client services client services

VALUATION ADVISORS AND INVESTMENT BANKERS

Thanksgiving Tower1601 Elm St., Suite 4340Dallas, Texas 75201214.954.1717 | phone

www.hfbe.com

Mellie Esperson Building 815 Walker, Suite 1140Houston, Texas 77002phone | 713.225.9580

CLIENT SERVICESCLIENT SERVICES

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Table of ContentsTable of Contents

HFBE

Client Services– Valuation Services– Financial Advisory Services– Investment Banking Services

Selected HFBE Officer Biographies

Appendices

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HFBEHFBE

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Overview of HFBEOverview of HFBE

HFBE provides professional, informed opinions of value in important situations.HFBE provides professional, informed opinions of value in important situations.

One of the largest independent valuation advisory firms in the Southwest

Established in September 1991

24 professionals available to meet clients’ needs

Offices in Houston and Dallas

National client base

Credentialed staff:– Chartered Financial Analysts– Accredited Senior Appraisers of the American Society of

Appraisers – Certified Public Accountant, Accredited in Business Valuation– Registered Representatives and Registered Principals with the

NASD

HFBE Capital, L.P. (broker/dealer) established in September 1999

HFBE

The Professional’s Choice for

Delivering Value SM

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HFBE Offers a Wide Array of ServicesHFBE Offers a Wide Array of Services

Securities offered through HFBE Capital, LP, an affiliate of Howard Frazier Barker Elliott, Inc.

• Business and Securities Valuations

• Estate and Gift Tax Appraisals

• Intangible Asset Valuations

• Deferred Compensation– Section 409A

• Financial Reporting – FAS 141/142 – FAS 123 R

ValuationValuation

• Fairness Opinions

• Employee Stock Ownership Plans

• Dispute Analysis and Litigation Support

• Restructuring of Debt and Equity

Financial AdvisoryFinancial Advisory

Mergers and Acquisitions

Private Placements

• Sell-side Advisory and Execution• Buy-side Advisory and Execution

• Private Equity • Senior and Subordinated Debt• LBO/MBO Financing

Real Estate Equity and Debt

Investment BankingInvestment Banking

• Institutional Equity • Senior and Subordinated Debt

HFBE

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HFBE Clients Span the U.S.HFBE Clients Span the U.S.

WA

CA

NV

AZ

CO

NM

TX

OK

MS AL

AR

LA

MO

FL

SC

OH

NY

PA

San Antonio■Austin

Los Angeles

Seattle

San Francisco/ Bay Area

Las Vegas

Denver

Miami

Tulsa

Little Rock

St. Louis

New Orleans

Birmingham ■

Reno

Jackson

Biloxi

Mobile

Houston

Ft. Lauderdale

Tampa ■

JacksonvilleBaton Rouge■

Oklahoma City ■

Orlando

Wilmington

New York

Shreveport

Corpus Christi

Erie

Phoenix

El Paso

■Greenville

Dallas

Santa FeAlbuquerque ■

ID

KS

MN

Minneapolis■

Wichita ■

Kansas City

Boise

■PittsburghColumbus ■

Washington, D.C. ■

Delray Beach

MIDetroit ■

MA

NHNashuaPortland

ME

IL

Boston

Chicago ■

■CharlotteNC

OR

Portland

Atlanta

HFBE

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Client ServicesClient Services

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HFBEHFBE’’s Primary Service Areas Meet Your Needss Primary Service Areas Meet Your Needs

Investment BankingInvestment BankingPublic and private company advisory in the areas of corporate control and raising capital.Sell-side, buy-side, and private placements.

ValuationValuation

Financial AdvisoryFinancial Advisory

Services to publicly-traded companies are a significant part of our business. Services to publicly-traded companies are a significant part of our business.

Includes financial analysis and value assessments involving tax and other non-advocacy opinions.

Includes thoughtful, focused financial analysis assisting clients with transaction advisory and financial decisions.

Client Services

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Valuation ServicesValuation Services

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Valuation ServicesValuation Services

Estate and Gift Tax Appraisal

Estate and Gift Tax Appraisal

HFBE has performed appraisals in over 100 different industries, thus building a large base of experience as a foundation for our work.

HFBE has performed appraisals in over 100 different industries, thus building a large base of experience as a foundation for our work.

Business and Securities Valuation

Business and Securities Valuation

Key shareholders and affiliates of the company will require an appraisal for estate or gift tax purposes.

Business valuations for purposes such as buy-sell agreements, reporting, and collateral valuation.

Options, warrants, and other illiquid securities.

Financial ReportingFinancial Reporting

Valuation Services

FAS 123R, 141, 142 and other purposes.

Note: See Appendix I for additional information.

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Business and Securities ValuationBusiness and Securities ValuationValuation Experience from Closely-held Businesses to Illiquid Securities

Business valuations can be required for a variety of purposes including portfolio reporting and buy-sell agreements.

An independent valuation may also be required if a business wants to collateralize intangible assets.

HFBE values warrants, preferred stock, convertible securities, and notes in a variety of settings. (Please see tombstones at the end of this section.)

Incentive Stock Option plans in stock of non-public companies constitute an important component of executive compensation.

When capital markets fail to provide a representative value, a valuation expert provides the needed interpretation. HFBE has extensive experience in valuing

businesses, assets and illiquid securities.

When capital markets fail to provide a representative value, a valuation expert provides the needed interpretation. HFBE has extensive experience in valuing

businesses, assets and illiquid securities.

Valuation Services

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Estate and Gift Tax AppraisalEstate and Gift Tax AppraisalHFBE Sets the Value as of a Specific Date

Key shareholders and affiliates of the company will require the use of an appraiser for estate or gift tax purposes.

An important issue that commonly arises is the value of a large block of the company’s shares. Special valuation may also be required because of restrictions on trading imposed upon the block.

IRS guidelines in many cases call for an independent, third-party valuation by an expert.

Members of the HFBE staff have testified in U.S. Tax Courts and in other federal and state jurisdictions, have acted as objective intermediaries, and have

participated in IRS appellate level conferences.

Members of the HFBE staff have testified in U.S. Tax Courts and in other federal and state jurisdictions, have acted as objective intermediaries, and have

participated in IRS appellate level conferences.

Valuation Services

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Intangible Asset Valuations and Financial ReportingIntangible Asset Valuations and Financial Reporting

Transaction Related Assets

The strategy behind every acquisition or product development is value creation.

Management must strive to create and maintain a business that is both growing and achieving profitability at rates in excess of the competition.

Significant changes have recently been made that affect the valuation of intangible assets.

HFBE provides purchase price allocations to intangible assets including goodwill and intellectual property, as well as ongoing impairment testing, as provided by FAS 141 & 142.

Changes in the accounting treatment for assets created through business combinations has created a significant need for companies to receive

independent valuations. HFBE’s breadth of expertise makes it the ideal provider of an independent valuation.

Changes in the accounting treatment for assets created through business combinations has created a significant need for companies to receive

independent valuations. HFBE’s breadth of expertise makes it the ideal provider of an independent valuation.

Valuation Services

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Financial Advisory ServicesFinancial Advisory Services

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Financial Advisory ServicesFinancial Advisory Services

Fairness OpinionsFairness OpinionsHFBE delivers value to all stakeholders with additional due diligence and independent exploration of a proposal and its alternatives.

Employee Stock Ownership Plans

Employee Stock Ownership Plans

Professional valuations play a key role in providing confidence in the integrity of the ESOP to both the company and participants.

Dispute Analysis and Litigation Support

Dispute Analysis and Litigation Support

HFBE offers expert testimony relating to the value of a going concern.

Financial Advisory Services

Our experience in valuation provides the competency to opine on the fairness of any proposal. HFBE represents the interests of clients ranging from board of directors and equity holders tounsecured and senior creditors.

Restructuring Debt and Equity

Restructuring Debt and Equity

Outside consultation helps fiduciaries meet their responsibilities to stakeholders, which is especially poignant in light of the importance of their duties and the

current business environment.

Outside consultation helps fiduciaries meet their responsibilities to stakeholders, which is especially poignant in light of the importance of their duties and the

current business environment.Note: See Appendix II for additional information.

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Fairness OpinionsFairness Opinions

Independence has Never Been More Valued

Fairness opinions benefit fiduciaries and shareholders when decisions or proposals impact the value of one or more elements of companies’ financial structures.

This opinion not only affords the directors the comfort of knowing that the transaction was diligently investigated, it benefits the stockholders by assuring them that the deal was independently reviewed.

Trustees or other individuals with fiduciary responsibility often seek opinions when determining how to vote shares under their control. Similarly, a thorough opinion helps shareholders make a knowledgeable determination on their vote.

HFBE provides a fresh, outside perspective. An independent opinion provides fiduciaries with added assurance in the wake of perceived corporate

governance failures and adoption of the Sarbanes-Oxley Act.

HFBE provides a fresh, outside perspective. An independent opinion provides fiduciaries with added assurance in the wake of perceived corporate

governance failures and adoption of the Sarbanes-Oxley Act.


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Employee Stock Ownership PlansEmployee Stock Ownership PlansGreater Complexity Requires Expertise

ESOPs can be a great benefit to employees and employers, but they are also complicated programs requiring considerable analytical and administrative efforts.

Because of their complexity ESOPs are not easily valued.

Due to the increasing frequency of audits, inaccurate valuation judgments can be very costly to the company.

Professional valuations play a key role in providing confidence to the integrity of the ESOP to both the company and participants.

ESOPs are a valuable compensation component that align the incentives of key employees to those of the shareholders. Leverage HFBE’s experience in

valuation and the intricacies unique to ESOPs to your benefit.

ESOPs are a valuable compensation component that align the incentives of key employees to those of the shareholders. Leverage HFBE’s experience in

valuation and the intricacies unique to ESOPs to your benefit.


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Dispute Analysis & Litigation SupportDispute Analysis & Litigation SupportHFBE Supports You in Controversy

From time to time all corporations, private and public, become party to litigation involving the value of stock or a business enterprise.

HFBE principals have testified as expert witnesses in a wide range of disputes, including breach of contract, business interruption, post-acquisition disputes, shareholder disputes, dissolutions, breach of fiduciary duty, and estate and gift tax valuations.

We place great emphasis on coordinating our activities with the client’s legal counsel so that we may maintain the same schedule and be available to explain the implications of our determinations.

HFBE has a strong track record for testifying in court in defense of our opinions. HFBE has provided strong client support in tax court, federal court

of claims, state court and federal district court.

HFBE has a strong track record for testifying in court in defense of our opinions. HFBE has provided strong client support in tax court, federal court

of claims, state court and federal district court.


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Restructuring Debt and EquityRestructuring Debt and EquityIndependent Representation, Commitment to Clients and Results

Experience in valuation and capital markets provides HFBE with the tools to deliver value to clients considering restructuring and other alternatives.

A thorough fairness opinion regarding a proposed restructuring is vital to any board of directors of a public company that is considering a financial restructuring.

Where appropriate, HFBE also represents senior and unsecured creditors during the restructuring process to secure the largest recovery possible.

Financial restructurings are often time-constrained situations that require thorough analysis and expertise in the process. HFBE is focused on delivering

maximum attention to its clients.

Financial restructurings are often time-constrained situations that require thorough analysis and expertise in the process. HFBE is focused on delivering

maximum attention to its clients.


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Recent TransactionsRecent TransactionsFinancial Advisory Services

has commenced a tender offer to purchase shares of its common stock connection with a going private transaction.

The undersigned acted as financial advisor and rendered an opinion of fairness to the Special Committee of the Board of Directors of

DiCon Fiberoptics, Inc. in connection with the transaction.


has acquired

The undersigned acted as financial advisor and rendered an opinion of fairness to the Trustees of the ClubCorp, Inc.

Employee Stock Ownership Plan


$1,800,000,000

has acquired

The undersigned acted as financial advisor andrendered an opinion of fairness to

the Board of Directors of Geokinetics Inc.regarding the terms of the financing in the transaction


Geokinetics Inc.

Grant Geophysical, Inc.

with financing provided by

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Recent Transactions Recent Transactions (cont(cont’’d)d)


Symtx, Inc. has been acquired by

The undersigned acted as financial advisor and rendered an opinion of fairness to the Special Committee

of the Board of Directors of Symtx, Inc.


a wholly owned subsidiary of

AAI Corporation

GENBAND Inc. has completed a recapitalization

The undersigned acted as financial advisor and rendered an opinion of fairness to the Special Committee of the Board of Directors of GENBAND Inc.


The undersigned acted as financial advisor and renderedan opinion of fairness to the Board of Directors of

FirstCity Financial Corp.

has completed a sale of its minority interest in


to Senior Management of Drive Financial Services LP, and affiliates of

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has been acquired by


The undersigned rendered an opinion of fairness to the Board of Directors of Petroleum Oil & Gas España, S.A.

acquired certain leasehold interests in the Bethany Longstreet field

from

Tauren Exploration, Inc.


The undersigned rendered an opinion of fairness to the Board of Directors of Cubic Energy, Inc.

has acquired the remaining 15 percent of the Common Stock of

The undersigned acted as financial advisor and rendered an opinion of fairness to the Special Committee of the Board of Managers of Texas HealthSpring, LLC in connection with the Initial Public Offering of

HealthSpring, Inc.


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Investment Banking ServicesInvestment Banking Services

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Investment Banking ServicesInvestment Banking Services



Private PlacementsPrivate Placements

Sell-side Advisory and ExecutionBuy-side Advisory and Execution

Private Equity Senior and Subordinated DebtLBO/MBO Financing

Institutional EquitySenior and Subordinated Debt

In M&A, HFBE adds value to your deal with expert value determination and effective transaction support. HFBE provides access to capital via private

placements and also assists you with IPO advice and support.

In M&A, HFBE adds value to your deal with expert value determination and effective transaction support. HFBE provides access to capital via private

placements and also assists you with IPO advice and support.



Investment Banking Services

Note: See Appendix III for additional information.

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HFBE Targets Maximum Disposition Value RealizationHFBE Targets Maximum Disposition Value Realization

Sale of Company

Assisting management in the determination of target sell-side value; assessing full range of strategic alternatives.

Instituting and maintaining a confidentiality policy; ensuring that managed and uniform information flow is accretive to value.

Creating serious buyer competition; calibrating interest and targeting uniform prospect development.

Assisting in negotiations and evaluation of offers.

HFBE takes each merger and acquisition assignment very seriously. We staff each project with senior members of our firm – each project involves a principal, officer and analyst. In addition to being concerned about price, we work closely

with your attorneys and accountants to achieve the most efficient results.

HFBE takes each merger and acquisition assignment very seriously. We staff each project with senior members of our firm – each project involves a principal, officer and analyst. In addition to being concerned about price, we work closely

with your attorneys and accountants to achieve the most efficient results.


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HFBE Runs Acquisition SearchesHFBE Runs Acquisition SearchesBuy-side Process Requires Structure and Uniformity of Purpose

Development of criteria and assistance in adhering to the plan.

Identifying candidates.

Determining the value of a candidate.

Acquisition financing.

Initiating and negotiating the transaction.

Strategic financial planning.

Because of our extensive research staff, we are well positioned to assist you in locating and approaching acquisition candidates. We focus your

organization’s growth efforts.

Because of our extensive research staff, we are well positioned to assist you in locating and approaching acquisition candidates. We focus your

organization’s growth efforts.


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HFBE Provides Access to Private CapitalHFBE Provides Access to Private Capital

Growth Requires Capital

HFBE meets with you to understand your basic strategic and financial needs.

HFBE analyzes your company’s financial and operating record and outlook.

HFBE recommends a capital/cash management and access strategy.

HFBE prepares a private offering memorandum with input from management.

HFBE assists in structuring, negotiations, and documentation.

For officers, directors, or major shareholders success is measured by increases in the value of shareholders’ investment in the company. HFBE can unlock

the capital to fuel your value realization.

For officers, directors, or major shareholders success is measured by increases in the value of shareholders’ investment in the company. HFBE can unlock

the capital to fuel your value realization.


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Private Placements Private Placements -- EquityEquityPublic Markets are not Always “Open”

Private equity investors have become very specialized. HFBE helps you find the right capital source.

A sound business purpose is essential but not sufficient to obtaining financing.

The cost of money, that is, the size of equity ownership of your business required by the investor, depends on the amount being raised and the current and prospective value of your business.

Acquiring necessary equity capital is a critical decision. A private equity investor seeks a favorable rate of return on investment. HFBE provides

investor contact, capital market knowledge and deal experience to support your issuance of private equity.

Acquiring necessary equity capital is a critical decision. A private equity investor seeks a favorable rate of return on investment. HFBE provides

investor contact, capital market knowledge and deal experience to support your issuance of private equity.


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Private Placements Private Placements –– Senior and Subordinated DebtSenior and Subordinated DebtLeverage can be Accretive to Value

Under appropriate conditions, debt may best fulfill capital needs.

Proper structuring of debt can enhance your cash flow and allow you to generate a higher rate of return on invested capital.

This financing tool may be utilized in connection with a management buyout, going private or acquisition, a refinancing or restructuring, or as additional expansion capital.

HFBE has extensive contacts with commercial banks, asset-based lenders, insurance companies, subordinated debt funds, and other non-bank financing sources to meet all your company’s objectives for debt sourcing.

In addition to raising equity capital, HFBE also assists in the structuring, negotiating and placement of senior and subordinated debt.

In addition to raising equity capital, HFBE also assists in the structuring, negotiating and placement of senior and subordinated debt.


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Private Placements Private Placements –– LBO/MBO FinancingLBO/MBO FinancingUnlocking the Value

HFBE assists in completing both leveraged buyouts and management buyouts.

A leveraged buyout (“LBO”) is the acquisition of an existing public or private business by a private investor group and is financed primarily with debt and new equity capital.

A management buyout (“MBO”) is a leveraged buyout in which the acquired company’s incumbent management team participates in the buying group.

HFBE advises operating management or a financial sponsor group on the purchase of an existing company operating division or product line of a public

or private company.

HFBE advises operating management or a financial sponsor group on the purchase of an existing company operating division or product line of a public

or private company.


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Real Estate OverviewReal Estate OverviewSerious Advice for Significant Decisions

The HFBE real estate team provides a broad range of financing, advisory, and investment services to real estate operating and development companies.

Our complete product offering enables HFBE to offer clients unparalleled and attentive service throughout the financing process.

Specifically, services we provide include: – Objective advisory services – Access to capital– Valuable and productive structuring capabilities

HFBE matches your objectives with the most appropriate product in the marketplace.

HFBE matches your objectives with the most appropriate product in the marketplace.


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Recent TransactionsRecent Transactions

The undersigned acted as exclusive financial advisor to PULSE EFT Association (“PULSE”) and rendered an assessment to PULSE’s Board of Directors regarding

the allocation of the cash consideration among certain members.


announced plans to merge with

for cash consideration of $311 million

The undersigned acted as the exclusive financial advisor to BNC Environmental Services, Inc.

BNC Environmental Services, Inc.The company and its shareholders have entered into an

asset purchase agreement with

Conestoga-Rovers & Associates, Inc.



The undersigned initiated this transaction, assisted in the structuring and negotiations, and acted as financial advisor to

Rimkus Consulting Group, Inc.

has completed a recapitalization


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The undersigned acted as the exclusive financial advisorto the shareholder group owning a majority interest

in the CableVision Companies



The undersigned negotiated and structured the transactionand acted as the exclusive financial advisor

to The Andress-Walsh Company



The undersigned assisted in the negotiations, arranged the necessary financing, and acted as financial advisor to

the Acquisition Group

Mr. John Hamm and Other Investors

have acquired the North American operations of

Moeller Vertrieb International GmbH



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The Goldman Sachs Urban Investment Groupmade an equity investment of

$17,935,000 in a joint venture with an affiliate of

The undersigned acted as the exclusive placement agent forNoteware Development, LLC in arranging the financing


to finance Jamestown Equity Partners, LLC, a 198-unit condominium project in San Francisco, CA

through an affiliate has made anequity investment of $10,750,000

in a joint venture with an affiliate of

The undersigned acted as the exclusive placement agent forNoteware Development, LLC in arranging the financing


to finance Mesa Verde Associates, a 356-unit condominiumproject in Las Vegas, Nevada

K&S Realty Ventures, LLC

has made a debt financing commitment of $33,034,400 in an affiliate of

The undersigned initiated the transaction and acted as exclusive financial advisor for the financing


to finance the Lofts at Briar Forest

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Selected HFBE Officer BiographiesSelected HFBE Officer Biographies

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Alex W. Howard, CFA, ASAAlex W. Howard, CFA, ASA

Senior Managing Director, Principal

Standard Research Consultants (1972-1981)

Rotan Mosle, Inc. (1981-1985)

First Interstate Capital Company of Texas (1985-1988)

Kemper Securities Group, Inc. (1988-1991)

HFBE (1991-Present)


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William H. Frazier, ASAWilliam H. Frazier, ASA


Underwood, Neuhaus & Co., Inc. (1975-1981)

Lovett Mitchell Webb & Garrison, Inc. (1981-1989)

J.B. Poindexter & Co. (1989-1990)


HFBE (1991-Present)


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Donald W. Barker, CFA, ASADonald W. Barker, CFA, ASA


Federal Reserve Bank of Dallas (1971-1973)

American National Bank (1973-1978)

Rotan Mosle, Inc. (1978-1982)

Underwood, Neuhaus & Co., Inc. (1982-1988)


HFBE (1991-Present)


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Larrie A. Weil, CFALarrie A. Weil, CFA

Senior Managing Director

Kohlmeyer & Co. (1968-1973)

Stern Brothers & Co. (1974-1980)

Boettcher & Company (1980-1981 )

Eppler, Guerin & Turner, Inc. (1981-1985 )

Underwood, Neuhaus & Co. (1986-1991)

Barre & Company (1991-1995 )

Southwest Securities, Inc. (1995-2002 )

Weil Capital Advisors (2002-2003)

HFBE (2003-present)


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David S. David S. KulkarniKulkarni

Senior Managing Director

BBA – Accounting, University of Houston

MBA – University of Houston

Texas Children’s Hospital (June 1993-June 1994)

Bankers Trust (July 1994-December 1994)Global Energy Investment Banking Group

HFBE (May 1995-Present)


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Appendices Appendices

I. Valuation Services

II. Financial Advisory Services

III. Investment Banking Services

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Business and Securities Valuation Services Business and Securities Valuation Services We have performed appraisals in over 100 different industries, thus building a large base of experience as a foundation for our work.– We have at our disposal a wealth of research data and materials.– These resources, combined with experience gained over the years, enable us to analyze and understand the

dynamics and intricacies of every situation.– We can perform an expert appraisal of any going concern and stand prepared to defend our work.– We will explain each step of our analysis without the leaps of faith possibly seen in the sweeping, general

statements contained in some appraisal reports.

Obtaining an independent appraisal by an expert at the time of sale or constructing a flexible and supportable formula is the best course of action for both parties and required under Section 2703 of Chapter 14 of the Internal Revenue Code.

When a bank or asset based lender makes a loan to a company where the assets are intangible in nature or may have value which is more prospective than current, a valuation of the asset on a going concern basis is appropriate.

For companies at the pre-IPO stage, the issuance of incentive stock options (“ISOs”) is very important.– ISOs, as a form of executive compensation, must be granted pursuant to a stock option plan adopted by the

company’s board of directors and approved by the shareholders.– To insure that there is no tax owed at the time of issuance, the options must be issued with an exercise price

equal to the fair market value of the company’s stock.

For numerous reasons, companies may privately issue warrants, preferred stock, convertible securities or notes.– These securities typically require valuation for tax or GAAP purposes, and often both.– HFBE has significant experience in valuing these types of closely held securities.

Appendix I: Valuation Services

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Estate and Gift Tax AppraisalsEstate and Gift Tax AppraisalsKey shareholders and affiliates of the company will require the use of an appraiser for estate or gift tax purposes.

An important issue that commonly arises is the value of a large block of the company’s shares. Special valuation may be required because of the size of the block and/or restrictions on trading imposed upon the block.

Valuation is a key element of taxation and the burden of proof rests with the taxpayer. The Internal Revenue Service (“IRS”) requires a realistically determined and well documented source of information regarding values used in a filed return, whether for income, gift or estate tax purposes.

IRS guidelines in many cases call for an independent third-party valuation by an expert. Crucial to such a valuation is its defensibility in an IRS proceeding or court of law.– Only qualified professionals, knowledgeable of pertinent regulations and rulings,

should be entrusted with such a critical assignment.– Members of our staff have testified in U.S. Tax Courts and in other federal and state

jurisdictions, have acted as objective intermediaries, and have participated in IRS appellate level conferences.

– Members of our staff have represented the IRS as well as taxpayers.


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Intangible Asset ValuationIntangible Asset ValuationThe strategy behind every acquisition or product development is value creation.

Management’s objectives are to create and maintain a business that is both growing and achieving profitability at rates in excess of the competition.

The ability to attain these goals is usually based on proprietary technology, skills, or information. These proprietary characteristics that create a competitive edge for the company are intangible assets.– In some cases the intangible asset is manifested in an identifiable intellectual property

such as a patent or copyright.– A company might also hold valuable licenses, contracts, non-compete agreements, or

franchises.– In other instances, the competitive edge is found in less obvious attributes such as trade

secrets, a unique workforce, or a loyal customer base.

Valuing intangible assets is a continuous part of the appraisal activities of HFBE. In most instances, our valuation methods are based on:– The ability to measure expected future cash flows (Income Approach)– Transactions in the marketplace involving similar assets (Market Approach)– The current cost to create the identical asset (Cost Approach)


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Intangible Asset Valuation Intangible Asset Valuation (cont(cont’’d)d)

Financial Accounting Standards Board (“FASB”) announced in July of 2001 that it would eliminate the pooling method of merger accounting. The new standards, FAS 141 and 142, abolish pooling and also eliminate the amortization of goodwill in a merger or acquisition.– Under the new proposal, goodwill is assigned a fair value and is booked as an asset.– Identifiable, specific intangible assets are recorded as separate assets apart from goodwill (FAS

141).– Any goodwill booked must be monitored; if the value of goodwill falls below the original fair value

(i.e., is “impaired”), a charge against earnings must be recorded (FAS 142).– Too low, or too high, a write-off could invite scrutiny from investors, the SEC and other regulators.

Both of these regulations call for appraisals by independent business valuation experts.

Following are some of the more common reasons for the valuation of intangible assets:– Mergers and acquisitions: amortization of identifiable intangible assets not considered to be general

goodwill are an important feature of the new accounting standards (FAS 141).– Goodwill determination and impairment studies: in addition to establishing amortization rates for

intangible assets, companies must write down goodwill that has become impaired; the process is performed by determining the current fair market value of items booked as goodwill and measuring the indicated value against the value reported on the company’s books (FAS 142).

– Tax: technology transfers among related parties must be based upon fair market value in order to comply with Section 482 of the Internal Revenue Code.

– Litigation: disputes relating to patent infringement or other forms of technology misappropriation require a valuation in order to establish damages; intangible asset valuation is often important in any civil case involving damage to a corporate entity.


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Fairness OpinionsFairness OpinionsCorporate boards of directors or trustees considering a merger, acquisition, divestiture, repurchase of company stock or other decisions having a significant impact on shareholders’value frequently obtain an outside opinion to assess the fairness of the contemplated transaction to their stockholders.

We have provided fairness opinions to public and private companies for a wide range of proposals, including mergers and acquisitions, ESOP plans, restructurings, equity placements, and going private transactions.

Valuation expertise, access to timely capital market information, comprehension of similar transactions, and independence are vital to providing a sound opinion to shareholders.

Fairness opinions from HFBE utilize proven valuation techniques, implementing thorough industry analysis and extensive due diligence, and include a rigorous analysis of the alternatives available to a proposal.

Fairness opinions are not only additive to the decision processes of fiduciaries but can provide shareholders information that is integral to determining whether a proposal is worthy of their vote.

Appendix II: Financial Advisory Services

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Employee Stock Ownership PlansEmployee Stock Ownership PlansEmployee Stock Ownership Plans (“ESOPs”) can be a great benefit to employees and employers, but they are also complicated programs requiring considerable analytical and administrative efforts.

Because of their complexity, ESOPs are not easily valued. The “once over lightly” or “book value” approach to a company's value is no longer sufficient. The Department of Labor and Internal Revenue Service require that the ESOP be valued by an independent expert.

Because of the increasing frequency of audits by those agencies, inaccurate valuation judgments can be very costly to the company.

Further, the very existence of an ESOP has significant impact on the value of the company overall.– For example, future stock repurchase obligations, the effect of lower cost borrowing

through a leveraged ESOP and potential dilution in earnings per share from ESOP stock issuance are all important factors to be considered.

– Such plans must be of clear benefit to employees and transactions must be consummated on an arm’s length basis.

Professional valuations play a key role in providing confidence in the integrity of the ESOP to both the company and participants.


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Dispute Analysis and Litigation SupportDispute Analysis and Litigation SupportLitigation relating to going concern value usually requires testimony by an expert. We stand ready to defend our valuations in court or before regulatory or investigative bodies.

We have provided expert witness testimony in cases involving the following:

We prepare all tax related valuations assuming that there may be an adversary proceeding requiring us to defend our work.

In addition, damage theories and quantification in securities law (10-B(5) or Section 11) or civil litigation are valuation specialties in which we are often involved.

Shareholder disputes

Estate and gift tax valuationsPost-acquisition disputes

Breach of fiduciary dutyBusiness interruption

DissolutionsBreach of contract


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RestructuringRestructuringChapter 11 Planning/Plans of Reorganization– Our extensive background in valuation issues combined with our experience in capital

market transactions provide us with an ideal framework for giving advice with respect to the reorganization of a company.

– Our input can be utilized at both the formulative and response phases of these plans.– Separate and apart from providing advice on plans of reorganization, expert witness

testimony is also frequently required.– In addition to testimony relating to valuation implications of a plan, we have been

asked for our opinion on other topics, including:The reasonableness of pro forma financial projectionsVarious aspects of fraudulent conveyance, including solvency and fair consideration

Restructuring Debt and Equity– Financial restructurings are often extremely complicated and time-constrained as the

interests of current and potentially new creditors and equity holders put parties at odds for a stake of the remaining and future value of the entity.

– During this process it is important to maintain focus on the goal of maximizing the value to all stakeholders, which requires building consensus on a plan and objectives for the future of the business.

– We have experience in both rendering opinions on proposed restructurings and representing creditors and other stakeholders through the restructuring process.


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Restructuring Restructuring (cont(cont’’d)d)

Debtor-in-Possession (“DIP”) Financing– DIP loans are issued to companies in bankruptcy and must be completely paid off before the

borrower can emerge from Chapter 11.– This alternative may be attractive for a company that has the potential to work out of bankruptcy if

access to capital enabled management to invest in promising projects or if conditions were expected to improve marked for a companies products or services in the near-term.

– DIP financiers are specialized asset-based lenders. The ability to quickly identify the lenders with the most favorable terms and properly structure debt can make the difference between an entity surviving bankruptcy relatively intact and liquidation.

Distressed Mergers and Acquisitions– This alternative to restructuring or bankruptcy can at times provide the greatest preservation of value

to stakeholders.– Buyers bring enhanced financial strength and a strategic buyer can bring operational improvements,

improves leverage with suppliers, and opportunities to expand product or market areas.– Terms of a distressed merger or acquisition can vary widely based on the prospects of the target.

Valuation is our principle business, which enables our team to properly analyze the intrinsic and option value of your business.

– HFBE provides active sell-side or buy-side services or can render an opinion on a proposed transaction. As with any of the services provided by HFBE, our breadth of services provide customers with thorough analysis of alternatives and support fiduciaries making critical decisions.


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SellSell--side Transactionsside TransactionsAssist management in the determination of value– Management decisions regarding an offer to sell or to initiate the sale of a company,

subsidiary or division require a clear understanding of the fair market value of the entity.

– The market capitalization of the company’s stock may not be a good indication of the company’s sale value, especially if the company’s stock is thinly traded. Overpricing can be just as disastrous as undervaluation.

– Thus, an expertly prepared valuation saves management both valuable time and resources during this critical process.

Institute and maintain a confidentiality policy– This obviously is a key component of the sales process. Our process is designed to

maintain tight confidentiality.– We contact candidates, prescreened and approved by you, on an anonymous basis

using a summary sales memorandum. Candidates interested in pursuing the matter must sign a confidentiality agreement. Only then will they receive a selling memorandum which refers to the company by a code word.

– Although we deal with confidential matters on a daily basis, your project will also be assigned a code word and only those persons whom you pre-authorize and with a need to know will have access to the files.

Appendix III: Investment Banking Services

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SellSell--side Transactions side Transactions (cont(cont’’d)d)Institute and maintain a confidentiality policy (cont’d)– Many merger and acquisition firms tout their vast network of buyers with whom they are in contact

and can readily approach. Most buyers in the market have fairly specific ideas but broaden their categories when giving their search criteria to brokers in order to see the maximum number of candidates. As a result, a firm of this type is likely to show your company to many companies who will not be interested. This wastes time and risks confidentiality.

– Further, the typical business broker works with a network of other brokerage firms who, in turn, have their own buyers. These firms work together through fee sharing arrangements. Where confidentiality is not a concern, this can be a good method of finding a buyer. In this process, however, confidentiality is usually impossible to maintain. This is obviously an unacceptable alternative for a company desiring to maintain some degree of control over the process.

Create serious buyer competition– Engaging an investment banker demonstrates that the company is serious about selling and ensures

prompt response and closing. A well prepared selling memorandum and thorough procedures let potential buyers know that others may be looking as well.

– We know from our analysis that the right buyer for your company – the one who will pay the highest price with the most acceptable deal terms – is likely to be located through selective, methodical industry analysis.

– A significant amount of our daily efforts are devoted to research. We are well-equipped and experienced in acquisition target research.

– As a natural adjunct to our valuation business, we spend significant financial resources annually for databases allowing us to research detailed financial and operating characteristics of thousands of publicly-traded and closely held businesses.


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SellSell--side Transactions side Transactions (cont(cont’’d)d)

Assist in negotiations and evaluation of offers– We have internally developed financial modeling tools designed for merger and

acquisition related work. With this software, we can do extensive modeling of different scenarios producing a full set of pro forma combined financial statements. This is particularly useful when looking at the projected results from varying levels of revenues and expenses and different capital structures.

– In this way, we are able to replicate the investment analysis that the potential buyer would be performing. If we know what a potential buyer’s inclinations are with respect to certain inputs in the model such as profit margins and overhead levels, we can anticipate in advance what the buyer’s likely value result will be.


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Acquisition SearchesAcquisition SearchesStrategic financial planning– Not all companies require strategic financial planning, but many companies are

concerned about the pro forma effects of a strategic acquisition strategy on capital structure and shareholder value.

– We can help with the analysis so that management can be assured that the candidates it seeks to acquire will be the ones best suited to meet the company’s goals.

Adhering to the plan– Whether you have your own plan or whether we help with the development of a plan,

it is critical that we, as your agent, fully understand your motivations for seeking an acquisition.

– Some key aspects that must be considered in building an acquisition candidate’s profile include:

Product or service linesSizeProfitabilityGrowth

– Finding a willing seller is not enough; the acquisition must fit within management’s strategic plan.

ManagementLeverageReputationLocation


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Acquisition Searches Acquisition Searches (cont(cont’’d)d)

Identifying candidates– Identifying “comparables” or competitors is an analytical step taken in almost all of our valuation

assignments. We research detailed financial and structural characteristics of both publicly-traded and closely-held businesses in search of attractive candidates.

– In addition, we have developed relationships with a large number of privately-held corporations which serve as both targets and referral sources.

Determining the value of a candidate– We are especially well equipped for this function as valuation services are a core part of our service

offerings.– As the largest and most experienced business valuation firm in the Southwest, we can deliver a

timely and highly comprehensive valuation analysis incorporating the most efficient structures from the standpoints of taxation, leverage employed, and liability to the buyer.

Acquisition financing– We can assist you in raising any required funding for an acquisition, whether it be debt or equity.– Further details can be found in the Private Placements section of this presentation.

Initiating and negotiating the transaction– As your agent, we will screen and contact potential candidates on your behalf. Once an interested

seller is ready and willing to meet face to face with the buyer, we will introduce the parties.– We will stay involved, serving as your intermediary, until the transaction is closed.


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Private Placement Issues/ServicesPrivate Placement Issues/ServicesWe meet with you to understand your basic needs.– Do you need equity, subordinated debt, senior debt or a combination?– How much capital is required?– How much is realistic?– Before getting too deeply entrenched in details, what is the “ballpark” outlook regarding capital

availability, pricing and fees?

We analyze your company’s financial and operating record and outlook. – We analyze your company in the same way a potential investor would.

We recommend a strategy– Timing.– Fees.– What is expected of you during the process.– Further details can be found in the following sections pertaining to each form of capital.

We prepare a private offering memorandum.– If you have not prepared a business plan, this document can serve as the foundation.– We would contact financing sources, including private equity funds, mezzanine funds, and subordinated

and senior debt sources.– Credibility and familiarity with financing sources ensures a prompt response to financing prospects and

facilitates negotiations.

We assist in structuring, negotiations, and documentation.– Having been through the process before allows us to:

Anticipate roadblocks, those five or six things that could kill your deal.Be aware of solutions to delicate transaction problems.


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Private Placements Private Placements -- EquityEquityAcquiring equity capital is a critical decision. There are times when the public market is not an option for raising equity capital.

Private equity investors have become very specialized. Although there are many venture funds that will invest along with lead investors, fewer are willing and qualified to be a lead investor.– Being the lead investor requires a serious commitment of time and effort.– Since this investor will sit on your board, you should seek someone who is well

qualified to provide advice to your company.

In order to obtain financing, a sound business purpose is required. A document that can clearly and concisely articulate your goals and objectives is critical to this process.

The cost of the money, that is, the size of equity ownership of your business required by the investor, depends on the amount being raised and the current and prospective value of your business.

A private equity investor seeks a favorable rate of return on his investment. Generally, the time horizon for an exit is five to seven years and expected rates of return are dependent on overall risk profile.


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Private Placements Private Placements –– Senior and Subordinated DebtSenior and Subordinated Debt

If your company has matured to the point that it has a stable cash flow base, some of your capital needs could be met by:– A term loan from a commercial bank– A private placement of long term debt from a financial institution such as an insurance

company

Extending out your maturities can enhance your cash flow, allowing you to generate a higher rate of return.

This financing may be used as part of a broader financing package for a management buyout or acquisition, as part of a refinancing or restructuring, or as additional expansion capital.

HFBE has extensive contacts with commercial banks, asset-based lenders, insurance companies, subordinated debt funds, and other non-bank financing sources. Our experience and knowledge of the marketplace ensures our clients of a competitively priced and structured financing.

We have also had success securing financing for more difficult or highly-leveraged transactions. HFBE does more than just the “easy” deals.


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Senior loans are almost always collateralized and typically structured based on a company’s assets or historical cash flow, while subordinated debt is typically unsecured and based on the company’s cash flow and capital structure.

The key elements of subordinated debt financing include: – Loan amount based on excess cash flow after senior debt service– Typically second lien on fixed assets– Interest rate typically fixed at 12-14% although some flexibility– Term of 5-7 years with interest only during initial 4-5 years– Warrants to purchase common stock (usually less than 20% ownership)– Target internal rate of return of 18-25% (including warrants)– Typically represents 15-40% of capital structure

Senior and Subordinated Debt (contSenior and Subordinated Debt (cont’’d)d)Appendix III: Investment Banking Services

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A leveraged buyout (“LBO”) is the acquisition of an existing public or private business by a private investor group and is financed primarily with debt and new equity capital.– Typically, the private investor group arranges the entire financing.– In an LBO, a private investor group typically uses the assets and operating cash flow of a target

company to obtain financing to buy a controlling stake in the company’s shares. They may, however, also use their own assets as collateral.

– The deals are usually structured so that the future cash flows expected to be generated from the target company are used to repay the debt incurred in financing the acquisition.

– In most LBOs, the target company’s shareholders receive a premium over the security’s current market value.

A management buyout (“MBO”) is a leveraged buyout in which the acquired company’s incumbent management team participates in the buying group. A company’s management would use this technique to take over their own company--that is, the operating management takes the company from being publicly owned to privately owned.

HFBE can assist in completing both leveraged buyouts and management buyouts.– We advise the operating management or a financial sponsor group on the purchase of an existing

company or the acquisition of an operating division or product line of either a public or private company.

– Additionally, we work with experienced management teams seeking to acquire or start companies within their industries of expertise, advise management teams within companies to assist them in acquiring their divisions, as well as provide ongoing financial advisory support up to and including add-on acquisitions and the initial public offering (“IPO”) process.

Private Placements Private Placements –– LBO/MBOLBO/MBOAppendix III: Investment Banking Services

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