Education Session to the Financial Accounting Standards Board

August 28, 2002

1 © Copyright 2002. The Financial Valuation Group, LC.

Founding Member Firm

Presented by:

Michael J. Mard, CPA/ABV, ASA The Financial Valuation Group mmard@fvginternational.com (813) 985-2232 James R. Hitchner, CPA/ABV, ASA Phillips Hitchner jhitchner@phillips-hitchner.com (404) 873-6633
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Some of the material in this presentation is from: Valuation for Financial Reporting: Intangible Assets, Goodwill, and Impairment Analysis, SFAS 141 and 142 by
Michael J. Mard, CPA/ABV, ASA James R. Hitchner, CPA/ABV, ASA Steven D. Hyden, CPA, ASA Mark L. Zyla, CPA/ABV, CFA, ASA © Copyright 2002, John Wiley & Sons, Inc. This material is used by permission of John Wiley & Sons, Inc
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Agenda
• • • • Valuation Methodology Example: Purchase Price Allocation Example: Goodwill Impairment Implementation of SFAS Nos. 141 and 142: Controversial Issues • Examples: Valuation Reports • Tools to Perform a Valuation Analysis

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Valuation Methodology
AICPA Statement on Standards for Valuation Services No. 1 Intangible Assets Present Value vs. Future Value Prospective Financial Information Valuation Approaches
5 © Copyright 2002. The Financial Valuation Group, LC.

AICPA Statement on Standards for Valuation Services No. 1
History Ongoing Process Section 1. General Standards
Purpose; Applicability; Effective Date; Definitions; Jurisdictional Exception; Record Keeping; General Principles Relating to a Valuation Engagement or a Consulting Valuation Engagement; Remuneration; Terms of the Engagement; Use of An Expert

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AICPA Statement on Standards for Valuation Services No. 1
Section 2. Performance Standards and Procedures for a Comprehensive Valuation Analysis
Applicability; Use, Purpose and Scope; Due Diligence; Standard of Value; Premise of Value; Valuation Approaches and Methods; Key Parameters and Assumptions; Sufficient Evidence; Prospective Financial Information; Representation Letter; Documentation; Minority, Majority and Control Issues; Other Discounts; Analysis and Understanding of the Business Interest Being Valued; Analysis and Understanding of the Economic, Industry and Other Relevant Data (continued)

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AICPA Statement on Standards for Valuation Services No. 1
Section 2. Performance Standards and Procedures for a Comprehensive Valuation Analysis
Classes of Stock and Their Rights; Valuation Date; Scope of Work; Restrictions on the Scope of Work; Extraordinary and Hypothetical Assumptions; Existence of Relationship Between the Valuation analyst and the Business; Financial Information; Fundamental Financial Information; Business Valuation Methods and Analyses; Business Valuation Conclusion

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AICPA Statement on Standards for Valuation Services No. 1
Section 3. Reporting Standards
Purpose; Applicability; Classifications of Valuation Reports; Comprehensive Valuation Report; Certification and Signature of the Valuation Analyst(s); Summary Reports of Value; Other Valuation Reports; Oral Reports

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Intangible Assets
Exhibit 2.3 The income approach is heavily relied on when valuing intangibles. Typically, two of three elements are known or can be computed thus leading to a solution for the third. If $ Return Rate of Return $ Return Value Rate of Return And
X

=

Value for Intangible Asset

Then

=

Rate of Return

=

$ Return

Value
© Copyright 2002 by John Wiley & Sons, Inc. Used with permission. © Copyright 2002. The Financial Valuation Group, LC. 10

Exhibit 2.4 A company's tangible and intangible rates of return can be presented as:
Risk/Return Distribution 30% 25% 25% 28%

20% 16% 15% 16% 16%

18%

18%

18%

10% 7% 5% 5%

8%

Land and Building

Machinery and Equipment

Assembled Workforce

Working Capital

Customer Base

Trade Name

Noncompete Agreement

Technology

Where: 1. The midline of the distribution represents the company's discount rate, 2. Items below the midline represent returns on tangible assets (such as working capital: 5% 3. Items above the midline represent returns on intangible assets (such as IPR&D: 25% and 4. The highest rate of return represents the riskiest asset, goodwill. © Copyright 2002 by John Wiley & Sons, Inc. Used with permission.

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Goodwill

0%

Software

IPR&D

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Intangible Assets
The Statement notes five elements of a present value measurement, which taken together capture the economic differences among assets:
1. An estimate of the future cash flow, or in more complex cases, series of future cash flows at different times 2. Expectations about possible variations in the amount or timing of those cash flows 3. The time value of money, represented by the risk-free rate of interest
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Intangible Assets
The Statement notes five elements of a present value measurement, which taken together capture the economic differences among assets:
4. The price for bearing the uncertainty inherent in the asset or liability 5. Other sometimes unidentifiable factors, including illiquidity and market imperfections1
1 Financial

Accounting Standards Board, Statement of Financial Concepts No. 7, Using Cash Flow Information and Present Value in Accounting Measurements, (February 2000), at 39.

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Intangible Assets
Estimates of future cash flows are subject to a variety of risks and uncertainties, especially related to new product launches, such as:
– – – – The time to bring the product to market The market and customer acceptance The viability of the technology Regulatory approval

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Intangible Assets
Estimates of future cash flows are subject to a variety of risks and uncertainties, especially related to new product launches, such as:
– Competitor response – The price and performance characteristics of the product2
Randy J. Larson, et al, Assets Acquired in a Business Combination to Be Used in Research and Development Activities: A Focus on Software, Electronic Devices, and Pharmaceutical Industries, (New York: AICPA, 2001), p. 91.
2

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Intangible Assets
The risk premium assessed in a discount rate should decrease as a project successfully proceeds through its continuum of development, since the uncertainty about accomplishing the necessary first step and each subsequent step diminishes.

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Present Value vs. Future Value
Risk Value of Future Payments
$160

$140

$120

$100 Value

$80

$60

$40

$20

$1 2 3 4 5 6 7 8 9 Year 10 11 12 13 14 15 16 17 18

19

20

Present Value of Payments of $100 over 20 years at Rate of Return of: 25% - $395.39 20% - $486.96 15% - $625.93 10% - $851.36 5% - $1,246.22

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Present Value vs. Future Value
Guaranteed Return of Future Payments
$160

$140

$120

$100 Value

$80

$60

$40

$20

$1 2 3 4 5 6 7 8 Year Guaranteed Return on Future Payments at 5% Rate of Return over 20 years, assuming Payments of: 9 10 11 12 13 14 15 16 17 18 19 20

$30 - $373.87

$50 - $623.11

$100 - $1,246.22

$150 - $1,869.33

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Present Value vs. Future Value
Guaranteed Return vs. Risk Value of Future Payments
$160

$100 at 5% $1,246.22
$140

$100 at 10% 851.36
$120

$100 at 15% 625.93 $100 at 20% $486.96 $100 at 25% $395.39 $150 at 5% $1,869.33 $100 at 5% $1,246.22 $50 at 5% $623.11 $30 at 5% $373.87

$100 Value

$80

$60

$40

$20

$1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Year

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Prospective Financial Information (PFI)
“...PFI provided by management that is accepted by the valuation specialist without having been subjected to validating procedures by the valuation specialist would contradict the performance of best practices.…”3 “The valuation specialist does not simply accept PFI from management without investigating its suitability for use in the valuation analysis. The valuation specialist is responsible for evaluating the methodology and assumptions used by management in preparing the PFI and concluding whether the PFI is appropriate for use in valuing the assets acquired.”4
Ibid., at 5.2.08. 4 Ibid., at 5.3.11.
3

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Prospective Financial Information (PFI)
The following represents specific elements of PFI for the valuation specialist to verify and suggested sources of objective evidence that support each material assumption underlying the specific elements of PFI:
• • • • • Revenue Costs of sales Sales and marketing expense General and administrative expense Technical support expense
21

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Prospective Financial Information (PFI)
The following represents specific elements of PFI for the valuation specialist to verify and suggested sources of objective evidence that support each material assumption underlying the specific elements of PFI (continued):
• • • • • R&D expense Tax expense Required levels of net working capital Required levels of tangible assets Required levels of intangible assets
22

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Valuation Approaches
• Cost Approach • Market Approach • Income Approach

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Example: Purchase Price Allocation

24 © Copyright 2002. The Financial Valuation Group, LC.

Adjusted Purchase Price: Cash paid* Liabilities assumed Current liabilities** Current maturities of long-term debt Long-term debt Adjusted Purchase Price $150,000,000 25,000,000 4,000,000 30,000,000 $209,000,000

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Cash Marketable securities Accounts receivable Inventory Prepaid expenses Land and building Machinery and equipment Organization costs and other intangibles Total current and tangible assets

Carrying Value $ 1,500,000 4,000,000 17,000,000 12,000,000 3,000,000 10,000,000 15,000,000 5,000,000 $ 67,500,000

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Carrying Value Cash $ 1,500,000 Marketable securities 4,000,000 Accounts receivable 17,000,000 Inventory 12,000,000 Prepaid expenses 3,000,000 Land and building 10,000,000 Machinery and equipment 15,000,000 Organization costs and other intangibles 5,000,000 Total current and tangible assets $ 67,500,000
(a) As marked to market. (c) Per machinery and equipment appraisal.
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Fair Value $ 1,500,000 8,000,000 (a) 17,000,000 12,000,000 3,000,000 22,000,000 (b) 19,000,000 (c) 0 (d) $ 82,500,000

(b) Per real estate appraisal. (d) Written off.
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Exhibit 3.1 - General Allocation Form ula

Current Assets

Current Liabilities

+
Tangible Assets

+
Debt and Other LTL

+
Intangible Assets

=

+
Equity

+
Goodw ill

© 2002. The Financial Valuation Group, LC. Used w ith permission.

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Exhibit 3.2 - General Allocation Form ula

Current Assets $41,500,000

Current Liabilities $25,000,000

+
Tangible Assets $209,000,000 $41,000,000 =

+
Debt and Other LTL (including shortterm portion) $34,000,000

+
Intangible Assets and Goodw ill $126,500,000

+
Equity $150,000,000

$209,000,000

© 2002. The Financial Valuation Group, LC. Used w ith permission.

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Asset Software Customer relationships Assembled workforce* Noncompete agreements Technology In-process research and development Trade Name Goodwill

Type Technology-based Customer-related Goodwill Contractual-based Technology-based Technology-based Marketing-related N/A

Valuation Approach (Method) Cost approach (cost to recreate) Cost approach (coast to recreate) Cost approach (coast to recreate) Income approach (before and after DCF) Income approach (multi-period excess earnings) Income approach (multi-period excess earnings) Income approach (relief from royalties) Residual

•* SFAS No. 141 prohibits Assembled Workforce from recognition as an intangible asset apart from goodwill. However, the asset is valued here to provide a basis for a return in the excess earnings methodology. Its value is included in Goodwill in the final analysis.
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Exhibit 3.3 - General Allocation Form ula - Invested Capital

Net Working Capital $16,500,000

Debt and Other LTL (including shortterm portion) $34,000,000

+
Tangible Assets $184,000,000 $41,000,000 =

+
$184,000,000 Equity

+
Intangible Assets and Goodw ill $126,500,000

$150,000,000

© 2002. The Financial Valuation Group, LC. Used w ith permission.
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TAR GET C OM P ANY B US INES S ENTER P R IS E VALUE - AS S UM P TIONS AS OF DEC EM B ER 31, 2001 ($ 000s ) A C T UA L 2001 1. S A LE S S a le s Gro wth P e rc e nta ge Ne t S a le s 2 . E XP E N S E S C o s t o f S a le s C o s t o f S a le s P e rc e nta ge Ope ra ting Expe ns e s Ope ra ting Expe ns e s P e rc e nta ge De pre c ia tio n (M AC R S ) Othe r Inc o m e (Expe ns e ), ne t 3 . C A S H F LO W C a pita l Expe nditure s C a pita l Expe nditure s P e rc e nta ge P ro je c te d Wo rking C a pita l a s P e rc e nt o f S a le s P ro je c te d Wo rking C a pita l B a la nc e (1) $ 16,500 P ro je c te d Wo rking C a pita l R e quire m e nt 4 . OTHER Effe c tive Ta x R a te R e quire d R a te o f R e turn 40.0% 16.0%

Exhibit 3.4

F OR EC A S T 2 0 11 7.5% $ 155,070 $ 60,477 39.0% $ 44,970 29.0% $ 1,551 0.0% $ 1,551 1.0% 15.0% $ 23,260 1,623 40.0%

$ 60,000 $ 24,000 40.0% $ 18,000 30.0% $ 1,750 0.0%

(1) B a la nc e a t De c e m be r 31, 2001 s ta te d a t fa ir va lue . No te : S o m e a m o unts m a y no t fo o t due to ro unding. © 2002. J o hn Wile y & S o ns , Inc . Us e d with pe rm is s io n.

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TARGET COMP ANY BUSINESS ENTERP RISE VALUE - ASSUM P TIONS AS OF DECEMBER 31, 2001 ($ 000s ) A M OR TIZA TION OF IN TA N GIB LES (TA X) As s umptio n: Intangibles receive 15-year tax life per Sec. 197 P urchas e P rice P lus : Liabilities As s umed Adjus ted P urchas e P rice Les s : Tangible As s ets Amo rtizable Intangible As s ets Divide: Tax Life (years ) Annual Amo rtizatio n, Ro unded $ 150,000 59,000 209,000 (82,500) $ 126,500 15 $ 8,433

Exhibit 3.4

No te: So me amo unts may no t fo o t due to ro unding. © 2002. J o hn Wiley & So ns , Inc. Us ed with permis s io n.

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TARGET COM PANY BUSINESS ENTERPRISE VALUE - CASH FLOW FORECAST AS OF DECEM BER 3 1, 2 0 0 1 ($ 0 0 0 s ) A C TU A L 2001 Sales Gro wt h Percent ag e Net Sales Co s t o f Sales Gro s s Pro fit Op erat ing Exp ens es Dep reciat io n (M ACRS) Amo rt izat io n o f Int ang ib les (Tax) To t al Op erat ing Exp ens es Taxab le Inco me Inco me Taxes Net Inco me Net Cas h Flo w Net Inco me Cap it al Exp end it ures Chang e in Wo rking Cap it al Dep reciat io n Amo rt izat io n o f Int ang ib les (Tax) Net Cas h Flo w Pres ent Value Fact o r, where Dis co unt Rat e = Pres ent Value o f Net Cas h Flo w 16 .0 % $ 6 0 ,0 0 0 2 4 ,0 0 0 3 6 ,0 0 0 18 ,0 0 0 1,750 0 19 ,750 16 ,2 50 6 ,50 0 $9 ,750

Exhib it 3 .5

F O R EC A S T 2002 2 0 11 15.0 % 7.5% $6 9 ,0 0 0 $155,0 70 2 7,6 0 0 6 0 ,4 77 4 1,4 0 0 2 0 ,70 0 3 ,0 9 7 8 ,4 3 3 3 2 ,2 3 0 9 ,170 3 ,6 6 8 $5,50 2 9 4 ,59 3 4 4 ,9 70 1,551 8 ,4 3 3 54 ,9 55 3 9 ,6 3 8 15,8 55 $2 3 ,78 3

$5,50 2 (6 9 0 ) 6 ,150 3 ,0 9 7 8 ,4 3 3 2 2 ,4 9 2 0 .9 2 8 5 $2 0 ,8 8 3

$2 3 ,78 3 (1,551) (1,6 2 3 ) 1,551 8 ,4 3 3 3 0 ,59 4 0 .2 4 4 1 $7,4 6 9

No t e: So me amo unt s may no t fo o t d ue t o ro und ing . © 2 0 0 2 . J o hn Wiley & So ns , Inc. Us ed wit h p ermis s io n.

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TARGET COM PANY BUSINESS ENTERPRISE VALUE - CASH FLOW FORECAST AS OF DECEM BER 3 1, 2 0 0 1 ($ 0 0 0 s ) A C TU A L 2001 2 0 11 Cas h Flo w Les s : Tax Benefit o f Amo rtizat io n 2 0 11 Cas h Flo w, net o f Benefit 2 0 12 Cas h Flo w, As s uming Gro wt h o f Res id ual Cap it alizat io n Rat e Res id ual Value, 2 0 12 Pres ent Value Fact o r Fair Value o f Res id ual Net Pres ent Value o f Net Cas h Flo w, 2 0 0 2 - 2 0 11 Net Pres ent Value o f Res id ual Cas h Flo w Pres ent Value o f Amo rt izat io n Tax Benefit, 2 0 12 -2 0 16 To t a l Inv e s t e d C a p i t a l, R o und e d No te: So me amo unt s may no t fo o t d ue t o ro und ing . © 2 0 0 2 . J o hn Wiley & So ns , Inc. Us ed wit h p ermis s io n. 5.0 %

Exhib it 3 .5

F O R EC A S T 2002 $3 0 ,59 4 (3 ,3 73 ) $2 7,2 2 0 $2 8 ,58 1 11.0 0 % $2 59 ,8 3 0 0 .2 4 4 1 $6 3 ,4 3 6 $118 ,4 59 6 3 ,4 3 6 2 ,6 9 7 $18 5,0 0 0

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The weighted average cost of capital is expressed in the following formula: WACC Where: WACC Ke We = (Ke x We ) + (kp x Wp) + (kd(pt)[1-t] x Wd) = Weighted average cost of capital = Cost of common equity capital = Percentage of common equity in the capital structure, at market value kp = Cost of preferred equity Wp = Percentage of preferred equity in the capital structure, at market value kd(pt) = Cost of debt (pretax) t = Tax rate Wd = Percentage of debt in the capital structure, at market value5

Shannon P. Pratt, Cost of Capital, Estimation and Applications, John Wiley & Sons, Inc., (New York: 1998), p. 46.
5

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Substituting values into the WACC formula provides the following: WACC = (20.00% x 75.00%) + (6.50%[1-40.00%] x 25.00%) = 15.00% + (3.90% x 25.00%) = 15.00% + 0.97% = 15.97% Rounded to, 16%

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The rates of return on the other intangibles are similarly selected with reference to the WACC. The rates for the intangible assets are:
Software Customer base Assembled workforce Trade name Noncompete agreement Existing technology In-process research and development 18% 18% 16% 16% 16% 18% 25%

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The formula for the tax amortization benefit is: AB = PVCF*(n/(n-((PV(Dr,n,-1)*(1+Dr)^0.5)*T))-1) Where: AB PVCF n Dr = = = = Amortization benefit Present value of cash flows from the asset 15 year amortization period Discount rate Present value of an annuity of $1 over 15 years, at the discount rate Tax rate

PV(Dr,n,-1)*(1+Dr)^0.5 = T =

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TARGET COM PANY VALUATION OF ACQUIRED SOFTWARE AS OF DECEM BER 3 1, 2 0 0 1

Exhib it 3 .6

All s o ftware was d evelo p ed int ernally b y Co mp any fo r its o wn us e. Rig hts t o s o ftware were trans ferred at acq uis itio n. The s o ft ware is writ ten in C++ p ro g ramming lang uag e. Valuatio n is b as ed o n co s t to rep lace les s o b s o les cence. Co s t s are b as ed o n internally d evelo p ed Co mp any metrics fo r s o ftware d evelo p ment p ro d uct ivit y. So urce: Leo nard Riles , Direct o r o f Pro d uct Develo p ment P R OD U C TIV ITY LIN ES OF IN P LA C E C OD E R A TIN G ( 1) R A TE ( 1) M o d ule 1 2 6 ,4 0 0 2 3 .0 M o d ule 2 3 2 ,6 0 0 3 2 .0 M o d ule 19 M o d ule 2 0 To tal Numb er o f Lines To tal Numb er o f Ho urs to Recreate 7,0 0 0 54 ,0 0 0 2 9 4 ,9 8 0 112 ,50 7 2 3 3 .0 2 .0

HOU R S TO R EC R EA TE 8 ,8 0 0 16 ,3 0 0 2 ,3 3 3 2 7,0 0 0

(1) Lines o f co d e p er ho ur, b as ed o n p ro d uct ivit y as s es s ment fo r averag e mo d ule o f p ro g ramming . No te: So me amo unt s may no t fo o t d ue t o ro und ing . © 2 0 0 2 . J o hn Wiley & So ns , Inc. Us ed wit h p ermis s io n.

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TARGET COM PANY VALUATION OF ACQUIRED SOFTWARE AS OF DECEM BER 3 1, 2 0 0 1 To tal Numb er o f Ho urs to Recreate Times : Blend ed Ho urly Rate (s ee b elo w) Rep ro d uctio n Co s t Les s : Ob s o les cence (2 ) Rep lacement Co s t Les s : Taxes @ Aft er Tax Value Befo re Amo rtizatio n Benefit Amo rtizatio n Benefit Dis co unt Rate Tax Rate Tax Amo rt izat io n Perio d Amo rtizatio n Benefit F a ir V a lue o f S o f t w a re , R o und e d (2 ) Es t imate b as ed o n numb er o f lines o f red und ant/extraneo us co d e and effective ag e and remaining eco no mic lives o f s ys tem. No te: So me amo unt s may no t fo o t d ue to ro und ing . © 2 0 0 2 . J o hn Wiley & So ns , Inc. Us ed with p ermis s io n. 18 .0 % 4 0 .0 % 15 2 5.0 % 4 0 .0 %

Exhib it 3 .6

112 ,50 7 $119 $13 ,3 8 8 ,3 3 3 (3 ,3 4 7,0 8 3 ) $10 ,0 4 1,2 50 (4 ,0 16 ,50 0 ) $6 ,0 2 4 ,750

1,0 4 2 ,3 2 1 $7,0 70 ,0 0 0

S OF TW A R E D EV ELOP M EN T C OS TS - ES TIM A TED P R OJ EC T TEA M F U N C TION Pro ject M anag er Sys tems Analys t Technical Writer Pro g rammer Sup p o rt Blend ed Ho urly Rate, Ro und ed No te: So me amo unts may no t fo o t d ue to ro und ing . © 2 0 0 2 . J o hn Wiley & So ns , Inc. Us ed with p ermis s io n. N U M B ER 1 2 1 4 2 B U R D EN ED HOU R LY R A TE $2 0 0 .0 0 150 .0 0 12 5.0 0 115.0 0 50 .0 0 $119 .0 0

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TARGET COM PANY VALUATION OF CUSTOM ER BASE AS OF DECEM BER 3 1, 2 0 0 1 HIS TOR IC A L C U S TOM ER D A TA PERCENT OF REVENUE FROM NEW CUSTOM ERS 2 .4 6 % 2 .2 6 % 4 .4 6 %

Exhib it 3 .7

YEAR 2001 2000 19 9 9

TOTAL SELLING COSTS $5,0 10 ,0 0 0 5,3 0 7,0 0 0 4 ,8 4 8 ,0 0 0 $15,16 5,0 0 0

NEW CUSTOM ER SELLING COSTS $12 3 ,2 4 6 119 ,9 3 8 2 16 ,2 2 1 $4 59 ,4 0 5

NUM BER OF NEW CUSTOM ERS 4 5 4 13

C A LC U LA TIO N O F F A IR V A LU E To t al Pret ax Selling co s ts - New Cus to mers Les s : Taxes @ Aft er Tax Selling Co s t s - New Cus to mers Divid e b y: Numb er o f New Cus to mers , 19 9 9 -2 0 0 1 Rep lacement Co s t p er New Cus to mer Times : Numb er o f Acq uired Cus to mers Rep lacement Co s t o f Cus to mer Bas e Amo rtizat io n Benefit Dis co unt Rate Tax Rate Tax Amo rtizatio n Perio d Amo rtizat io n Benefit F a i r V a l ue o f C us t o me r B a s e , R o und e d No t e: So me amo unts may no t fo o t d ue to ro und ing . © 2 0 0 2 . J o hn Wiley & So ns , Inc. Us ed with p ermis s io n. 18 .0 % 4 0 .0 % 15 9 57,4 15 $6 ,4 9 0 ,0 0 0 4 0 .0 % $4 59 ,4 0 5 (18 3 ,76 2 ) $2 75,6 4 3 13 $2 1,2 0 3 261 $5,53 3 ,9 8 3

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TARGET COM PANY VALUATION OF ASSEM BLED WORKFORCE AS OF DECEM BER 3 1, 2 0 0 1 ($ 0 0 0 s ) J OB TITLE N O. 1 M emb er o f Technical Staff 2 M emb er o f Technical Staff 64 65 M emb er o f Technical Staff M emb er o f Technical Staff S A LA R Y $9 0 ,0 0 0 8 0 ,2 50 73 ,3 50 9 9 ,4 6 5 $6 ,13 4 ,752 20% B EN EF ITS $18 ,0 0 0 16 ,0 50 14 ,6 70 19 ,8 9 3 $1,2 2 6 ,9 50 TOTA L $10 8 ,0 0 0 9 6 ,3 0 0 8 8 ,0 2 0 119 ,3 58 $7,3 6 1,70 2

Exhib it 3 .8

( 1) TR A IN . P ER . C L. YRS. 1 0 .12 5 2 0 .3 75 2 3 0 .3 75 0 .750

3 3 .3 % C OS T $4 ,50 0 12 ,0 3 8 11,0 0 3 2 9 ,8 4 0 $771,0 73

(2 ) 2 7.5% R EC R U IT. $2 4 ,750 2 2 ,0 6 9 2 0 ,171 2 7,3 53 $1,6 8 7,0 6 0

IN TER V IEW & H. R . $3 75 750 750 1,50 0 $4 1,6 2 5

TOTA L $2 9 ,6 2 5 3 4 ,8 57 3 1,9 2 4 58 ,6 9 3 $2 ,4 9 9 ,758 $2 ,4 9 9 ,758 (9 9 9 ,9 0 3 ) $1,4 9 9 ,8 55

To tal 6 5

Rep lacement Co s t o f As s emb led Wo rkfo rce Les s : Taxes Interview & H.R. (1) Qualified Rep lacementTraining M o nths 1 = < 3 mo nths 2 = 3 -6 mo nths 3 = 6 -12 mo nths (2 ) So urce: Karl M allo ney, Recruiter Ho urs 5 10 20 Rate $75.0 0 $75.0 0 $75.0 0 Co s ts Avo id ed , Net o f Tax Amo rtizatio n Benefit Rate o f Return Tax Rate Tax Amo rtizatio n Perio d Amo rtizatio n Benefit F a ir V a lue o f A s s e mb le d W o rkf o rc e , R o und e d No te: So me amo unts may no t fo o t d ue to ro und ing . © 2 0 0 2 . J o hn Wiley & So ns , Inc. Us ed with p ermis s io n.

4 0 .0 %

16 .0 % 4 0 .0 % 15 2 8 5,9 6 7 $1,79 0 ,0 0 0

© Copyright 2002. The Financial Valuation Group, LC.

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TARGET COM PANY VALUATION OF TRADE NAM E AS OF DECEM BER 3 1, 2 0 0 1 ($ 0 0 0 s ) 2002 Net Sales fro m Bus ines s Enterp ris e Valuatio n (1) Pret ax Relief fro m Ro yalty Inco me Tax Liab ility After-Tax Ro yalty Pres ent Value Inco me Fact o r Pres ent Value Relief fro m Ro yalt y Sum o f Pres ent Value Relief fro m Ro yalt y, 2 0 0 2 -2 0 0 6 Res id ual Calculatio n: 2 0 0 6 After-Tax Ro yalty 2 0 0 7 Aft er-Tax Ro yalt y, As s uming Gro wth o f Res id ual Cap italizat io n Rate Res id ual Value, 2 0 0 7 Pres ent Value Facto r Fair M arket Value o f Res id ual Pres ent Value o f Trad e Name Ro yalt y Flo ws Amo rt izatio n Benefit Dis co unt Rat e Tax Rate Tax Amo rt izat io n Perio d Amo rt izatio n Benefit F a ir V a lue o f Tra d e N a me , R o und e d (1) Fig ures s ho wn fro m Bus ines s Enterp ris e Valuatio n (Exhib it 3 .5) No te: So me amo unt s may no t fo o t d ue t o ro und ing . © 2 0 0 2 . J o hn Wiley & So ns , Inc. Us ed wit h p ermis s io n. 5.0 % 4 .0 % 4 0 .0 % $6 9 ,0 0 0 $2 ,76 0 1,10 4 1,6 56 0 .9 2 8 5 $1,53 8 2003 $79 ,3 50 $3 ,174 1,2 70 1,9 0 4 0 .8 0 0 4 $1,52 4 $7,2 71 $2 ,59 2 $2 ,72 2 11.0 % $2 4 ,74 2 0 .512 8 12 ,6 8 7 $19 ,9 59 2004 $8 9 ,2 6 9 $3 ,571 1,4 2 8 2 ,14 2 0 .6 9 0 0 $1,4 78 2005 $9 8 ,19 6 $3 ,9 2 8 1,571 2 ,3 57 0 .59 4 8 $1,4 0 2

Exhib it 3 .9

2006 $10 8 ,0 15 $4 ,3 2 1 1,72 8 2 ,59 2 0 .512 8 $1,3 2 9

16 .0 %

16 .0 % 4 0 .0 % 15 3 ,8 0 5 $2 3 ,76 0

© Copyright 2002. The Financial Valuation Group, LC.

44

Noncompete agreement assumptions: BEV Without Competition Exhibit 3.5 Net Sales Growth Rate Year one Year two Operating Expenses Year one Year two 15% 15% 30% 29% BEV With Competition Exhibit 3.10 10% 10% 32% 30%

© Copyright 2002. The Financial Valuation Group, LC.

45

TARGET COM PANY VALUATION OF NONCOM PETE AS OF DECEM BER 3 1, 2 0 0 1 ($ 0 0 0 s ) C A S H F LO W S ( W ITHOU T N O N C O M P ETE IN P LA C E) Sales Gro wt h Percentag e (1) Net Sales Co s t o f Sales Percentag e (1) Co s t o f Sales Gro s s Pro fit Op erating Exp ens e Percentag e (1) Op erating Exp ens es Dep reciatio n (M ACRS) Amo rtizatio n o f Intang ib les (Tax) To tal Op erating Exp ens es Taxab le Inco me Inco me Taxes Net Inco me Net Cas h Flo w Net Inco me Cap ital Exp end itures Chang e in Wo rking Cap ital Dep reciatio n Amo rtizatio n o f Intang ib les (Tax) Net Cas h Flo w Pres ent Value Fact o r, where Dis co unt Rate = Pres ent Value o f Net Cas h Flo w (1) Percentag es b as ed o n as s ump tio n o f co mp etitio n. No te: So me amo unts may no t fo o t d ue to ro und ing . © 2 0 0 2 . J o hn Wiley & So ns , Inc. Us ed wit h p ermis s io n. 16 .0 % A C TU A L 2001

Exhib it 3 .10

F O R EC A S T 2002 2 0 11 10 .0 % $6 6 ,0 0 0 4 0 .0 % $2 6 ,4 0 0 3 9 ,6 0 0 3 2 .0 % $2 1,12 0 3 ,0 9 7 8 ,4 3 3 3 2 ,6 50 6 ,9 50 2 ,78 0 $4 ,170 $4 ,170 (6 6 0 ) 6 ,6 0 0 3 ,0 9 7 8 ,4 3 3 2 1,6 4 0 0 .9 2 8 5 $2 0 ,0 9 2 7.5% $14 1,8 79 3 9 .0 % $55,3 3 3 8 6 ,54 6 2 9 .0 % $4 1,14 5 1,551 8 ,4 3 3 51,12 9 3 5,4 17 14 ,16 7 $2 1,2 50 $2 1,2 50 (1,4 19 ) (1,4 8 5) 1,551 8 ,4 3 3 2 8 ,3 3 1 0 .2 4 4 1 $6 ,9 17

$6 0 ,0 0 0 4 0 .0 % $2 4 ,0 0 0 3 6 ,0 0 0 3 0 .0 % $18 ,0 0 0 1,750 0 19 ,750 16 ,2 50 6 ,50 0 $9 ,750

© Copyright 2002. The Financial Valuation Group, LC.

46

TARGET COM PANY VALUATION OF NONCOM PETE AS OF DECEM BER 3 1, 2 0 0 1 ($ 0 0 0 s ) 2 0 11 Cas h Flo w Les s : Tax Benefit o f Amo rtizatio n 2 0 11 Cas h Flo w, net o f Benefit 2 0 12 Cas h Flo w, As s uming Gro wth o f Res id ual Cap italizatio n Rate Res id ual Value, 2 0 12 Pres ent Value Facto r Fair Value o f Res id ual Net Pres ent Value o f Net Cas h Flo w, 2 0 0 2 - 2 0 11 Net Pres ent Value o f Res id ual Cas h Flo w Pres ent Value o f Amo rtizatio n Tax Benefit, 2 0 12 -2 0 16 To tal Inves ted Cap ital w it h C o mp e t it io n, Ro und ed Bus ines s Enterp ris e Value (Exhib it 3 .5) Difference = Gro s s Value o f No nco mp ete Times : Pro b ab ility Facto r (2 ) Pro b ab ility Ad jus ted Value o f No nco mp ete Amo rtizatio n Benefit Dis co unt Rate Tax Rate Tax Amo rtizatio n Perio d Amo rtizatio n Benefit 5.0 % $2 8 ,3 3 1 (3 ,3 73 ) $2 4 ,9 58 $2 6 ,2 0 5 11.0 0 % $2 3 8 ,2 3 1 0 .2 4 4 1 $58 ,16 3 $111,0 55 58 ,16 3 2 ,6 9 7 $172 ,0 0 0 18 5,0 0 0 $13 ,0 0 0 6 0 .0 % $7,8 0 0 16 .0 % 4 0 .0 % 15 1,4 8 6 $9 ,3 0 0

Exhib it 3 .10

F a ir V a lue o f N o nc o mp e t e A g re e me nt , R o und e d

© Copyright 2002. The Financial Valuation Group, LC.

(2 ) To acco unt fo r likeho o d o f co mp eting ab s ent an ag reement and likeliho o d o f s ucces s . No te: So me amo unts may no t fo o t d ue to ro und ing . © 2 0 0 2 . J o hn Wiley & So ns , Inc. Us ed with p ermis s io n.

47

The following table from the IPR&D Practice Aid provides examples of assets typically treated as contributory assets, and suggested bases for determining the fair return. Generally, it is presumed that the return of the asset is reflected in the operating costs when applicable (for example, depreciation expense). The contributory asset charge is the “product of the asset’s fair value and the required rate of return on the asset.”6
6

American Institute of Certified Public Accountants, Assets Acquired in a Business Combination to Be Used in Research and Development Activities: A Focus on Software, Electronic Devices, and Pharmaceutical Industries, (New York, NY: 2001), at 5.3.64.
48

© Copyright 2002. The Financial Valuation Group, LC.

Asset Working capital

Basis of Charge Short-term lending rates for market participants (for example, working capital lines or short-term revolver rates) Financing rate for similar assets for market participants (for example, terms offered by vendor financing), or rates implied by operating leases, capital leases, or both (typically segregated between returns of [that is, recapture of investment] and returns on). Weighted average cost of capital (WACC) for young, single-product companies (may be lower than discount rate applicable to a particular project)

Fixed assets (for example, property, plant, and equipment)

Workforce (which is not recognized separate from goodwill), customer lists, trademarks, and trade names

© Copyright 2002. The Financial Valuation Group, LC.

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Asset Patents

Basis of Charge WACC for young, single-product companies (may be lower than discount rate applicable to a particular project). In cases where risk of realizing economic value of patent is close to or the same as risk of realizing a project, rates would be equivalent to that of the project. Rates appropriate to the risk of the subject intangible. When market evidence is available it should be used. In other cases, rates should be consistent with the relative risk of other assets in the analysis and should be higher for riskier assets.7

Other intangibles, including base (or core) technology

7

American Institute of Certified Public Accountants, Assets Acquired in a Business Combination to Be Used in Research and Development Activities: A Focus on Software, Electronic Devices, and Pharmaceutical Industries, (New York, NY: 2001), at 5.3.64.
50

© Copyright 2002. The Financial Valuation Group, LC.

TARGET COMP ANY VALUATION OF TECHNOLOGY AS OF DECEMBER 31, 2001 ($ 000s ) CALCULATION OF CONTRIBUTORY ASSET CHARGES C o ntributo ry A s s e t A . A s s e t B a la nc e s Net Wo rking Capital Land and Buildings Machinery and Equipment, net So ftware Trade Name No nco mpete Agreement As s embled Wo rkfo rce Cus to mer Bas e 2002 $ 13,425 21,934 17,849 7,070 23,760 9,300 1,790 6,490 2003 $ 11,126 21,815 14,551 7,070 23,760 9,300 1,790 6,490 2004 $ 12,646 21,718 10,900 7,070 23,760 9,300 1,790 6,490 2005 $ 14,060 21,640 8,348 7,070 23,760 9,300 1,790 6,490

Exhibit 3.11

2006 $ 15,466 21,580 6,582 7,070 23,760 9,300 1,790 6,490

No te: So me amo unts may no t fo o t due to ro unding. © 2002. J o hn Wiley & So ns , Inc. Us ed with permis s io n.

© Copyright 2002. The Financial Valuation Group, LC.

51

TARGET COMPANY VALUATION OF TECHNOLOGY AS OF DECEMBER 31, 2001 ($ 000s) CALCULATION OF CONTRIBUTORY ASSET CHARGES C o nt rib ut o ry A s s e t B . To t al R e t urns Net Working Capital Land and Buildings Machinery and Equipment, net Software Trade Name Noncompete Agreement Assembled Workforce Customer Base R at e 5.0% 7.0% 8.0% 18.0% 16.0% 16.0% 16.0% 18.0% 2002 $671 1,535 1,428 1,273 3,802 1,488 286 1,168 2003 $556 1,527 1,164 1,273 3,802 1,488 286 1,168 2004 $632 1,520 872 1,273 3,802 1,488 286 1,168 2005 $703 1,515 668 1,273 3,802 1,488 286 1,168

Exhibit 3.11

2006 $773 1,511 527 1,273 3,802 1,488 286 1,168

Note: Some amounts may not foot due to rounding. © 2002. John Wiley & Sons, Inc. Used with permission.

© Copyright 2002. The Financial Valuation Group, LC.

52

TARGET COMPANY VALUATION OF TECHNOLOGY AS OF DECEMBER 31, 2001 ($ 000s) CALCULATION OF CONTRIBUTORY ASSET CHARGES C o nt rib ut o ry A s s e t C . D is t rib ut io n o f R e ve nue s Technology IPR&D Total DCF Revenues Technology Percent IPR&D Percent Total Note: Some amounts may not foot due to rounding. © 2002. John Wiley & Sons, Inc. Used with permission. 2002 $61,800 7,200 $69,000 89.57% 10.43% 100.00% 2003 $63,654 15,696 $79,350 80.22% 19.78% 100.00% 2004 $65,564 23,705 $89,269 73.45% 26.55% 100.00% 2005 $67,531 30,665 $98,196 68.77% 31.23% 100.00%

Exhibit 3.11

2006 $69,556 38,459 $108,015 64.40% 35.60% 100.00%

© Copyright 2002. The Financial Valuation Group, LC.

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TARGET COMPANY VALUATION OF TECHNOLOGY AS OF DECEMBER 31, 2001 ($ 000s) CALCULATION OF CONTRIBUTORY ASSET CHARGES C o nt rib ut o ry A s s e t D . A llo c at e d R e t urns - Te c hno lo g y Net Working Capital Land and Buildings Machinery and Equipment, net Software Trade Name Noncompete Agreement Assembled Workforce Customer Base Total Note: Some amounts may not foot due to rounding. © 2002. John Wiley & Sons, Inc. Used with permission. 2002 $601 1,375 1,279 1,140 3,405 1,333 257 1,046 $10,436 2003 $446 1,225 934 1,021 3,050 1,194 230 937 $9,036 2004 $464 1,117 640 935 2,792 1,093 210 858 $8,109 2005 $483 1,042 459 875 2,614 1,023 197 803 $7,498

Exhibit 3.11

© Copyright 2002. The Financial Valuation Group, LC.

54

TARGET COMPANY VALUATION OF TECHNOLOGY AS OF DECEMBER 31, 2001 ($ 000s) CALCULATION OF CONTRIBUTORY ASSET CHARGES C o nt rib ut o ry A s s e t E. A llo c at e d R e t urns - IP R &D Net Working Capital Land and Buildings Machinery and Equipment, net Software Trade Name Noncompete Agreement Assembled Workforce Customer Base Total Note: Some amounts may not foot due to rounding. © 2002. John Wiley & Sons, Inc. Used with permission. 2002 $70 160 149 133 397 155 30 122 $1,216 2003 $110 302 230 252 752 294 57 231 $2,228 2004 $168 404 232 338 1,010 395 76 310 $2,932 2005 $220 473 209 397 1,187 465 89 365 $3,405

Exhibit 3.11

2006 $275 538 187 453 1,354 530 102 416 $3,855

© Copyright 2002. The Financial Valuation Group, LC.

55

Contributory Asset Charges:
Working capital Land and building Machinery and equipment Software Customer base Assembled workforce Trade name Noncompete agreement Existing technology In-process research and development 5.0% 7.0% 8.0% 18.0% 18.0% 16.0% 16.0% 16.0% 18.0% 25.0%

© Copyright 2002. The Financial Valuation Group, LC.

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TARGET COM PANY VALUATION OF TECHNOLOGY AS OF DECEM BER 3 1, 2 0 0 1 ($ 0 0 0 s ) A C TU A L 2001 Net Sales -Exis ting Techno lo g y (1) Co s t o f Sales Gro s s Pro fit Op erating Exp ens es (2 ) Dep reciatio n To tal Op erating Exp ens es Taxab le Inco me Inco me Taxes Net Inco me $6 0 ,0 0 0 2 4 ,0 0 0 3 6 ,0 0 0 12 ,0 0 0 1,750 13 ,750 2 2 ,2 50 8 ,9 0 0 $13 ,3 50

Exhib it 3 .12

F OR EC A S T 2002 2005 $6 1,8 0 0 2 4 ,72 0 3 7,0 8 0 12 ,3 6 0 2 ,774 15,13 4 2 1,9 4 6 8 ,778 $13 ,16 8 $6 7,53 1 2 6 ,3 3 7 4 1,19 4 12 ,8 3 1 2 ,14 5 14 ,9 76 2 6 ,2 17 10 ,4 8 7 $15,73 0

(1) Bas ed o n 2 0 0 1 actual s ales , with g ro wth attrib utab le to exis ting techno lo g y. (2 ) Exclud es d evelo p ment exp ens es o f 10 p ercent to reflect that d evelo p ed techno lo g y s ho uld no t b e b urd ened b y the exp ens es o f d evelo p ing new techno lo g y. No te: So me amo unts may no t fo o t d ue to ro und ing . © 2 0 0 2 . J o hn Wiley & So ns , Inc. Us ed with p ermis s io n.

© Copyright 2002. The Financial Valuation Group, LC.

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TARGET COM PANY VALUATION OF TECHNOLOGY AS OF DECEM BER 3 1, 2 0 0 1 ($ 0 0 0 s ) A C TU A L 2001 Net Inco me Res id ual Cas h Flo w At trib ut ab le t o Techno lo g y Les s Ret urns o n $16 ,50 0 Net Wo rking Cap ital 2 2 ,0 0 0 Land and Build ing s 19 ,0 0 0 M achinery and Eq uip ment , net 7,0 70 So ft ware 2 3 ,76 0 Trad e Name 9 ,3 0 0 No nco mp et e Ag reement 1,79 0 As s emb led Wo rkfo rce 6 ,4 9 0 Cus t o mer Bas e Sum o f Returns Aft er-Tax Res id ual Cas h Flo ws Survivo rs hip o f Techno lo g y (3 ) Surviving Res id ual Cas h Flo ws 18 .0 0 % Pres ent Value Fact o r fo r Res id ual Cas h Flo w Pres ent Value o f Surviving Res id ual Cas h Flo ws Sum o f Pres ent Values , 2 0 0 2 -2 0 0 5 Amo rtizat io n Benefit Dis co unt Rate Tax Rat e Tax Amo rt izat io n Perio d Amo rtizat io n Benefit F a i r V a l ue o f Te c hno l o g y , R o und e d (3 ) As s umes 4 year life. No t e: So me amo unt s may no t fo o t d ue to ro und ing . © 2 0 0 2 . J o hn Wiley & So ns , Inc. Us ed wit h p ermis s io n. $13 ,3 50

Exhib it 3 .12

F O R EC A S T 2002 2005 $13 ,16 8 $15,73 0

5.0 % 7.0 % 8 .0 % 18 .0 % 16 .0 % 16 .0 % 16 .0 % 18 .0 %

$6 0 1 1,3 75 1,2 79 1,14 0 3 ,4 0 5 1,3 3 3 2 57 1,0 4 6 $10 ,4 3 6 $2 ,73 2 10 0 .0 % $2 ,73 2 0 .9 2 0 6 $2 ,515 $11,519

$4 8 3 1,0 4 2 4 59 8 75 2 ,6 14 1,0 2 3 19 7 803 $7,4 9 8 $8 ,2 3 3 50 .0 % $4 ,116 0 .56 0 3 $2 ,3 0 6

18 .0 % 4 0 .0 % 15 1,9 9 3 $13 ,50 0

© Copyright 2002. The Financial Valuation Group, LC.

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TARGET COM PANY VALUATION OF IN-PROCESS RESEARCH AND DEVELOPM ENT AS OF DECEM BER 3 1, 2 0 0 1 ($ 0 0 0 s )

Exhib it 3 .13

F O R EC A S T 2002 2006 Net Sales -New Techno lo g y (1) Co s t o f Sales Gro s s Pro fit Op erat ing Exp ens es (2 ) Co s t t o Co mp let e Dep reciat io n To t al Op erat ing Exp ens es Taxab le Inco me Inco me Taxes Net Inco me $7,2 0 0 2 ,8 8 0 4 ,3 2 0 1,4 4 0 300 323 2 ,0 6 3 2 ,2 57 903 $1,3 54 $3 8 ,4 59 14 ,9 9 9 2 3 ,4 6 0 7,3 0 7 0 906 8 ,2 13 15,2 4 7 6 ,0 9 9 $9 ,14 8

(1) Bas ed o n Bus ines s Ent erp ris e Value (Exhib it 3 .5), les s s ales d ue t o exis t ing Techno lo g y (2 ) Exclud es d evelo p ment exp ens es o f 10 p ercent t o reflect no fut ure d evelo p ment co s t s rel No t e: So me amo unt s may no t fo o t d ue t o ro und ing . © 2 0 0 2 . J o hn Wiley & So ns , Inc. Us ed wit h p ermis s io n.

© Copyright 2002. The Financial Valuation Group, LC.

59

TARGET COM PANY VALUATION OF IN-PROCESS RESEARCH AND DEVELOPM ENT AS OF DECEM BER 3 1, 2 0 0 1 ($ 0 0 0 s )

Exhib it 3 .13

F OR EC A S T 2002 2006 Res id ual Cas h Flo w Attrib utab le to Techno lo g y Les s Returns o n $16 ,50 0 Net Wo rking Cap ital 2 2 ,0 0 0 Land and Build ing s 19 ,0 0 0 M achinery and Eq uip ment, net 7,0 70 So ftware 2 3 ,76 0 Trad e Name 9 ,3 0 0 No nco mp ete Ag reement 1,79 0 As s emb led Wo rkfo rce 6 ,4 9 0 Cus to mer Bas e Sum o f Returns After-Tax Res id ual Cas h Flo ws Survivo rs hip o f Techno lo g y (3 ) Surviving Exces s Cas h Flo ws 2 5.0 % Pres ent Value Facto r fo r Res id ual Cas h Flo w Pres ent Value o f Surviving Res id ual Cas h Flo ws Sum o f Pres ent Values , 2 0 0 2 -2 0 0 6 Amo rtizatio n Benefit Dis co unt Rate Tax Rate Tax Amo rtizat io n Perio d Amo rtizatio n Benefit F a i r V a lue o f IP R &D , R o und e d (3 ) As s umes 5 year life. No t e: So me amo unts may no t fo o t d ue t o ro und ing . © 2 0 0 2 . J o hn Wiley & So ns , Inc. Us ed with p ermis s io n.

5.0 % 7.0 % 8 .0 % 18 .0 % 16 .0 % 16 .0 % 16 .0 % 18 .0 %

$70 16 0 14 9 13 3 397 155 30 12 2 $1,2 16 $13 8 10 0 .0 % $13 8 0 .8 9 4 4 $12 4 $3 ,8 3 3

$2 75 53 8 18 7 4 53 1,3 54 53 0 10 2 4 16 $3 ,8 55 $5,2 9 3 50 .0 % $2 ,6 4 7 0 .3 6 6 4 $9 70

2 5.0 % 4 0 .0 % 15 498 $4 ,3 3 0

© Copyright 2002. The Financial Valuation Group, LC.

60

TARGET COM PANY VALUATION OF GOODWILL AS OF DECEM BER 3 1, 2 0 0 1 ($ 0 0 0 s )

Exhib it 3 .14

Cas h and Acq uis itio n Co s ts Deb t-Free Current Liab ilities Current M aturities o f Lo ng -Term Deb t Lo ng -Term Deb t Ad jus ted Purchas e Price Les s : Fair Value o f Current As s ets Les s : Fair Value o f Tang ib le As s ets Les s : Fair Value o f Intang ib le As s ets So ftware Cus to mer Bas e Trad e Name No nco mp ete Ag reement Techno lo g y In-Pro ces s Res earch and Develo p ment R e s id ua l Go o d w ill No te: So me amo unts may no t fo o t d ue to ro und ing . © 2 0 0 2 . J o hn Wiley & So ns , Inc. Us ed with p ermis s io n.

$150 ,0 0 0 2 5,0 0 0 4 ,0 0 0 3 0 ,0 0 0 2 0 9 ,0 0 0 (4 1,50 0 ) (4 1,0 0 0 ) (7,0 70 ) (6 ,4 9 0 ) (2 3 ,76 0 ) (9 ,3 0 0 ) (13 ,50 0 ) (4 ,3 3 0 ) $6 2 ,0 50

© Copyright 2002. The Financial Valuation Group, LC.

61

TARGET COM PANY VALUATION SUM M ARY AS OF DECEM BER 3 1, 2 0 0 1 ($ 0 0 0 s )

Exhib it 3 .15

F A IR M A R KET V A LU E R ETU R N A S S ET N A M E Cas h Inves tments in M arketab le Securit ies Acco unt s Receivab le Invento ry Prep aid Exp ens es Land and Build ing s M achinery and Eq uip ment, net TOTAL CURRENT AND TANGIBLE ASSETS So ftware Techno lo g y In-Pro ces s Res earch and Develo p ment Trad e Name Cus to mer Bas e As s emb led Wo rkfo rce No nco mp ete Ag reement TOTAL INTANGIBLE ASSETS GOODWILL (exclud ing as s emb led wo rkfo rce) TOTAL ASSETS $1,50 0 8 ,0 0 0 17,0 0 0 12 ,0 0 0 3 ,0 0 0 2 2 ,0 0 0 19 ,0 0 0 $8 2 ,50 0 $7,0 70 13 ,50 0 4 ,3 3 0 2 3 ,76 0 6 ,4 9 0 1,79 0 9 ,3 0 0 $6 6 ,2 4 0 $6 0 ,2 6 0 $2 0 9 ,0 0 0 2 8 .0 0 % 18 .0 0 % 18 .0 0 % 2 5.0 0 % 16 .0 0 % 18 .0 0 % 16 .0 0 % 16 .0 0 % 5.0 0 % 5.0 0 % 5.0 0 % 5.0 0 % 5.0 0 % 7.0 0 % 8 .0 0 %

P ER C EN T TO P U R C HA S E W EIGHTED P R IC E R ETU R N 0 .7% 3 .8 % 8 .1% 5.7% 1.4 % 10 .5% 9 .1% 0 .0 4 % 0 .19 % 0 .4 1% 0 .2 9 % 0 .0 7% 0 .74 % 0 .73 %

3 .4 % 6 .5% 2 .1% 11.4 % 3 .1% 0 .9 % 4 .4 %

0 .6 1% 1.16 % 0 .52 % 1.8 2 % 0 .56 % 0 .14 % 0 .71%

2 8 .8 %

8 .0 7% 16 .0 5%

No te: Fo r financial rep o rting p urp o s es , the fair value o f g o o d will includ es t he fair value o f as s emb led wo rkfo rce fo r a to t al fair value o f res id ual g o o d will o f $6 2 ,0 50 ,0 0 0 . No te: So me amo unts may no t fo o t d ue to ro und ing . © 2 0 0 2 . J o hn Wiley & So ns , Inc. Us ed with p ermis s io n.

© Copyright 2002. The Financial Valuation Group, LC.

62

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

60,000

65,000

Cash
1,500 8,000 17,000 12,000 3,000 22,000 19,000 23,760 9,300 1,790

5,000

0

Investments in Marketable Securities Accounts Receivable Inventory Prepaid Expenses Land and Buildings Machinery and Equipment Trade Name Noncompete Agreement Assembled Workforce Technology Software Customer Base IPR&D Goodwill
4,330

© Copyright 2002. The Financial Valuation Group, LC.

Asset Values ($ 000s)

13,500 7,070 23,760

60,260

63

Example: Goodwill Impairment
Triggering Event Asset Allocation Valuation of Tangible Assets Valuation of Intangible Assets Goodwill Impairment Analysis Summary of Fair Values and Impairment
64 © Copyright 2002. The Financial Valuation Group, LC.

Triggering Event
2001 Actual Net Sales Cost of Sales Percentage of Sales Gross Profit Operating Expense EBITDA Percentage of Sales $ 60,000,000 24,000,000 40.0% $ 36,000,000 18,000,000 $ 18,000,000 30.0% 2002 Forecast $ 69,000,000 27,600,000 40.0% $41,400,000 20,700,000 $20,700,000 30.0% 2002 Actual $ 56,000,000 23,520,000 42.0% $ 32,480,000 17,360,000 $15,120,000 27.0%

© Copyright 2002. The Financial Valuation Group, LC.

65

Asset Allocation
12/31/01 Fair Value Cash Investments in Marketable Securities Accounts Receivable Inventory Prepaid Expenses Land and Building Machinery & Equipment, net TOTAL TANGIBLES $ 1,500,000 8,000,000 17,000,000 12,000,000 3,000,000 22,000,000 19,000,000 $ 82,500,000 12/31/02 Carrying Value $ 2,850,000 7,000,000 13,000,000 10,500,000 2,500,000 21,687,000 16,216,000 $ 73,753,000

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Asset Allocation
12/31/01 Fair Value Software Technology In-Process Research & Development Trade Name Customer Base Non-Competition Agreement TOTAL INTANGIBLES $ 7,070,000 13,500,000 4,330,000 23,760,000 6,490,000 9,300,000 $ 64,450,000 12/31/02 Carrying Value $ 5,300,000 10,120,000 0 23,760,000 5,190,000 7,440,000 $ 51,810,000

© Copyright 2002. The Financial Valuation Group, LC.

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Asset Allocation
12/31/01 Fair Value TOTAL TANGIBLES TOTAL INTANGIBLES GOODWILL TOTAL ASSETS 64,450,000 62,050,000 12/31/02 Carrying Value 51,810,000 62,050,000 12/31/02 Fair Value $ 78,150,000 45,420,000 39,430,000 $163,000,000

$ 82,500,000 $ 73,753,000

$ 209,000,000 $ 187,613,000

© Copyright 2002. The Financial Valuation Group, LC.

68

Valuation of Tangible Assets

Land and Building (Per real estate appraisal) Machinery and Equipment (Per machinery and equipment appraisal)

$ 23,000,000 19,000,000

© Copyright 2002. The Financial Valuation Group, LC.

69

Valuation of Intangible Assets
Carrying Values 12/31/02 Software $ 5,300,000 Fair Value $ 7,810,000 Impairment Loss $ 0

© Copyright 2002. The Financial Valuation Group, LC.

70

Valuation of Intangible Assets
Carrying Values 12/31/02 Software Customer Base $ 5,300,000 5,190,000 Fair Value $ 7,810,000 5,820,000 Impairment Loss $ 0 0

© Copyright 2002. The Financial Valuation Group, LC.

71

Valuation of Intangible Assets
Carrying Values 12/31/02 Software Customer Base Assembled Workforce* $ 5,300,000 5,190,000 1,790,000 Fair Value $ 7,810,000 5,820,000 1,510,000 Impairment Loss $ 0 0 0

* Included in Goodwill
© Copyright 2002. The Financial Valuation Group, LC. 72

Valuation of Intangible Assets
Carrying Values 12/31/02 Software Customer Base Assembled Workforce* Trade Name $ 5,300,000 5,190,000 --23,760,000 Fair Value $ 7,810,000 5,820,000 --18,450,000 Impairment Loss $ 0 0 --(5,310,000)

* Included in Goodwill
© Copyright 2002. The Financial Valuation Group, LC. 73

Valuation of Intangible Assets
Carrying Values 12/31/02 Software Customer Base Assembled Workforce* Trade Name Noncompete Agreement $ 5,300,000 5,190,000 --23,760,000 7,440,000 Fair Value $ 7,810,000 5,820,000 --18,450,000 Impairment Loss $ 0 0 --(5,310,000)

* Included in Goodwill
© Copyright 2002. The Financial Valuation Group, LC. 74

Valuation of Intangible Assets
Noncompete Agreement Impairment Test
TARGET COM PANY VALUATION OF NONCOM PETE AS OF DECEM BER 3 1, 2 0 0 2 ($ 0 0 0 s ) A C TU A L 2002 F a i r V a l ue o f N o nc o mp e t e A g re e me nt , R o und e d S F A S N o . 14 4 Imp a i rme nt Te s t Und is co unt ed Net Cas h Flo ws , BEV (Exhib it 5.2 ) Und is co unt ed Net Cas h Flo ws , BEV wit h Co mp et it io n Difference = Net Cas h Flo ws , At t rib ut ab le t o No nco mp et e Sum o f Und is co unt ed Net Cas h Flo ws At t rib ut ab le t o No nco mp et e Carrying Value o f No nco mp et e Exhib it 5.7

F O R EC A S T 2003 2 0 12 $5,0 0 0

$2 1,0 6 2 2 0 ,53 8 $52 4

$2 2 ,14 1 2 0 ,8 9 0 $1,2 51

$9 ,4 6 3 $7,4 4 0

C o nc l us i o n: R e c o v e ra b l e und e r S F A S N o . 14 4 , t he re f o re no i mp a i rme nt . No t e: So me amo unt s may no t fo o t d ue t o ro und ing . The imp airment t es t p res ent ed in t his examp le is as s umed t o b e p erfo rmed as o f Decemb er 3 1, 2 0 0 2 . © 2 0 0 2 . J o hn Wiley & So ns , Inc. Us ed wit h p ermis s io n.

© Copyright 2002. The Financial Valuation Group, LC.

75

Valuation of Intangible Assets
Carrying Values 12/31/02 Software Customer Base Assembled Workforce* Trade Name Noncompete Agreement $ 5,300,000 5,190,000 --23,760,000 7,440,000 Fair Value $ 7,810,000 5,820,000 --18,450,000 5,000,000 Impairment Loss $ 0 0 --(5,310,000) 0

* Included in Goodwill
© Copyright 2002. The Financial Valuation Group, LC. 76

Valuation of Intangible Assets
Carrying Values 12/31/02 Software Customer Base Assembled Workforce* Trade Name Non-competition Agreement Technology $ 5,300,000 5,190,000 --23,760,000 7,440,000 10,120,000 Fair Value $ 7,810,000 5,820,000 --18,450,000 5,000,000 Impairment Loss $ 0 0 --(5,310,000) 0

* Included in Goodwill
© Copyright 2002. The Financial Valuation Group, LC. 77

Valuation of Intangible Assets
Technology Impairment Test
TARGET COM PANY VALUATION OF TECHNOLOGY AS OF DECEM BER 3 1, 2 0 0 2 ($ 0 0 0 s ) S F A S N o . 14 4 Imp a irme nt Te s t Sum o f Und is co unt ed Res id ual Cas h Flo ws (4 ) Sum o f Pres ent Values , 2 0 0 3 -2 0 0 6 Amo rtizatio n Benefit Dis co unt Rate Tax Rate Tax Amo rtizatio n Perio d Amo rtizatio n Benefit F a ir V a lue o f Te c hno lo g y , R o und e d $7,3 4 5 $5,10 4 18 .0 % 4 0 .0 % 15 883 $5,9 9 0 Exhib it 5.9

(4 ) The s um o f the und is co unted res id ual cas h flo ws o f $7,3 4 5 is les s than t he carrying value o f $10 ,12 0 , ind icat ing imp airment und er SFAS No . 14 4 . No te: So me amo unt s may no t fo o t d ue to ro und ing . The imp airment tes t p res ented in this examp le is as s umed to b e p erfo rmed as o f Decemb er 3 1, 2 0 0 2 . © 2 0 0 2 . J o hn Wiley & So ns , Inc. Us ed with p ermis s io n.

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78

Valuation of Intangible Assets
Carrying Values 12/31/02 Software Customer Base Assembled Workforce* Trade Name Non-competition Agreement Technology $ 5,300,000 5,190,000 --23,760,000 7,440,000 10,120,000 Fair Value $ 7,810,000 5,820,000 --18,450,000 5,000,000 5,990,000 Impairment Loss $ 0 0 --(5,310,000) 0 (4,130,000)

* Included in Goodwill
© Copyright 2002. The Financial Valuation Group, LC. 79

Valuation of Intangible Assets
Carrying Values 12/31/02 Software Customer Base Assembled Workforce* Trade Name Non-competition Agreement Technology IPR&D $ 5,300,000 5,190,000 --23,760,000 7,440,000 10,120,000 0 Fair Value $ 7,810,000 5,820,000 --18,450,000 5,000,000 5,990,000 2,350,000 Impairment Loss $ 0 0 --(5,310,000) 0 (4,130,000) 0

* Included in Goodwill
© Copyright 2002. The Financial Valuation Group, LC. 80

Valuation of Intangible Assets
Carrying Values 12/31/02 Software Customer Base Assembled Workforce* Trade Name Non-competition Agreement Technology IPR&D TOTAL IDENTIFIED INTANGIBLES * Included in Goodwill
© Copyright 2002. The Financial Valuation Group, LC. 81

Fair Value $ 7,810,000 5,820,000 --18,450,000 5,000,000 5,990,000 2,350,000 $ 45,420,000

Impairment Loss $ 0 0 --(5,310,000) 0 (4,130,000) 0 ($ 9,440,000)

$ 5,300,000 5,190,000 --23,760,000 7,440,000 10,120,000 0 $ 51,810,000

Goodwill Impairment Analysis
Carrying Values 12/31/02 Goodwill (Including Assembled Workforce) $ 62,050,000 Impairment Loss

Fair Value

© Copyright 2002. The Financial Valuation Group, LC.

82

Goodwill Impairment Analysis
TARGET COM PANY VALUATION OF GOODWILL AS OF DECEM BER 3 1, 2 0 0 2 ($ 0 0 0 s ) Exhib it 5.11

To tal Value o f Inves ted Cap ital Deb t-Free Current Liab ilities To tal Liab ilities and Eq uity Les s : Fair Value o f Current As s ets Les s : Fair Value o f Tang ib le As s ets Les s : Fair Value o f Intang ib le As s ets So ftware Cus to mer Bas e Trad e Name No nco mp ete Ag reement Techno lo g y In-Pro ces s Res earch and Develo p ment R e s id ua l Go o d w ill

$14 3 ,0 0 0 2 0 ,0 0 0 16 3 ,0 0 0 (3 6 ,150 ) (4 2 ,0 0 0 ) (7,8 10 ) (5,8 2 0 ) (18 ,4 50 ) (5,0 0 0 ) (5,9 9 0 ) (2 ,3 50 ) $3 9 ,4 3 0

No te: So me amo unts may no t fo o t d ue to ro und ing . The imp airment tes t p res ented in this examp le is as s umed to b e p erfo rmed as o f Decemb er 3 1, 2 0 0 2 . © 2 0 0 2 . J o hn Wiley & So ns , Inc. Us ed with p ermis s io n.

© Copyright 2002. The Financial Valuation Group, LC.

83

Goodwill Impairment Analysis
Carrying Values 12/31/02 Goodwill (Including Assembled Workforce) $ 62,050,000 Impairment Loss ($22,620,000)

Fair Value $ 39,430,000

© Copyright 2002. The Financial Valuation Group, LC.

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TARGET COM PANY SUM M ARY OF FAIR VALUES AND IM PAIRM ENT LOSSES AS OF DECEM BER 3 1, 2 0 0 2 ($ 0 0 0 s )

Summary of Fair Values and Impairment Losses
$1,50 0 8 ,0 0 0 17,0 0 0 12 ,0 0 0 3 ,0 0 0 4 1,50 0 2 2 ,0 0 0 19 ,0 0 0 4 1,0 0 0 8 2 ,50 0 7,0 70 13 ,50 0 4 ,3 3 0 2 3 ,76 0 6 ,4 9 0 9 ,3 0 0 6 4 ,4 50 6 2 ,0 50 $2 0 9 ,0 0 0 $2 ,8 50 7,0 0 0 13 ,0 0 0 10 ,50 0 2 ,50 0 3 5,8 50 2 1,6 8 7 16 ,2 16 3 7,9 0 3 73 ,753 5,3 0 0 10 ,12 0 0 2 3 ,76 0 5,19 0 7,4 4 0 51,8 10 6 2 ,0 50 $18 7,6 13 $2 ,8 50 7,3 0 0 13 ,0 0 0 10 ,50 0 2 ,50 0 3 6 ,150 2 3 ,0 0 0 19 ,0 0 0 4 2 ,0 0 0 78 ,150 7,8 10 5,9 9 0 2 ,3 50 18 ,4 50 5,8 2 0 5,0 0 0 4 5,4 2 0 3 9 ,4 3 0 $16 3 ,0 0 0 $2 ,8 50 7,0 0 0 13 ,0 0 0 10 ,50 0 2 ,50 0 3 5,8 50 2 1,6 8 7 16 ,2 16 3 7,9 0 3 73 ,753 5,3 0 0 5,9 9 0 0 18 ,4 50 5,19 0 7,4 4 0 4 2 ,3 70 3 9 ,4 3 0 $155,553

Exhib it 5.12

C A R R Y IN G V A LU E C A R R Y IN G V A LU E B EF O R E A F TER F A IR V A LU E IM P A IR M EN T F A IR V A LU E IM P A IR M EN T IM P A IR M EN T 12 / 3 1/ 0 1 12 / 3 1/ 0 2 12 / 3 1/ 0 2 12 / 3 1/ 0 2 12 / 3 1/ 0 2 Cas h Inves tments in M arketab le Securities Acco unts Receivab le Invento ry Prep aid Exp ens es TOTAL CURRENT ASSETS Land and Build ing s M achinery and Eq uip ment, net TOTAL LONG-LIVED TANGIBLE ASSETS TOTAL CURRENT AND TANGIBLE ASSETS So ftware Techno lo g y In-Pro ces s Res earch and Develo p ment Trad e Name Cus to mer Bas e No nco mp ete Ag reement TOTAL IDENTIFIED INTANGIBLE ASSETS GOODWILL (includ ing as s emb led wo rkfo rce) TOTAL ASSETS na na na na na 0 0 0 0 0 0 (4 ,13 0 ) 0 (5,3 10 ) 0 0 (9 ,4 4 0 ) (2 2 ,6 2 0 ) ($3 2 ,0 6 0 )

No te: So me amo unts may no t fo o t d ue to ro und ing . The imp airment tes t p res ented in this examp le is as s umed to b e p erfo rmed as o f Decemb er 3 1, 2 0 0 2 . © 2 0 0 2 . J o hn Wiley & So ns , Inc. Us ed with p ermis s io n.

© Copyright 2002. The Financial Valuation Group, LC.

85

Implementation of SFAS Nos. 141 and 142: Controversial Issues

86 © Copyright 2002. The Financial Valuation Group, LC.

AITF Meeting: SFAS 141 and 142 Symposium: Essential Discussion Items
1. In valuing a reporting unit, using the Market Comparable Approach (prices of publicly traded securities of ‘similar’ companies) should one apply a ‘control premium’? Obviously the impact of adding 20% - 30% or more is to reduce the likelihood of an impairment charge. Some appraisers are adding the control premium and others are not. The FASB clearly believes the basis for valuing a reporting unit in on the premise of control, including any acquisition premium which a buyer may pay over the implied valued from the trading prices of individual shares of stock. The SEC has challenged this, arguing that there is a heavy burden of proof to overcome their contention that the price of a share of stock is its fair value. Clarification is necessary.
© Copyright 2002. The Financial Valuation Group, LC. 87

AITF Meeting: SFAS 141 and 142 Symposium: Essential Discussion Items
RESPONSE: The use of a control premium in applying the market approach is an individual judgment issue, based on the facts of the case. Mergerstat documents that a vast majority of transactions include a control premium. Nevertheless, if a control premium is used it should be tested with other means, namely the Income Approach. This will assure that the degree of control premium assessed is supported by available cash flow.

© Copyright 2002. The Financial Valuation Group, LC.

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AITF Meeting: SFAS 141 and 142 Symposium: Essential Discussion Items
2. In applying the Income Approach, should the company's own WACC be used, should an industry-wide WACC be used, or should something else? The reporting unit will, by definition, be less than a totally independent business so the question is, what is the most appropriate discount rate?

© Copyright 2002. The Financial Valuation Group, LC.

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AITF Meeting: SFAS 141 and 142 Symposium: Essential Discussion Items
RESPONSE: The industry WACC should be considered. The definition of fair value contemplates a transaction at the reporting unit level. Since a transaction is contemplated, the industry ratios should be considered, along with a discussion with management about the current capital structure.

© Copyright 2002. The Financial Valuation Group, LC.

90

AITF Meeting: SFAS 141 and 142 Symposium: Essential Discussion Items
10. In some industries individual brands are purchased based on the contribution margin of the product. The company only purchases brands in its existing marketplace. The company already does business with Wal-Mart, Kmart, Eckerd Drugs, etc. It does not need to add any sales personnel to sell the new brand. They simply throw a few more boxes on the delivery truck. So when they bid on brands and acquire brands they run DCFs on incremental profits. They buy a number of brands this way. When the baseline assessment is performed, we are told by an accounting firm to allocate corporate overhead to the brands. But that is not how brands are bought and sold in this market place. Also, we are told to add the tax shield, although the client never figures this into his calculation of what he thinks the brand is worth.
© Copyright 2002. The Financial Valuation Group, LC. 91

AITF Meeting: SFAS 141 and 142 Symposium: Essential Discussion Items
RESPONSE: Although brands may be purchased based on incremental profits, the issue seems to be the degree of allocation. The client example implies very little overhead allocation. In the extreme, the client position would be that no overhead would ever be allocated. The answer to this point is that there should be an overhead allocation and a tax shield. However, this issue does bring up a more valid question: When does fair value equal what was paid? This question seems to be the crux of the conference.

© Copyright 2002. The Financial Valuation Group, LC.

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AITF Meeting: SFAS 141 and 142 Symposium: Essential Discussion Items
16. Valuation issues related to valuing contingent consideration should be discussed. Is the methodology consistent with asset valuations?

© Copyright 2002. The Financial Valuation Group, LC.

93

AITF Meeting: SFAS 141 and 142 Symposium: Essential Discussion Items
RESPONSE: The methodology of valuing contingent consideration is consistent with determining fair value for intangibles. There is a new exposure draft forthcoming from the FASB, which in the preliminary stages establishes that fair value is to be the standard of value for contingent consideration. Mike Mard sits on the Task Force for that FASB Exposure Draft.

© Copyright 2002. The Financial Valuation Group, LC.

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AITF Meeting: SFAS 141 and 142 Symposium: Essential Discussion Items
19. Only those reporting units with goodwill need to be valued for Step 1 of the SFAS impairment test. But the values of the units tested should be checked against the value of the entire entity, at least for reasonableness. This is problematic where the client is willing to pay for the valuation of only those units to be tested. Is there a solution?

© Copyright 2002. The Financial Valuation Group, LC.

95

AITF Meeting: SFAS 141 and 142 Symposium: Essential Discussion Items
RESPONSE: This is the ‘pushback’ question. The answer is yes, the determination as the full entity value needs to be determined and the practitioner, if he has quoted a fee not supporting that work may have to eat some fee. Otherwise , the practitioner may have avoided his responsibilities for conducting due diligence.

© Copyright 2002. The Financial Valuation Group, LC.

96

AITF Meeting: SFAS 141 and 142 Symposium: Essential Discussion Items
20. Should the valuation professional opine on management’s conclusion regarding assignment of assets to the reporting units?

© Copyright 2002. The Financial Valuation Group, LC.

97

AITF Meeting: SFAS 141 and 142 Symposium: Essential Discussion Items
RESPONSE: Part of the valuation conclusion is to infer agreement with management’s allocation of assets to the reporting units. If the valuation professional disagrees with such allocation, he cannot render his conclusion without qualification. Likewise, an unqualified conclusion would require some degree of due diligence so that the valuation professional will have a basis of comfort with management’s allocation of assets. However, it is management’s responsibility.

© Copyright 2002. The Financial Valuation Group, LC.

98

AITF Meeting: SFAS 141 and 142 Symposium: Essential Discussion Items
21. In applying the Income Approach, should the appraiser utilize management’s projections? What if they appear unreasonable, should the appraiser substitute his own judgment?

© Copyright 2002. The Financial Valuation Group, LC.

99

AITF Meeting: SFAS 141 and 142 Symposium: Essential Discussion Items
RESPONSE: The IPR&D Practice Aid gives best practices guidance on prospective financial information (PFI) and requires significant due diligence on the PFI by the valuator. Though specific to the Practice Aid, the SEC and public at large will not continue to accept management representations related to the PFI without some level of due diligence. The PFI is critical to virtually all of the conclusions related to the valuation and as such it requires specific care and consideration.

© Copyright 2002. The Financial Valuation Group, LC.

100

AITF Meeting: SFAS 141 and 142 Symposium: Essential Discussion Items
23. Should the valuation guidance of the Practice Aid be applied to all financial reporting valuation matters?

© Copyright 2002. The Financial Valuation Group, LC.

101

AITF Meeting: SFAS 141 and 142 Symposium: Essential Discussion Items
RESPONSE: Yes, the Practice Aid is being strongly considered as a staff bulletin. Its procedures and content are very meaningful, although its organization is poor. The reality is the Practice Aid is here to stay and the practitioner to deviate is likely to be asked some very pointed questions as to justifying that deviation.

© Copyright 2002. The Financial Valuation Group, LC.

102

AITF Meeting: SFAS 141 and 142 Symposium: Essential Discussion Items
24. When using market cap as the indication of fair value of the reporting unit, can the stock price being used be from a date other than the valuation date? Two approaches: no information subsequent to the valuation date should be considered and therefore the stock price should be as of the valuation date --or: in a situation the auditor and the company felt information that the Company knew and a prospective buyer would have known (i.e. poor fourth quarter results and lack of market traction of newly introduced products) brought down the share price, therefore alternative date should be used.

© Copyright 2002. The Financial Valuation Group, LC.

103

AITF Meeting: SFAS 141 and 142 Symposium: Essential Discussion Items
RESPONSE: Generally, the practitioner may have to consider market data covering a broad horizon. Market declines may be temporary, but impairment is permanent. If the decline is seen as temporary, the practitioner needs to look at the subsequent data to support the temporary nature of the decline. On the other hand, if the decline is seen as permanent, the practitioner needs to analyze the subsequent data to support the permanent nature of the decline. The appraiser should consult with the auditor.

© Copyright 2002. The Financial Valuation Group, LC.

104

AITF Meeting: SFAS 141 and 142 Symposium: Essential Discussion Items
25. When valuing developed technology do ancillary revenue streams need to be excluded, similar to IPR&D? A software company sells pre-packaged software that is generally sold with some maintenance, consulting, implementation services that are an indirect result of the sale of the software licenses. (first year maintenance is required to be purchased) Can/should the ancillary cash flows be considered in valuing developed technology?

© Copyright 2002. The Financial Valuation Group, LC.

105

AITF Meeting: SFAS 141 and 142 Symposium: Essential Discussion Items
RESPONSE: The Practice Aid should be followed.

© Copyright 2002. The Financial Valuation Group, LC.

106

AITF Meeting: SFAS 141 and 142 Symposium: Essential Discussion Items
26. When performing an allocation for either an impairment of goodwill or for an acquisition should a contributory asset charge be applied for an assembled workforce, even though it is no longer recognized apart from goodwill? How can a contributory charge for workforce be estimated, given the fact that the Board does not believe it can be valued?

© Copyright 2002. The Financial Valuation Group, LC.

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AITF Meeting: SFAS 141 and 142 Symposium: Essential Discussion Items
RESPONSE: Yes, the contributory charge for assembled workforce must be assessed. The assembled workforce is a valid intangible asset although not separable by definition. The FASB has dictated that assembled workforce will be subsumed into goodwill, however, to not assess contributory charge to assembled workforce will result in incorrect conclusions of value for other assets.

© Copyright 2002. The Financial Valuation Group, LC.

108

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