instructor
Principles of Valuation - Part 2. American Society of Appraisers, Austin, TX, 2005;
Chicago, IL, 2006; Brooklyn, NY 2006.
Small Business Valuation: A Real Life Case Study. American Institute of Certified Public
Accountants, Rocky Hill, CT, 2005; Richmond, VA, 2005; Columbia, MD, 2005.
Valuation Discount and Capitalization Rates, Valuations Premiums and Discounts.
Rhode Island Society of CPAs, Providence, RI, 2004.
Mergers and Acquisitions. Rhode Island Society of CPAs, Providence, RI, 2004.
Valuing a Small Business: Case Study. Rhode Island Society of CPAs, Providence, RI,
2004.
Discounts & Premiums in a Business Valuation Environment. American Institute of
Certified Public Accountants, Roseland, NJ; 2004, Rocky Hill, CT, 2005.
Advanced Cost of Capital Computations. American Society of Certified Public
Accountants, Rhode Island, NJ 2004.
Fundamentals of Business Valuation - Part 2. American Institute of Certified Public
Accountants, Atlanta, GA, 2004.
Splitting Up is Hard to Do: Advanced Valuation Issues in Divorce and Other Litigation
Disputes. American Institute of Certified Public Accountants, Providence, RI, 2002.
Fundamentals of Business Valuation - Part 1. American Institute of Certified Public
Accountants, Dallas, TX, 2001.
Advanced Topics. The Institute of Business Appraisers, Orlando, FL, 2001.
Business Valuation. Federal Judicial Center, Washington, DC, 2001.
Appendix 4
Instructor
Business Issues: Business Valuation-State Issues; Marital Dissolution; Shareholder
Issues and Economic Damages. National Judicial College, Charleston, SC, 2000.
Business Valuation for Marital Dissolutions. National Judicial College, San Francisco, CA,
2000.
Business Valuation Workshop. 2000 Spring Industry Conference, American Institute of
Certified Public Accountants, Seattle, WA, 2000.
Developing Discount & Capitalization Rates. The Institute of Business Appraisers,
Phoenix, AZ, 2000.
Mergers & Acquisitions. National Association of Certified Valuation Analysts, Nevada,
1998; Ohio, 1998.
Valuation Issues in Divorce Settings. American Institute of Certified Public Accountants,
New Jersey, 1998.
Financial Statements in the Courtroom (Business Valuation Component). American
Institute of Certified Public Accountants for the National Judicial College, Texas, 1997;
Florida, 1997, 1998, 2001; Louisiana, 1998, 1999; Nevada, 1999, 2001; South Carolina,
2000, 2006; Georgia, 2000; Arizona, 2001; New York, 2002; Colorado, 2003; Ohio, 2003;
Florida, 2003; New Jersey 2005.
Preparing for AICPAs ABV Examination Review Course. American Institute of Certified
Public Accountants, New York, 1997, 2000, 2001; Pennsylvania, 1998; Kansas, 1998;
Maryland, 2000, 2001; Massachusetts, 2000; Virginia, 2002.
How to Value Mid-Size and Smaller Businesses/Using Transaction Data to Value
Closely-Held Businesses. Atlanta, GA, Chicago, IL, 1996.
Conducting a Valuation of a Closely-Held Business. The Institute of Business
How To Value Mid-Size and Smaller Businesses. The Institute of Business Appraisers,
Inc., 1995.
Valuation of Small Businesses and Professional Practices. American Society of
Appraisers, 1995.
Uniform Standards of Professional Appraisal Practice. American Society of Appraisers,
1995.
Appendix 4
Instructor
Advanced Topics in Business Valuation. New Jersey Society of Certified Public
Accountants, 1995, 1996, 1997.
Business Valuation Theory. New Jersey, 1994, 1995, 1996, 1997, 1999, 2000, 2002;
Rhode Island, 2004.
Business Valuation Approaches and Methods. New Jersey, 1994, 1995, 1996, 1997,
1998, 1999, 2000, 2002; North Carolina, 1997, 1999, 2000; Louisiana, 1997, 1998;
Massachusetts, 1997, 1998, 1999; Pennsylvania, 1997; New York, 1997, 2000; Indiana,
1997; Connecticut, 1997, 2000; Ohio, 1998; Rhode Island, 1999, 2003.
Business Valuation Discount Rates, Capitalization Rates, Valuation Premiums and
Discounts. New Jersey, 1998, 2000, 2002; North Carolina, 1997, 1999, 2000; Louisiana,
1997; Massachusetts, 1997, 1998; Rhode Island, 1997, 1999; Indiana, 1997;
Connecticut, 1997, 2000.
Business Valuation. Champaign, IL, American Institute of Certified Public Accountants
National Tax School, 1994, 1995, 1996.
Principles of Valuation: Introduction to Business Valuation. American Society of
Appraisers, 1998, 1999, 2001, 2002.
Principles of Valuation: Business Valuation Methodology. American Society of
Appraisers, 1992, 1993, 1995, 1996, 1997, 1998, 1999, 2001.
Principles of Valuation: Case Study. American Society of Appraisers, 1993, 1999, 2000,
2001, 2002, 2003.
Principles of Valuation: Selected Advanced Topics. American Society of Appraisers,
1992, 1994, 1995, 1996, 1998, 2002.
Developing Your Business Valuation Skills: An Engagement Approach. NJ Society of
Certified Public Accountants, 1992, 1993.
Advanced Business Valuation Seminar. The Institute of Business Appraisers, Inc., 1991,
1992.
10 Day Workshop on Appraising Closely-Held Businesses. The Institute of Business
Appraisers, Inc., 1991, 1998.
Financial Statement Analysis. St. Charles, MO, Lindenwood College Valuation Sciences
Program, 1989, 1990.
Appendix 4
Instructor
Former Adjunct Instructor of Federal Income Taxation and Intermediate Accounting.
Centenary College, Hackettstown, NJ, 1982-1987.
Organizations
The Institute of Business Appraisers, Inc.
American Society of Appraisers.
American Institute of Certified Public Accountants.
New Jersey Society of Certified Public Accountants.
New York State Society of Certified Public Accountants.
Florida Institute of Certified Public Accountants.
Collaborative Family Lawyers of South Florida
Awards
Presented with the Hall of Fame Award by the American Institute of Certified Public
Accountants in December 1999 for dedication towards the advancement of the business
valuation profession.
Presented with the Fellow Award by The Institute of Business Appraisers Inc., in
January 1996 for contributions made to the profession.
Professional Appointments
The Institute of Business Appraisers, Inc. Former Regional Governor for the Mid-Atlantic
Region consisting of Delaware, Kentucky, Maryland, New Jersey, Pennsylvania, Ohio,
Virginia, and West Virginia.
The American Society of Appraisers Chapter 73. Treasurer, 1996 - 1997.
Current Committee Service
Chairman of Valuation, Forensic Accounting and Litigation Services Section - Florida
Institute of CPAs.
Appendix 4
Current Committee Service
Chairman of Disciplinary and Ethics Committee -The Institute of Business Appraisers,
Inc. (committee established 1989).
AICPA ABV Examination Committee.
Past Committee Service
AICPA Committee with the Judiciary.
AICPA ABV Credential Committee.
AICPA Management Consulting Services Division - Executive Committee.
Chairman of the Valuation Standards Subcommittee - NJ Society of Certified Public
Accountants Litigation Services Committee.
Matrimonial Subcommittee - NJ Society of Certified Public Accountants Litigation
Services Committee.
Co-Chair of Courses and Seminars for Certified Public Accountants Subcommittee - NJ
Society of Certified Public Accountants.
Education Committee - The Institute of Business Appraisers, Inc.
Chairman of Education Committee - North Jersey Chapter of American Society of
Appraisers.
AICPA Subcommittee on Business Valuation & Appraisal.
International Board of Examiners - American Society of Appraisers.
Qualifications Review Committee - The Institute of Business Appraisers, Inc.
Editor
Editorial Advisor for Financial Valuation and Litigation Expert, Valuation Products and
Services.
Editorial Advisor for CPA Expert, American Institute of Certified Public Accountants.
Editorial Advisor for The Journal of Accountancy, American Institute of Certified Public
Accountants.
Appendix 4
Editor
Former Editorial Advisor of BV Q&A, Business Valuation Resources.
Former Editorial Board of CPA Litigation Service Counselor, Harcourt Brace, San Diego,
CA.
Former Editorial Board of Business Valuation Review, American Society of Appraisers,
Herndon, VA.
Author
Course entitled Small Business Valuation: A Real Life Case Study, American Institute of
Certified Public Accountants (2005).
Guideline Public Company Method - Control or Minority Value?, Shannon Pratts
Business Valuation Update (2003).
C Signed, Sealed, Delivered, Journal of Accountancy (2002).
C A CPAs Guide to Valuing a Closely Held Business, American Institute of Certified Public
Accountants (2001).
C Course entitled Business Issues - State Courts, National Judicial College, Reno, NV
(2000).
C Understanding Business Valuation: A Practical Guide to Valuing Small to Medium-Sized
Businesses, American Institute of Certified Public Accountants, First Edition (1998)
Second Edition (2002).
C Contributing author to The Handbook of Advanced Business Valuation, McGraw-Hill
(1999).
C Course entitled Valuation Issues in Divorce Settings for the American Institute of Certified
C Co-author of course entitled Accredited Business Valuer Review Course (Market
Approach Chapter) for the American Institute of Certified Public Accountants (1997).
C Understanding Business Valuations for The Institute of Continuing Legal Education
(1997).
C Six Day Business Valuation Series consisting of Business Valuation Theory, Valuation
Approaches & Methods and Advanced Topics in Business Valuation (1994, 1995.)
Appendix 4
Author
C Advocacy vs. Objectivity, CPA Litigation Service Counselor, Harcourt Brace, San Diego,
CA (1993).
C Valuation of a Closely-Held Business, Practice Aid for the American Institute of Certified
C Co-author of Guide to Divorce Engagements, Practitioners Publishing Company, Fort
Worth, TX (1992).
C A Threat to Business Valuation Practices, Journal of Accountancy (December 1991).
C Course entitled Advanced One Day Seminar for The Institute of Business Appraisers, Inc.
(1991).
C Course entitled Understanding Business Valuation for the Practice of Law for the Institute
of Continuing Legal Education in NJ.
C An Appraiser's Approach to Business Valuation, Fair$hare, Prentice Hall Law & Business
(July & August, 1991).
C What is Fair Market Value? Back to Basics, Fair$hare, Prentice Hall Law & Business
(June 1990).

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