1. - 1 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved PREDICTIVE CAPABILITY OF VALUATION MODELS New York City QUAFAFEW By Rawley Thomas, President LifeCycle Returns, Inc. March 23, 2004 Rawley@LCRT.com

2. - 2 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt AN INTRINSIC VALUE CHART ENABLES US TO VISUALIZE THE MEASUREMENT OF ROBUSTNESS AND ACCURACY OF A DCF MODEL PRICE LEVEL USING ONLY ACTUAL REPORTED FINANCIAL DATA AND THE SAME GLOBAL PARAMETERS ACROSS THE ENTIRE UNIVERSE TO DRIVE A MECHANICAL LIFE CYCLE FORECAST OF CASH FLOWS FOR EACH COMPANY Sources: Financial Statements and Price Data – Simplystocks Calculations - LCRT’s Platform

3. - 3 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt LCRT’S RESEARCH METHODOLOGY CONTRASTS SHARPLY WITH THE TRADITIONAL VALUATION APPROACH Traditional Approach Forecasts 3-10 Years of Cash Flows Applies Perpetuity or Multiple for Terminal Value Discounts to Present (plan valuation) Implicitly assumes the structure and parameters of the terminal valuation are robust and accurate or “plugs” the parameters to explain current price LCRT Methodology Employs only actual data to empirically test robustness and accuracy of valuation models, methodologies, and parameters –Enables testing hypotheses in an independent way which does not contain a look- ahead bias by knowing current price Extends the best models to use as terminal values in traditional plan valuations using security analyst estimates or other forecasts

4. - 4 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt LCRT’s MODEL IS 28-67% MORE ACCURATE THAN OTHER MODELS (at 50 th Percentile) AND MORE ACCURATE FOR 67% OF THE UNIVERSE Sources: Financial Statements and Price Data – Simplystocks Calculations - LCRT’s Platform Constant Dollar Gross Investment > $100 Million 20,957 Company-Years Feltham-Ohlson: 67%=100% (79.2/47.4-1) Free Cash Flow 38% = 100% (65.7/47.4-1) 8 X EBITDA 28% = 100% (61.0/47.4-1) Residual Income 33% = 100% (63.4/47.4) LOG 2 of % Absolute Model Error versus Actual Price - Fiscal Year +3 Months 1994-2002 47 63 79 67 % Greater Accuracy of LCRT Model at Cumulative 50 th Percentile of Universe Cumulative % of Universe Tracking error equals the % absolute difference between the Model Intrinsic Value and the actual stock price at Fiscal Year + 3 Months. The Chart compares models, methodologies, or parameters.

5. - 5 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt LCRT’S MODEL IS UP TO 25% MORE ROBUST THAN OTHER MODELS LCRT 8 X EBITDA Residual Income Free Cash Flow Perpetuity Feltham-Ohlson Sources: Financial Statements and Price Data – Simplystocks Calculations - LCRT’s Platform Constant Dollar Gross Investment > $100 Million

6. - 6 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt ~ 3,000 INDUSTRIAL AND MANUFACTURING COMPANIES WITH MEDIAN TOTAL SHAREHOLDER RETURN OF -7.84% 1994-2002 DIVIDED INTO “WINNERS” AND “LOSERS” BASED ON INTRINSIC VALUE SCREENS AT FISCAL YEAR + 3 MONTHS SPLITTING DISTRIBUTION APPROXIMATELY IN HALF Sources: Financial Statements and Price Data – Simplystocks Calculations - LCRT’s Platform Constant Dollar Gross Investment > $100 Million Total Universe Median = -7.84% N = 17,697 Company-Years 1994-2002 Panel Data “Winners” are under- valued at Fiscal Year + 3 Months and “Losers” are over- valued at Fiscal Year + 3 Months.

7. - 7 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt LCRT “WINNERS” OUT-PERFORM “LOSERS” BY 12.3% (= -2.04 –(-14.38)) Sources: Financial Statements and Price Data – Simplystocks Calculations - LCRT’s Platform Constant Dollar Gross Investment > $100 Million “Winners” Median = -2.04% N = 8,628 Company-Years 1994-2002 Panel Data “Losers” Median = -14.38% N = 8,771 Company-Years 1994-2002 Panel Data “Winners” are under- valued at Fiscal Year + 3 Months and “Losers” are over- valued at Fiscal Year + 3 Months.

8. - 8 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt FREE CASH FLOW AND LCRT PERFORM THE BEST TO SEPARATE “WINNERS” FROM “LOSERS” Sources: Financial Statements and Price Data – Simplystocks Calculations - LCRT’s Platform Constant Dollar Gross Investment > $100 Million, Panel Data from 1994-2002, 17,697 Company-Years

9. - 9 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt FREE CASH FLOW AND LCRT PERFORM THE BEST TO SEPARATE “WINNERS” FROM “LOSERS” Sources: Financial Statements and Price Data – Simplystocks Calculations - LCRT’s Platform Constant Dollar Gross Investment > $100 Million, Panel Data from 1994-2002, 17,697 Company-Years

10. - 10 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt COMBINING FREE CASH FLOW AND LCRT SCREENS SEPARATE “WINNERS” FROM “LOSERS” BY 17.0% = (-.45-(-17.50) FCF “Winners” & LCRT “Winners” Median = -0.45% N = 7,074 Company-Years FCF “Losers” & LCRT “Winners” Median = -7.74% N = 1,527 Company-Years FCF “Losers” & LCRT “Losers” Median = -17.50% N = 6,320 Company-Years FCF “Winners” & LCRT “Losers” Median = -7.54% N = 2,212 Company-Years Sources: Financial Statements and Price Data – Simplystocks Calculations - LCRT’s Platform Constant Dollar Gross Investment > $100 Million, Panel Data from 1994-2002

11. - 11 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt THE LCRT INTRINSIC VALUE SCREEN SUCCESSFULLY SEPARATES “WINNERS” FROM “LOSERS” FOR ALL YEARS EXCEPT FISCAL YEARS 1997-1998 Recall that Fiscal Years 1997-1998 cover the “Bubble” time period from March of 1998 to March of 2000. The market peaked in August of 2000. Sources: Financial Statements and Price Data – Simplystocks Calculations - LCRT’s Platform Constant Dollar Gross Investment > $100 Million, Panel Data from 1994-2002, 17,697 Company-Years

12. - 12 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt IN A CAREFULLY CONTROLLED EXPERIMENT IN AN ECONOMICS LABORATORY, VERNON SMITH et. al. DEMONSTRATES SIGNIFICANT DIFFERENCES OF TRADED PRICES FROM KNOWN INTRINSIC VALUES Vernon L. Smith, Gerry L. Suchanek, and Arlington W. Williams, “Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets,” in Vernon Smith, Papers in Experimental Economics, Cambridge University Press, Cambridge, 1991, pp. 339- 371, chart from p. 352.

13. - 13 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt BEHAVIORAL EXPLANATIONS OF VIOLATIONS OF INSTANTANEOUSLY EFFICIENT MARKET’S HYPOTHESIS People employ significantly different and inconsistent models of fundamental valuation, relying on various forecasts Depending on the weights of all the classes of people buying and selling a stock at any point in time, the actual price will diverge significantly from the long term intrinsic value Strongly held academic beliefs in instantaneous market efficiency impede empirical research to show otherwise Price event studies only demonstrate that the market reacts in the correct direction, but not necessarily by the correct amount Robust, accurate DCF models of intrinsic valuation are required to empirically test instantaneous market efficiency

14. - 14 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt COMPARISON OF FELTHAM-OHLSON AND FREE CASH FLOW PERPETUITY Feltham-Ohlson Based on market value of equity/ operating assets regressed against return on assets, change in return on assets, and growth rate in assets From Jing Liu and James A. Ohlson, “The Feltham-Ohlson Model: Empirical Implications,” Journal of Accounting, Auditing and Finance, 2000, v15 [3, Summer], pp. 321-331, especially p. 326-327. Programmed with the aid of Sally Webber, Accounting Professor, Northern Illinois University Free Cash Flow Perpetuity Based on growing free cash flow for T years and capitalizing the terminal year’s free cash flow into perpetuity Free cash flow = income after taxes + depreciation and amortization – non-operating items after tax – normalized capital expenditures – working capital additions The terminal year’s cash flow is capitalized by a CAPM nominal discount rate less a nominal growth rate From specifications by Dan Van Vleet of Willamette

15. - 15 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt COMPARISON OF RESIDUAL INCOME AND LCRT Residual Income From PV of growing excess residual income (EVA ® ) for T years plus release of capital at terminal value employing a CAPM cost of capital Bennett Stewart, The Quest for Value, Harper Business, 1991, especially p. 324-325. Programmed with the aid of Sally Webber, Accounting Professor, Northern Illinois University LifeCycle Returns (LCRT) From PV of net cash flows for 50+ years using a market derived discount rate Net cash flows derive from fading growth rates and cash economic returns applied to constant dollar gross investment less replacement assets less growth in gross investment See Bartley J. Madden, CFROI Valuation: A Total System Approach to Valuing the Firm, Butterworth-Heinemann, Oxford, 1999.

16. - 16 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt LCRT’S UNIQUE RESEARCH METHODOLOGY AND PROCESS CONSULTING Translates each dimension of a person’s belief structure into a testable hypothesis and model –Relies only on historical data for forecast estimates –Produces an intrinsic value for every company for every year at Fiscal Year + 3 Months to reflect disclosure lags and prevent look ahead bias –Displays tracking errors on a single chart where tracking errors = % absolute difference between the intrinsic model value and actual price for all 20,000+ company-years Measures the predictive capability of the % difference between intrinsic value and actual price for every company for every year for Months Fiscal Year +4, 5, 6, 9, 12, & 15 –Measures the risk of the distributions of “Winners” and “Losers” using the parameters of the fat tailed Stable Paretian Distribution Determines which models, methodologies, and parameters: –Produce the most accurate intrinsic values with the least tracking errors –Separate the universe into “Winners” and “Losers” with the greatest spread on relative wealth performance from Fiscal Year +3 Months to +15 Months Changes valuations, investment processes, and cultures with a powerful Platform by producing comparative quantitative feedback on belief structures of stock market pricing and reactions to fundamentals

17. - 17 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt EXTRA SLIDES

18. - 18 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt THE LCRT INTRINSIC VALUE SCREEN SUCCESSFULLY SEPARATE “WINNERS” FROM “LOSERS” FOR ALL YEARS EXCEPT 1997-1998 Sources: Financial Statements and Price Data – Simplystocks Calculations - LCRT’s Platform Constant Dollar Gross Investment > $100 Million, Panel Data from 1994-2002 Recall that Fiscal Years 1997-1998 cover the “Bubble” time period from March of 1998 to March of 2000. The market peaked in August of 2000.

19. - 19 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved COMPARATIVE ACCURACY AND PREDICTIVE CAPABILITY OF LCRT AND FORMER MODELS By Rawley Thomas President LifeCycle Returns, Inc. February 20, 2004 Rawley@LCRT.com

20. - 20 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt LCRT’S RESEARCH MODEL IMPROVES ON FORMER MODELS WITHOUT ENHANCEMENTS AND OVERRIDES BY 13.7% (=100% (53.9/47.4 -1)) Cumulative % of Universe LOG 2 of % Absolute Model Error versus Actual Price – Fiscal Year + 3 Months 1994-2002 47 54 Sources: Financial Statements and Price Data – Simplystocks Calculations - LCRT’s Platform Constant Dollar Gross Investment > $100 Million, 1994-2002

21. - 21 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt LCRT PERFORMS BETTER THAN FORMER MODELS WITHOUT ENHANCEMENTS AND OVERRIDES TO SEPARATE “WINNERS” FROM “LOSERS” Sources: Financial Statements and Price Data – Simplystocks Calculations - LCRT’s Platform Constant Dollar Gross Investment > $100 Million, Panel Data from 1994-2002

22. - 22 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt LCRT PERFORMS 2.6% BETTER THAN FORMER MODELS WITHOUT ENHANCEMENTS AND OVERRIDES TO SEPARATE “WINNERS” FROM “LOSERS” Sources: Financial Statements and Price Data – Simplystocks Calculations - LCRT’s Platform Constant Dollar Gross Investment > $100 Million, 1994-2002

23. - 23 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt COMPARISON OF LCRT RESEARCH AND FORMER MODELS WITHOUT ENHANCEMENTS AND OVERRIDES LCRT RESEARCH CER Fade-To based on 7 Year Past Median of Firms with Current Dollar Gross Investment > 100 $Million 45% CER Fade Rate, 50% Growth Fade Rate, 40% Sustainability Factor, 10% CER Momentum Market Derived Discount Rate related to leverage, inventory asset mix, and depreciating asset mix X plant life Excessive growth rates limited to -15% to +20% by arc-tangent function FORMER MODELS CER Fade-To based on long term CER for aggregate of large firms 10% CER Fade Rate, 10% Growth Fade Rate, 0% Sustainability Factor, 0% CER Momentum Market Derived Discount Rate related to leverage No limit on excessive growth rates

24. - 24 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved VALUE MANAGEMENT PAST, PRESENT, & FUTURE (A WORK-IN-PROGRESS) (Excerpts) Financial Management Association International Denver, Colorado October 9, 2003 By Rawley Thomas President LifeCycle Returns, Inc. Rawley@LCRT.com

25. - 25 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt MOST ASSETS PRODUCE A NEARLY LEVEL USEFUL OUTPUT UNTIL FAILURE, INSTEAD OF THE STRAIGHT LINE OR THE DECLINING BALANCE CURVE REFLECTING DEPRECIATED PLANT Output Time (2) Most Assets Produce Nearly Level Output… Until Failure (1) Constant Output = Constant Dollar Level Annuity Economic Life (3) Straight Line Depreciation Net Plant (4) Accelerated Depreciation Net Plant Failure (One Horse Shay) (Economic Value Added Implicit Assumption)

26. - 26 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt ECONOMIC VERSUS ACCOUNTING ANNUAL PERFORMANCE MEASURES In order to accurately reflect asset productivity, economic measures should assume constant dollar level annuities of cash flows In contrast, traditional accounting measures, like RONA (Return On Net Assets), do not reflect the reality of asset utilization. They only reflect the IRR of the underlying project, when the output declines linearly.

27. - 27 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt TRADITIONAL ACCOUNTING MEASURES FIRST UNDERSTATE AND THEN OVERSTATE ECONOMIC RETURNS AS ASSETS AGE (ASSUMING CONSTANT OUTPUT = CONSTANT DOLLAR LEVEL ANNUITY) (A DESIRED ANNUAL PERFORMANCE MEASURE REFLECTS THE PROJECT IRR) NOTE: The Annual CER each and every year precisely equals the IRR of the project. -$10,000 PROJECT $1,740 Life = 8 Years IRR = 8.00% Annual Performance Measures of Project Year 12345678 Income490 Depreciation1,250 Gross Cash Flow1740 Gross Plant10000 Accumulated Depreciation125025003750500062507500875010000 Net Plant87507500625050003750250012500 Return on Net Assets = RONA = Income/Net Plant5.60%6.53%7.84%9.80%13.07%19.60%39.20%∞ Cash Economic Return (CER)8.00% Difference-2.40%-1.47%-0.16%1.80%5.07%11.60%31.20%∞ Return on Gross Assets 17.40%

28. - 28 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt CASH ECONOMIC RETURN REFLECTS THE AVERAGE INTERNAL RATE OF RETURN OF ALL THE PROJECTS IN PLACE Cash Economic Return Existing Projects

29. - 29 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt IMPROVED MEASUREMENTS (PORTFOLIO) GREATER INSIGHTS SUPERIOR DECISIONS Portfolio Applications TraditionalLCRT Framework CER (Cash Economic Return) E.P.S.RisingPurchaseCERDecliningSell P/ELowPurchaseCER< Cost of Capital and Growing Sell E.P.S.LevelAvoidCERRisingBuy

30. - 30 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt THE LIFE CYCLE OF THE AVERAGE FIRM Growth Phase Decay from Drop-Outs Due to Acquisition & Bankruptcy Investors price for these expectations in Firms’ life cycles and associated cash flows. Corporate Average Start-Up Growth Phase Surviving Mature Firm Fade

31. - 31 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Predictive Capability of Models – QUAFAFEW March 23, 2004 Rt VALUATION: SIMPLE DISCOUNTED CASH FLOW PRESENT VALUE PRINCIPLES Since the corporate rate of return of 20% exceeds the investor’s discount rate of 10%, the price of $109 exceeds the $100 cost of the Gross Investment. Gross Investment Time 0Time 1 $100 $120 Value $109 $20 Gross Cash Flow 20% Return