SUMMARY OF RESEARCH AND OPINIONS OF KRISTIN L.

HUNG

IN THE MATTER OF

ALUMINUM RECOVERY CORPORATION v. MANUFACTURING ALUMINUM, INC.

PREPARED BY: GROUP 1 KRISTIN HUNG LAUREN SEIFERT, CARLY MOORE, MEGAN DAVIS, ANDREW DAVIS, VIJAY NETAJI

Table of Contents
I. II. III. IV. V. Identifications and Qualifications Issues and Preparation Analysis Overview Out of Pocket Approach Benefit-of-the-Bargain Model A. B. C. D. E. F. VI. VI. Revenue Projections Component Decreased Value of the Investment Scenario I Scenario II Scenario III Lost Profits if Facility is Put to Use 4 5 5 6 6 7 7 9 11 12 3 4 3

DECEMBER 2003

Summary of Opinions Resume of Kristin L Hung

SUMMARY OF REASEARCH AND OPINIONS OF KRISTIN HUNG

IN THE MATTER OF ALUMINUM RECOVERY CORPORATION v. MANUFACTURING ALUMINUM, INC. I. Identification and Qualifications My name is Kristin L. Hung. I am a Senior Accountant at McAfee, Inc, a global software company specializing in security for consumers, small, and large businesses. I am responsible for all contra revenue activities and work on a daily basis with the Sales, Marketing, and the Legal teams to ensure that the revenue generated from our marketing is accurately accounted for at a profitable basis. My education background includes a Bachelor of Business Administration in Financial Consulting from Southern Methodist University in Dallas, TX. I am also currently pursuing my Masters in Business Administration with concentrations in Accounting and Strategy & Entrepreneurship at SMU. In the professional arena, I possess experience in many different industries ranging from financial banking, commercial real estate, aviation manufacturing, and the medical industry. A brief resume is attached. II. Issues and Preparation Aluminum Recovery Corporation, hereafter referred to as ARC, and Manufacturing Aluminum, Inc., hereafter referred to as MAI, entered into a 5-year contract, whereby ARC was to take the waste product generated in the course of MAIs manufacturing process and recover the aluminum that is contained in the waste. The processing was to begin on January 1, 2004; however, after ARC had built the facility for the processing, MAI decided to close its facility and cancel the contract with ARC.

The analysis required for this assignment involves calculating the damages that we believe ARC suffered as a direct result of MAIs breach of contract. The two techniques used in assessing the damages, the out of pocket approach and the benefit of the bargain model, are widely accepted and have been used in damages analysis for a number of years. III. Analysis Overview The analysis performed by our group seeks to measure ARCS losses resulting from the termination of the contract by MAI. The analysis progresses as follows: (1) Determining, with certainty, that such damages have been caused directly by the breach of contract by MAI and, (2) Determining the magnitude of MAIs breach on the economic performance of ARC. As it is clear that ARC suffered damages as a direct result of MAIs breach of contract, our analysis then proceeded to determine the exact amount of damages suffered. We did this through two different damage theories, the Out of Pocket Approach and the Benefit-of-the-Bargain Model. IV. Out-of-Pocket Approach The out-of-pocket loss approach refers to the difference between the actual value received and the actual value conveyed. In this situation, ARC received nothing as a result of their contract with MAI. However, they did convey the costs of building the new facility, which was made specifically to fulfill their contractual obligations with MAI. The facility construction costs are outlined below: Table 1. Facility Construction Costs

Engineering & Design: Equipment: Construction: Employee Relocation/ Other: Total:

$250,000 1,200,000 1,800,000 50,000 $3,300,000

Thus, the total amount of ARCs investment is $3,300,000. However, in order to be conservative in estimating the damages incurred, our final damage calculation using the out-of-pocket approach excludes the estimated salvage value of the facility. As an appraiser has estimated that the building and equipment could be sold for $1,200,000 and $800,000, respectively, our final total damage calculation using the out-of-pocket approach is $1,300,000 ($3,300,000 investment less combined salvage value of $2,000,000).

V. Benefit-of-the-Bargain Model The alternate model that we used to calculate damages is known as the benefitof-the-bargain model. In the benefit-of-the-bargain model, the damages calculated include not only the money invested but also other expenses such as future lost profits and decreased value of the investment. In other words, with this model, the damages are based on ARCs reasonably expected performance if ARC had received the full benefit of the bargain as represented by the contract with MAI. This expected future performance is measured as future revenues less future costs, which we will assess under three different cost scenarios. A. Revenue Projections Component As a basis for our analysis and calculations, we prepared the following schedule of ARCs projected future revenues generated from the contract with MAI. The revenues are projected for the life of the 5-year period originally employed by the contract, beginning in 2004 and concluding at the end of 2008. Table 2. Future Revenue Projections
Tons of Aluminum Available for Sale 15,000 19,250

Year 2004 2005

Tons Received 50,000 55,000

% Recovery of Aluminum 30% 35%

Sales Price of Aluminum $300 $306

Projected Revenue $4,500,000 $5,890,500

2006 2007 2008

60,000 65,000 70,000

35% 35% 35%

21,000 22,750 24,500

$312 $318 $325

$6,554,520 $7,242,745 $7,955,876

The preceding revenue projections were calculated using the following assumptions:

(1) The volume of waste sent to ARC by MAI is estimated to be 50,000 tons in
2004 and is considered to increase by 5,000 each following year. (2) Recovery of aluminum from the waste is considered to be 30% for the first year and 35% in the consecutive years. (3) ARC and MAI agreed to the price for aluminum of $ 300 per ton. The escalation clause includes a price increase of 2% each year. These numbers will be the basis for which we calculate estimated future lost profits in the following three scenarios. B. Decreased Value of the Investment One aspect often included in the assessment of damages under the benefit-of the-bargain model is the decreased value of the investment. In the case of ARC, the investment is the cost of the facility of $3,300,000 and its value is constantly decreased by depreciation. The depreciation expense on the facility each year and over the life of the contract is outlined by the following calculation: Depreciation per year = Cost Salvage Value Estimated Useful Life = ($3,300,000 - $2,000,000) 30-year life = $43,333 per year x 5 years of contract = $216,666 As this depreciation expense would not have been incurred had the facility not been built, our damage calculations under each of the following three scenarios will also include the decreased value of the investment. In this case, that value is the $216,666 depreciation expense taken over the life of the 5-year contract.

C. Scenario I Under the first costing scenario, we analyze future estimated lost profits based on the 35% profit margins that other ARC facilities generate. The following table describes this estimate: Table 3. Lost Profits Based on 35% Profit Margin (of other ARC facilities)
Projected Revenue (from Table 2) $4,500,000 $5,890,500 $6,554,520 $7,242,745 $7,955,876 Projected Lost Profits under Scenario I $1,575,000 $2,061,675 $2,294,082 $2,534,961 $2,784,557 Present Value Factor (r=14%) 1 0.877 0.769 0.675 0.592 WACC Adjusted Lost Profits $1,575,000 $1,808,089 $1,764,149 $1,711,098 $1,648,458 $8,506,794 Total Lost Profits

Year 2004 2005 2006 2007 2008

Profit Margin 35% 35% 35% 35% 35%

Thus, using a profit margin of 35%, we estimate that the damages suffered by ARC are the lost future profits of $8,506,794 that would have been generated had MAI not broken the contract. These profits have been discounted to their present value using a WACC of 14%. As discussed previously, damages under the benefit-ofthe-bargain model also include the money invested and the decrease value of the investment. Therefore, total assessed damages under Scenario I is $10,023,460 ($8,506,794 lost future profits + $1,300,000 money invested + $216,666 decreased value of the investment, i.e. depreciation of the facility as discussed in Part A of this report). D. Scenario II Under the second costing scenario, we analyze future estimated profits based on the standard industry profit margin of 40%. The following table describes this estimate: Table 4. Lost Profits Based on 40% Profit Margin (standard industry margin)

Year 2004 2005 2006 2007 2008

Projected Revenue (from Table 2) $4,500,000 $5,890,500 $6,554,520 $7,242,745 $7,955,876

Profit Margin 40% 40% 40% 40% 40%

Projected Lost Profits under Scenario II $1,800,000 $2,356,200 $2,621,808 $2,897,098 $3,182,351

Present Value Factor (r=14%) 1 0.877 0.769 0.675 0.592

WACC Adjusted Lost Profits $1,800,000 $2,066,387 $2,016,170 $1,955,541 $1,883,952 $9,722,050 Total Lost Profits

Thus, using a profit margin of 40%, we estimate that the damages suffered by ARC are the lost future profits of $9,722,050 that would have been generated had MAI not broken the contract. These profits have been discounted to their present value using a WACC of 14%. As discussed previously, damages under the benefit-ofthe-bargain model also include the money invested and the decrease value of the investment. Therefore, total assessed damages under Scenario II are $11,238,716 ($9,722,050 lost future profits + $1,300,000 money invested + $216,666 decreased value of the investment, i.e. depreciation of the facility as discussed in Part A of this report). E. Scenario III Finally, under the third costing scenario, we analyze future estimated profits based on the following explicit cost data for the processing of aluminum:

Table 5. Explicit Cost Data for Processing Aluminum Year 1 Standard Processing Costs (labor, material, OH) Storage & Packing Costs Trucking Costs Total Costs $160/ton $9/ton $20/ton $189/ton

Thus, for the first year, under the explicit cost data scenario the projected future

lost profits are calculated as revenues less the explicit costs of $189 per ton of aluminum sold. These costs, in conjunction with the increased selling prices, will also rise at 2% per year. Thus, total cost per ton for 2005, 2006, 2007 and 2008 are $192.78, 196.64, 200.57 and 204.58, respectively. These projected lost future profits are shown in the table below: Table 6. Lost Profits Based on Explicit Cost Data
Tons Available for Sale (from Table 2) 15,000 19,250 21,000 22,750 24,500 Explicit Costs Associated with Revenues ($cost/ton x # of tons) $2,835,000 $3,711,015 $4,129,440 $4,562,968 $5,012,210

Year 2004 2005 2006 2007 2008

Projected Revenue $4,500,000 $5,890,500 $6,554,520 $7,242,745 $7,955,876

Projected Lost Profits under Scenario III $1,665,000 $2,179,485 $2,425,080 $2,679,777 $2,943,666

Present Value Factor (r=14%) 1 0.877 0.769 0.675 0.592

WACC Adjusted Lost Profits $1,665,000 $1,911,408 $1,864,887 $1,808,850 $1,742,650 Total Lost Profits

$8,992,795

Thus, using the explicit cost data, we estimate that the damages suffered by ARC are the lost future profits of $8,992,795 that would have been generated had MAI not broken the contract. These profits have been discounted to their present value using a WACC of 14%. As discussed previously, damages under the benefit-of-thebargain model also include the money invested and the decrease value of the investment. Therefore, total assessed damages under Scenario III are $10,509,461 ($8,992,795 lost future profits + $1,300,000 money invested + $216,666 decreased value of the investment, i.e. depreciation of the facility as discussed in Part A of this report). We believe that the damages suffered by ARC are most accurately determined using cost scenario III. Rather than calculating lost profits based on other company facilities or the industry as a whole, the third scenario uses specific cost information based on the contract between ARC and MAI. Because we know both the cost per ton and the expected volume of waste in tons each year, the costs that ARC would

have incurred can be reasonably computed. By subtracting these costs from ARCs lost revenue, also calculated on a per ton basis, we can produce a reliable estimation of lost profits to ARC. F. Lost Profits if Facility is put to Use During his deposition, ARCs CFO states that ARC believes it can secure other contracts to process aluminum waste at the facility and/or shift production from another one of its facilities. ARC expects that it can utilize the facility at 30% of the anticipated MAI volume by the year 2006, 50% by the year 2007 and 75% by the year 2008. Under this possibility, we have generated new damage estimates under each of the three former cost scenarios where the estimated recovery percentages are applied to the estimated future lost profits. Each of the three scenarios is shown in the following tables: Table 7. Lost Profits under Scenario I had the Facility been Utilized
Projected Loss Profits if Facility is Utilized (Lost Profits Recovered Lost Profits) $1,575,000 $2,061,675 $1,605,857 $1,267,480 $696,139

Year 2004 2005 2006 2007 2008

Projected Lost Profits under Scenario I (Facility not Utilized) $1,575,000 $2,061,675 $2,294,082 $2,534,961 $2,784,557

% of Profits Recovered if Facility is Utilized 0% 0% 30% 50% 75%

Lost Profits Recovered by Utilization $0 $0 $688,225 $1,267,480 $2,088,418

Present Value Factor (r=14%) 1 0.877 0.769 0.675 0.592

WACC Adjusted Lost Profits $1,575,000 $1,808,089 $1,234,904 $855,549 $412,114 $5,885,657 Total Lost Profits

Table 8. Lost Profits under Scenario II had the Facility been Utilized

10

Table 9. Lost Profits under Scenario III had the Facility been Utilized

Year

Projected Lost Profits under Scenario II (Facility not Utilized) $1,800,000 $2,356,200 $2,621,808 $2,897,098 $3,182,351

% of Profits Recovered if Facility is Utilized 0% 0% 30% 50% 75%

Lost Profits Recovered by Utilization

2004 2005 2006 2007 2008

$0 $0 $786,542 $1,448,549 $2,386,763

Projected Loss Profits if Facility is Utilized (Lost Profits Recovered Lost Profits) $1,800,000 $2,356,200 $1,835,266 $1,448,549 $795,588

Present Value Factor (r=14%)

WACC Adjusted Lost Profits

1 0.877 0.769 0.675 0.592

$1,800,000 $2,066,387 $1,411,319 $977,771 $470,988 $6,726,465

Total Lost Profits

Thus, after adding both the $1,300,000 money invested and $216,666 decreased value of the investment, i.e. depreciation of the facility as discussed in Part A of this report, to the total lost profits demonstrated by the preceding three tables, the total damage estimates for Scenario I, II, and III had the facility been utilized are $7,402,323, $8,243,131, and $7,738,582 respectively.

VI. Summary of Opinions Based on the analysis and other factors discussed in this report, I have developed the following opinions: 1. MAI breached their contract with ARC, which resulted in direct damages suffered by ARC. 2. Our final total damage calculation using the out-of-pocket approach is $1,300,000. 3. Total assessed damages under Scenario I, using a 35% profit margin, is $10,023,460 ($8,506,794 lost future profits + $1,300,000 money invested + $216,666 decreased value of the investment, i.e. depreciation of the facility as

11

discussed in Part A of this report). 4. Total assessed damages under Scenario II, using a 40% profit margin, are $11,238,716 ($9,722,050 lost future profits + $1,300,000 money invested + $216,666 decreased value of the investment, i.e. depreciation of the facility as discussed in Part A of this report). 5. Total assessed damages under Scenario III are $10,509,461 ($8,992,795 lost future profits + $1,300,000 money invested + $216,666 decreased value of the investment, i.e. depreciation of the facility as discussed in Part A of this report).

6. We believe that the damages suffered by ARC are most accurately determined
using cost Scenario III, the $10,509,461 assessment. 7. Had the facility been put to use as discussed by ARCs CFO, the revised damages under Scenario I, Scenario II, and Scenario III are $7,402,323, $8,243,131, and $7,738,582, respectively. The opinions provided above reflect my work to date on this matter involving Aluminum Recovery Corporation and Manufacturing Aluminum, Inc.

Respectfully submitted, _________________________________ Kristin Hung Member, Group 1

Kristin Hung
13500 Noel Road, Apt #419 Dallas, TX 75240 KristinHung@Gmail.com

Educatio n

Master of Business Administration

12

Concentration in Accounting, Strategy & Entrepreneurship Southern Methodist University, Dallas, TX

December 2010 Bachelor of Business Administration Concentration in Financial Consulting, 15 hours Accounting Southern Methodist University, Dallas, TX December 2006 Experien ce Senior Accountant McAfee, Inc., Plano, TX

August 2009 Present Perform account reconciliations, post journal entries, analyze g/l accounts in SAP Work with auditors to conduct financial audit and control reviews Learn complex business and accounting issues that impact revenue recognition and market program eligibility with Marketing, Sales, and Legal teams Responsibilities increased to manager level during Q22010 hiring freeze
Commercial Analyst Jones Lang LaSalle, Dallas, TX

February 2007 July 2009 Provided strategic lease consulting to client executives for portfolios totaling over 3 million square feet Account manager for multiple transition and integration projects. Oversaw the interpretation, abstraction, and implementation of new lease systems for 4 new client lease portfolios totaling over 200 leases. Daily interaction in a client based environment; communicated financial concepts to non-financial people. Reconciled annual operating expenses and tax assessments to ensure compliance and accuracy resulted in savings of over $300,000

Profile

Licensed TX Real Estate Broker Proficient in Mandarin Chinese Certified in Microsoft Office: Word, Excel, Access, & PowerPoint

13