Table 7 Historical Balance Sheets (2002‐2006)

Page 63 of 141
Table 8 Historical Income Statements (2002‐2006)

Before a proper and complete financial analysis can be performed, the Company’s financial statements must be normalized. The following section discusses the theory of normalizing financial statements and the results of the ensuing analysis.
4.8.1 Financial Statement Normalization
Overview
Business valuation procedures require that the valuator review the financial statements to determine if any adjustments are needed to better reflect the economic value of an appraisal subject (in other words, normalizing the financial statements. Generally speaking, most adjustments are made due to the controlling interests choices regarding implementation of certain accounting treatments and tax planning strategies. Closely‐held businesses rarely attract passive investors and as such the final presentation of financial statements are not necessarily high on the controlling interest’s priorities. One of their main
S ALES b7,295,000
100.0%
6,489,000
$
100.0%
5,755,000
$
100.0%
4,156,000
$
100.0%
3,529,000
$
100.0%
O PER AT INGE X PENS ES bOfficers Compensation Other Salaries & Wages
47.9%
3,109,000
$
47.9%
2,757,000
$
47.9%
1,991,000
$
47.9%
1,691,000
$ Rent
0.9%
54,000
$
0.8%
48,000
$
0.8%
42,000
$
1.0%
36,000
$ Payroll Taxes
5.6%
360,000
$
5.5%
320,000
$
5.6%
231,000
$
5.6%
196,000
$
5.6%
Truck/Equipment/A uto Expense
8.7%
520,000
$
8.0%
463,000
$
8.0%
411,000
$
9.9%
325,000
$ Insurance
1.1%
61,000
$
0.9%
49,000
$
0.9%
36,000
$
0.9%
29,000
$
0.8%
Legal/P ro fessio nal Expenses
0.6%
31,000
$
0.5%
29,000
$
0.5%
27,000
$
0.6%
26,000
$ Travel & Entertainment
0.1%
5,000
$
0.1%
5,000
$
0.1%
4,000
$
0.1%
4,000
$ Director Fees
0.2%
10,000
$
0.2%
6,000
$
0.1%
5,000
$
0.1%
3,000
$ Pension Profit Sharing
1.0%
65,000
$
1.0%
58,000
$
1.0%
42,000
$
1.0%
35,000
$ Depreciation Amortization Interest Expense
1.6%
107,000
$
1.6%
94,000
$
1.6%
68,000
$
1.6%
58,000
$ Other Operating Expense
7.2%
469,000
$
7.2%
416,000
$
7.2%
332,000
$
8.0%
286,000
$ Total Operating Expenses
79.1%
5,067,000
$
78.1%
4,499,000
$
78.2%
3,401,000
$
81.8%
2,866,000
$
81.2%
O PER AT ING INCOME
1,526,000
$
20.9%
1,422,000
$
21.9%
1,256,000
$
21.8%
755,000
$
18.2%
663,000
$
18.8%
O THE R INCOME bOther Income (Expense
1.2%
67,000
$
1.0%
53,000
$
0.9%
31,000
$
0.7%
22,000
$
0.6%
E AR N ING SB E FORE TAX b1,610,000
22.1%
1,489,000
$
22.9%
1,309,000
$
22.7%
786,000
$
18.9%
685,000
$ Income Tax Expense
8.6%
558,000
$
8.6%
491,000
$
8.5%
324,000
$
7.8%
270,000
$
7.7%
N ET INCOME LOSS )
9 8 4 ,0 0 0
$ 13 .5 %
9 3 1,0 0 0
$ 14 .3 %
8 18 ,0 0 0
$ 14 .2 %
4 6 2 ,0 0 0
$ 11.1%
4 15 ,0 0 0
$ 11.8 %
6 / 3 0 / 2 0 0 6
6 / 3 0 / 2 0 0 5
6 / 3 0 / 2 0 0 4
6 / 3 0 / 2 0 0 3
6 / 3 0 / 2 0 0 2

Page 64 of 141 focuses is on financial strategies that minimize taxable Income which sometimes result in inconsistent operating performance. The objective of normalizing the financial statements is to convert the historical financial statements and performance statistics into amounts that may better reflect the real economics of the underlying business. These normalization adjustments are not always precise however, they are based on the valuator’s analysis of the subject, including interviews with management and their advisors (e.g., lawyers and accountants. In general, when a situation exists and appears to need such an adjustment, the adjustment is made if the following conditions are generally present
• The amounts presented on historical financial statements are inconsistent with the valuator’s perspective of fair market value fora particular line item.
• Fair market value can be reasonably determined based on initial findings.
• The authority to make the normalization adjustments required is borne by the interest being appraised (or some other disclosed circumstance exists e.g., shareholder or other binding agreement. In the case of appraising anon controlling (minority) interest, some adjustments contemplated fora controlling interest would not be appropriate and therefore may not be made. The control attributes are key determinants as to how the adjustments should be made and are case specific i.e., it depends. These normalization adjustments generally take four forms (1) Comparability, (2)
Non‐Recurring, (3) Non‐Operating, and (4) Discretionary. The following table illustrates these normalization adjustments and the potential impact they have on the perspective of control of the Company’s operation

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