Net Gains from Synergy: SBC Acquisition of AT&T

2005 2006 2007 2008 2009 2010 2011 2012

Bottom Line
Cost savings 0.2 0.3 0.4 0.6 0.6 0.6 0.6
Staff savings 0.1 0.2 0.3 0.4 0.4 0.4
Sales team 0.5 1 1.6 1.6 1.6 1.6
Networks 0.25 0.5 1 1 1 1

Severance costs -2

Top Line Gains 0.375 0.375 0.375 0.375 0.375 0.375

Annual gains -1.8 1.525 2.475 3.875 3.975 3.975 3.975

Terminal value 49.6875

Present value -1.666667 1.307442 1.964735 2.848241 2.705318 2.504924 31.31155

Sum 40.97555

Assumptions
Growth after 2012 0%
WACC 8%
ACTIVE GENERATION INC, VALUATION

VALUATION BASED ON COMPARABLES

ASSUMPTIONS
Comparable Company Ratios
Market/Book Ratio -- KHC 1.3
Price/Earnings Ratio -- KHC 12.6

Book Value $13,646,000

2003 Sales -- AGI $44,000,000

Sales Growth Rate -- AGI

As-Is 8.0%
Post Acquisition 11.0%

Operating Income Margin -- AGI

As-Is 7.0%
Post Acquisition 7.8%

Tax Rate -- AGI 28.0%

Post
INCOME PROJECTIONS -- 2004 As Is Acquisition
2004 Sales $47,520,000 $48,840,000

Operating Income $3,326,400 $3,809,520

Less Taxes ($931,392) ($1,066,666)
2004 Net Income $2,395,008 $2,742,854

COMPARABLES VALUATION METHODS

Book Value $13,646,000
Peers Multiple 1.3 x
Comparables Valuation $17,739,800

2004 Net Income -- As Is $2,395,008

Peers Multiple 12.6 x
Comparables Valuation $30,177,101
2004 Net Income -- Post Acquisition $2,742,854
Peers Multiple 12.6 x
Comparables Valuation $34,559,965
ACTIVE GENERATION INC, VALUATION

VALUATION BASED ON STAND-ALONE DCF

COST OF CAPITAL ASSUMPTIONS -- AGI

Cost of Equity
Risk-free Rate (Treasury Bonds) 5.2%
Market Risk Premium -- Small Company 12.0%

BETA CALCULATION -- AGI

Beta -- KHC 0.9
Tax Rate -- KHC 28%
Market Value, Debt -- KHC $1,292,042
Market Value, Equity -- KHC $4,460,000

Beta -- AGI 0.745

COST OF CAPITAL CALCULATIONS

Cost of Equity
Market Risk Premium -- Small Company 12.0%
Beta -- AGI 0.745 x
Subtotal 8.9%
Plus Risk Free Return 5.2% +
Cost of Equity 14.14%

WACC -- Active Generation, Inc. 14.14%

VALUATION ASSUMPTIONS --
AS IS
2003 Sales -- AGI $44,000,000
Sales Growth Rate -- AGI 8.0%

Operating Income Margin -- AGI 7.0%

Tax Rate -- AGI 28.0%

Increase in Working Capital 12%

(as a % of Increase in Sales)

Depreciation = Capital Expenditures

CASH FLOW PROJECTIONS -- 2004 2005 2006
AS IS (Year 1) (Year 2) (Year 3)
Sales $47,520,000 $51,321,600 $55,427,328
Sales Growth Rate 8.0% 8.0% 8.0%

Operating Income $3,326,400 $3,592,512 $3,879,913

Less Taxes ($931,392) ($1,005,903) ($1,086,376)
Net Income $2,395,008 $2,586,609 $2,793,537
Less Increase in Working Capital ($422,400) ($456,192) ($492,687)
Free Cash Flow $1,972,608 $2,130,417 $2,300,850

TERMINAL VALUE CALCULATION

FCF -- Future Years $3,017,020
WACC -- Active Generation, Inc. 14.14%
Terminal Value (Perpetuity Method) $21,342,662

DCF VALUATION -- 2004 2005 2006

AS IS (Year 1) (Year 2) (Year 3)
Free Cash Flow $1,972,608 $2,130,417 $2,300,850
Terminal Value
Total $1,972,608 $2,130,417 $2,300,850

WACC -- Active Generation, Inc. 14.14% 14.14% 14.14%

Discounted Value (Present Value) $1,728,295 $1,635,379 $1,547,459

DCF Valuation $18,951,802

 2007 Future
(Year 4) Years
$59,861,514 $59,861,514
8.0% 0.0%

$4,190,306 $4,190,306
($1,173,286) ($1,173,286)
$3,017,020 $3,017,020
($532,102) $0
$2,484,918 $3,017,020

2007
(Year 4)
$2,484,918
$21,342,662
$23,827,580

14.14%
$14,040,669
ACTIVE GENERATION INC, VALUATION

VALUATION BASED ON COMPARABLES

ASSUMPTIONS - TRISTATE COST OF CAPITAL

Capital Structure -- Book
Long Term Debt $1,500,000
Preferred Stock $300,000
Equity $3,200,000
Total Capitalization $5,000,000

Cost of Debt
Coupon (Semi-Annual Payments) 7.0%
Yield to Maturity 8.5%
Maturity (Years) 18.5
Tax Rate 28.0%

Cost of Preferred Stock

Market Yield (Trading at Par) 9.0%

Cost of Equity
Risk-free Rate (Treasury Bonds) 5.2%
Market Risk Premium--Large Company 7.0%
Beta -- KHC 0.9
Market/Book Ratio -- KHC 1.3

MARKET VALUE CALCULATIONS

Long Term Debt
N (Number of Semi-Annual Payments) 37.0
I (YTM on semi-annual basis) 4.25%
PMT (Semi-annual coupon payments) $52,500
FV (Final Principal Payment) $1,500,000
PV (Market Value of Debt) $1,292,042

Preferred Stock (Trading at Par) $300,000

Equity
Book Value -- Equity $3,200,000
Market/Book Ratio 1.3 x
Market Valuation -- Equity $4,160,000
COST OF CAPITAL CALCULATIONS
Long Term Debt
Yield to Maturity 8.5%
Tax Adjustment (1 - Tax Rate) 72.0% x
Cost of Debt 6.12%

Preferred Stock
Cost of Preferred Stock (Market Yield) 9.00%

Cost of Equity
Market Risk Premium -- Large Company 7.0%
Beta -- KHC 0.9 x
Subtotal 6.3%
Plus Risk Free Return 5.2% +
Cost of Equity 11.50%

Market % of Cost of
WACC CALCULATIONS Value Total Capital
Long Term Debt $1,292,042 22.46% 6.12%
Preferred Stock $300,000 5.22% 9.00%
Equity $4,160,000 72.32% 11.50%
Total $5,752,042 100.00%

WACC -- Kirkland

ASSUMPTIONS --
POST ACQUISITION
2003 Sales -- AGI $44,000,000
Sales Growth Rate -- AGI 11.0%

Operating Income Margin -- AGI 7.8%

Tax Rate -- AGI 28.0%

Increase in Working Capital 12%

(as a % of Increase in Sales)
Depreciation = Capital Expenditures

CASH FLOW PROJECTIONS -- 2004 2005 2006

POST ACQUISITION (Year 1) (Year 2) (Year 3)
Sales $48,840,000 $54,212,400 $60,175,764
Sales Growth Rate 11.0% 11.0% 11.0%

Operating Income $3,809,520 $4,228,567 $4,693,710

Less Taxes ($1,066,666) ($1,183,999) ($1,314,239)
Net Income $2,742,854 $3,044,568 $3,379,471
Less Increase in Working Capital ($580,800) ($644,688) ($715,604)
Free Cash Flow $2,162,054 $2,399,880 $2,663,867

TERMINAL VALUE CALCULATION

FCF -- Future Years $3,751,213
WACC -- Kirkland 10.16%
Terminal Value (Perpetuity Method) $36,917,247

DCF VALUATION -- 2004 2005 2006

POST ACQUISITION (Year 1) (Year 2) (Year 3)
Free Cash Flow $2,162,054 $2,399,880 $2,663,867
Terminal Value
Total $2,162,054 $2,399,880 $2,663,867

WACC -- Kirkland 10.16% 10.16% 10.16%

Discounted Value (Present Value) $1,962,629 $1,977,574 $1,992,633

DCF Valuation $33,008,409

 WACC
Component
1.37%
0.47%
8.32%
10.16%

10.16%
 2007 Future
(Year 4) Years
$66,795,098 $66,795,098
11.0% 0.0%

$5,210,018 $5,210,018
($1,458,805) ($1,458,805)
$3,751,213 $3,751,213
($794,320) $0
$2,956,893 $3,751,213

2007
(Year 4)
$2,956,893
$36,917,247
$39,874,140

10.16%
$27,075,573
ACTIVE GENERATION INC, VALUATION

DCF VALUATION BASED ON ACQUIROR'S WACC

ASSUMPTIONS --
AS IS
2003 Sales -- BMI $44,000,000
Sales Growth Rate -- BMI 8.0%

Operating Income Margin -- BMI 7.0%

Tax Rate -- BMI 28.0%

Increase in Working Capital 12%

(as a % of Increase in Sales)

Depreciation = Capital Expenditures

CASH FLOW PROJECTIONS - 2004 2005 2006 2007

AS IS (Year 1) (Year 2) (Year 3) (Year 4)
Sales $47,520,000 $51,321,600 $55,427,328 $59,861,514
Sales Growth Rate 8.0% 8.0% 8.0% 8.0%

Operating Income $3,326,400 $3,592,512 $3,879,913 $4,190,306

Less Taxes ($931,392) ($1,005,903) ($1,086,376) ($1,173,286)
Net Income $2,395,008 $2,586,609 $2,793,537 $3,017,020
Less Increase in Working Capital ($422,400) ($456,192) ($492,687) ($532,102)
Free Cash Flow $1,972,608 $2,130,417 $2,300,850 $2,484,918

TERMINAL VALUE CALCULATION

FCF -- Future Years $3,017,020
WACC 10.16%
Terminal Value (Perpetuity Meth $29,691,754

DCF VALUATION -- 2004 2005 2006 2007

AS IS (Year 1) (Year 2) (Year 3) (Year 4)
Free Cash Flow $1,972,608 $2,130,417 $2,300,850 $2,484,918
Terminal Value $29,691,754
Total $1,972,608 $2,130,417 $2,300,850 $32,176,672
WACC 10.16% 10.16% 10.16% 10.16%
Discounted Value (Present Value $1,790,657 $1,755,528 $1,721,088 $21,848,793

DCF Valuation $27,116,066

Future
Years
$59,861,514
0.0%

$4,190,306
($1,173,286)
$3,017,020
$0
$3,017,020
ACTIVE GENERATION INC, VALUATION

SUMMARY

VALUATION SUMMARY
STATIC METHODS
Book Value $13,646,000
Replacement Value $11,904,600
Liquidation Value $10,895,800

COMPARABLES METHODS
Price to Book Ratio $17,739,800
Price/Earnings Ratio -- As Is $30,177,101
Price/Earnings Ratio -- Post Acquisition $34,559,965

DCF VALUATION -- AS IS
WACC -- Active 14.14%
Valuation (8% Growth and 7.0% Margins) $18,951,802

WACC -- Kirkland 10.16%

Valuation (8% Growth and 7.0% Margins) $27,116,066

DCF VALUATION -- POST ACQUISITION

WACC -- Kirkland 10.16%
Valuation (11% Growth and 7.8% Margins) $33,008,409

RULE OF THUMB -- AS IS
2003 Sales $44,000,000
2003 Operating Income -- As Is $3,080,000
EBIT Multiple 6.0 x
Valuation $18,480,000
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