Proforma Statements ( Debt )

Income statements ($000s) Y2010 % of Sales 1 2 3 4 5 6

Existing hearing aids 30,687 31,454 31,861 30,427 28,298 23,234
New hearing aids 0 2,832 6,607 9,580 13,605 18,774
Total Sales 29,366 ### 30,687 34,286 38,468 40,007 41,903 42,008
COGS ratio to sales of Existing 44.00% 13,502 13,840 14,019 13,388 12,451 10,223
COGS ratio to sales of New 47.00% 0 1,331 3,105 4,503 6,394 8,824
Cost of goods sold expense 12,442 42.37% 13,502 15,171 17,124 17,891 18,845 19,047
Gross profit margin 16,924 57.63% 17,185 19,115 21,344 22,117 23,057 22,961

SG&A 10,527 36.00% 10,544 11,817 13,298 13,827 14,482 14,492

Research & development expense 2,619 8.92% 1,700 600 600 600 600 600
Depreciation expense 1,050 3.58% 0 0 0 0 0 100
Rent payments 1,313 1,391 1,475 1,563 1,657 1,756
Operating income 2,727 9.29% 3,628 5,307 5,971 6,127 6,318 6,013

Lease payments 2,000 2,000 2,000 2,000 2,000 0

Interest expense 0 9.00% 633 628 623 617 610 603
Income before income taxes 2,727 9.29% 995 2,679 3,349 3,510 3,708 5,410

Income tax expense 927 3.16% 338 911 1,139 1,193 1,261 1,839
Net income 1,800 6.13% 657 1,768 2,210 2,317 2,447 3,570

Balance Sheet ($000s) % of Sales 1 2 3 4 5 6

Cash 1,100 5.33% 1,636 1,827 2,050 2,132 2,233 2,239
Accounts receivable 7,231 24.60% 7,549 8,434 9,463 9,842 10,308 10,334
Inventory 2,554 20.50% 2,768 3,110 3,510 3,668 3,863 3,905
Equipment 5,835 28.30% 8,684 9,703 10,886 11,322 11,858 11,888
Building & land 3,900 18.91% 0 0 0 0 0 500
Total assets 20,620 ### 20,637 23,074 25,910 26,964 28,263 28,866

Accounts payable 1,533 12.30% 1,661 1,866 2,106 2,201 2,318 2,343
Long Term Liability 603 603 603 603 603 603
Owners' equity 19,087 92.57% 28,407 31,738 35,610 37,035 38,789 38,887
Total liabilities & owners' equity 20,620 ### 30,671 34,207 38,319 39,838 41,710 41,833
(10,034) (11,133) (12,409) (12,874) (13,447) (12,967)

FCF = EBIT(1-t) + D - I -WC + TV 1 2 3 4 5 6

EBIT 3,628 5,307 5,971 6,127 6,318 6,013
Tax rate 34% 34% 34% 34% 34% 34% 34%
(1-t) 66% 66% 66% 66% 66% 66%
WC 8,252 28.10% 8,656 9,678 10,867 11,309 11,853 11,896
EBIT(1-t) 2,394 3,503 3,941 4,044 4,170 3,968
Depreciation (+) 0 0 0 0 0 100
Investment (-) 1,700 600 600 600 600 600
WC (-) 404 1,022 1,189 442 544 42
TV (+)
FCF 290 1,881 2,152 3,002 3,026 3,426
FCF with TV 290 1,881 2,152 3,002 3,026 3,426
NPV 8% ###
 7 Memo How to create PF
15,488 from E5 1 Create PF based on each ratio to sales
25,345 from E5 2 Adjust each figure based on E4
40,833 from E5 3 Put appropreate formula (not the ratio to sales)
6,815 E4
11,912 E4
18,727 Formula
22,106 Formula

14,040 E4, from E3

600 E4
100 E4
1,862 from E3 (Rent received from Harmonic)
5,504 Formula

0 E4, Lease payments

E4: 9% of 5423 and 1277 loans
603
+ E4
4,901 Formula

1,667 EBT X Tax rate

3,235 EBT - Tax

7
2,176
10,045 E4 Investment: 24.6% to sales
3,839 E4 Investment: 20.5% to COGS
11,556
400 E4, no Fix Assets(1-5), purchase 500K(6)
28,016 SUM

2,303 E4 Investment: 12.3% to COGS

E4: 5423 and 1277 loans
603
No principal repayments are made
37,799
40,706 SUM
(12,690) Balance check

7
5,504
34% E4
66%
11,581
 3,633
100
11,100 Investment + 10500
(315)
45,290 E4: will be sold by at 7th yr for 14 times net income
38,238
83,528
Proforma Statements ( Equity )
Income statements ($000s) Y2010 % of Sales 1 2 3 4 5
Existing hearing aids 30,687 31,454 31,861 30,427 28,298
New hearing aids 3,236 7,551 10,949 15,548 21,456
Total Sales 29,366 100.00% 33,923 39,005 42,810 45,975 49,754
Cost of goods sold expense 12,442 42.37% 14,373 16,526 18,139 19,480 21,081
Gross profit margin 16,924 57.63% 19,550 22,479 24,671 26,495 28,673

SG&A 10,527 35.85% 12,161 13,983 15,347 16,482 17,837

Research & development expense 2,619 8.92% 3,026 3,479 3,819 4,101 4,438
Depreciation expense 1,050 3.58% 1,214 1,396 1,533 1,646 1,781
Operating income 2,727 9.29% 3,151 3,624 3,977 4,271 4,622

Interest expense 0 0.00% 0 0 0 0 0

Income before income taxes 2,727 9.29% 3,151 3,624 3,977 4,271 4,622

Income tax expense 927 3.16% 1,072 1,233 1,353 1,453 1,572
Net income 1,800 6.13% 2,079 2,391 2,624 2,818 3,050

Balance Sheet ($000s) % of Sales 1 2 3 4 5

Cash 1,100 5.33% 1,808 2,079 2,282 2,450 2,652
Accounts receivable 7,231 35.07% 11,897 13,679 15,013 16,123 17,449
Inventory 2,554 12.39% 4,203 4,833 5,304 5,696 6,165
Equipment 5,835 28.30% 9,600 11,038 12,115 13,011 14,080
Building & land 3,900 18.91% 6,415 7,376 8,095 8,694 9,408
Total assets 20,620 100.00% 33,923 39,005 42,810 45,975 49,754

Accounts payable 1,533 7.43% 2,520 2,898 3,181 3,416 3,697

Owners' equity 19,087 92.57% 31,403 36,107 39,629 42,559 46,057
Total liabilities & owners' equity 20,620 100.00% 33,923 39,005 42,810 45,975 49,754

FCF = EBIT(1-t) + D - I -WC + TV 1 2 3 4 5

EBIT 3,151 3,624 3,977 4,271 4,622
Tax rate 34.0% 34.0% 34.0% 34.0% 34.0% 34.0%
(1-t) 66.0% 66.0% 66.0% 66.0% 66.0%
WC 8,252 13,579 15,614 17,137 18,404 19,917

EBIT(1-t) 2,080 2,392 2,625 2,819 3,051

Depreciation (+) 1,214 1,396 1,533 1,646 1,781
Investment (-) 3,026 3,479 3,819 4,101 4,438
WC (-) 5,327 2,034 1,523 1,267 1,513
TV (+)
FCF (5,059) (1,725) (1,184) (903) (1,119)
 6 7
23,234 15,488
28,966 39,104
52,200 54,592
22,117 23,131
30,083 31,461

18,714 19,571
4,656 4,870
1,869 1,954
4,849 5,072

0 0
4,849 5,072

1,650 1,725
3,200 3,346

6 7
2,782 2,910
18,307 19,145
6,468 6,764
14,773 15,450
9,871 10,323
52,200 54,592

3,878 4,056
48,322 50,536
52,200 54,592

6 7
4,849 5,072
34.0% 34.0%
66.0% 66.0%
20,896 21,853

3,201 3,348
1,869 1,954
4,656 4,870
979 958
(566) (525)
Figure 3
Excess Cash $500,000
Borrowing backed by accounts receivable $5,423,000
Borrowing backed by inventory $1,277,000
Sale and leaseback of equipment $7,000,000
Loan to Harmonic, guaranteed by Burns and Irvine $300,000
Personal funds of Burns and Irvine $200,000

unit: 000
Figure 3 0
Excess Cash 500
Borrowing backed by accounts receivable 5,423
Borrowing backed by inventory 1,277
Sale and leaseback of equipment 7,000
Loan to Harmonic, guaranteed by Burns and Irvine 300
Personal funds of Burns and Irvine 200
Exhibit 2Asset Value Comparisons as of Year-End 2010
Apprais
Book
($000s) ed
Value
Value
Cash $ 1,100 $ 1,100
Accounts receivable $ 7,231 $ 7,231
Inventory $ 2,554 $ 2,554
Equipment $ 5,835 $ 8,835
Building & land $ 3,900 $ ###

Total assets $ ### $ ###

Exhibit 3 Real Estate Transaction
Mortgage Assumptions:
- 25-year maturity
-$8,400,000loan amount
-7.0%interest Rate
-$720,808constant annual payment

Amortization Schedule
Year
Year 1 2 3 4 5
Interest payments 588,000 578,703 568,756 558,112 546,724
Principal reduction 132,808 142,105 152,052 162,696 174,084

Principal balance of mortgage ### ### ### ### ###

Annual Real Estate Cash Flows to Frank

Thomas
Year 1 2 3 4 5
Rent received from Harmonic ### ### ### ### ###
- Maintenance costs 315,000 330,750 347,288 364,652 382,884
- Property taxes paid 188,000 195,520 203,341 211,474 219,933
- Depreciation expense on buildinga 288,462 277,367 266,699 256,441 246,578
Operating income 521,038 587,613 657,398 730,641 807,605
- Interest payments 588,000 578,703 568,756 558,112 546,724
Income before income taxes -66,962 8,910 88,642 172,528 260,881
+ Tax benefit (cost) at 40% 26,785 -3,564 -35,457 -69,011 -104,352
Net income -40,177 5,346 53,185 103,517 156,529
+ Depreciation expense 288,462 277,367 266,699 256,441 246,578
- Principal payments 132,808 142,105 152,052 162,696 174,084
Net after tax cash flow 115,477 140,608 167,832 197,263 229,023

Hypothetical Cash Flows to Frank Thomas

from Sale of Building and Land to Harmonic at
the End ofagreed-upon
Assumed Year 7 sale price ### ###
Calculation of capital gains tax owed:
Sale price ### ###
- Book valueb ### ###
Gain on sale ### ###
Capital gains tax owed20% 260,123 360,123
Calculation of net cash proceeds:
Sale price ### ###
- Capital gains tax owed 260,123 360,123
- Mortgage balance owed ### ###
Net cash proceeds ### ###
a Calculated as 150% declining balance for
b Calculated
39years as salvage
to zero original purchase
value price of
$10,500,000 minus accumulated depreciation of
$1,800,616
Unit: 000
Amortization Schedule
Year
Year 1 2 3 4 5
Interest payments 588 579 569 558 547
Principal reduction 133 142 152 163 174
0
Principal balance of mortgage 8,267 8,125 7,973 7,810 7,636
0
Annual Real Estate Cash Flows to Frank Thomas
Year 1 2 3 4 5
Rent received from Harmonic 1,313 1,391 1,475 1,563 1,657
- Maintenance costs 315 331 347 365 383
- Property taxes paid 188 196 203 211 220
- Depreciation expense on buildinga 288 277 267 256 247
Operating income 521 588 657 731 808
- Interest payments 588 579 569 558 547
Income before income taxes (67) 9 89 173 261
+ Tax benefit (cost) at 40% 27 (4) (35) (69) (104)
Net income (40) 5 53 104 157
+ Depreciation expense 288 277 267 256 247
- Principal payments 133 142 152 163 174
Net after tax cash flow 115 141 168 197 229
0
Hypothetical Cash Flows to Frank Thomas from 0
Sale of Building and Land to Harmonic at the End
of Year 7 agreed-upon sale price
Assumed 10,000 10,500
Calculation of capital gains tax owed:
Sale price 10,000 10,500
- Book valueb 8,699 8,699
Gain on sale 1,301 1,801
Capital gains tax owed20% 260 360
Calculation of net cash proceeds:
Sale price 10,000 10,500
- Capital gains tax owed 260 360
- Mortgage balance owed 7,251 7,251
Net cash proceeds 2,489 2,889
0
a Calculated as 150% declining balance for 39years to
zero salvage value
b Calculated as original purchase price of $10,500,000
minus accumulated depreciation of $1,800,616
0
 6 7
534,538 521,499
186,270 199,309

### ###

6 7
### ###
402,029 422,130
228,731 237,880
237,094 227,975
888,567 973,821
534,538 521,499
354,029 452,322
-141,612 -180,929
212,418 271,393
237,094 227,975
186,270 199,309
263,242 300,059

###

###
###
###
460,123

###
460,123
###
###
 6 7
535 521
186 199

7,450 7,251

6 7
1,756 1,862
402 422
229 238
237 228
889 974
535 521
354 452
(142) (181)
212 271
237 228
186 199
263 300

11,000

11,000
8,699
2,301
460

11,000
460
7,251
3,289
Exhibit 4 (continued)

Year 1 2 3 4 5 6 7
Interest $30,000 $25,086 $19,681 $13,735 $7,194
Principal $49,139 $54,053 $59,458 $65,404 $71,945
Remaining Principa $250,861 $196,808 $137,350 $71,946 0 0 0
10.00%
Year 1 2 3 4 5
$700,000 $150,000 $50,000 $0 $0

Unit: 000
Year 1 2 3 4 5
Interest 30 25 20 14 7
Principal 49 54 59 65 72 300
Remaining Principal 251 197 137 72 0
10.00% 0 0 0 0 0
Year 1 2 3 4 5
0 700 150 50 0 0
Exhibit 5 Sales Forecasts by Financing Alternatives

Sales Under Debt Financing

Year 1 2 3 4 5 6
Existing hearing aids ### ### ### ### ### ###
New hearing aids 0 2,831,500 6,607,125 9,580,375 ### ###
Total Sales ### ### ### ### ### ###

Unit : 000
Sales Under Debt Financing
Year 1 2 3 4 5 6
Existing hearing aids 30,687 31,454 31,861 30,427 28,298 23,234
New hearing aids 0 2,832 6,607 9,580 13,605 18,774
Total Sales 30,687 34,286 38,468 40,007 41,903 42,008

Unit : 000
Sales Under Equity Financing
Year 1 2 3 4 5 6
Existing hearing aids ### ### ### ### ### ###
New hearing aids 3,236,000 7,551,000 ### ### ### ###
Total Sales ### ### ### ### ### ###

Sales Under Equity Financing

Year 1 2 3 4 5 6
Existing hearing aids 30,687 31,454 31,861 30,427 28,298 23,234
New hearing aids 3,236 7,551 10,949 15,548 21,456 28,966
Total Sales 33,923 39,005 42,810 45,975 49,754 52,200
7
###
###
###

7
15,488
25,345
40,833

7
###
###
###

7
15,488
39,104
54,592