1. “Analysis of Intelligent Reasoning Systems, Inc.”
By John Frederick
FI 512: Keller Graduate School of Management
August 22, 2006
Part I: Investment Merits and Risks:
Merits:
• Shows EMS Market for OI increasing each year from 2001 and beyond
• Growth in market share and all other related markets like semiconductor and
historical performance.
• Interesting technology ideas
• Strong research and development ideas
• Fast growing company
Risks:
• Company presented net losses for 1998, 1999, and 2000 on the income statement
Part II: Recommendation:
I would recommend an investment into the company, before the competition buys the
company in a merger or acquisition. I would not make huge investments into the
company because of the low profits. This company has a good technology idea that may
change the way technology is done. This is an investment in an idea, a tool, and a device.
This is not an investment in money or capital. This investment is not a rapid, fast
growing investment like commodities.
Part III: Investment Amount:
As a result of valuation and research, I have chosen to investment a minimal of
$1,000,000 only, with a return of $9,089,900 after six years.
Part IV: Company Value:
The company is valued at $8,100,000 from research.
Part V: Capital Structure:
I would buy common stocks and warrants.

2. Income Statement

3. CAGR 53% 55% 43% 36%
2001 2002 2003 2004 2005
Rev. 520 590 670 759 998
COGS 506.8 542.7 542.9 469.4 545.9
Gross Profit 13.2 68.2 19.1 137.8 212.4
EBITDA 2.2 20.9 63.9 151.8 239.7
Operating Income 3,411 5,287 7,560 10,281 13,982
Int. Exp -206 -319 -456 -620 -843
Pre-Tax 3,617 4,968 7,104 9,661 13,139
Net Income 3,617 4,968 7,104 9,661 13,139
Balance Sheet
CAGR 53% 55% 43% 36%
2001 2002 2003 2004 2005
Assets
Cash & Cash Equ 10,986 16,808 26,052 37,254 50,665
A/R 6,397 9,787 15,169 21,691 29,499
Inventory 10,480 16,034 24,852 35,538 48,331
Other C.A. 97 148 229 327 444
Total C.A. 27,959 42,777 66,304 94,810 128,941
Net PP&E 3,014 4,611 7,147 10,220 13,899
Other Assets 512 783 1,213 1,734 2,358
Total Assets 31,485 32,671 50,640 72,415 98,484
Liab & Equity
Bank Revolver 0 0 0 0 0
A/P 4,091 6,259 9,701 13,872 18,865
Bank facility
Other C.L. 5,400 8,262 4,544 6,497 8,835
Total C.L. 9,491 14,521 22,507 32,185 43,771
Notes Payable
Other L-T Liab
Sub Convert N/P
Existing Sr Debt 640 979 1,517 2,169 2,949
Total Liab 10,131 15,500 24,024 34,354 46,721
Existing Pf stock 24,794 37,934 58,797 84,079 114,347
Common Equity -3,440 -5,263 -8,157 -11,664 -15,863
Total Liab & Eq 31,485 32,671 50,640 72,415 98,484

4. Cash Flow
CAGR 53% 55% 43% 36%
2001 2002 2003 2004 2005
CFO
Net Income 3,617 4,968 7,104 9,661 13,139
Adj to Net Income
Dep Exp 1,116 1,707 2,441 3,319 4,513
Prepaid
Accr Liab
Inventory -10,480 -16,034 -24,852 -35,538 -48,331
A/P -4,091 -6,259 -9,701 -13,872 -18,865
A/R 6,397 9,787 15,169 21,691 29,499
Total -7,058 -10,799 -16,943 -24,400 -33,184
Net CFO -3,441 -5,831 -19,384 -14,789 -22,045
CFI 0 0 0 0 0
CFF 0 0 0 0 0
Change in Cash -3,441 -5,831 -19,384 -14,789 -22,045
Unlevered Free Cash Flow
2001 2002 2003 2004 2005 Totals
Unlev Net Income 3,617 4,968 7,104 9,661 13,139
Dep 1,116 1,707 2,441 3,319 4,513
Delta in Work
Cap. -7,058 10,798 16,736 23,932 32,547
CapX 0 0 0 0 0
Total -2,325 17,473 26,281 36,912 50,199 128,540
FCF -2,325 17,473 26,281 36,912 50,199
1-WACC 30% 0.7 0.7 0.7 0.7 0.7
Totals -3,321 24,961 37,544 52,731 71,712 183,627
Perpetuity Growth Rate
128,540 0.7 183,627 Terminal Value
EBITDA Exit Multiple
2001 2002 2003 2004 2005 Totals
Year 5 EBIT 2.2 20.9 63.9 151.8 239.7 478.5
Plus Dep 1,116 1,707 2,441 3,319 4,513 13,096
Terminal EBITDA 3.3 22.6 66.3 155.1 244.2 491.5
EBITDA Multiple 5.0x
Terminal Value 183,627
Implied Perpetuity Growth Rate 37%

5. Enterprise Value WACC = 30% (CF/r)
Enterprise Value 183,627 Unleveed Cash Flow
Excess Cash 0
Debt 46,721 2005 Total Liab, from Balance Sheet
Equity Value 136,906 Enterprise Value
CF 136,906 Enterprise Value
r 30% WACC
456,353 Enterprise Value
Pro forma cash -- adjust
Enterprise Value 456,353
Excess Cash -22,045 from Cash Flow
Debt 10,131 2001 Total Liab, from Balance Sheet
Equity Value 444,439 Pre-Money Equity Value
Invested Money (Post-Money Value)
Date
Investor Hurdle Rate 37%
Cash Investment 1/1/2006 -1,000,000
Return of Capital 12/31/2010 8,100,000 (from research)
IRR 37%
Multiple of Invested Capital 8.0x
12/31/10 Projected Value 64,800,000
12/31/10 Investor Return 1,350,000
Implied Ownership 12%
Pre-Money Value 444,439
Post-Money Value 1,444,439
Investment 1,000,000
Ownership 12% (required % ownership)
Discounted Cash Flow -- 5 years
Cash
Flow 12% PV
1,000,000 1.12 1,120,000
1,000,000 1.254 1,254,000
1,000,000 1.405 1,405,000
1,000,000 1.574 1,574,000
1,000,000 1.762 1,762,000
1,000,000 1.974 1,974,000
9,089,000
What type of securities will you purchase? Common stock