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In mid-September of 2001, Jennifer Campbell, chief financial officer (CFO) of Eastboro

Machine Tools Corporation, paced the floor of her Minnesota office. She needed to submit a
recommendation to Eastboros board of directors regarding the companys dividend policy, a policy
that had been the subject of an ongoing debate among the firms senior managers. Compounding her
problem was the previous weeks terrorist attacks on the World Trade Center and the Pentagon. The
stock market had plummeted in response to the attacks, and along with it Eastboros stock had fallen
18%, to $22.15. In response to the market collapse, a spate of companies had announced plans to
buy back stock, some to signal confidence in their companies as well as in the U.S. financial
markets, and others for opportunistic reasons. Now Jennifer Campbells dividend decision problem
was compounded by the dilemma of whether to use Eastboros company funds to pay out dividends
or to use it to buy back stock instead.

Background on the Dividend Question

After years of traditionally strong earnings and predictable dividend growth, Eastboro had
faltered in the past five years. In response, management implemented two extensive restructuring
programs, both of which were accompanied by net losses. For three years in a row since 1996,
dividends had exceeded earnings; then, in 1999, dividends decreased to a level below earnings.
Despite extraordinary losses in 2000, the board of directors had declared a small dividend. For the
first two quarters of 2001, the board had declared no dividend. But in a special letter to shareholders,
the board had committed itself to resuming the dividend as early as possibleideally, in 2001.

In a related matter, senior management was considering embarking on a campaign of

corporate image advertising along with changing the name of the corporation to Eastboro Advanced
Systems International, Inc. Management felt that this would help to improve the perception of the
company in the investment community.

Overall, managements view was that Eastboro was a resurgent company that demonstrated
great potential for growth and profitability. The restructurings had revitalized the companys operating

This case is dedicated to Professors Robert F. Vandell and Pearson Hunt, the authors of an antecedent case, long out of
print, that provided the model of the economic problem for this case. Eastboro is a fictional firm, although it draws on the
dilemmas of contemporary companies. The financial support of the Batten Institute is gratefully acknowledged.
Copyright 2001 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To
order copies, send an e-mail to No part of this publication may be reproduced, stored in a
retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical,
photocopying, recording, or otherwisewithout the permission of the Darden School Foundation.

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divisions. In addition, newly developed machine tools designed on state-of-the-art computers showed
signs of being well received in the market and promised to render competitors products obsolete. Many
within the company viewed 2001 as the dawning of a new era that, in spite of the companys recent
performance, would turn Eastboro into a growth stock. The company had no Moodys or Standard &
Poors rating because it had no bonds outstanding, but Value Line rated it an A company.1

Out of that combination of a troubled past and a bright future arose Campbells dilemma. Did
the market view Eastboro as a company on the wane, a blue-chip stock, or a potential growth stock?
How, if at all, could Eastboro affect that perception? Would a change of name help frame investors
views of the firm? Did the companys investors expect capital growth or steady dividends? Would a
stock buyback instead of a dividend affect investors perceptions of Eastboro in any way? And, if
those questions could be answered, what were the implications for Eastboros future dividend

The Company

Eastboro Corporation was founded in 1923 in Concord, New Hampshire, by two mechanical
engineers, James East and David Peterboro. The two men had gone to school together and were
disenchanted with their prospects as mechanics at a local farm-equipment manufacturer.

In its early years, Eastboro had designed and manufactured a number of machinery parts,
including metal presses, dies, and molds. In the 1940s, the companys large manufacturing plant
produced tank and armored-vehicle parts and miscellaneous equipment for the war effort, including
riveters and welders. After the war, the company concentrated on the production of industrial presses
and molds for plastics as well as metals. By 1975, the company had developed a reputation as an
innovative producer of industrial machinery and machine tools.

In the late 1970s, Eastboro entered the new field of computer-aided design and computer-
aided manufacturing (CAD/CAM). Working with a small software company, it developed a line of
presses that would manufacture metal parts by responding to computer commands. Eastboro merged
the software company into its operations and, over the next several years, perfected the CAM
equipment. At the same time, it developed a superior line of CAD software and equipment that
allowed an engineer to design a part to exact specifications on the computer. The design could then
be entered into the companys CAM equipment, and the parts would be manufactured without the
use of blueprints or human interference. By year-end 2000, CAD/CAM equipment and software
were responsible for about 45% of sales; while presses, dies, and molds accounted for 40% and
miscellaneous machine tools for 15%.

Most press and mold companies were small local or regional firms with limited clientele. For
that reason, Eastboro stood out as a true industry leader. Within the CAD/CAM industry, however, a
Value Lines financial-strength ratings, from A++ to C, were a measure of a companys ability to withstand adverse
business conditions and were based on leverage, liquidity, business risk, company size, and stock-price variability, as
well as analysts judgments.

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number of larger firms, including General Electric, Hewlett-Packard, and Digital Equipment,
competed for dominance of the growing market.

Throughout the 1980s, Eastboro helped set the standard for CAD/CAM, but the aggressive
entry of large foreign firms into CAD/CAM and the rise of the U.S. dollar dampened sales. In the
mid-to-late 1990s, technological advances and aggressive venture capitalism fueled the entry of
highly specialized, state-of-the-art CAD/CAM firms. Eastboro fell behind some of its competition in
the development of user-friendly software and the integration of design and manufacturing. As a
result, revenues declined from a high of $911 million in 1994 to $757 million in 2000.

To combat the decline in revenues and improve weak profit margins, Eastboro took a
two-pronged approach. First, it devoted a greater share of its research and development (R&D)
budget to CAD/CAM in an effort to reestablish leadership in the field. Second, the company
underwent two massive restructurings. In 1998, it sold two unprofitable lines of business with
revenues of $51 million, sold two plants, eliminated five leased facilities, and reduced personnel.
Restructuring costs totaled $65 million. Then, in 2000, the company began a second round of
restructuring by altering its manufacturing strategy, refocusing its sales and marketing approach, and
adopting administrative procedures that allowed for a further reduction in staff and facilities. The
total cost of the operational restructuring in 2000 was $89 million.

The companys recent income statements and balance sheets are provided in Exhibits 1 and
2. Although the two restructurings produced losses totaling $202 million in 1998 and 2000, by 2001
the restructurings and the increased emphasis on CAD/CAM research appeared to have launched a
turnaround. Not only was the company leaner, but also the CAD/CAM research led to the
development of a system that Eastboro management believed would redefine the industry. Known as
the Artificial Workforce, the system was an array of advanced-control hardware, software, and
applications that distributed information throughout a plant.

Essentially, the Artificial Workforce allowed an engineer to design a part on the CAD software
and input the data into a CAM that controlled the mixing of chemicals or the molding of parts from any
number of different materials on different machines. The system could also assemble and can, box, or
shrink-wrap the finished product. The Artificial Workforce ran on complex circuitry and highly
advanced software that allowed machines to communicate with each other electronically. Thus, no
matter how intricate it was, a product could be designed, manufactured, and packaged solely by

In 2000, Eastboro developed applications of the product for the chemical and the oil- and
gas-refining industries, and by the next year developed applications for the trucking, automobile
parts, and airline industries.

By October 2000, when the first Artificial Workforce was shipped, Eastboro had orders
totaling $75 million; by year-end, the backlog totaled $100 million. The future for the product
looked bright. Several securities analysts were optimistic about the products impact on the
company. The following comments paraphrase their thoughts:

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The Artificial Workforce products have compelling advantages over competing

entries and will enable Eastboro to increase its share of a market that, ignoring
periodic growth spurts, will expand at a real annual rate of about 5% over the next
several years.

The company is producing the Artificial Workforce in a new automated facility that,
when in full swing, will help restore margins to levels not seen for years.

The important question now is how quickly Eastboro will be able to ship in volume.
Manufacturing foul-ups and missing components have delayed production growth
through May 2001, about six months beyond the original target date. And start-up
costs, which were a significant factor in last years deficits, have continued to
penalize earnings. Our estimates assume that production will proceed smoothly from
now on and that it will approach the optimum level by years end.

Eastboro management expected domestic revenues from the Artificial Workforce series to
total $90 million in 2001 and $150 million in 2002. Thereafter, growth in sales would depend on the
development of more system applications and the creation of system improvements and add-on
features. International sales through Eastboros existing offices in Frankfurt, Germany; London,
England; Milan, Italy; and Paris, France; and new offices in Hong Kong, China; Seoul, Korea;
Manila, Philippines; and Tokyo, Japan, were expected to provide additional revenues of $150
million as early as 2003. Currently, international sales accounted for about 15% of total corporate

Two factors that could affect sales were of some concern to Eastboro. First, although the
company had successfully patented several of the processes used by the Artificial Workforce system,
management had received hints through industry observers that two strong competitors were
developing comparable products and would probably introduce them within the next 12 months.
Second, sales of molds, presses, machine tools, and CAD/CAM equipment and software were highly
cyclical, and current predictions about the strength of the U.S. economy were not encouraging. As
shown in Exhibit 3, real GDP growth was expected to slow to 1.6% that year from around 4% over
the past three years. Industrial production was expected to decline by 2.5%. Despite the
macroeconomic environment, Eastboros management remained optimistic about the companys
prospects because of the successful introduction of the Artificial Workforce.

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Corporate Goals

A number of corporate objectives had grown out of the restructurings and recent
technological advances. First and foremost, management both wanted and expected the firm to grow
at an average annual compound rate of 15%. A great deal of corporate planning had been devoted to
that goal over the past three years and, indeed, second-quarter financial data suggested that Eastboro
would achieve revenues of about $870 million in 2001, as shown in Exhibit 1. If Eastboro achieved
a 15% compound rate of growth through 2007, the company would reach $2.0 billion in sales and
$160 million in net income.

In order to achieve this growth goal, Eastboros management proposed a strategy that relied
on three key points. First, the mix of production would shift substantially: CAD/CAM and peripheral
products on the cutting edge of industry technology would account for three-quarters of sales; the
companys traditional presses and molds would account for the remainder. Second, the company
would aggressively expand internationally, where it hoped to obtain half of its sales and profits by
2007. This expansion would be achieved through opening new field sales offices around the world.
Third, the company would expand through joint ventures and acquisitions of small software
companies, which would provide one-half of the new products through 2007; internal research
would provide the other half.

From its beginning, Eastboro had an aversion to debt. Management believed that small
amounts of debt, primarily to meet working-capital needs, had its place, but that anything beyond a
40% debt-to-equity ratio was, in the oft-quoted words of cofounder David Peterboro, unthinkable,
indicative of sloppy management, and flirting with trouble. Senior management was aware that
equity was typically more costly than debt, but took great satisfaction in the companys doing it on
its own. Eastboros highest debt-to-capital ratio (22%) in the past 25 years occurred in 2000, and
was still the subject of conversations among its senior managers.

Although 11 members of the East and Peterboro families owned 30% of the companys stock
and three were on the board of directors, Eastboros management placed the interests of the public
shareholders first. (Shareholder data are provided in Exhibit 4.) Stephen East, board chair and
grandson of the cofounder, sought to maximize growth in the market value of the companys stock
over time.

At age 61, East was actively involved in all aspects of the companys growth and future. He
was conversant with a range of technical details of Eastboros products and was especially interested
in finding ways to improve the companys domestic market share. His retirement was no more than
four years into the future, and he wanted to leave a legacy of corporate financial strength and
technological advancement. The Artificial Workforce, a project he had taken under his wing four
years earlier, was beginning to bear fruit. He now wanted to ensure that the firm would also soon be
able to pay a dividend.

East took particular pride in selecting and developing young, promising managers. Campbell
had a bachelors degree in electrical engineering and had been a systems analyst for Motorola before

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attending graduate school. She had been hired in 1991 out of a well-known MBA program. By 2000,
she had risen to the position of CFO.

Dividend Policy

Eastboros dividend and stock price histories are presented in Exhibit 5. Prior to 1995, both
earnings and dividends per share had grown at a relatively steady pace, but Eastboros troubles in
the mid-to-late 1990s took their toll on earnings. As a consequence, dividends were pared back in
1999 to $0.25 per sharethe lowest dividend since 1986. In 2000, the board of directors declared a
payout of $0.25 per share despite reporting the largest per-share earnings loss in the firms history,
and, in effect, borrowing to pay the dividend. In the first two quarters of 2001, the directors had not
declared a dividend. In a special letter to shareholders, however, the directors declared their
intention to continue the annual payout later in 2001.

In August 2001, Campbell contemplated her choices as she decided which of the three
dividend policies to recommend:

Zero-dividend payout: This option could be justified in light of the firms strategic emphasis
on advanced technologies and CAD/CAM and reflected the huge cash requirements of that
move. The proponents of this policy argued that it would signal that the firm belonged in a
class of high-growth and high-technology firms. Some securities analysts wondered whether
the market still considered Eastboro a traditional electrical-equipment manufacturer or if it
considered it a more technologically advanced CAD/CAM company. The latter category
would imply that the market expected strong capital appreciation but perhaps little in the
way of dividends. Others cited Eastboros recent performance problems. One questioned the
wisdom of ignoring the financial statements in favor of acting like a blue chip. Was a high
dividend in the long-term interests of the company and its stockholders, or would the
strategy backfire and make investors skittish?
Campbell recalled a recently published study, which found that firms displayed a lower
propensity for paying dividends. The study found that the percentage of firms paying cash
dividends had dropped from 66.5% in 1978, to 20.8% in 1999.2 In that light, perhaps the
market would react kindly if Eastboro assumed a zero dividend-payout policy.
40% dividend payout or a dividend of around $0.20 a share: This would restore the firm to
an implied annual dividend payment of $0.80 per share, the highest since 1997. Proponents
of that policy argued that there was undoubtedly some anticipation of such an announcement
in the current stock price of $32 a share and that this was justified by the expected increases
in orders and sales. Eastboros investment banker suggested that the market might be
expecting a strong dividend in order to bring the payout back in line with the 45% average
within the electrical industrial-equipment industry and with the 29% average in the machine-

Eugene Fama and Kenneth French, Changing Firm Characteristics or Lower Propensity to Pay, Journal of
Financial Economics 60 (April 2001): 343.

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tool industry. Still others believed that it was important to send a strong signal to
shareholders and that a large dividend (on the order of a 40% payout) would suggest that the
company had conquered its problems and that its directors were confident of future earnings.
Supporters of that view argued that borrowing to pay dividends was consistent with the
behavior of most firms. Finally, some older members of management opined that a growth
rate in the range of 10% to 20% should accompany a payout of 30% to 50%.
Campbell remembered reading a Wall Street Journal article only a few days earlier in which
the columnist had argued that with the recent collapse in technology and other growth
stocks, investors flocked to dividend-paying stocks. The article quoted Jeremy Siegel, a
finance professor at the Wharton School at the University of Pennsylvania: A little more
than a year ago, people laughed at dividends. In the future, I believe that more attention
will be paid to dividends and current earnings, and less [attention paid to] to growth.3
Residual dividend-payout policy: A few members of the finance staff argued that Eastboro
should pay dividends only after funding all projects offering positive net present values (NPV).
Their view was that investors paid managers to deploy their funds at returns better than they
could achieve otherwise, and that, by definition, such investments would yield positive NPVs.
By deploying funds into those projects and otherwise returning unused funds to investors in the
form of dividends, the firm would build trust with investors and be rewarded with higher
valuation multiples. General Motors was a preeminent example of a firm that had followed
such a policy, although few large publicly held firms followed its example.
Another argument in support of this view was that the dividend policy was irrelevant in a
growing firm. Any dividend paid today would be offset by dilution at some future date by the
issue of shares needed to make up for the dividend. This argument reflected the theory of
dividends in a perfect market advanced by two finance professors, Merton Miller and Franco
Modigliani.4 To Jennifer Campbell, the main disadvantage of this policy was that dividend
payments would be unpredictable. In some years, dividends could be cut, even to zero, possibly
imposing negative pressure on the firms share price. Campbell was all too aware of Eastboros
own share price collapse following its dividend cut. She recalled a study by another finance
professor, John Lintner,5 which found that firms dividend payments tended to be sticky
upwardthat is, dividends rose over time and rarely fell, and that mature, slower-growth firms
paid higher dividends, while high-growth firms paid lower dividends.

In response to that internal debate, Campbells staff pulled together the data (Exhibits 6 and
7), which present comparative information on companies in three industriesCAD/CAM, machine
tools, and electrical-industrial equipmentand on a general sample of high- and low-payout
companies. To test the feasibility of a 40% dividend payout rate, Campbell developed the projected
sources and uses of cash (Exhibit 8). She took the boldest approach by assuming that the company

Jonathan Clements, Dividends, not Growth, is Wave of Future, Wall Street Journal, 21 August 2001, C1.
M.H. Miller and F. Modigliani, Dividend Policy, Growth, and the Valuation of Shares, Journal of Business 34
(October 1961): 411433.
J. Lintner, Distribution of Incomes of Corporations among Dividends, Retained Earnings, and Taxes, American
Economic Review 46 (May 1956): 97113.

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would grow at a 15% compound rate, that margins would improve over the next few years to
historical levels, and that the firm would pay a dividend of 40% of earnings each year. In particular,
the forecast assumed that the firms net margin would hover between 4.0% and 6.0% over the next
six years, and then increase to 7.95% in 2007. The firms operating executives believed that this
increase in profitability was consistent with economies of scale to be achieved upon the attainment
of higher operating output of the Artificial Workforce.

Image Advertising and Name Change

As part of a general review of the firms standing in the financial markets, Eastboros
director of Investor Relations, Cathy Williams, concluded that investors misperceived the firms
prospects and that the firms current name was more consistent with the firms historical product
mix and markets than with those expected in the future. Williams commissioned surveys of readers
of financial magazines, which revealed a relatively low awareness of Eastboro or its business.
Surveys of stockbrokers revealed higher awareness of the firm, but a low or mediocre outlook on
Eastboros likely returns to shareholders and growth prospects. Williams retained a consulting firm
that recommended a program of corporate-image advertising targeting opinion-leading institutional
and individual investors. The objective was to enhance the awareness and image of Eastboro.
Through focus groups, the consultants identified a name that appeared to suggest the firms
promising strategy: Eastboro Advanced Systems International, Inc. Williams estimated that the
image advertising campaign and name change would cost the firm approximately $10 million.

Stephen Easts response was mildly skeptical: Do you mean to raise our stock price by
marketing our shares? This is a novel approach. Can you sell claims on a company the way Procter
& Gamble markets soap? The consultants could give no empirical evidence that stock prices
responded favorably to corporate-image campaigns or name changes, although they did offer some
favorable anecdotes.


Jennifer Campbell was caught in a difficult position. Members of the board and management
disagreed on the very nature of Eastboros future. Some managers saw the company as entering a
new stage of rapid growth and thought that a large (or, in the minds of some, any) dividend would be
inappropriate. Others thought that it was important to make a strong gesture to the public that
management believed Eastboro had turned the corner and was about to return to the levels of growth
and profitability seen in the 1970s and 1980s. This action could only be accomplished through a
dividend. Then there was the confounding question of the stock buyback: should Eastboro use funds
to repurchase stocks instead of paying out a dividend? As she wrestled with the different points of
view, she wondered whether management might be representative of the companys shareholders.
Did the majority of public shareholders own stock for the same reason or were their reasons just as
diverse as those of management?

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Exhibit 1
Consolidated Income Statements
(dollars in thousands, except per-share data)

For the Years Ended December 31,

1998 1999 2000 2001

Net sales $ 858,263 $ 815,979 $ 756,638 $ 870,000

Cost of sales 540,747 501,458 498,879 549,750
Gross profit 317,516 314,522 257,759 320,250

Research & development 77,678 70,545 75,417 77,250

Selling, general, & administrative 229,971 223,634 231,008 211,500
Restructuring costs 65,448 0 89,411 0
Operating profit (loss) (55,581) 20,343 (138,077) 31,500

Other income (expense) (4,500) 1,065 (3,458) (4,200)

Income (loss) before taxes (60,081) 21,408 (141,534) 27,300
Income taxes (benefit) 1,241 8,415 (750) 9,282

Net income (loss) ($61,322) $12,993 ($140,784) $18,018

Earnings (loss) per share ($3.25) $0.69 ($7.57) $0.98

Dividends per share $0.77 $0.25 $0.25 $0.39

Note: The dividends in 2001 assume a payout ratio of 40%.

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Exhibit 2
Consolidated Balance Sheets
(dollars in thousands)
December 31st
1999 2000 2001

Cash & equivalents $ 13,917 $ 22,230 $ 25,665

Accounts receivable 208,541 187,235 217,510
Inventories 230,342 203,888 217,221
Prepaid expenses 14,259 13,016 15,011
Other 22,184 20,714 21,000
Total Current Assets 489,242 447,082 496,407

Property, plant, & equipment 327,603 358,841 410,988

Less depreciation 167,414 183,486 205,530
Net property, plant, & equipment 160,190 175,355 205,458
Intangible assets 9,429 2,099 1,515
Other assets 15,723 17,688 17,969

Total assets $674,583 $642,223 $721,350

Bank loans $ 34,196 71,345 74,981

Accounts payable 36,449 34,239 37,527
Current portion of long-term debt 300 150 1,515
Accruals and other 129,374 161,633 183,014
Total Current Liabilities 200,318 267,367 297,037

Deferred taxes 16,986 13,769 16,526

Long-term debt 9,000 8,775 30,021
Deferred pension costs 44,790 64,329 70,134
Other liabilities 2,318 5,444 7,505
Total Liabilities 273,411 359,683 421,224

Common stock, $1 par value 18,855 18,855 18,835

Capital in excess of par 107,874 107,907 107,889
Cumulative translation adjustment (6,566) 20,208 26,990
Retained earnings 291,498 146,065 156,875
Less treasury stock at cost:
1986--256,151, 1987--255,506 (10,490) (10,494) (10,464)
Total shareholders' equity 401,172 282,541 300,126

Total Liabilities & Equity $674,583 $642,223 $721,350

Note: Projections assume a dividend payout ratio of 40%.

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Exhibit 3
Economic Indicators and Projections
(all numbers are percentages)

1998 1999 2000 2001 2002 2003
3-month Treasury bill rate (at auction) 4.8 4.6 5.8 3.9 3.8 4.5
10-year Treasury bond rate 5.26 5.64 6.03 5.17 5.7 7.2
AAA corporate bond rate 6.5 7.0 7.7 7.6 7.9 8.0

Change in:
Real gross domestic product 4.4 4.2 5.0 1.6 2.6 3.4
Producer price index 0.9 1.8 3.7 2.7 0.5 1.2
Industrial production 4.8 4.1 5.6 2.5 2.6 5.9
Production of durable goods 9.1 8.2 10.0 2.7 3.4 9.1
Consumption of durable goods 10.6 12.4 9.5 4.6 6.1 4.2
Consumer spending 4.7 5.3 5.3 3.0 3.0 3.1
Price deflator 1.3 1.5 2.0 2.3 2.2 2.6

Sources: U.S. Economic Outlook, WEFA Group, August 2001; Value Line Investment Survey, 24 August 2001.

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Exhibit 4
Stockholder Comparative Data: 1990 and 2000*
(in thousands of shares)

1990 2000
Shares Percentage Shares Percentage

Founders families 2,390 13 2,384 13

Employees and families 3,677 20 3,118 17
Institutional investors
A. growth-oriented 2,390 13 1,101 6
B. value-oriented 1,471 8 2,384 13
Individual investors
A. long-term; retirement 6,803 37 4,769 27
B. short-term; trading-oriented 919 5 2,384 13
C. other; unknown 735 4 2,201 12

18,342 100 18,342 100

* Some rounding has occurred.

Note: The investor relations department identified these categories from company records. The type of institutional
investor was identified from promotional materials stating the investment goals of the institutions. The type of individual
investor was identified from a survey of subsamples of investors.

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Exhibit 5
Per-Share Financial and Stock Data1

Sales / -----Stock Price----- Avg. Payout Avg. Outstanding
Year Share EPS~ DPS~ CPS~ High Low Avg. P/E Ratio Yield (Millions)

1985 $14.52 $ 0.45 $0.18 $0.97 $20.37 $9.69 $14.48 32.4 40% 1.2% 15.49
1986 16.00 0.74 0.22 1.29 21.11 10.18 14.85 20.2 30% 1.5 15.58
1987 22.25 0.89 0.27 1.43 21.23 8.20 13.50 15.1 30% 2.0 16.04
1988 25.64 1.59 0.31 2.05 18.50 10.18 13.35 8.4 19% 2.3 17.87
1989 27.19 2.29 0.40 2.83 22.48 12.17 18.36 8.0 17% 2.2 18.08
1990 30.06 2.59 0.57 3.25 23.84 18.01 21.00 8.1 22% 2.7 18.39
1991 31.66 2.61 0.72 3.34 26.70 18.25 22.73 8.7 27% 3.1 18.76
1992 37.71 2.69 0.81 3.60 29.43 19.50 24.23 9.0 30% 3.4 18.76
1993 40.69 2.56 0.86 3.62 39.74 20.12 29.48 11.5 34% 2.9 18.78
1994 48.23 3.58 0.92 4.81 40.98 27.32 33.98 9.5 26% 2.7 18.88
1995 43.59 2.79 1.03 4.25 38.74 21.36 31.82 11.4 37% 3.2 18.66
1996 42.87 0.65 1.03 2.23 47.19 29.55 36.81 57.0 160% 2.8 18.66
1997 41.48 0.35 1.03 2.00 40.23 26.82 31.26 89.9 297% 3.3 18.66
1998 46.01 (3.29) 0.77 2.86 30.75 22.13 26.45 NMF NMF 2.9 18.85
1999 43.88 0.70 0.25 1.99 71.88 50.74 61.33 88.2 35% 0.4 18.85
2000 40.68 (7.57) 0.25 -0.97 39.88 18.38 29.15 NMF NMF 0.9 18.60

This document is authorized for use only by Utomo Sarjono Putro in 2017.
Note: NMF = not a meaningful figure.
Adjusted for a 3-for-2 stock split in January 1991 and 50% stock dividend in June 1995.
For the exclusive use of U. Putro, 2017.
-14- UVA-F-1360

Exhibit 6
Comparative Industry Data
(compiled from data available as of August 200; dollars are in millions)
Annual Growth Rate
of Cash Flow (%)
Last Next Current Current
10 3-5 Payout Dividend Debt/ Insider P/E
Sales Years Years Ratio (%) Yield (%) Equity (%) Ownership (%) Ratio ()

Eastboro $504 1.5 +15 28 30 NMF

CAD/CAM Companies (software and hardware)

Autodesk $936 10.5 15.5 12.8 0.6 0 5.0 17.5

Brooks Automation 321 NMF 30.0 0 7.7 NMF
Parametric Tech. 928 41.0 10.0 0 2.6 36.0
Intergraph 691 NMF NMF 41.8 4.9 NMF
Mentor Graphics 590 4.0 17.0 0.6 3.9 16.3
Moldflow Corp. 40 NA 21.0 0 14.9 32.5
Sun Microsystems 15,721 23.5 15.0 4.8 3.3 87.4
Gerber Scientific 554 3.0 3.0 68.0 16.9 33.4
Hewlett-Packard $9,601 29.51 10.5 0.6 32.3 47.0

Electrical Industrial-Equipment Manufacturers

Emerson Electric $15,545 9.5 7.5 47.9 2.9 21.0 0.8 18.8
General Electric 63,807 11.5 10.5 43.3 1.4 37.3 <1 30.8
Hubbell, Inc. 1,424 8.0 8.0 61.9 4.7 19.8 51.0 17.5

This document is authorized for use only by Utomo Sarjono Putro in 2017.
Honeywell 25,023 9.0 7.5 26.5 2.0 18.8 <1 16.7
Esterline Tech. $491 7.5 11.5 29.3 6.2 10.5

Machine Tool Manufacturers

Actuant Corp. $515 9.5 6.5 278.1 10.0 9.5

Lincoln Electric 1,059 8.01 10.0 27.7 2.5 8.8 22.3 11.9
Milacron, Inc. 1,584 11.0 1.5 23.3 2.8 93.9 4.2 NMF
Snap-on Inc. $2,176 5.0 4.0 37.3 3.6 34.2 4.8 15.3

NMF = not a meaningful figure because of recent reported losses.

Last 5 years only.
Source: Value Line Investment Survey, August 24, 2001.
For the exclusive use of U. Putro, 2017.
-15- UVA-F-1360

Exhibit 7
Selected Healthy Companies with High and Zero Dividend-Payouts
(compiled from data available as of August 2001)

Expected Return Expected Growth Current Current Expected Growth Current

on Total Capital Rate of Dividends Dividend Dividend Rate of Sales P/E
Industry (next 35 years) (next 35 years) Payout Yield (next 35 years) Ratio

High-Payout Companies

Scudder High Income Investment company NA NA 108 11.2 NA NA

Hospitality Properties Real estate investment trust 9.0 NA 124 9.9 NA 12.2
New Plan Excel Realty Real estate inv. trust 8.0 NA 145 10.1 NA 13.1
DQE Electric utility 7.5 4.5 122 7.9 5.0 19.7
Cedar Fair L.P. Recreation 18.0 3.5 90 7.8 6.0 14.3
Plum Creek Timber Paper and forest products 19.0 0.5 185 8.0 NMF 27.0
Puget Energy Inc. Electric utility 7.5 0 85 7.7 13.0 12.0
National Presto Ind. Home appliances 7.0 1.5 97 7.0 12.5 18.1

Zero-Payout Companies

Oracle Systems Software 24.0 0 0 0 15.5 33.3

Novell Software 15.5 0 0 0 9.5 NMF
AOL Time Warner Media and entertainment 6.5 0 0 0 NMF 31.8
Broadcom Corp. Telecommunications 7.5 0 0 0 NMF NMF
Advanced Micro Devices Semiconductor 15.5 0 0 0 12.5 35.2
Madden (Steven) Retail 18.5 0 0 0 19.5 10.9

This document is authorized for use only by Utomo Sarjono Putro in 2017.
Lands End Retail 14.0 0 0 0 8.0 23.1
Enterasys Networks Network systems 7.5 0 0 0 8.0 NMF
Cisco Systems Network systems 13.5 0 0 0 18.0 NMF

Source: Value Line Investment Survey, 24 August 2001.

For the exclusive use of U. Putro, 2017.
For the exclusive use of U. Putro, 2017.

-16- UVA-F-1360

Exhibit 8
Projected Sources and Uses Statement
Assuming a 40% Payout Ratio1
(dollars in millions)

2001 2002 2003 2004 2005 2006 2007 2001-07

Sales $ 870 $ 1,001 $ 1,151 $ 1,323 $ 1,522 $ 1,750 $ 2,013 9,630

Net income 18 40 58 73 91 98 160 538
Depreciation 23 26 30 35 41 47 53 252
41 66 88 107 132 145 213 790
Capital expend. 44 50 58 66 68 79 91 456
Change in Working capital 20 22 26 30 34 39 44 214
63 73 83 96 102 117 135 670

Excess cash/(Borrowing needs) (23) (7) 4 12 29 27 78 120

Dividend 7 16 23 29 37 39 64 215

After dividend
Excess cash/(Borrowing needs) (30) (23) (19) (18) (7) (12) 14 (95)

Note: Dividend calculated as 40% of net income.

This analysis ignores the effects of borrowing on interest and amortization. It includes all increases in long-term liabilities
and equity items other than retained earnings.

This document is authorized for use only by Utomo Sarjono Putro in 2017.