Three Islands Investments

Appendix A Formulas

BALANCE SHEET RATIOS

1. Current Ratio

        = CA /CL

Rule of Thumb > 2 and < 5 is good

is a measure of liquidity

2. Acid Test Ratio

        = (CA - I ) /CL

Rule of Thumb > 1 is good

is a strict measure of liquidity

3. Net Tangible Assets per $1000 Debt

        = (TA - ITCAO - DC - IA - CL + STD) / (STD + LTD) X 1000

Rule of Thumb for Industrial > 2000 is good

Rule of Thumb for Utility > 1500 is good

is a measure of debtholders' protection

4. Equity per Preferred Share (in $)

        = (PSC + CSC + CS + RE + FEA) / #PS

Rule of Thumb > 2 times liquidation value in each of last five fiscal years is good

is a measure of preferred shareholders' protection

5. Equity per Common Share (in $)

        = (CSC + +CS + RE + FEA) / #CS

No meaningful Rule of Thumb

is a measure of common shareholders' protection

6. % of Capital Structure Attributable to Debtholders

        = (STD + LTD) / (STD + LTD + PSC + CSC + CS + RE + FEA)

Rule of Thumb for Industrial < 1/3 is good

Rule of Thumb for Utility < 3/5 is good

is a measure of leverage

6.a) % of Capital Structure Attributable to Debtholders*

        = (STD + LTD) / (STD + LTD + PSC + CSC + CS + RE + FEA + DITB + MI)

Rule of Thumb for Industrial < 1/3 is good

Rule of Thumb for Utility < 3/5 is good

is a measure of leverage

7. Debt to Equity Ratio

        = (STD + LTD) / (PSC + CSC + CS + RE + FEA)

Rule of Thumb for Industrial < 0.5 is good

Rule of Thumb for Utility < 1.5 is good

is a measure of leverage

Appendix A Formulas (cont'd)

EARNINGS AND RETAINED EARNINGS STATEMENT RATIOS

1. Interest Coverage

        = (NEBEI - EI + MIIEOSC + AIT + TIC) / TIC

Rule of Thumb for Industrial > 3 in each of last five fiscal years is good

Rule of Thumb for Utility > 2 in each of last five fiscal years is good

is a measure of debtholders' margin of safety

1. a) Interest Coverage including Capitalized Interest

        = (NEBEI - EI + MIIEOSC + AIT + TIC) / (TIC + CIC)

Rule of Thumb for Industrial > 3 in each of last five fiscal years is good

Rule of Thumb for Utility > 2 in each of last five fiscal years is good

is a measure of debtholders' margin of safety

2. Preferred Dividend Coverage

        = (NEBEI - EI + MIIEOSC + AIT + TIC) / (TIC + PDP*)

        , where PDP* = PDP / (1 - TAXRATE)
        , where TAXRATE = AIT / (NEBEI - EI + MIIEOSC + AIT)

Rule of Thumb for Industrial > 3 in each of last five fiscal years is good

Rule of Thumb for Utility > 2 in each of last five fiscal years is good

is a measure of debtholders' margin of safety

3. Preferred and Common Dividends Payout %

        = (CDP + PDP) / NEBEI

No meaningful Rule of Thumb

is a measure of portion of earnings paid out in all dividends

4. Common Dividends Payout %

        = CDP / (NEBEI - PDP)

No meaningful Rule of Thumb

is a measure of portion of earnings paid out in common dividends

5. Gross Profit Margin

        = (NS - COGS) / NS

No meaningful Rule of Thumb

is a measure of efficiency turning goods over at a profit

6. Operating Profit Margin

        = (NS - COGS - SAGE) / NS

No meaningful Rule of Thumb

is a measure of efficiency turning goods over at a profit

7. Net Profit Margin

        = (NEBEI - EI + MIIEOSC) / NS

No meaningful Rule of Thumb

is a measure of efficiency turning goods over at a profit

Appendix A Formulas (cont'd)

COMBINED RATIOS

1. Pre-Tax Return on Invested Capital

        = (NEBEI + AIT + TIC) / (STD + LTD + PSC + CSC + RE + CS + FEA)

No meaningful Rule of Thumb

is a measure of how well management employed the capital at its disposal

2. Net Return on Invested Capital

        = (NEBEI + (TIC X (1 - TAXRATE))) / (STD + LTD + PSC + CSC + RE + CS + FEA)

No meaningful Rule of Thumb

is a measure of how well management employed the capital at its disposal

3. Net Return on Common Equity

        = (NEBEI - PDP) / (CSC + RE + CS + FEA)

No meaningful Rule of Thumb

is a measure of how well management employed common shareholders' capital

4. Cash Flow to Total Debt Ratio

        = (NEBEI - EI + MIIEOSC + DITE + D + A) / (STD + LTD)

Rule of Thumb for Industrial > 0.3 in each of last five fiscal years is good

Rule of Thumb for Utility > 0.2 in each of last five fiscal years is good

is a measure of ability to repay borrowed funds

5. Earnings per Common Share (in $)

        = (NEBEI - PDP) / #CS

No meaningful Rule of Thumb

is a measure of earnings, expressed on a per share basis

6. Inventory Turnover (in days)

        = 365 / (COGS / I)

No meaningful Rule of Thumb

is a measure of the number of days to turn over existing inventory

Appendix A Formulas (cont'd)

VALUE RATIOS

1. Yield on Preferred Shares

        = PDP / #PS / ((MPPH + MPPL) / 2)

No meaningful Rule of Thumb

is a measure of return on investment, in dividends for preferred shareholders

2. Yield on Common Shares

        = CDP / #CS / ((MPCH + MPCL) / 2)

No meaningful Rule of Thumb

is a measure of return on investment, in dividends for common shareholders

3. Price Earnings Ratio

        = ((MPCH + MPCL) / 2) / ((NEBEI - PDP) / #CS)

No meaningful Rule of Thumb

is a measure of price per share over earnings per share

Appendix A Formulas (cont'd)

LEGEND

CA        Current Assets
I         Inventories
DC        Deferred Charges
IA        Intangible Assets
ITCAO     Investment Tax Credits and Other Assets
TA        Total Assets

CL        Current Liabilities
STD       Short Term Debt
DITB      Deferred Income Taxes from Balance Sheet
MI        Minority Interest
LTD       Long Term Debt

PSC       Preferred Share Capital
CSC       Common Share Capital
CS        Contributed Surplus
RE        Retained Earnings
FEA       Foreign Exchange Adjustment
PDIA      Preferred Dividends in Arrears

NS        Net Sales
COGS      Cost of Goods Sold
SAGE      Selling, Administrative, and General Expenses
D         Depreciation Expense
A         Amortization Expense
CIC       Capitalized Interest Charges
TIC       Total Interest Charges (does not include Capitalized Interest Charges)
DITE      Deferred Income Taxes from Earnings Statement
AIT       All Income Taxes (includes Current and Deferred Income Taxes)
MIIEOSC   Minority Interest in Earnings of Subsidiary Companies
EI        Equity Income
NEBEI     Net Earnings Before Extraordinary Items
PDP       Preferred Dividends Paid
PDP*      Preferred Dividends Paid adjusted for tax
CDP       Common Dividends Paid


MPCH      Market Price of Common High
MPCL      Market Price of Common Low
MPPH      Market Price of Preferred High
MPPL      Market Price of Preferred Low
#CS       Number of Common Shares Outstanding
#PS       Number of Preferred Shares Outstanding