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Copyright 2011, FMV Opinions, Inc.

All rights reserved. No part o this publication may be reproduced, stored in a retrieval system, or transmitted, in any orm or by any means, electron

mechanical, photocopying, recording, or otherwise, without the prior written permission o the copyright owner.

ContentsI. IntroductIon . . . . . . . . . . . . . . . . . . . . 2

II. new developments to the FmvrestrIcted stock studytm . . . . . . . . . . . 3

III. dIscounts For lack oFmarketabIlIty a brIeF hIstory . . . . . . 5

Iv. understandIng restrIctedstock and rule 144 . . . . . . . . . . . . . . . . 7

v. descrIptIon oF the Fmv study . . . . . . 12

vI. Fmvs preFerred dlomdetermInatIon methodology . . . . . . 19

vII. usIng the Fmv dlom calculator . . . 27

vIII. more thoughts onusIng the Fmv study . . . . . . . . . . . . . . 33

To Our Readers:

It is our pleasure to present to you the third edition o The FMRestricted Stock Study Companion Guide. We hope you wenjoy this Guide, which is provided to users oThe FMV RestrictStock Study at www.BVMarketData.comsm. Beore beginni

to use the FMV Study, we suggest that you take a moment review the inormation contained in this Guide.

The study has been designed to meet the needs o anyone wis charged with determining discounts or lack o marketabiliWhen creating The FMV Restricted Stock Study, we had oparticular audience in mind: the expert who, charged wsubstantiating discount opinions with too little empirical dands that the opposing side has much more ammunition to uagainst her than she has or her deense.

On behal o FMV Opinions, it is our pleasure to welcome yto browse through and analyze the results o our many years

research. We hope you will nd our study useul and protabl

We would like to express our gratitude or the support we hareceived rom Business Valuation Resources in preparing this snicant update to The FMV Restricted Stock Study, and orvaluable assistance in developing The FMV DLOM Calculatora groundbreaking, practical tool or determining discounts lack o marketability.

Finally, we would like to thank the many subscribers who haprovided valuable eedback over the years and who have raisthought-provoking questions regarding the database, whihave resulted in useul developments and improvements to T

FMV Restricted Stock Study.

Sincerely,

FMV Opinions, Inc.

Determining Discounts for Lack of MarketabilityA Companion Guide to The FMV Restricted Stock Stud

2011 Edition
http://www.bvmarketdata.com/defaulttextonly.asp?f=FMV%20Introhttp://www.bvmarketdata.com/defaulttextonly.asp?f=FMV%20Introhttp://www.bvmarketdata.com/defaulttextonly.asp?f=FMV%20Introhttp://www.bvmarketdata.com/defaulttextonly.asp?f=FMV%20Introhttp://www.bvmarketdata.com/defaulttextonly.asp?f=FMV%20Introhttp://www.bvmarketdata.com/defaulttextonly.asp?f=FMV%20Intro

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a companIon guIde to the Fmv restrIcted stock study 2011 eii

ci 2011, Fmv oii, I. a i .

I. IntroductIon

Over the past decade, the Courts have become more demanding in the proo required to support discounts or lack o marketabil(DLOM). It is clear that the Courts are increasingly requiring a comparative analysis between the subject company and the compancomprising a database o restricted stock transactions. In an eort to aid the valuation community in determining deendable DLOM

in 2001, FMV Opinions, Inc. (FMV) introduced The FMV Restricted Stock StudyTM (FMV Study), which is licensed through BusineValuation Resources, LLC. Comprised o nearly 600 restricted stock transactions with distinct transaction and company characterist

on which comparisons to a subject company can be made, the FMV Study represents the most widely used and accepted databaavailable to valuators or DLOM determination.

Many subscribers to the FMV Study have been overwhelmed with the wealth o data. For users o the FMV Study, valid and necessaquestions arise: Which data are most relevant? How should I interpret the data? What is the best way to use the data? How does FM

use the data? As valuation proessionals have dissected the data, many realized that signicant time must be invested in order to maappropriate DLOM determinations: time that clients are generally not willing to pay or. As a result, some valuators invested the necessa

time to understand and appropriately use the data, while others looked to other, less time-consuming, discount methodologies. Sother valuators inquired o FMV as to how it uses the data.

This Guide provides valuators with the inormation necessary to understand the theoretical oundation or the DLOM, be ully inormregarding the data underlying the FMV Study, weigh the valid discount characteristics, determine an appropriate DLOM, and expla

and deend the discount determination when challenged. In Section VII o this Guide, we provide a tutorial to users o The FMV DLO

CalculatorTM

, a newly released web-based application that allows users to employ FMVs preerred DLOM determination methodolog

Disclaimer The discussion included herein illustrates one possible method or deriving a DLOM or minority interests in private compani

and may not be appropriate in all cases. The application o the proposed methodology to the Subject Interest in ABC Corp., as described

Section VII, is provided or illustrative purposes only and may not be relied upon by anyone, or any purpose, as accurately reecting the DLO

or any interest in any company, no matter how similar such interest/company may be to the example provided herein. FMV and Busin

Valuation Resources do not assume any responsibility or the improper use and/or interpretation o the data and/or methodology describ

herein.

The data and analyses summarized herein are derived rom The FMV Restricted Stock StudyTM, available atwww.BVMarketData.comsm, as

November 2010. The FMV Study is periodically updated, and thereore the results o the analyses, as presented herein, and FMVs propos

methodology or determining DLOMs, are subject to change without notice.
http://www.bvmarketdata.com/defaulttextonly.asp?f=FMV%20Introhttp://www.bvmarketdata.com/defaulttextonly.asp?f=FMV%20Introhttp://www.bvmarketdata.com/defaulttextonly.asp?f=FMV%20Intro

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II. new developments to the Fmv restrIcted stock studytm

Over many years, FMV has worked diligently to better understand the marketplace or restricted stock and to incorporate new and usedevelopments to the FMV Study. We trust you will nd that these developments will enhance the quality and integrity o your DLOanalyses.

The FMV DLOM Calculator

The FMV DLOM Calculator was released in Fall 2010. This interactive, web-based tool, which incorporates inputs rom a users subje

company, takes valuators step-by-step through FMVs preerred DLOM determination method. The FMV DLOM CalculatorTM providvaluators with many benets, including:

1. Greatly reduces time and eort in deriving DLOMs.2. Makes detailed comparisons between subject companies and issuers o restricted stock included in the FMV Study.

3. Provides users with an option to adjust or ination the relevant nancial statistics in the FMV Study or enhanced comparabiwith a subject company as o a specic valuation date.

4. Allows users exibility to enter their own assumptions and tailor the results based on their proessional knowledge aexperience.

5. Creates an easy-to-ollow set o exhibits that can be inserted into the users valuation report.

6. Provides users with the condence that they are always utilizing the latest restricted stock data and DLOM methodolo

suggested by FMV, the industry leader in determining DLOMs.

Infation Adjustment Tool

Users who choose not to use The FMV DLOM Calculator can still adjust the statistics in the FMV Study or ination. Posted on the FMArticles page is an Ination Adjustment Tool that adjusts the data in the FMV Study to a user-selected valuation date, based on t

Consumer Price Index (CPI), published by the U.S. Bureau o Labor Statistics.

Consideration o Stock Market Volatility

Each transaction in the FMV Study occurring ater June 1990 now includes a VIX variable,1 which represents the level o expected utuvolatility in equity markets around the time o the transaction. FMV has previously demonstrated that a public companys stock pr

volatility is a key determinant o the DLOM. However, the volatility o private company stock can be extremely difcult (i not impossib

to estimate. In response to this dilemma, FMV has or the rst time made an empirical connection between DLOMs and overall stomarket volatility, making it possible to incorporate stock market volatility as a consideration when determining DLOMs or minori

non-marketable interests in private companies. This is especially important or valuations during 2008 and 2009, when stock markdemonstrated unprecedented levels o volatility and when, as a result, investors ed to the saety o highly liquid, low volatility asse

such as short-term Treasury bills.

Anticipated Future Developments

FMV continues to devote substantial resources to the ongoing development o the FMV Study, with the ollowing two primary goa

(1) to provide the largest, most detailed, and most current database o restricted stock transactions available anywhere; and (2) add valuable insight as to the appropriate interpretation and application o the data underlying the FMV Study or the purpose

more efcient, accurate and deensible DLOM determinations. In the near uture, we look orward to the ollowing additions aimprovements to the FMV Study:

1) Addition o an Expected Liquidation Period variable or each transaction in the FMV Study, which will incorporate the initrequired holding period and volume limitations under Rule 144 as well as market-based trading volume limitations (i

blockage). The Courts have acknowledged that or minority interests in private companies, where there is no expectatior a liquidity event in the oreseeable uture, the concept o a holding period may not be meaningul. However, or ma

illiquid securities, such as restricted stock in public companies, an expected liquidation period may be measurable as t

1 The CBOE Volatility Index (VIX) is a key measure o market expectations o near-term volatility conveyed by S&P 500 stock index option prices. Sin

its introduction in 1993, VIX has been considered by many to be the worlds premier barometer o investor sentiment and market volatility. See http

www.cboe.com/micro/vix/introduction.aspx.
http://www.bvmarketdata.com/defaulttextonly.asp?f=FMV%20Articleshttp://www.bvmarketdata.com/defaulttextonly.asp?f=FMV%20Articleshttp://www.bls.gov/cpi/http://www.bls.gov/cpi/http://www.bvmarketdata.com/defaulttextonly.asp?f=FMV%20Articleshttp://www.bvmarketdata.com/defaulttextonly.asp?f=FMV%20Articles

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time until the illiquid securities may reasonably be sold in the public marketplace. This new addition will allow valuatorsbetter support DLOMs or such securities.

2) Addition o a Premium Required Return variable. When perorming a discounted cash ow analysis, valuation expesometimes preer to increase the discount rate applied to uture cash ows to account or the illiquidity o an investme

This new variable will provide empirical support or the premium return required or i lliquid investments by includinor each transaction in the FMV Study, a Premium Required Return data eld. By perorming a comparative analysis w

underlying issuers, valuators can estimate what annualized rate o return arms length investors would require, in additito a private companys cost o equity (marketable basis), to compensate or a lack o marketability.

3) Release o data regarding private placements with short periods until registration and subsequent liquidation throupublic markets. This data will provide extremely useul support or DLOMs associated with more liquid interests (e.g., lar

blocks o publicly traded stock, interests in liquidating entities, etc.).

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III. dIscounts For lack oF marketabIlIty a brIeF hIstory

Discounts Allowed in Prior Court Cases

The sheer paucity o data available to the rst valuators regarding how to determine a DLOM was rightening. As a result, many valuat

looked to the marketability discounts determined in prior Court decisions to support a DLOM. In act, most initial challenges by the Iregarding the DLOM still contain a list o prior Court cases and the discount determined in each case. Depending on what side o t

debate the valuator is on, many appraisers tend to emphasize the discounts most suitable to their respective position.

However, with the passage o time, alternative discount valuation methodologies have been introduced and the Discounts-Allowed-Prior-Court-Cases approach to determine discounts has allen out o avor. For the diehards who still rely on this approach, the LeFr

Court, echoing other prior decisions, stated we must remind the parties that the amount o discount must be decided on the basis

the record in the instant case, and not on what a court ound reasonable in another case involving dierent evidence.2

While it remains appropriate or an attorney in negotiations with the IRS over the magnitude o the DLOM to discuss discounts detemined in prior Court cases, it is never appropriate or a valuation expert to utilize this approach in a ormal appraisal.

Benchmark Average Approach

In 1971, with the publication o the Security and Exchange Commissions Institutional Investor Study (SEC Study), the valuator had a to

based on empirical evidence, to aid in determining the DLOM. The SEC Study examined more than 300 private placement purchases o stothat was restricted under provisions similar to Rule 144, issued by publicly traded companies, which occurred between 1966 and mid-196

This landmark study ound that, on average, sales o restricted stock sold at a 24% discount to its otherwise identical publicly traded sis

stock. Importantly, the SEC Study ound that restricted stock discounts were correlated with certain key nancial metrics o the issuer, and wehigher i the reely traded sister securities were traded over-the-counter rather than on an established securities exchange. For the rst timvaluators could point to hard data involving actual willing buyers and willing sellers to support a DLOM. The SEC Study was the catalyst

the IRSs issuance o Revenue Ruling 77-287, which established guidelines or the valuation o securities that cannot be immediately resobecause they are restricted rom resale pursuant to Federal securities laws. The Ruling stated that no automatic ormula could be used and th

the discounts were a unction o the companys earnings, net assets, sales, trading market and any resale agreement provisions.

The SEC Study marked the beginning o an explosion in other restricted stock transaction studies (see table below). However, thesubsequent studies generally diered rom the SEC Study in two important ways. First, these studies involved a very limited numb

o transactions. Second they generally reported only the average discount and lacked the detailed background o the SEC Study th

allows or an analysis o how the characteristics o a given company inuence the magnitude o the discount. Important to many vaators, however, was that these studies uniormly arrived at substantially higher average discounts than the SEC Study. As a result, t

SEC Study ell into disuse and valuators ocused on the average 33% to 35% discount reported in the studies. This approach came to known as the Benchmark Average Approach.

The ollowing table excerpted rom Shannon Pratts Valuing a Business: The Analysis and Appraisal o Closely Held Companies3 shows t

type o discounts arrived at over the years through various restricted stock studies.

Empirical Study Years Covered In Study Average Price Discount

SEC Overall Average 1966-1969 25.8

SEC Nonreporting OTC Companies 1966-1969 32.6

Gelman 1968-1970 33.0

Trout 1968-1972 33.5

Moroney NA 35.6

Maher 1969-1973 35.4

Standard Research Consultants 1978-1982 45.0

Willamette Management Associates 1981-1984 31.2

Silber 1981-1988 33.8

2 Estate o Lerak, T.C. Memo. 1993-526 (November 16, 1993)

3 Pratt, Shannon, and Alina Niculita.Valuing a Business: The Analysis and Appraisal o Closely Held Companies. 5th ed. McGraw-Hill Proessional, 2008. 4

Print. Studies more recent than Silber have been excluded rom the table due to their inapplicability to the discussion contained herein.

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The above table is representative o the Benchmark Average Approach in that, other than the average discount, there are no other chacteristics rom which a comparative analysis with the subject company can be perormed. Recently, the Benchmark Average Approa

has come under stark criticism by the Courts. In an appeal or more detailed data, the McCormickCourt stated, Respondent relied third party studies or herbase [discount]. We are unable to analyze the specics o respondents base. 4 In other words, the Couare seeking rst party studies with sufcient data available underlying the discounts so that the Courts may ensure valuators ma

appropriate comparisons.

This complaint was echoed in Peracchio, as the Court dismissed the discount determined by the use o the Benchmark Average Approastating, [The valuation expert] simply lists the average discounts observed in several such studies, eectively asking us to accept

aith the premise that the approximate average o those results provides a reliable benchmark or the transerred interests.5 And Tem

picked up the complaints o the Peracchio Court stating, Rather than taking restricted stock sale data and explaining its relation to tgited interests, [the Taxpayers expert] simply listed the studies and picked a discount based on the range o numbers in the studies

The Mandelbaum Approach

In Mandelbaum v. Commissioner,7 both experts utilized the Benchmark Average Approach in support o their respective discoun

However, the Taxpayers expert endorsed a 70% to 75% discount while the IRSs expert concluded a 30% discount. Judge David Laone o the most knowledgeable o the Tax Court judges on valuation issues, disappointedly stated that he had ound limited reugethe opinions o either expert. As a variation on the Benchmark Average Approach, Judge Laro developed a nine-actor adjustme

process to the Benchmark Average. These actors are:

1. Financial Statement Analysis;2. Companys Dividend Policy;

3. Nature o the Company, its History, its Position in the Industry, and its Economic Outlook;4. Company Management;5. Amount o Control in Transerred Shares;

6. Restrictions on Transerability o Stock;7. Holding Period or Stock;

8. Companys Redemption Policy; and9. Costs Associated With Making a Public Oering.

This nine-step approach was an improvement over the Benchmark Average Approach and invited appraisers to perorm a more detail

analysis o the subject company and subject interest being valued. However, the problem remained that without the underlying da

there is no ability to assess the specics o the subject company against the unpublished (and thereore unknown) data underlying tdiscount averages in order to quantiy the impact o the Mandelbaum actors on the DLOM. As a result, the DLOMs arrived at und

the so-called Mandelbaum Approach are generally not more reliable than those determined under the Benchmark Average Approac

The Preerred Method - Restricted Stock Comparative Analysis Approach

In Temple v. U.S., the Court was aced with three dierent discount approaches: the Benchmark Average Approach; the QMDM (a versio the discounted cash ow approach to determining the DLOM), and the Restricted Stock Comparative Analysis Approach (RSCAA

The Temple Court rejected both the Benchmark Average Approach and the QMDM. However, the Temple Court responded avorably

the RSCAA, stating, As or the lack o marketability discount, the Court nds [the IRSs experts] method to be correct. the Court nreliability in the act that [the IRSs expert] endeavored to understand and incorporate the market dynamics o restricted stock sale

.The better method is to analyze the data rom the restricted stock studies and relate it to the gited interests in some manner, as [tIRSs expert] did.

Accordingly, the Courts have come to a conclusion: the preerred discount methodology is the RSCAA. In order to use this approactwo things are necessary: (1) a sufcient database o restricted stock transactions, including specic characteristics o the underlyi

companies, and (2) an in-depth understanding o restricted stock.

4 Estate o McCormick, T.C. Memo. 1995-371 (August 7, 1995)

5 Peracchio v. Commissioner, T.C. Memo. 2003-80 (Sept. 25, 2003)

6 Temple v. U.S., No. 9:03-CV-165 (March 10, 2006)

7 Mandelbaum v. Commissioner, T.C. Memo. 1995-255, ad. 91 F.3d 124 (3d Circuit, 1996)

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Iv. understandIng restrIcted stock and rule 144

In order to eectively use the FMV Study, it is important that valuation experts understand what restricted stock is. The term restrictstock is oten used synonymously with unregistered stock or letter-stock, and reers to (1) unregistered shares issued by public copanies in private placement transactions, and (2) registered and unregistered securities held by afliates o issuers. Restricted sto

may not be sold through public transactions, not because o contractual arrangements between holders and issuers, but rather duesecurities laws and regulations.

Ater the stock market crash o 1929, the Federal government sought ways to prevent manipulation o stock prices through the pu

chasing and dumping o large blocks o stock. While the government understood that, periodically, legitimate long-term investomay want to sell their shares, the government sought to limit the ability o short-term speculators to do the same. Through passage

The Securities Act o 1933 (Act), the government requires registration o nearly all securities prior to their sale in public transactio

unless an exemption rom registration under the Act can be ound. Private placements are exempt under Section 4(2) o the Act, athe exemption most commonly used or resale o unregistered stock in the public markets is Section 4(1) transactions not involvin

issuers, underwriters, or dealers. Section 2(a)(11) o the Act denes underwriters as anyone who participates in a distribution or who hpurchased rom an issuer with a view todistribution (emphasis added). Anyone who purchases unregistered securities rom an issu

in a private placement, or example, and then wishes to sell the stock to the public, must show that he or she is not an underwriterorder to qualiy or this exemption rom registration.

Prior to the adoption o Rule 144, the SEC and the Courts were required to delve into the subjective intent o the purchaser to rea

a conclusion regarding whether or not a seller o unregistered shares qualied or exemption under Section 4(1). In other words, thneeded to ascertain whether or not the purchaser bought unregistered stock with a view to distribute it. Over time, this subjecttest evolved in the Courts into a complicated set o rules, ocusing on how long the purchaser had held the securities and whether t

purchaser had undergone a change o circumstances that might orce a sale. This complex and unpredictable situation was unsatisatory to issuers, investors, and the SEC alike. Needless to say, unregistered securities had severely limited marketability under this regim

Rule 144

In January 1972, the SEC adopted Rule 144 under the Act as an objective sae harbor or the resale o restricted securities. The result wan improvement in the liquidity o restricted stock as the rules surrounding resale became signicantly more predictable. Rule 144 reg

lates public sales o restricted securities, including both unregistered securities and control securities. Unregistered securities are thoacquired in private sales rom public issuers or afliates o public issuers through private placement oerings, Regulation D oering

employee stock benet plans, or in exchange or start-up capital.8 Control securities are those held by afliates o issuers, where afliat

are those with the power to direct the companys management and policies, whether through the ownership o voting securities, contract, or otherwise. The denition o an afliate is similar to, but not the same as, the denition o an insider under Section 16

the Securities Exchange Act o 1934. Individuals may be considered afliates based on evidence o actual control exercised, board seheld, management responsibilities, and percentage ownership. Owners o 5% or more o an issuers outstanding shares are typica

considered afliates, but while this gure is widely relied upon, it is not included in any rule or statute.9 Rule 144 governs public sales afliates o both unregistered and registered stock, while it only governs sales by non-afliates o unregistered stock. It is important

note that restricted shares may always be sold to other accredited investors in private sales.10

To prevent the purchasing o unregistered securities with a view to resale in public markets, Rule 144 requires an initial holding peri

o some length o time. Under the original version o the rule, all unregistered securities had to be held or at least two years, mesured rom the time the securities were purchased rom the issuer or an afliate, beore any public resale. Ater the initial holdi

period, unregistered securities could be sold in public transactions by complying with certain dribble out, or volume limit provisioAccording to these provisions, the total amount o unregistered securities sold in public transactions in any three-month period,

qualiy or exemption rom registration, is determined as ollows:

For exchange-listed and Nasdaq-quoted securities, up to the greater o (i) 1% o the outstanding shares o the same class bei

sold, or (ii) the average reported weekly trading volume during the our weeks preceding each sale.

For over-the-counter (OTC) issuers (OTCBB and Pink Sheets), up to 1% o the outstanding shares o the same class being so

8 Rule 144(a)(3) identies what types o transactions produce restricted securities.

9 Untangling Rule 144: Restricted Stock Sales and Afliate Volume Limitations. http://www.learnaboutlaw.com/newsletter/v0007.html

10 Private sales o restricted shares are neither governed nor protected by Rule 144, and commonly rely upon what is known as the 4(1 and

exemption.

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Furthermore, in order to sell securities under Rule 144, issuers subject to the public reporting requirements o the Act must be currein their ling o all reports (nancial and other) required by the SEC, and issuers not subject to the reporting requirements under the A

must have inormation publicly available equivalent to that ound in a 15c2-11 ling (which may be satised by posting corporate anancial inormation their company websites). Rule 144 provides additional requirements or afliates, including the ollowing:

Manner o Sale Requirement - Sales must be handled in all respects as routine trading transactions, meaning that brokers mnot receive more than a normal commission and neither the seller nor the broker can solicit orders to buy the securities.

Filing Requirement The seller must le a Notice o Proposed Sale with the SEC (Form 144) in advance o any sale, eective

3 months, i the sale involves more than 5,000 shares or the aggregate dollar amount is greater than $50,000 in any 3-monperiod.

Rule 144 has become the resale exemption o choice or unregistered and afliate-held securities, in particular ater the 1983-200amendments (as described below), although other exemptions may be available in certain circumstances. Rule 144 is non-exclusiv

and acts and circumstances may allow the Section 4(1) exemption to be used even i the requirements o Rule 144 have not all besatised.

Amendments to Rule 144

Rule 144 has been amended on various occasions, each time resulting in improved liquidity or restricted stock.

In 1983, Rule 144 (k) was added, and provides that non-afliates may sell unregistered securities without volume limits athree years rom the date o purchase.

In 1990, the tacking concept o Rule 144 was amended. Prior to this amendment, any sale o unregistered stock, evenprivately negotiated transactions, would result in the required holding restarting. The 1990 amendment allowed non-aflia

purchasers to tack the previous owners holding period to his own holding period, as long as the previous owners were noafliates o the issuer.

In 1997, the initial holding period was decreased rom two years to one year and the ultimate holding period or non-aflia

was shortened rom three years to two years (afliates remain subject to Rule 144 requirements as long as they are afliates

In 2008, the initial holding period was shortened rom one year to six months, and the ultimate holding period or non-aflia

was shortened rom two years to one year (afliates remain subject to Rule 144s requirements as long as they are afliates).

The ollowing table provides a summary o the historical changes to Rule 144.

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1971 - 1983 1983 - 1990 1990 - 1997 1997 - 2007 2008 -

Announced Date NA NA NA 2/20/97 11/15/07

Effective Date1

1/11/72 9/23/83 4/1/90 4/29/97 2/15/08

Affilates

Initial Holding PeriodReporting Issuers 2 Years 2 Years 2 Years 1 Year 6 Months

Non-Reporting Issuers 2 Years 2 Years 2 Years 1 Year 1 Year

Tacking?2

No No Yes Yes Yes

Volume Limitations3

Reporting Issuers Indefinitely Indefinitely Indefinitely Indefinitely Indefinitely

Non-Reporting Issuers Indefinitely Indefinitely Indefinitely Indefinitely Indefinitely

Non-Affilates

Initial Holding Period

Reporting Issuers 2 Years 2 Years 2 Years 1 Year 6 Months

Non-Reporting Issuers 2 Years 2 Years 2 Years 1 Year 1 Year

Tacking?2

No No Yes Yes Yes

Volume Limitations3, 4

Reporting Issuers - Current Indefinitely 3 Years 3 Years 2 Years 6 Months

Reporting Issuers - Non-Current Indefinitely 3 Years 3 Years 2 Years 1 Year

Non-Reporting Issuers Indefinitely 3 Years 3 Years 2 Years 1 Year

Notes

General - Highlighted items signify changes to Rule 144 versus the immediately prior period.

1) Amendments to Rule 144 are applicable to securities acquired before or after the Effective Date.

2) Allows purchases by non-affiliates to tack the prior non-affiliate owner's holding period onto his/her own.

4) Time period includes the Initial Holding Period. As an example, between 1997 and 2008, after 1 year non-affiliates

may begin to sell shares in accordance with Rule 144's volume limitations. After 1 additional year (2 years total from

the date of acquisition of the restricted shares), the shares may be sold freely.

3) For exchange-listed and Nasdaq-quoted securities, up to the greater of (i) 1% of the outstanding shares of the same

class being sold, or (2) the average reported weekly trading volume during the four weeks prior to sale. For OTC

securities (OTCBB and Pink Sheets), 1% of the outstanding shares of the same class being sold.

The ollowing table is provided in the SECs ofcial document regarding the 2008 revisions to Rule 144, and provides a summary o tRule 144s current requirements or afliates and non-afliates o reporting and non-reporting issuers.

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Afliates Non-Afliates

Reporting Issuers During 6-month holding period - During 6-month holding period -

no resales under Rule 144 permitted. no resales under Rule 144 permitted.

After 6-month holding period - After 6-month holding period, before 1 year -

may resell in accordance with Rule 144 unlimited public resales except that the

requirements including: current public information requirement

- Current public information still applies.

- Volume limitations

- Manner of sale requirements

for equity securities

- Filing of Form 144

Non-Reporting Issuers During 1-year holding period - During 1-year holding period -

no resales under Rule 144 permitted. no resales under Rule 144 permitted.

After 1-year holding period - After 1-year holding period -

may resell in accordance with Rule 144 unlimited public sales; need not comply

requirements including: with any other Rule 144 requirements.- Current public information

- Volume limitations

- Manner of sale requirements

for equity securities

- Filing of Form 144

Liquidating Restricted Stock Positions

Non-afliate owners o unregistered stock who wishes to liquidate shares prior to the end o the ultimate holding period (ater whi

shares may be sold reely) have several options or doing so, including:

1. Sell in public transactions citing an exemption under the Act, such as Rule 144.

2. Sell to accredited investors in privately negotiated transactions.

3. Persuade the issuer to register the securities, which is generally accomplished through a pre-negotiated registration rig

agreement (described below).

4. Hedge the position to remove most o the economic risk, and then borrow against the hedged position. This can be achiev

by purchasing a put option and writing a call option on the position (reerred to as a collar). Such a transaction has a cost to tinvestor and is limited to small share blocks in securities which are widely traded, having signicant liquidity and option activ

The majority o companies in the FMV Study and other published restricted stock studies are not large and liquid enough to good candidates or such hedging or sale transactions.

Registration Rights Agreements

Even though Rule 144s resale limitations have been relaxed somewhat over the years, investors oten look or issuers in private placments to provide or possible liquidity prior to the end o the required holding period by entering into registration rights agreemen

These agreements typically occur in one o the ollowing orms:

1. Demand Registration Rights - require issuers to register the shares or a portion o the shares upon the purchasers requegenerally at the issuers expense. These are typically considered the most valuable orm o registration rights, and are also tmost rare orm.

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2. Mandatory Registration Rights - require issuers to register the shares or a portion o the shares within some specied timrame, at either the issuers or the investors expense. While these rights provide investors with some benet, there are ot

lengthy periods until required registration.

3. Piggyback Registration Rights - grant investors the right to register the shares when either the issuer or another investor in

ates a registration o shares. These are viewed as inerior to Demand and Mandatory registration rights because the invescannot initiate the registration process.

The presence o a registration rights agreement tends to improve the liquidity o restricted stock. However, there is no standard re

istration rights agreement and it is difcult to gauge the precise impact that a particular registration rights agreement has on tmarketability o a particular security. Even ater registration, many investors may be deemed to be afliates and thus still subject to Ru144. Accordingly, restricted stock, even when registration rights are present, is less liquid than the issuers unrestricted shares. Outsi

o a pre-negotiated registration rights agreement, a holder o unregistered securities is unlikely to be able to orce the issuer to registhe shares due to the signicant time, eort and expense involved.

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v. descrIptIon oF the Fmv study

The FMV Study is a database o private placements o unregistered common stock issued by public companies. FMV Opinions begcompiling the database upon its ounding in 1991. As o November 2010, the FMV Study includes transactions rom 1980 to 20Over the years, the number o transactions in the database has grown to nearly 600 and, as the database is consistently added to, it w

continue to grow over time.

Selection Criteria

The transactions in the FMV Study were discovered through searches using a number o sources, including: 10K Wizard, Security DaCorporation; EDGAR and EDGAR Pro; Dow Jones News Retrieval; Disclosure CompactD; and S&P Corporate Transactions Records. Feach transaction identied, we reviewed all relevant public lings and exhibits thereto, including but not limited to orms 8K, 10K, 10

S-1, S-3, S-4, stock purchase agreements, and registration rights agreements. Overall, we reviewed thousands o private placemetransactions during the construction o the FMV Study. Transactions were eliminated rom the study or the ollowing reasons:

1. The transaction was not a private placement o unregistered shares (i.e., the stock was registered prior to the transaction da

or the stock was registered and became ully marketable within 30 days o the transaction;

2. The private placement was o debt, preerred stock, convertible preerred stock, or some kind o hybrid equity-derivative sec

rity (the security issued must be identical to the publicly traded common stock in all respects other than its unregistered statu

3. The private placement was issued as part o a stock-warrant unit or had warrants attached, or detachable warrants or optiowere issued with the common stock;

4. The transaction did not close (i.e., was announced and later withdrawn);

5. The stock was not traded on a domestic exchange;

6. The stock traded below $1 or the entire month o the transaction;

7. Signicant pieces o inormation were unavailable, to the extent we were unable to determine the private placement discousuch as the ollowing:

a, the market reerence price or the ully liquid shares was unavailable;b. the private placement transaction price was unavailable;

c. only the net transaction proceeds to the issuer were reported publicly (net o unknown transaction costs and ees), nthe gross purchase price;

8. There were special contractual arrangements between buyer and seller limiting either the economic upside or downside o t

buyer (e.g., an agreement to increase the number o shares purchased i the market trading price were to all below a certalevel within some specied period o time);

9. The stock was issued in connection with a merger or acquisition, in exchange or services, or in connection with any othtransaction that could cast doubt on what the air market value o the restricted stock was; and

10. The lead purchaser11 in the transaction was, based on explicit language provided in the issuers public lings (or, i not explic

stated, based on our best judgment considering all available evidence), a related party or received one or more seats on tissuers board o directors as a result o the transaction.

This cleaning process eliminated over 95% o the transactions reviewed, leaving the current database (November 2010) o 596 plavanilla private placements o restricted common stock.

11 A lead purchaser is deemed to be any purchaser o greater than 50 percent o the shares acquired in the private placement.

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DLOM Calculation

The DLOM was calculated by dividing the dierence between the private placement price and the market reerence price by the marreerence price. The market reerence price in the FMV Study is represented by the high-low average stock price or the month o ttransaction, because or many transactions in the FMV Study only the month o the transaction, not the exact transaction date,

specied.

Analysis o the Data

This section examines the FMV Study data in detail and provides empirical evidence illustrating which company-specic and broadmarket variables are relevant determinants o the DLOM. In general, these variables relate to the issuers risk prole, the degree o liquity o the privately placed stock, and the overall level o stock market volatility around the time o the transaction.

Using data rom the FMV Study, we have examined 596 private placement transactions o unregistered common stock, with and witho

registration rights, issued by publicly traded companies rom July 1980 through October 2008. The overall average discount or all 5transactions in the FMV Study (as o November 2010) is 20.6% and the median discount is 17.1%. The sample distribution is shown

the histogram below:

The FMV Restricted Stock Study

0

10

20

30

40

50

60

70

80

75

%

Restricted Stock Discount

Frequency

Investment Risk and Discounts

The impact o investment risk on the DLOM is signicant. Smaller, less protable entities, with a higher degree o income and balansheet risk and greater stock price volatility, tend to issue restricted stock at higher discounts. The ollowing table provides a comparis

o company characteristics between high-discount transactions and low-discount transactions. The sample is divided into ve eqpercentile groups, or quintiles, based on the distribution o the restricted stock discount, and medians are computed or each quint

group across all parameters. Due to the long time period over which the FMV Study transactions take place, company nancial charteristics have been adjusted or ination or better comparability.12

12 For this analysis, nancial characteristics have been adjusted based on percentage changes in the U.S. Bureau o Labor Statistics Consumer Pr

Index, using a base value o 217.97 as o June 1, 2010.

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Quintile1

1 2 3 4 5

Discount

Low -79.0% 7.4% 13.6% 22.4% 34.9%

High 7.3% 13.5% 22.1% 34.8% 91.3%

Median 1.6% 10.5% 17.1% 27.3% 44.4%

Company Characteristics (Median Statistics)2

Market Value ($mm) 173.4 168.1 122.7 64.5 46.0

Revenues ($mm) 26.6 28.4 30.1 14.2 8.1

Total Assets ($mm) 69.0 68.4 47.3 18.0 9.8

Book Value of Equity ($mm) 43.4 32.2 23.7 8.2 5.4

MTB Ratio 3.5 3.8 3.7 6.2 5.9

Net Income ($mm) (3.5) (1.8) (1.5) (2.1) (1.6)

Net Profit Margin -15.9% -9.8% -6.1% -27.0% -35.8%

Volatility 67.1% 69.0% 72.3% 78.9% 104.0%

1) Transactions sorted by Discount. Each "Quintile" includes either 119 or 120 transactions.

2) All statistics have been adjusted for inflation as of mid-2010.

As shown in the table, lower market values, revenues, total assets and book values, and higher market-to-book (MTB) ratios and sto

price volatility, are correlated with higher discounts. Accordingly, higher investment risk, as reected in smaller rm size, higher Mratios and increasing stock price volatility, tends to increase the discount. Protability is also oten used as an indicator o rm riHowever, absolute levels o earnings/losses do not demonstrate a strong correlation with the discount due primarily to the great

impact o company size on the discount. Private placements by large, unprotable rms tend to exhibit lower discounts than smprotable rms. Net prot margin tends to be a better indicator than net income as it is not impacted by rm size.

Discounts by Industry

The table below summarizes how the marketability discount varies in the FMV Study across the spectrum o industries.

Median Statistics

Industry Description SIC RangeTrans.Count

Discount% Shares

Placed

MarketValue($mm)

TotalAssets($mm)

MTBRatio

IssuerVolatility

All All 595* 17.0% 9.8% $106.8 $36.8 4.4 74.5%

Mining 1000-1999 64 13.7% 11.7% 109.0 70.7 3.0 69.5%

Manufacturing 2000-3999 245 17.8% 10.0% 95.6 26.6 4.9 74.8%

Transportation, Communica-tions, Electric, Gas and Sani-tary Services

4000-4999 31 15.4% 8.3% 144.1 40.0 5.9 77.2%

Wholesale Trade 5000-5199 12 16.4% 15.7% 20.3 23.2 3.9 80.5%

Retail Trade 5200-5999 24 12.7% 8.6% 201.0 91.8 4.2 67.8%

Finance, Insurance and RealEstate

6000-6999 65 12.2% 10.1% 142.5 620.5 1.5 52.6%

Services 7000-8999 154 23.0% 9.0% 97.8 16.5 6.7 85.0%

* 1 transaction from the Agriculture industry (SIC 0161) has been excluded from this table.

Note - the gures in this table have been adjusted for ination as of mid-2010.

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As shown in the table, the median discounts vary somewhat based on the SIC o the companies in the study. However, the variatiin discounts appears to result rom diering key nancial characteristics among the SIC groups. For example, higher-than-avera

discounts in the Services industry may be due to the signicantly lower-than-average total asset values and greater stock price volatithan other SIC groups. Similarly, lower-than-average discounts in Finance, Insurance and Real Estate, as well as Retail Trade, are crelated with high market values and total assets and lower stock price volatility than the other SIC groups. Accordingly, it is our opini

that a companys industry should not in itsel have a signicant impact on the DLOM, which is instead driven much more by a compannancial characteristics and stock price volatility.

Degree o Liquidity and Discounts

The variables discussed previously in this section are primarily indicators o a companys nancial and market risk. The FMV Study aprovides data on variables that are directly associated with the particular degree o liquidity o the block o restricted stock sold in ea

private placement. This data is particularly important to the valuation o interests in privately held companies, as described urther belo

Section IV discusses Rule 144s sae harbor provisions or the resale o restricted stock. As discussed, these provisions are more imposion afliates than non-afliates and on non-current issuers than current issuers. Based on the publicly available inormation regardi

the transactions in the FMV Study, all issuers in the FMV Study are subject to the reporting requirements o the Act and are likely currein their lings. However, while FMV has eliminated private placements that are known to involve related party purchasers, it is unknowwhether or not one or more purchasers in each transaction might be deemed to be an afliate. Accordingly, or each transaction

the FMV Study it is unclear what the purchasers expectations are regarding the required holding period under Rule 144. This is urth

complicated by the presence o registration rights agreements in the FMV Study transactions,13

the terms o which are largely unknowand thereore the resulting impact on the liquidity o the shares is impossible to assess.

Despite the aorementioned difculty in estimating the likely required holding period related to each transaction, it is true that, all ebeing equal, large blocks o unregistered stock (expressed as a percent o total shares outstanding) are more illiquid than small bloc

This results rom (i) Rule 144s volume limits ater the initial required holding period and prior to the ultimate holding period, and (ii) t

difculty in disposing o a large block o stock in a short time period through public sales due to general market supply and demanconditions. Rule 144s volume limits allow or the resale, in any three-month period, o the greater o 1% percent o the companys to

outstanding shares or the average weekly trading volume or the our weeks beore each such sale.14 Thus, under the dribble out prosions, a block o 20% or more would take up to ve years to resell ater the initial holding period, assuming (1) that it was sold to ju

one buyer, (2) that the holder o the block was deemed an afliate under Rule 144 and thus would be subject to Rule 144 volume limindenitely, and (3) that the trading volume o the stock was so low15 that 1% percent o total shares outstanding was the most that t

buyer could sell in any three-month period. As one can expect, the discount is correlated with the size o the block o stock sold in t

private placement, as shown in the chart below:

13 Approximately one-third o all transactions in the FMV Study are known to include registration rights, and or another approximately one-quar

o transactions the presence o registrations rights is not known.

14 For OTCBB and Pink Sheets companies, only the 1% o outstanding metric applies.

15 Or, the issuers shares are traded on the OTCBB or Pink Sheets.

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Block Size and Discounts

16.2% 16.6%17.6%

33.2%

38.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

0 - 10% 10 - 20% 20 - 30% 30 - 40% > 40%

Block Size (% of Outstanding)

Discount

The data shows that the discount increases due to a greater degree o illiquidity (i.e., larger block size), and the magnitude o t

relationship is most signicant among block sizes greater than 30%. Specically, increasing block size rom less than 30% (medidiscount o 16.5%) to greater than 30% (median discount o 38.5%) results in an increase to the median discount o 22 percentage poi

(38.5% - 16.5% = 22.0%), or 2.33 times (38.5% / 16.5% = 2.33). The largest blocks o restricted stock, which may require many yearsliquidate through public sales, are so illiquid that they resemble private equity. Stated dierently, Rule 144s dribble-out provisions

addition to general supply-demand conditions or the securities, make it so difcult to sell such blocks in public trading that the mo

attractive solution, in most cases, would be a private sale. As we will explain in Section VI, we use these acts, along with the empiridata discussed above, to derive DLOMs or minority interests in private companies.

Market Volatility and Discounts

The variables discussed previously in this section are indicators o company-specic nancial and market risk and the degree o liquid

o a security. The FMV Study also provides data regarding the impact o broader market risk, measured by volatility in equity markeAn analysis o the discounts associated with transactions occurring during periods o abnormally high market volatility suggests thgiven a xed level o company-specic nancial and market risk and the degree o liquidity o a security, discounts are greater durin

high volatility periods than during normal periods.

In order to assess the impact o broader market risk on restricted stock discounts, we have assigned each transaction in the FMV Stua market volatility variable. For this analysis, we utilized VIX values, a widely used measure o market risk.16 To control or short-te

uctuations in VIX values (which are highly volatile) and to account or the typical time period required to complete a private placment transaction, we have calculated a trailing 6-month average daily VIX closing value or each transaction. Since only the transactimonth and not the exact day is known or many o the FMV Study transactions, the market volatility variable or each transaction is t

maximum trailing 6-month average daily VIX closing value or the month o the transaction. The table below demonstrates that, whsorted by the VIX variable, transactions occurring during times o high VIX values have higher-than-normal discounts.

16 The CBOE Volatility Index (VIX) is a key measure o market expectations o near-term volatility conveyed by S&P 500 stock index option pric

Since its introduction in 1993, VIX has been considered by many to be the worlds premier barometer o investor sentiment and market volatility. S

http://www.cboe.com/micro/vix/introduction.aspx.

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Median Statistics

VIX Range:

Percentile Group Low High% Shares

PlacedTotal Assets

($mm)1VIX Discount

All Transaction Dates

0 - 60th 11.2 - 22.6 10.9% 38.9 14.6 14.8%

60 - 100th 22.6 - 32.9 7.3% 34.1 24.3 18.5%

1-Year Holding Period2

0 - 60th 11.2 - 23.2 9.4% 52.1 17.6 12.7%

60 - 100th 23.2 - 32.9 8.3% 18.9 26.0 22.1%

1) Adjusted for ination as of mid-2010.

2) February 20, 1997 - November 14, 2007.

Note - This analysis excludes all blocks > 30% shares placed.

VIXPercentile Group

VIX Range

Low High

MedianMultiplicativeAdjustment

Factor1

60 - 80th 23.2 26.0 1.16

80 - 100th 26.0 32.9 1.23

(1) Multiplicative difference between the RSED for each transaction and the actual discount for such transaction.

As discussed previously, transactions involving large blocks demonstrate higher discounts due to poorer liquidity. In order to isolamarket risk and control or the degree o liquidity, or the above analysis we have excluded transactions in the FMV Study with blo

sizes greater than 30%. As illustrated, the top 40% o transactions (60th100th percentile) when sorted by VIX, over the entire tim

period covered by the FMV Study, have a median discount o 18.5%, versus a discount or the bottom 60% o transactions o 14.8%. control or certain actors such as changes to Rule 144, we have perormed a similar analysis or the period between February 20, 19

and November 14, 2007, during which Rule 144 was unchanged. For this period, which captures periods o very high stock marvolatility (e.g., the tech boom and bust o 1997 to 2002), as well as periods o very low stock market volatility (e.g., 2003 to mid-2007

the FMV Study contains 300 transactions with block sizes less than 30%, providing a rich sample or analysis. As shown, the top 40o transactions (60th-100th percentile) when sorted by VIX have a median discount o 22.1%, versus only 12.7% or the bottom 60

o transactions. Based on our analysis, in the event that a valuation date alls within a period o unusually high market volatility, itappropriate to apply an adjustment actor to the discount arrived at by comparison o company-specic nancial and market risk asecurity liquidity characteristics.

The impact o market volatility on restricted stock discounts is particularly important during the latter part o 2008, when the VIX soar

well above historical highs. Prior to 2008, a VIX reading o 20 or below was considered to be an indication o investor calm and condenin the market, while a VIX value o 30 or above was considered to reect investor panic. From 1990 through the end o 2008, the V

briey topped 40 during only three periods; the 1998 Russian debt crises and subsequent collapse o Long-Term Capital Managemethe Dot.Com Bubble collapse, and the attack on the World Trade Center and Pentagon on September 11, 2001. However, during Octob2008 the average VIX closing value was 61.18; on October 27, 2008 the VIX closed at over 80.0. Based on the historical data analyz

above, one would expect signicantly higher restricted stock discounts during this period in light o such extreme market volatility.

The FMV Study includes 39 arms length common-stock-only private placements during 2008. Not surprisingly, the majority o these traactions occurred during the rst hal o the year, and only six were completed ater August 2008, when investors largely ed to less volat

more liquid investments. The median discount or the transactions occurring between January 1, 2008 and September 15, 2008 was 9.8However, it was 24.2% or transactions occurring ater September 15, 2008, approximately 2.5 times the median discount or the rst eigmonths o the year. Furthermore, companies that successully completed private placements ater August 2008 demonstrated substa

tially stronger nancial and market risk characteristics than those during the rst eight months o the year, which would otherwise sugge

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lower, rather than higher, discounts or such companies. This indicates that the actual impact o increased market volatility may be evgreater than observed (i.e., when the VIX is below 30). Furthermore, only two o these transactions occurred while VIX was greater th

40, and only one occurred when the VIX was greater than 50, suggesting severely limited demand or illiquid securities during this time extreme market volatility.

One issuer included in the FMV Study, Western Alliance Bancorporation (WAL), privately placed an 11.2% block o its common shaon June 27, 2008 and another 11.3% block on September 30, 2008. Based on block size and the terms o registration rights provided

each case, the two blocks purchased appear roughly equivalent with respect to liquidity. Furthermore, between June 27 and Septemb30, WALs share price increased rom $8.11 per share to $15.50 per share, similar to the share price increases o major competitors Bank

America and Wells Fargo, suggesting an improved market or WALs stock and the nancial sector generally. However, between the twtransaction dates, the VIX increased rom 23.4 to 46.7, a 2-old increase. As a result, the June transaction had a discount o 13.0%, whthe September transaction had a discount o 43.4%, a 3.3 times multiple.17

Summary o Findings

In summary, the main conclusions o the FMV Study are that the magnitude o the DLOM is:

Negatively correlated with:

1. the issuing rms market value o equity;

2. the issuing rms revenues;3. the issuing rms total assets;4. the issuing rms book value o shareholders equity; and

5. the issuing rms net prot margin.

Positively correlated with:

1. the issuing rms MTB ratio;

2. the issuing rms stock price volatility;3. the block size o the placement, described as a percent o the total ownership; and

4. the level o market volatility prevailing as o the transaction date, as measured by VIX.

17 Discounts have been calculated based on the high-low average price or the month o the transactions.

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vI. Fmvs preFerred dlom determInatIon methodology

When valuing minority interests in privately held entities, appraisers oten use a valuation ramework with three dierent levels value: control; marketable minority (publicly traded equivalent); and non-marketable minority (private equity). However, the dierenbetween the public and private levels o value can be urther rened by another, intermediate, level o value: the restricted stock equiv

lent value. This is helpul because there is no available empirical data which provides a directly observable measure o the dierenbetween the public and private equity levels o value. Through this more detailed ramework, appraisers can accurately measure t

DLOM or minority interests in private companies by rst determining the discount applicable as i the company were a public compaissuing restricted stock through an empirical comparison with actual restricted stock issuers. From there, appraisers can determin

discount increment to account or the greater illiquidity o private company stock versus typical restricted stock in public companies

Levels of Value Framework

Traditional Framework Alternative Framework

Control Control

Marketable Minority Marketable Minority

(Publicly Traded Equivalent) (Publicly Traded Equivalent)

Restricted Stock Equivalent

Non-Marketable Minority Non-Marketable Minority

(Private Equity) (Private Equity)

There are several important dierences between restricted stock in public companies and private company interests. However, tdierence is one o degree and not o kind. That is, interests in private entities and the restricted stock o public entities are both illiqu

securities. Furthermore, in both cases, their illiquidity is a unction o being cut of rom public markets. In the case o restricted sto

this condition is a temporary one, while or private entities it is more long-lasting and in many cases even permanent. It is importantnote that both restricted stock in public companies and interests in private entities may generally be sold at any point in time in priva

transactions. What they each lack is access to public markets.

[k pi] Minority interests in private companies should typically be considered less marketable than restricted stock in public copanies because interests in private companies have no market, whereas public companies have already-established trading markets

their shares, and their restricted shares will eventually become ully tradable in those markets, simply with the passage o time.

FMVs Discount Determination Methodology

Note:The ollowing methodology is the same as that employed by The FMV DLOM Calculator. The FMV DLOM Calculator automa

the data sorting and ormula building that a user would otherwise have to conduct manually. A tutorial or using The FMV DLOCalculator is provided in Section VII.

As described in Section V, an analysis o the FMV Study data suggests that the most important determinants o the DLOM are (1) tissuing rms nancial and market risk; (2) the level o stock market volatility prevailing around the transaction date ; and (3) the degr

o liquidity o the securities. Accordingly, FMVs determination o the appropriate DLOM or minority interests in private companinvolves a three-step analysis:

1. ri s eqi di (rsed).The discount applicable to the shares (or other equity interest) in a priva

company, as i they were typical restricted shares in a public company. The determination o the RSED is based on a compative analysis o the subject company and the FMV Study companies issuing small blocks o restricted stock (less than 30% shaplaced).

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2. m vii aj. The adjustment to the RSED required in the event that equity markets demonstrate unusuahigh volatility around a given valuation date. The adjustment actor is derived rom a comparison o FMV Study transactio

occurring during months with normal trailing 6-month average VIX values versus those occurring during months with vehigh trailing 6-month average VIX values. The result o applying the Market Volatility Adjustment to the RSED is the AdjustRestricted Stock Equivalent Discount, reerred to hereinater as the ARSED.

3. pi eqi di (ped). The discount required or private equity, which reects the act that interests in priva

companies are signicantly less liquid than all but the most illiquid issues (i.e., the largest blocks) o restricted stock in pubcompanies. The adjustment to go rom the ARSED to the PED is based on the adjustment actors derived rom the comparis

o discounts associated with small-block versus large-block transactions in the FMV Study.

The three steps outlined above relate to the alternative levels o value ramework, discussed previously, as shown in the ollowi

diagram.

Level of Value Adjustment Supporting Data / Methodology

Marketable Minority(Publicly Traded Equivalent)

Restricted Stock Equivalent DiscountComparative Analysis with Small-Block

Restricted Stock Transactions

Restricted Stock Equivalent(Normal Volatility Time Frame)

Market Volatility AdjustmentRestricted Stock Transactions During

Unusual Volatility Months vs. Normal Month

Restricted Stock Equivalent(Unusual Volatility Time Frame)

Private Equity AdjustmentLarge-Block vs. Small-Block

Restricted Stock Transactions

Non-Marketable Minority(Private Equity)

[k pi] FMV does not advocate estimating the DLOM based on a direct comparison o the subject company with large-block tranactions, which would necessitate a single step to derive the PED, because there is not a sufcient sample o large-block transactions

allow or a detailed nancial characteristics comparison and account or the various risk actors that impact the DLOM. It is our opinithat the three-step analysis to derive the PED generates more accurate results.

Restricted Stock Equivalent Discount (RSED)

The RSED takes the subject company value rom the public equity equivalent (marketable minority) level o value to the restricted stoequivalent level o value. Since the goal in this rst step is to determine the RSED and not the total discount applicable to a privately he

entity, we base this analysis on a comparison o small-block transactions only, or blocks less than 30% shares placed. For the determintion o the RSED, the nancial characteristics o the subject private company are analyzed in relation to the small-block data in the FM

Study. For private companies, we typically perorm this analysis on the ollowing variables: market value, revenues, total assets, bovalue o equity, MTB ratio, net prot margin, and volatility. Although stock price volatility demonstrates a strong positive correlati

with the DLOM, because it is not a measurable variable or the stock o private companies, FMV typically does not use this variablethe determination o DLOMs or private companies. Stock price volatility, however, should be considered in determining DLOMs restricted stock in publicly traded companies. Additionally, FMV typically does not consider industry classication to be a signica

determinant o the DLOM. Accordingly, when we determine the RSED or a subject entity, we generally use the above nancial richaracteristics rather than industry classication or selecting the companies in the FMV Study that we consider most comparable to t

subject entity.

To perorm a comparative analysis across the selected variables, we sort the FMV Study data into ve equal percentile groups (quintilor each variable, and compute the median discount or each group. We then compare the subject entity with the data or each paraeter to see in which quintile group it belongs. The median discount or the quintile group in which the subject entity alls provides o

indication or the appropriate RSED. The table below provides an example o this analysis with respect to the total assets variable.

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Total Assets Subject

Range ($mm)1

Median Co mp any Indi cated

High Low Discount Value ($mm) Discount

1st Quintile 16,326.3 157.1 11.0%

2nd Quintile 154.5 57.0 11.4%

3rd Quintile 56.2 21.6 15.9%

4th Quintile 21.4 9.3 23.7% 15.0 23.7%

5th Quintile 9.1 0.0 28.9%

1) Adjusted for inflation as of mid-2010.

The weighted average o the discount indications is then computed, where the selection o weights is based on which actors tend to

the most important determinants o the DLOM. In most cases the key variables are considered to be market value, total assets, shaholders equity, and volatility (i available). Revenues, MTB ratio and net prot margin tend to be somewhat weaker indicators. Howev

the weights applied in any particular case may vary based on the specic acts and circumstances surrounding the subject company athe subject interest being valued. A detailed example o this analysis applied to a hypothetical private company is provided in SectiVII.

In addition to the discount indication provided by the above analysis, we perorm an additional analysis which involves identiyicompanies in the FMV Study that are comparable to the subject company across a number o the key variables discussed above Agabecause our initial goal is to determine the RSED, we base this analysis on small-block transactions only. Each transaction in the FM

Study is analyzed to see i the issuing entity is a match with the subject company across the variables considered to be the key nancrisk characteristics that aect the discount. For this purpose, a match on any particular variable is dened as the issuing entity in tFMV Study being in the same quintile group as the subject company or that variable. The median discounts or each o the sub-samp

are computed, which provide additional indications or the appropriate RSED or the subject company. In this analysis, particular attetion should be given to the number o transactions included in each sample. Generally, depending on the sufciency o the number

transactions, greatest weight should be given to the discount indications rom the sub-samples with the greatest number o matchAn example o this analysis is provided below. In the example, we attempt to match the subject company with the FMV Study issu

across all seven variables.

Number of Number of

Quintile Transactions Median

Matches in Sample Discount

7 0 NA

6 3 19.9%

5 10 19.3%

4 24 21.6%

3 97 18.3%

2 222 16.6%

1 423 17.5%

The RSED or the subject company is selected giving consideration to each o the indications rom the two analyses described above

Market Volatility Adjustment

Having determined the RSED, which is based on the risk characteristics o the subject company, the next step is to determine the apppriate Market Volatility Adjustment in the event that a valuation date occurs within a period o abnormally high market volatility.

discussed in Section V and as shown below, transactions occurring in periods o high market volatility tend to exhibit higher discoun

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Median Statistics

Total

VIX Range: % Shares Assets

Percentile Group Low High Placed ($mm)1

VIX Discount

All Transaction Dates

0 - 60th 11.2 - 22.6 10.9% 38.9 14.6 14.8%

60 - 100th 22.6 - 32.9 7.3% 34.1 24.3 18.5%

1-Year Holding Period2

0 - 60th 11.2 - 23.2 9.4% 52.1 17.6 12.7%

60 - 100th 23.2 - 32.9 8.3% 18.9 26.0 22.1%


2) February 20, 1997 - November 14, 2007.

Note - This analysis excludes all blocks > 30% shares placed.

We note that there are dierences in company nancial characteristics between the low- and high-VIX groups, such as company s(measured by total assets, or example) that may account or a portion o the observed dierence in discounts. Accordingly, in determing the appropriate Market Volatility Adjustment, we rst determine what the RSED would be or each high-VIX transaction. Because t

RSED analysis is based on all small-block transactions occurring in low, normal and high VIX time periods, the resulting RSED generaprovides an indication or the discount appropriate in normal VIX time periods. We then compare the actual discount or each high-Vtransaction with the indicated RSED, and we calculate a multiplicative adjustment actor related to that transaction. For example, i t

RSED is indicated at 15%, and the actual transaction discount is 18%, the multiplicative adjustment actor would be 1.20 [18% / 15%We perorm this calculation or all high-VIX transactions, which produces the ollowing output:

Median

Multiplicative

VIX VIX Range Adjustment

Percentile Group Low High Factor1

60 - 80th 23.2 26.0 1.16

80 - 100th 26.0 32.9 1.23

(1) Multiplicative difference bewteen the RSED for each

transaction and the actual discount for such transaction.

As shown by the positive median multiplicative adjustment actors, the RSED tends to underestimate the actual transaction discoun

or high-VIX transactions. Accordingly, we determine that when the VIX is between 23.2 and 26.0, a 1.16x multiplicative actor is incated to apply to the RSED to determine the ARSED, and when the VIX is above 26.0, a 1.23x multiplicative actor is indicated to app

to the RSED to determine the ARSED.

The VIX statistic utilized or this analysis is the trailing 6-month average VIX or the transaction month, and so it ollows that the traili

6-month average VIX or a given valuation date should be given primary consideration in determining which adjustment actor, i ais appropriate. However, it is our opinion that investors would give consideration to more near-term trends in the VIX as well, and

consideration may be given to either rising or alling VIX values closer to the valuation date. For example, in the event the VIX vaon a given valuation date is signicantly above historical levels, such as during all 2008, valuation date VIX values may better captu

investor sentiment than trailing 6-month averages. In act, during such a time period, it may be appropriate to apply adjustment actin excess o those indicated by the top quintile. For example, due to the collapse o credit markets stemming rom the mortgage criand compounded by rapidly declining economic conditions in the U.S. and abroad, on October 24, 2008 the VIX reached a record lev

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o nearly 90, reecting unprecedented expectations o uture volatility. Given that the highest VIX value observed in the FMV Studyonly 32.9, the indicated adjustment actors would not appropriately take into consideration this unique period in history.

Appraisers should also consider the possibility that a downward adjustment to the RSED may be appropriate during times o historicalow stock market volatility. Our analysis o the FMV Study transactions, which have 6-month trailing average VIX values as low as 11

suggests that no downward adjustment is necessary when the VIX is between 11.2 and 23.2. However, i in the uture the VIX alls belothe levels represented in the FMV Study, a downward adjustment may be appropriate.

Private Equity Discount (PED)

The ARSED (calculated by applying the Market Volatility Adjustment to the RSED) represents the discount appropriate or a pubcompany issuing restricted stock that will ultimately have access to a public trading market. Interests in privately held entities a

generally subject to signicantly greater illiquidity, and thereore an additional analysis must be perormed to calculate the appropriaPED. However, we note that in certain cases a particular subject interest may be considered to possess similar or even improved liquid

over typical restricted securities in public companies. Under these more rare circumstances, a downward adjustment to the RSED mbe warranted.

The adjustment actor that takes the subject company value rom the restricted stock equivalent level o value to the private equ(non-marketable minority) level o value is based on an analysis o the largest (most illiquid) blocks o stock in the FMV Study, as d

cussed in Section V. This analysis involves comparing the discount indications or large-block transactions (i.e., those that most resemb

private equity) with those or small-block transactions (those used in determining the RSED).

[k pi] Unlike diering percentage minority interests in public companies, which have diering degrees o liquidity due to the acto

discussed above, diering percentage minority interests in private entities generally have similar degrees o liquidity. Furthermore, tdegree o liquidity o typical minority interests in private companies is most similar to the degree o liquidity o large blocks o restrictstock in public companies. Thereore, a large-block comparison is appropriate or minority interest private equity valuations o a

percentage interest because o the more similar degree o illiquidity.

Median Statistics

Total

% Shares Assets Issuer

Placed ($mm)1

Volatility Discount

0 - 10% $35.3 75.6% 16.2%

10 - 20% 43.2 68.5% 16.6%

20 - 30% 34.1 76.2% 17.6%

30 - 40% 23.8 79.8% 33.2%

> 40% 14.8 80.8% 38.5%


As shown above, the discounts associated with block sizes greater than 30% are substantially greater than those associated with blo

sizes less than 30%. We note that there are dierences in company nancial characteristics between the small- and large-block grousuch as company size (measured by total assets, or example) that may account or a portion o the observed dierence in discounAccordingly, in determining the appropriate PED adjustment actor, we rst determine what the RSED would be or each large-blo

transaction (recall that the RSED analysis is based only on a comparison between the subject company and issuers o small-blocksrestricted stock). We then compare the actual discount or each large-block transaction with the indicated RSED, and we calculat

multiplicative adjustment actor related to that transaction. For example, i the RSED is indicated at 15%, and the actual transactidiscount is 30%, the multiplicative adjustment actor would be 2.0 [30% / 15%]. We perorm this calculation or all large-block trans

tions, which produces the ollowing output:

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data. For most valuations, absent strong arguments to the contrary, the PED or the subject interest is likely to be drawn rom the middo this range. An example o this analysis is provided by the ollowing:

AR SE D 25.0%

Median Adjustment Factors

% Shares Inverse

Placed Multiplic ative Multiplica tive

30 - 40% 1.53 0.86

40 - 50% 1.83 0.78

PED Range Low High

Multiplicative 38.3% 45.8%

Inverse Multiplicative* 35.5% 41.5%

Selected PE D 40.0%

* Calculated as [1 - (1 - ARSED) x Inverse Multiplicative Factor]

Additional Considerations

In analyzing how a subject interest stacks up against the FMV Study transactions, consideration should be given to the ollowing.

1. Risk Comparison - While the average private rm tends to be riskier than the average public rm, the FMV Study issuers atend to be more risky than the average public rm. Careully analyze where the subject private rm ts within the data

across the relevant parameters. For larger private companies, the analysis may indicate that the subject company is less risthan the average rm in the FMV Study, which may indicate a lower DLOM.

2. Dividend Yield - Liquidity represents the ease o turning an asset into cash. For publicly traded stock, this typically occ

through the sale o the securities or cash. However, a portion o a stock value may be related to its dividend-paying capac

I a private rm pays signicant and consistent dividends, this may reduce the lack o marketability discount, as much o tvalue o the stock is received in cash by shareholders on a regular basis. In other words, the presence o dividends shortens t

duration o the security. In cases o high dividend yields, the DLOM should be lower than the indications rom the most illiqurestricted stock in the FMV Study, since such blocks are generally non dividend-paying. Due to the limited number o trans

tions in the FMV Study involving dividend-paying rms, this will involve a subjective adjustment determined by the valuato

3. Saleability Appraisers must consider the relative ease o nding a buyer or a given interest when determining an approprate DLOM. Certain actors may result in an interest being relatively more or less attractive, including but not limited to theollowing:

a. Ego Satisaction - The marketability o certain assets may be signicantly improved by the sex appeal o owning suc

assets. Minority interests in proessional sports ranchises or movie studios, or example, have historically not ollowedtrends demonstrated by broader private equities markets. Due to the wide appeal o owning such assets, there seems t

generally exist greater demand or such assets relative to typical interests in private rms.

b. Dollar Value o Interest - All else equal, a small dollar-value position in a private rm may be signicantly more difcul

to dispose o than a larger dollar-value position due to the high cost o due diligence. Purchasers o such interests maythereore demand greater discounts to compensate or this high percentage cost.

c. Right o First Reusal The presence o a Right o First Reusal on behal o a private company or its shareholders is

typically thought to have a negative impact on a minority shareholders ability to market interests in the company, aspotential purchasers may be hesitant, and possibly unwilling, to incur time and cost in evaluating interests with littlecertainty o ultimately being able to acquire such interests.

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4. Anticipation o a Liquidity Event - I a private company anticipates a liquidity event in the oreseeable uture, through whichshareholders will receive cash or liquid securities equal to a value in excess o the non-marketable minority value, such as in

a typical change-o-control transaction, the DLOM appropriate or such interest may be lower than that indicated rom thetransactions in the FMV Study. Key considerations in determining the likelihood o a near-term liquidity event may includethe ollowing:

a. Depth/Age o Key Management - While the strength and remaining tenure o a private companys management team

may reduce the risk o a minority investment in the rm, it may also inversely impact the DLOM. A weak managementteam, or the lack o an adequate succession plan, may increase the probability o the controlling shareholder(s) seeking

sale or merger, which may provide an opportunity or liquidity or minority shareholders.

b. M&A Cycle/Demand in Industry - I there exists a signicant probability that the subject private company will experi-

ence a liquidity event in the oreseeable uture due to active IPO and/or M&A markets, a downward adjustment to theindicated DLOM may be warranted.

5. Economic Cycle - Comparing a subject interest to the FMV Study transactions, which have been compiled over a 28-year perio

results in an indication o the DLOM applicable in a relatively normal economic cycle. Generally, weak economic climates aaccompanied by poorer perormance o companies, less access to capital and weaker demand or equity investments, includiminority interests in private rms. Alternatively, when economies are booming and high levels o capital are seeking investme

at high valuations, the marketability o equity interests, including minority interests in private rms, is improved.

6. Prior Transactions - Prior transactions in the stock o a subject company may not only provide indications o value or the subjeinterest, but also may provide clues as to the existence o a market or a particular interest. In certain private rms, or examp

there may be many, i not hundreds or even thousands o shareholders, some o which may at any point in time be interestedincreasing their ownership position. I there has been a history o trading activity in the stock o a private company, the liquido the subject interest should be considered greater than the most illiquid restricted stock in the FMV Study and, in some cas

may even be greater than small blocks o stock in the FMV Study.

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vII. usIng the Fmv dlom calculator

In this section, we provide instructions or using The FMV DLOM Calculator (Calculator) to derive DLOMs or minority interests private companies. Then, we provide a case study demonstrating how the Calculator may be used to determine a discount or a hypthetical private company interest.

General Instructions

The user is asked to input the ollowing:

Company Name: For presentation purposes only, as the Calculator allows users to print a set o illustrativschedules.

Valuation Date: Used to calculate ination adjustments to the restricted stock issuers nancial characte

istics, as well as to determine the applicable VIX values.

Ination Adjustment: Allows users to select whether or not the restricted stock issuers nancial characteristiare adjusted to the same CPI basis as the subject companys characteristics. FMV recommends always selecting Yes, which provides or more appropriate comparisons betwee

the subject company and the restricted stock issuers.

Company Financials: Enter all gures in thousands o U.S. dollars (i.e., exclude three zeros), except or VolatilitI any o the characteristics are not available or a subject company, or i the user believe

any o the characteristics are not meaningul or a subject company, one or more o theselds may be let blank.

Volatility: For public companies, use trailing 12-month daily volatility, expressed as a percent. Fprivate companies, users may either estimate volatility based on the stock price volat

ity o a set o guideline public companies, or leave this eld blank. FMV typically donot utilize subject company volatility as a parameter in determining the DLOM or priva

companies, due to the difculty in estimating volatility or private companies.

Restricted Stock Equivalent Discount Analysis

This analysis, as described in Section VI, utilizes all transactions involving less than 30% shares placed. For the Financial Characterist

Comparison analysis, weights are recommended by FMV based on the observed strength o the relationship between each variaband the DLOM. I volatility is known, or i it may be r

dlom

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