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Harmonic Hearing Co.

Exhibit TN-1 Financial Forecasts Under Debt Financing Alternative

Year
Sales - existing hearing aids
Sales - new hearing aids
Total sales

1
$30,687,000
$0
$30,687,000

2
$31,454,000
$2,831,500
$34,285,500

3
$31,861,000
$6,607,125
$38,468,125

4
$30,427,000
$9,580,375
$40,007,375

5
$28,298,000
$13,604,500
$41,902,500

6
$23,234,000
$18,774,000
$42,008,000

7
$15,488,000
$25,345,250
$40,833,250

COGS - existing hearing aids


COGS - new hearing aids
Selling, general & administrative
Research & development
Depreciation
Rent payments
Equipment lease payments
Operating income
Interest
Income before income taxes
Income taxes
Net income

$13,502,280
$0
$10,544,320
$1,700,000
$0
$1,312,500
$2,000,000
$1,627,900
$633,000
$994,900
$338,266
$656,634

$13,839,760
$1,330,805
$11,816,510
$600,000
$0
$1,391,250
$2,000,000
$3,307,175
$628,086
$2,679,089
$910,890
$1,768,199

$14,018,840
$3,105,349
$13,297,896
$600,000
$0
$1,474,725
$2,000,000
$3,971,315
$622,681
$3,348,634
$1,138,536
$2,210,099

$13,387,880
$4,502,776
$13,826,529
$600,000
$0
$1,563,209
$2,000,000
$4,126,981
$616,735
$3,510,246
$1,193,484
$2,316,762

$12,451,120
$6,394,115
$14,482,083
$600,000
$0
$1,657,001
$2,000,000
$4,318,181
$610,194
$3,707,987
$1,260,716
$2,447,271

$10,222,960
$8,823,780
$14,492,120
$600,000
$100,000
$1,756,421
$0
$6,012,719
$603,000
$5,409,719
$1,839,304
$3,570,415

$6,814,720
$11,912,268
$14,039,960
$600,000
$100,000
$1,861,806
$0
$5,504,497
$603,000
$4,901,497
$1,666,509
$3,234,988

$0
$0
$318,002
$213,967
$127,780
$49,139
$203,306

$0
$0
$885,231
$69,183
$41,510
$54,053
$801,241

$0
$0
$1,028,926
$36,711
$22,027
$59,458
$1,107,030

$0
$0
$378,656
-$129,347
-$77,608
$65,404
$1,924,441

$0
$500,000
$466,201
-$192,036
-$115,221
$71,945
$1,485,940

$100,000
$0
$25,953
-$456,773
-$274,064
$0
$3,827,171

$100,000
$0
-$288,989
-$698,689
-$419,214
$0
$3,903,452

+ Depreciation
- Repurchase of equipment
- Investment in accounts receivable
- Investment in inventory *
+ Increase in accounts payable *
- Principal repayments
Free cash flow
Terminal value - cash from sale

* Changes in inventory and accounts payable for existing hearing aids only.

$45,289,828

Harmonic Hearing Co.


Exhibit TN-2 Financial Forecasts Under Equity Financing Alternative

Year
Sales - existing hearing aids
Sales - new hearing aids
Total sales

1
$30,687,000
$3,236,000
$33,923,000

2
$31,454,000
$7,551,000
$39,005,000

3
$31,861,000
$10,949,000
$42,810,000

4
$30,427,000
$15,548,000
$45,975,000

5
$28,298,000
$21,456,000
$49,754,000

6
$23,234,000
$28,966,000
$52,200,000

7
$15,488,000
$39,104,000
$54,592,000

COGS - existing hearing aids


COGS - new hearing aids
Selling, general & administrative
Research & development
Depreciation - new equipment
Depreciation - existing equipment
Rent payments
Equipment lease payments
Operating income
Interest
Income before income taxes
Income taxes
Net income

$13,502,280
$1,229,680
$12,212,280
$1,700,000
$140,000
$1,167,000
$0
$0
$3,971,760
$0
$3,971,760
$1,350,398
$2,621,362

$13,839,760
$2,869,380
$14,041,800
$600,000
$170,000
$1,167,000
$0
$0
$6,317,060
$0
$6,317,060
$2,147,800
$4,169,260

$14,018,840
$4,160,620
$15,411,600
$600,000
$180,000
$1,167,000
$0
$0
$7,271,940
$0
$7,271,940
$2,472,460
$4,799,480

$13,387,880
$5,908,240
$16,551,000
$600,000
$180,000
$1,167,000
$0
$0
$8,180,880
$0
$8,180,880
$2,781,499
$5,399,381

$12,451,120
$8,153,280
$17,911,440
$600,000
$180,000
$1,167,000
$0
$0
$9,291,160
$0
$9,291,160
$3,158,994
$6,132,166

$10,222,960
$11,007,080
$18,792,000
$600,000
$40,000
$0
$0
$0
$11,537,960
$0
$11,537,960
$3,922,906
$7,615,054

$6,814,720
$14,859,520
$19,653,120
$600,000
$10,000
$0
$0
$0
$12,654,640
$0
$12,654,640
$4,302,578
$8,352,062

$1,307,000
$700,000
$1,114,058
$466,052
$279,031
$0
$1,927,283
$1,284,855

$1,337,000
$150,000
$1,250,172
$405,322
$243,193
$0
$3,943,959

$1,347,000
$50,000
$936,030
$301,416
$180,849
$0
$5,039,884

$1,347,000
$0
$778,590
$228,915
$137,349
$0
$5,876,225

$1,347,000
$0
$929,634
$268,197
$160,918
$0
$6,442,253

$40,000
$0
$601,716
$128,256
$76,954
$0
$7,002,035

$10,000
$0
$588,432
$91,061
$54,637
$0
$7,737,206

+ Depreciation - all equipment


- Investment in equipment
- Investment in accounts receivable
- Investment in inventory
+ Increase in accounts payable
- Principal repayments
Free cash flow
Terminal value - cash from sale

$116,928,874

Harmonic Hearing Co.


Exhibit TN-3 Real Estate Transaction
Cash flows to Frank Thomas without sale of building and land
Year
0
Initial investment
-$2,100,000
Annual cash flow
Total cash flow
-$2,100,000
Net present value at 15%

1
$115,477
$115,477

$140,608
$140,608

4
$167,832
$167,832

$197,263
$197,263

$229,023
$229,023

.2(x-8699384)
$9,047,702

11309628

-$1,329,652

After tax cash flow from year 7 sale required to earn an after tax rate of return of 15%:
Additional NPV required
$1,329,652
Future value factor (15%, 7 years)
2.660020
Required receipts in year 7
$3,536,902

3,536,900.75

Sale price required in year 7 to receive this after tax cash flow:
Original purchase price
$10,500,000
- Accumulated depreciation
$1,800,616
Book value
$8,699,384
Sale price received in year 7
- Book value
Taxable gain on sale
x Capital gain tax rate
Capital gains tax paid

$11,309,628
$8,699,384
$2,610,244
20.0%
$522,049

Sale price received in year 7


- Capital gains tax paid
- Mortgage balance paid
Net cash receipts on sale

$11,309,628
$522,049
$7,250,677
$3,536,902

10787579+

$10,787,579

6
$263,242
$263,242

7
$300,059
$300,059

Harmonic Hearing Co.


Exhibit TN-4 Equity Ownership Proportion Required by Comet Capital
Cash flows to Comet Capital
Year
Capital investment
Annual cash flow
Total cash flow
Net present value at 25%

0
-$28,050,000
-$28,050,000

$1,284,855
$1,284,855

$2,629,306
$2,629,306

$3,359,923
$3,359,923

$3,917,483
$3,917,483

$4,294,835
$4,294,835

$4,668,023
$4,668,023

$5,158,137
$5,158,137

-$18,301,713

After tax cash flow from year 7 sale required to earn an after tax rate of return of 25%:
Additional NPV required
$18,301,713
Future value factor (25%, 7 years)
4.768372
Required receipts in year 7
$87,269,367
Required cash flow to Comet Capital at the end of year 7 to produce a 25% internal rate of return on investment

$87,269,367

Terminal value of company at the end of year 7

$116,928,874

Comet's required ownership proportion = Comet's required value terminal value


Residual terminal value at the end of year 7 for Burns and Irvine
Residual ownership proportion of Burns and Irvine

74.63%
$29,659,506
25.37%

Harmonic Hearing Co.


Exhibit TN-5 Return on Ownership Interest of Harriet Burns and Richard Irvine
Debt Financing Alternative
Cash flows
Year
Initial investment
Annual cash flow
Repurchase of building & land
Repayment of A/R & inventory loans
Terminal value of company
Total cash flow
Internal rate of return
Net present value at 25%
Net present value at 30%
Net present value at 35%
Net present value at 40%
Net present value at 45%

0
-$200,000

-$200,000

$203,306

$801,241

$1,107,030

$1,924,441

$1,485,940

$3,827,171

$203,306

$801,241

$1,107,030

$1,924,441

$1,485,940

$3,827,171

$642,428

$1,314,653

$1,679,961

$1,958,742

$2,147,418

$2,334,012

$642,428

$1,314,653

$1,679,961

$1,958,742

$2,147,418

$2,334,012

7
$3,903,452
-$11,309,628
-$6,700,000
$45,289,828
$31,183,652

227.35%
$9,860,358
$7,770,909
$6,199,026
$5,001,197
$4,077,313

Equity Financing Alternative


Cash flows
Year
Initial investment
Annual cash flow
Residual terminal value of company
Total cash flow
Internal rate of return
Net present value at 25%
Net present value at 30%
Net present value at 35%
Net present value at 40%
Net present value at 45%

0
-$250,000

-$250,000
330.41%
$10,844,193
$8,672,204
$7,029,142
$5,769,282
$4,790,858

7
$2,579,069
$29,659,506
$32,238,575