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Car Sharing Industry Boston University Student Research This report is published for educational purposes only by students competing in the CFA Institute Research Challenge. Zipcar, Inc.

Date: Dec. 12, 2011 Ticker: ZIP (NASDAQ) Recommendation: BUY

Price: $14.28 (As of 12/09/11) Price Target: $19.45

Earnings/Share (Normalized to 42.48mm weighted average diluted shares outstanding) Mar. Jun. Sept. Dec. Year P/E Ratio 2008A $(0.17) $(0.08) $(0.04) $(0.05) $(0.34) NA 2009A (0.07) (0.04) (0.03) 0.03 (0.11) NA 2010A (0.13) (0.12) (0.06) (0.02) (0.33) NA 2011E (0.14) (0.13) 0.02 0.00 (0.26) NM Source: CapitalIQ, Student Research

GREEN LIGHT TO BUY ZIPCAR

 We initiate coverage of Zipcar with a one-year price target of $19.45, offering a 36% upside in comparison to a ten-year standard deviation of returns of the Small Cap S&P600 Index of 20%. ZIP will maintain its position as the world’s leader in car sharing through aggressive expansion into markets like Europe, growing membership at a projected CAGR of 17% through 2016.

 Zipcar’s value proposition will drive membership growth, which will in turn drive revenues. Zipcar use is about 69% less expensive than owning a car, which is a strong incentive for new members to join, especially when coupled with increasing costs of living. We estimate Zipcar’s total revenue growth at 21% CAGR from 2011 through 2016, as a result of new members and increased vehicle utilization.

 Increased utilization and growing fee revenues will drive margin expansion which will boost earnings. Margin expansion will be driven by higher growth in fee revenue, which we expect to reach 15% of total revenue by 2016, up from 14% in 2011. We forecast EBITDA margin to be 16% by 2016, in comparison to 11% in 2011.

 Zipcar’s strong solvency position provides room for additional expansion. With the latest debt-to-equity ratio of 35%, Zipcar has an estimated 3.7% after-tax cost of debt. The Company’s asset-backed security notes allow for lower rate borrowings, which can be utilized for vehicle purchases. Zipcar has shown its ability to obtain additional term loans of up to $40 million to finance acquisitions.

 ZIP is an emerging story which makes it hard for investors to evaluate early in its business life cycle, similar to a venture capital company. We believe this leads to a misunderstanding of the Company’s potential and the low market valuation; however when all variables are well considered, we are confident that ZIP is a BUY.

ZIP vs. S&P 600 Market Profile (Apr. 2011 - Dec. 2011) 52-Week Price Range $31.50/$13.87

Average Daily Volume (USD mm) 0.36 0% Beta 1.17 Shares out (USD mm) 39.3 Market Cap (USD mm) 561.2

Institutional Holdings (USD mm) 233.1 -50% Insider Holdings (USD mm) 19.0 Apr-11 Jul-11 Oct-11 Total Debt to Equity 0.35 Return on Assets (LTM, 3Q11) 0.3% ZIP S&P 600 Return on Equity (LTM, 3Q11) -7.8%

Source: CapitalIQ Source: CapitalIQ

CFA Institute Research Challenge December 12, 2011

Car Ownership vs. Zipcar Costs USINESS ESCRIPTION Per Year B D Zipcar has grown revenues and membership rapidly but has so far made slow progress towards $6,000 profitability. $5,000 $4,000 Zipcar, founded in 2000 and based in Cambridge, Massachusetts, operates the world’s leading car sharing

$3,000 network. Zipcar went public in April of 2011 and has 72% of the car-sharing market share, which is only a small decrease from its 75% market share in 2005 due to its continued domination of the industry. The $2,000 Cost in USD in Cost Company has achieved five-year CAGR of 48% in organic membership growth and the acquisitions of $1,000 Flexcar and Streetcar in 2007 and 2011, added an additional 11% to membership to each year. $- Car Ownership Zipcar A key strength of the firm is the technology utilized in its operations. Private Ownership $4,733 $- Vehicles are reserved by phone, the internet, or through smart-phone applications and are unlocked with a Zipcar $- $455 keyless entry card (Zipcard), using RFID technology. Fleet operations are supported by software that collects Public Transit $720 $720 real-time data on Zipsters and allows the Company to monitor vehicle usage and profitability. Taxi $192 $384

Conventional Rental $- $200 As of 3Q 2011 the Company had operations in the United States, Canada, and the United Kingdom, and Figure 1: Zipsters spend an average $1,800 a year on transportation costs, about 650,000 members, 9,500 cars, 600employees, and a presence in over 130 cities including 15 major versus $5,500 per year for car owners. metropolitan areas. Despite its revenue growing at a CAGR of 67% from 2005 to 2010, Zipcar is making Sources: Victoria Transport Institute, US slow progress to profitability; net income margin of 1% was declared for the third quarter of 2011, but Dept of Transportation, Office of Fair Trading, TaxiFareFinder.com guidance for 4Q2011 is for a net loss.

 Services: ZIP provides an attractive value proposition for both individual and business Monthly Loss Per Vehicle customers, which should encourage new members to join. $2,500 SG&A Revenue: $1,888  Fleet Rental: ZIP provides self-service vehicles in convenient locations for an annual fee of $60 $2,000 R&D plus an hourly rate of between $7.75 and $13.50 or a monthly fee of $50 and a 10% discount on driving rates. Gas, insurance, and up to 180 free miles per day are included in the price. This results $1,500 Membership in savings of about 69% versus owning a car, despite decreased convenience (see Figure 1 and Services $1,000 Depreciation Exhibit 1 in Appendix).

$500 Parking  FastFleet: “FastFleet” is a proprietary vehicle-on-demand software that ZIP leases to organizations $- Insurance that manage their own fleet of vehicles, at a rate of $65 to $95 per car. This allows organizations to track vehicles, analyze usage and diagnostic data, and improve efficiency, saving as much as Gas $(500) $1,250 a month per vehicle. Loss: 18.1% Maintenance $(1,000) Cost Drivers: ZIP’s can distribute high fixed costs across its 650,000 members, and will increase Figure 2: Zipcar currently experiences utilization to improve profitability. an 11.5% loss on each vehicle without accounting for fee revenues, a loss they need to address through increased ZIP achieves economies of scale through distribution of fixed cost such as gas, parking, and car purchases, utilization. over its fleet (see Figure 2 and Exhibit 2 in Appendix). ZIP passes on gas price increases to customers, which keeps its own costs down, while still offering a cheaper alternative to customers owning vehicles.

Usage Revenue Per Vehicle Per Day Increasing utilization per vehicle will lead to higher revenues per vehicle, which will mean higher $100 profitability as ZIP covers its fixed costs. $90 $80  Revenue per vehicle per day is currently $65, which translates to utilization of 6.5 hours; both have $70 been increasing historically. $60  We believe this trend will continue as ZIP expands its corporate customer base, bringing more $50 $40 weekday utilization (see Figure 3). $30  Additionally, we believe that management is capable of achieving their stated target utilization rate $20 y = 0.013x - 503 of 9 hours, based on their record with past goals (see discussion of Management on page 4). $10 R² = 0.722 $0 Sep-09 Apr-11 Dec-12 Aug-14 Mar-16 CUSTOMERS Actual Predicted Zipcar’s plan for increasing utilization includes a new focus on business and governments. Figure 3: Historical revenue per vehicle per day has been increasing.  Individuals: Zipcar has traditionally targeted middle-class customers between the ages of 20 and Assuming a constant hourly rate of 35, who do not own cars and live in densely populated cities. These customers usually utilize $10, this means each car is being Zipcar for weekend trips for social gatherings and shopping. used for more hours daily.

 Universities: Zipcar operates in over 150 college campuses, offering car sharing to those between the ages of 21 and 25 without the additional charges required by traditional car rental firms. As of September 2011, universities make up 10% of the total revenue base. 2

CFA Institute Research Challenge December 12, 2011

Market Segments  Governments and Businesses: The Company partners with governments and corporations to (2011) provide cars and fleet management services (FlastFleet). “Z2B” offerings have grown by 40% as a Universities Govts/Businesses share of revenues since 2005, with 10,000 small and medium sized businesses signed up as of July Individuals 2011. ZIP also offers reduced membership fees and weekday driving rates to companies and governments who use ZIP’s fleet, providing a steadier source of income, since they use cars during 10% weekday hours when individual customers are not using them (see Figure 4).

Geographic Presence: ZIP sees increased profitability in established markets, but credible threat from 55% 35% incumbents as it enters new markets. Zipcar targets cities with a large population between 20 and 40 years old, with median household incomes between $34,000 and $72,000. Population density is a key factor for the “established markets,” with an average of 10,590 people per square mile (see Exhibit 3 & 4 in Append ix for Statistics on Zipcar cities).

Figure 4: Zipcar has a diversified  Cities: The “Established”1 Zipcar cities are New York, San Francisco, Boston, and Washington customer base and has been shifting its focus to businesses. Government D.C. Revenue and net income in these cities have grown at CAGRs of 20.3% and 40.4% over the and Business market shares are team last two years because of increased penetration and achieved economies of scale, especially with estimates. regards to management and marketing costs. o Zipcar utilization rates in San Francisco is higher than in other established markets, with the city achieving weekday utilization of 5.7 hours, in comparison to 4.9 weekday hours Geographic Market Segments for the other three cities. (2010) o We believe this is because San Francisco has embraced the collaborative consumption trend ahead of other cities, and that this trend will continue to catch on (see discussion of trends on page 4.) 17% UK 6%  Countries: North American and UK revenues have grown at a three-year CAGR of 40.0% and 301.8% respectively, with the big jump in UK revenues coming from the acquisition of Streetcar. CA o In Canada, operations have been slow, according to industry consultant, David Brook, 77% who said in an interview we conducted that the Company has struggled to take market US share from Canada’s incumbent, Modo Carsharing. o However, in the LTM revenue growth in Canada has been the strongest out of the three Figure 5: Zip is conducting an countries, growing at 38.7% (13.4% and 26.0% in the UK and US respectively), showing aggressive expansion to increase that while it takes time Zipcar can be successful in new markets with strong incumbents presence in other countries while most revenues still come from the US. (see Figure 5).

MANAGEMENT Appropriate compensation and skilled leadership should continue to drive financial performance. YOY Change in Executive Compensation is based on tangible objectives such as revenue, earnings, membership, and per car Compensation, Revenue metrics. and Members  Executive compensation has increased 20.9% YOY; it is associated with an even greater percentage (2009=Base) change in revenue and members (see Figure 6). 2009 2010  Management has been effective in increasing revenue and membership and has improved 154.7 profitability metrics, supporting our forecast for strong future earnings (see Exhibit 5 through 7 in 142 Appendix). 120.9  Additionally, the Streetcar integration was completed ahead of schedule, leading us to believe that 100 100 100 management is conservative in its promises.

Tot. Compens. Revenue Members Figure 6: While total executive compensation has increased 20.9% from 2009 to 2010, this is justified by a growth of 42.0% and 54.7% in revenue and membership respectively.

1 “Established Markets” are defined by Zipcar as the first four cities that Zipcar entered during the period of 2000-2005. Revenue and income before tax for these cities are reported separately on Financial Statements. 3

CFA Institute Research Challenge December 12, 2011

Competition INDUSTRY OVERVIEW AND COMPETITIVE POSITIONING Type of Business Model Players Service INDUSTRY OVERVIEW Traditional Firms own Hertz, Avis, Car Rental fleets, rent to Enterprise The car sharing industry includes companies that provide self-service cars to consumers who need them for individuals at a short durations and charge an hourly or daily rate. Competitors in this industry include traditional car rental, daily rate, charging extra if peer-to-peer (P2P) car rental, and co-ops, with ownership of fleet and pricing models as the key under 25 differentiators (see Figure 7). Car Firms own Zipcar, Sharing fleets, charge Car2Go, and Co-ops yearly Victoria While the number of players has increased, industry growth will keep rivalry low and pricing between membership Car Share firms will remain independent. fees and hourly/distance usage rates Even as the number of competitors increases due to low barriers to entry, ZIP’s membership growth has seen Peer-to- Car owners lend RelayRides, Peer (P2P) to others for Get strong compounded annual growth from 2006 to 2011 of 38.7% in North America and 18.1% worldwide (see hourly/distance Around, Exhibit 8). This growth is good news for industry profitability because firms do not have to cut into each rates; firm is Wheelz middleman and other’s profits (see Exhibit 9 in the Appendix for Porter’s Five Forces Analysis). installs tracking devices Figure 7: ZIP competes with car sharing MARKET TRENDS companies in addition to car rental and Intense urban congestion leads to governmental action that supports car sharing. peer to peer car sharing companies.  London charges a £10 congestion fee for traveling major roads, while “green”2 and nine passenger vehicles are exempt. Impact on Congestion Charge in  We believe similar regulation will spread to other congested cities, and people will turn to car London on Frequency of Travel sharing services to cope with it (see Figure 8 for effectiveness of congestion charge in London and 100% Exhibit 10 in appendix for congestion in the US)

90% Never Increasing collaborative consumption is driving customers to share resources, such as cars. 80%  The US is seeing an increase in collaborative consumption; services such as peer-to-peer lending 70% Less and travel accommodations (aka “couch surfing”) rose 62% and 1200% YOY respectively. 60% frequently  This growth signals a change in consumption behavior from owning to sharing, an additional shift 50% that will benefit car sharing companies. 40% 1x or more a month 30% With gas and food prices in the United States increasing 198.5% and 31.7% over the last ten years, car 20% 1x or more a sharing offers a sustainable way to save (see Exhibit 11 in Appendix). 10% week  Living in the high density cities that Zipcar targets, such as San Francisco and New York is 1.5 and 0% 2 times more expensive than the US average. Before After  Car sharing can save users close to $4,000 annually in comparison to owning a car, which should Figure 8: The enactment of a increase the rate of membership growth if ownership costs continue to rise. congestion charge in London has lead to a substantial decrease in the Heavy Car Sharing taxes and fees may discourage users. frequency of travel in the western  Nationally, the average tax imposed on car sharing is around 17.9% and 14.1% for a one-hour and extension zone. 24-hour reservation, respectively.  While still less expensive in total than private car ownership, these charges may turn off customers. Car Sharing Global Monthly Keyword Searches Sustainability is good marketing, but not a profitable trend. 2.0 1.8  While Zipcar states that sustainability is a driving trend in the industry, it will not be the biggest 1.6 driver of customers apart from being an impactful branding strategy. 1.4  According to the Journal of Marketing, while 40% of consumers say they are willing to purchase 1.2 green products, only 4% actually do when given a choice. 1.0 0.8  Nonetheless, according to a survey of college students’ perception of Zipcar, the Company scores 4 0.6 out of 5 in terms of environmental friendliness. Searches(Millions) 0.4 0.2 0.0 COMPETITIVE POSITIONING Branding While Zipcar has the strongest name in car sharing, the Company will balance availability of vehicles to please customers while maintaining its focus on increasing utilization. Figure 9: "Zipcar" had 1,743,356 global monthly searches versus "Car  Strong Brand Awareness: Strong brand power is illustrated by the outperformance of “Zipcar” Sharing,” which had 1,213,866, and "Car2Go,” which had 924,793 searches on Google’s Global Monthly keyword searches in comparison to competitors’ names and searches in October. general industry terms (see Figure 9).

2Any car that emits less than 100 grams of Carbon Dioxide is exempt from London congestion charge; Zipcar has at least 8 vehicles that qualify for this exemption. 4

CFA Institute Research Challenge December 12, 2011

Zipcar Yelp Ratings  Online Reviews are good, not great: Out of a sample of 633 Yelp.com ratings across the established markets, Boston, NY, San Francisco, and Chicago, 57.8% of reviewers gave Zipcar 4+ Great (4+ Stars) Neutral (3 Stars) stars (see Figure 10 and Exhibit 12 in Appendix). Most negative reviewers complained about the Negative (2- Stars) unavailability of cars, which is a problem management has stated it will focus on as markets mature 70% and more members share the same fleet. 60% 50%  Over 90% of customers recommend ZIP: We conducted an anonymous survey in October with 40% 141 respondents, 35% of which were either current or past users of Zipcar. Our results indicate that 30% over 90% of current and past Zipcar users would recommend Zipcar and its services to a family or 20% friend. This number, better known as the Net Promoter Score, is a critical metric Zipcar 10% management uses to measure customer satisfaction (see Exhibit 13 in Appendix). 0% Competition ZIP’s market leadership and competitive positioning should enable it to enter new markets with ease. Figure 10: Zipcar Yelp ratings show an overall positive perception of the ZIP holds 72% of the car sharing market share in 2011 (by membership), with the next biggest competitor Company in its top established markets. holding only 5%. While Car2Go, Connect by Hertz, and RelayRides are often cited as threats to Zipcar, it is apparent that they have not made a significant dent in the market and should not pose a credible threat to Zipcar’s leadership. The rest of the industry is made up of smaller players with 5,000 or fewer members (see Car Sharing Market Share by Members Figure 11). (2011) RelayRides, Cityzen Zipcar has positioned itself as a broad market differentiator, targeting a large market and charging premium Cars, Higear, prices while offering more services. Zipcar has the largest fleet in the most number of locations and uses Livop, Greenwheels, Tamyca, and advanced technology, enabling it to provide better service than competitors. Zipcar plans to maintain this Enterprise WeCar position via aggressive expansion plans. 1.9% Others Connect by Hertz 17.6% 3.3% While competitors may take members, they are unable to impact utilization, the main determinant of profitability. Car2Go Zipcar 5.0% 72.2% Connect by Hertz and Relay Rides pose the greatest threats in terms of competitive pricing. Hertz offers a no membership or enrollment fee plan with One Way trips available. Relay Rides also offers free membership and rates start at $5; in addition, cars generate an average of $250 per month with the owners keeping 65% of revenues. Figure 11: Zipcar has72.2% of the car sharing market share, as measured in members. However, these players are competing on price while Zipcar is focusing on service. Moreover, the key driver Source: tfl.gov.uk of profitability is utilization of cars, and while a loss in market share may decrease membership, we believe Zipcar can sustain utilization rates, thus competition should not present a credible threat to company performance (see Figure 3 on page 2). Competitive Positioning Map Cost Leadership Differentiation INVESTMENT SUMMARY We initiate coverage of Zipcar with a BUY rating and a one-year target price of $19.45, offering a 36% upside from its closing stock price as of December 9, 2011.

BroadMarket The Company’s future earnings will be driven by growth in capacity utilization coupled with an increase in share of revenue from fees:

Future Cash Inflows = ƒ(Number of vehicles*Usage revenue per vehicle, Fee Revenue)

NarrowMarket Implied capacity utilization growth will be driven by membership growth coupled with higher Figure 12: ZIP is positioned as a broad weekday usage from business customers. market differentiator; Car2Go seems to  We project that Zipcar’s membership will grow at a 17.0% CAGR over the next five years, in be trying to edge into this space while comparison to 53.3% CAGR from 2006 to 2011. Connect by Hertz is concentrating on maintaining cost leadership.  In addition, ZIP’s Z2B offerings increased 40% as a share of revenue since 2005 and are projected to grow further, which will boost weekday usage hours.  Membership growth per vehicle and higher weekday utilization from business customers result in increased usage revenue per the vehicle (see Figure 13 for forecasts).

While Zipcar may enter Asia in the long-term, we do not see Asia as target market for the next five years.  The Company’s international strategy focuses on congested cities with average GDP per capita of $34,000 to $71,000.

CFA Institute Research Challenge December 12, 2011

 Although Asian cities such as Tokyo, Singapore, and Hong Kong currently have these Growth Projections characteristics, they are too far apart geographically to achieve the scale efficiencies that are Penetration Membership by 2016 CAGR possible in Europe (see Exhibit 14). (2011-2016)  Entrance into Asia also requires special regulatory relationships. Thus, Zipcar will prioritize Established 2.1% 13.1% expansion into Europe and only enter Asia once these operations are under control, in five to ten Markets years. ~120 Other Cities in US 0.2% 13.2% Canada Increase in the share of revenue coming from fees leads to higher margins. Zipcar’s aggressive 1.5% 12.3% and UK market penetration strategy results in total revenue CAGR of 20.7% over the next five years. We estimate fee Europe 0.8% 13.8% revenue to account for 15.3% of total revenue by 2016, up from 13.7% in 2011. Vehicle utilization Figure 13: Our penetration and achievements coupled with 5-year fee revenue CAGR of 23.4% will support margin improvements. The membership growth projection is a key driver of capacity utilization. strategy is expected to increase EBITDA margin from 10% of total revenue in 2011 to 16% by 2016.

Continued revenue growth coupled with margin expansion will deliver positive free cash flows beginning 2015. Zipcar is expected to generate $25.1 million in FCF in 2016, compared to a negative $35.7 million in 2011. We estimate FCF to further grow at 30% annually from 2016 to 2021. Zipcar’s OCF to sales ratio will reach 16% by 2016, up from 11% in 2011.

Target Price Our target price of $19.45 is a weighted average of Discounted Cash Flow and Multiples Method Description Price Weight Analyses. We developed a set of comparable peers from three industries, screening for similarities between DCF Exit $20.42 50% business models. Our DCF model is used to correct for Zipcar’s higher growth potential and its ability to Multiple enhance its operational leverage (see Figure 14). and Perpetuity When stress tested for the simultaneous occurrence of four key risks we reach a combined Trading EV/Revenue $15.29 25% Multiple downside scenario price of $14.15, which would result in a HOLD recommendation. We prioritize (2.1X) four major risks connected to Zipcar’s future earnings as: failure to increase capacity utilization, failure to M&A EV/Revenue $21.66 25% penetrate new markets, increased competition, and absorption of higher input costs. Multiple (3.0X) VALUATION Total $19.45 100% We use two methods to value Zipcar: Multiples and Discounted Cash Flow (DCF) Analyses. The Multiples Figure 14: After weighting our valuation methods we arrive at a one- approach reflects market sentiment in regard to Zipcar-style firms and acts to balance our DCF price. The year target price of $19.45. DCF model is linked to penetration rates for each market and recognizes Zipcar’s unique potential to grow revenue and margins. Both valuation methods have equal weights of 50% in estimating the target price.

MULTIPLE ANALYSIS Due to the lack of publicly traded car-sharing companies, we defined three groups of companies that we believe are comparable to Zipcar. We also analyzed recent M&A transactions in similar groups and derived another set of multiples. We then assigned 25% weights for comparable and transaction-based multiples in calculating the final target price for Zipcar. Our assumptions are:

 Zipcar is in a car rental business. We acknowledge the fact that Zipcar possesses similar types of assets and liabilities, builds on comparable revenue model, and faces similar challenges as traditional car rental companies.  Zipcar is a game changer. Zipcar’s model attempts to decrease the need for car ownership, which would change customer lifestyle. This is similar to other market disrupters, including LinkedIn (Networking), Netflix (DVDs), and OpenTable (Reservations).  Zipcar is focused on capacity utilization. In order to be profitable, Zipcar must attempt to maximize the capacity utilization of its vehicles, similar to hotels.

We considered an EV/Revenue multiple of 2.1x to calculate our target price of $15.29 from trading multiples. We believe this is a good multiple because of the high correlation between sales growth and this multiple for comparable companies (see Exhibit 15 in Appendix).

We also analyzed M&A activity in five different industries and arrived at a median EV/Revenue multiple of 3.0x. We evaluated 22 deals that closed during the last twelve months in the industries such as car-sharing, car rental and leasing, auto manufacturing, hotels, and IT (see Exhibit 17 in Appendix for precedent multiples). Our target price from precedent transaction multiples is $21.66.

CFA Institute Research Challenge December 12, 2011

DCF ANALYSIS We estimated Zipcar’s value at $20.42 per share based on our DCF model. The driving metrics in our model are the membership growth and vehicle utilization rates, which feed into revenue growth and profitability.

Membership growth: Market specific penetration rates indicate that United States will account for 65% of total members by 2016 with the other 19% coming from United Kingdom and Canada. The remaining 16% of total members will come from expansion into new markets in Europe (see Exhibit 18 in Appendix for detailed membership projections). We do not believe that Zipcar will enter Asia within the next five years as explained earlier.

Weighted Average Cost of Revenue will grow at a CAGR of 20.7% through 2011-2016 based on growing usage revenue Capital combined with increasing share of fee revenue, a trend supported by Zipcar’s historical performance. Item %  Usage revenue reaches $525.4 million by 2016, a 20.3% CAGR over the next five years. Fee

Risk Premium 6.49% revenue grows to 15.3% of total revenue by 2016, up from 13.7% in 2011. Membership growth Beta Estimate 1.17 coupled with increase in business customers leads to higher usage revenue as well as increase in Risk Free: fees. 2.92% 30 Yr Treasury  Revenue growth combined with efficient cost control leads to expanding EBIT margin, which drives consistently improving free cash flow. Free cash flow turns positive by 2015, and grows at a

After-tax 30% CAGR through 2016-21. 3.70% Cost of debt Weight 25.90% Our WACC is estimated at 8.7% based on equity, debt, and minority interest. We further used three different methods to estimate beta for Zipcar (see Exhibit 19).

Cost of Equity 10.51% Weight 73.90% Our DCF price: We calculated the DCF price of $20.42 using a combination of two methods: perpetual

growth rate and exit multiples method.

Cost of  We apply two stage growth rates when calculating the terminal value. We computed 30% yearly Minority 0.00% FCF growth through 2016-21. We further use a 3.0% perpetual growth after 2021 to reflect the Interest industry’s significant growth potential. That results in a target price of $20.61, which is weighted Weight 0.20% 50% into our DCF price.  We also applied an EV/Revenue exit multiple of 2.1x to FCF in 2016, based upon our trading WACC 8.73% multiples analysis, which gives a target price of $20.23, also weighted 50% into our DCF Price. Figure 15: We estimated our WACC to be 8.7%. SENSITIVITY Zipcar’s ability to control expenses via operating leverage enhancements (capacity utilization) and fleet optimization is a critical factor in our model. Historically, expenses (as % of sales) have declined by 150 bps/year. To stress test our analysis, we apply a 75 bps upswing in expenses (as % of sales) which results in a -45% change to our target price.

Sensitivity tests are also applied to valuation analysis inputs such as WACC, the perpetuity growth factor, EV/Revenue multiples and operational drivers such as revenue and expenses. On a stand-alone basis, our BUY recommendation holds under every test except for expenses (+ 75bps). Zipcar’s ability to gradually enhance operational leverage as they increase market penetration will be crucial to translating top-line revenue into EPS (see Exhibit 20)

Though unlikely, our ultimate best/worst case scenarios which are driven by the simultaneous occurrence of all five sensitivities result in share prices of $34.65/$8.21.

Conservative Projections FINANCIAL ANALYSIS CAGR Historical Projected After performing a sanity check through the analysis of historical figures using 2008-11 experience we 2008- 2011 2012-2016 strongly believe that our projections are achievable. Revenue 31.7% 20.7% Usage 29.3% 20.3% Revenue Revenue Growth: Our projections are conservative in relation to historical numbers and recent Fee 54.7% 24.7% developments provide compelling support for projections (see Figure 16). Revenue  Domestic revenue reached record $136.8 million for the nine months period ended September 30, Membership 37.7% 17.0% 2011, presenting a 26.7% YOY. Established markets account for 75.3% of US revenue as of the Figure 16: Our projected growth is last reported date, and remain a main driver for the total US revenue with a 22.8% growth consistently lower than historical growth compared to the same nine months period in 2010. in order to remain conservative.

CFA Institute Research Challenge December 12, 2011

 Zipcar’s revenue from international operations increased $15.9 million, or 61.2%, for the comparable nine months ended periods, driven by $2.7 million increase in revenue from Canada and $13.2 million increase in revenue from United Kingdom.

Margin Projections Margins: ZIP has improved operational efficiency historically, which should lead to positive EBIT margins Historical Projected by 2012. In addition, higher utilization rates coupled with an increase in fee revenue result in margin 2008-2011 2012-2016 improvements. We believe historical numbers are consistent with our projections, where EBIT reaches EBIT positive margin by 2012, and equals 4% by 2016. Margin (3%) 3% Average Cash Flows: Cash flow growth has remained strong up to 2011, a trend which we expect to continue. Cash Fleet Costs flows from operating activities turned positive in 2009 and reached $17.8 million for the nine months ending as % of 79% - 66% 64% - 60% Rev  September 30, 2011. We foresee this number will keep growing as the Company starts turning higher returns Figure 17: Our projected margins are on each of the vehicles. Unlevered free cash flow, however, is not expected to turn positive until 2015. in line with historical numbers. Balance Sheet and Financing: ZIP has a strong balance sheet, which places it in a favorable position for expansion in the future. As 3Q2011, Zipcar had $88 million in cash, which is an adequate source of funding for future expansions.  Historically, the Company was able to secure additional term loans for the total amount of $40 million to fund its acquisitions. However, Zipcar paid off those term loans after its initial public offering, and its latest outstanding principal amount of debt equals to $75.3 million. It is comprised of $50.0 million under ABS facility, and $25.3 million under Capital Lease Obligations (see Exhibit 21for debt structure).  Based on a leverage coverage ratio analysis of comparable companies in the traditional car rental industry, ZIP is in a better position to service its debt; its Debt/EBITDA ratio is 3.0x compared to an industry median of 7.1x (see Exhibit 22 for leverage ratio analysis).

MARKET’S PERCEPTION While the market has celebrated good news like a government contract, we believe the market has discounted ZIP’s share price too heavily due to worries about profitability.

 In October, ZIP’s stock increased with the news of a secured government contract. The market recognized that this partnership would increase weekday utilization, a key to profitability.  In November, ZIP offered negative net income guidance for Q4, and the share price dropped by 21%. This announcement only reinforced concerns about Zipcar’s ability to produce positive earnings. However, we believe that near term losses does not negate future sustainable profitability.  Zipcar’s launch of its Zipvan service was received with doubts. The market demonstrated a concern with Zipcar’s attempt to directly compete with U-Haul, the leader in the moving space. We believe that this service will be appreciated by Zipsters, who responded in our survey saying that moving was among their top motivations for using Zipcar.

Figure 18: Zipcar has generally underperformed the market due to investor worries about future profitability.

CFA Institute Research Challenge December 12, 2011

INVESTMENT RISKS The combined effect of four downside risks brings the target price to $14.15, a 27% decrease from the one-year target price of $19.45, which would result in a HOLD recommendation (see Exhibit 23).

Failure to Increase Capacity Utilization, High Risk – 35% The key driver to improving profitability is ZIP’s ability to increase capacity utilization rates.  We estimate a 35% probability that ZIP will fail in its attempt to increase member usage and optimize pricing. To accurately estimate these effects, we put a ceiling on revenue per vehicle per day at $65, which was originally projected to be $90 by 2016.  Marketing expenses under SG&A also increased at an addition .025%, assuming that ZIP’s marketing strategies would fail in increasing awareness for established markets.  This stress-test decreases the target price by 36% to $12.48, resulting in a SELL recommendation.

Failure to Penetrate New Markets, High Risk – 30% To estimate the effects of an unsuccessful entrance into the European markets, we discounted the total number forecasted members in Europe by 90% and increased the loss on sale cars, which still resulted in a BUY recommendation with a new target price at $15.95, a decrease of 18%.

Increased Competition, Moderate Risk – 20% New players are entering the car sharing industry at a rapid rate, with about 3 players entering into the industry every year since 2000.  These firms pose a threat to Zipcar’s market share and future member growth.  We quantified this risk by decreasing total membership base by 15% and increasing SG&A expenses by .5% every year.  This results in a SELL recommendation with a 30% decrease in the price to $13.70.

Absorption of Input Costs, Low Risk – 15% Zipcar relies on partnerships and 3rd party vendors such as vehicle manufacturers, insurance companies, and other maintenance providers to offer its car-sharing services at a competitive price.  An unfavorable turn in economic forces that affect these suppliers could increase ZIP’s fleet operation expense growth by an additional .9% annually.  This stress-test still results in a BUY recommendation of $16.55, a decrease 15% from the one-year target price.

RECOMMENDATION After considering all risk scenarios, we reiterate our BUY recommendation. Looking toward the horizon, we believe ZIP will continue to accelerate, leaving its competition in the rear view mirror.

These fundamentals, combined with attractive valuation, indicate a 36% upside to the stock.

CFA Institute Research Challenge December 12, 2011

APPENDIX

Exhibit 1: While car sharing is more cost effective than private car ownership, it is still not as convenien t as having a car available at one’s disposal. Combining car sharing with other forms yields similar convenience to private ownership. Source: Victoria Transport Policy Institute.

Convenience of Different Transportation Modes (1 = Least Convenient 3= Most Convenient) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Public Transit Car Sharing Conventional Taxi Private Rental Ownership

Exhibit 2: Zipcar partners with both local and national suppliers and is able to achieve cost savings from volume purchases and logistical efficiency.

Supplier Cost Car Manufacturers ZIP partners with major car manufacturers to yield savings on fleet (average cost of $20k per car). Parking ZIP pays for parking spots from local parking facilities and major parking companies such as Interpark, Inc. (monthly parking per car averages around $600). Some municipalities and universities offer Zipcar free parking in an effort to promote sustainable behavior. Labor Zipcar’s 593 employees are compensated based on their departmental functions (wages averages around $26k to $60k). Gas ZIP absorbs the majority of fluctuations in gas prices, occasionally passing on increases to customers via higher fees. ZIP partners with Wright Express, a business payment processor, to supply its vehicles with gas cards (for a monthly fee of $2 per card). Insurance Liberty Mutual provides car insurance to ZIP (for a cost of about $150 per car per month). Third Party Service ZIP uses third party service providers for services such as maintenance ($33 per car per month) and data centers. Providers

Exhibit 3: A correlation matrix run on number of cars Zipcar has in its top ten cities and nationally agai nst population characteristics suggests that Zipcar targets dense urban populations.

Cities Characteristics vs. Number of Zipcar Cars Top 10 Cities All US Cities Cars 1.00 1.00 Population 0.65 0.67 Number of Universities 0.37 0.56 Number of College Students 0.47 0.46 Median HH Income 0.54 0.10 Population Density (per sq mile) 0.90 0.11 20 to 24 years 0.64 0.49 25 to 29 years 0.65 0.53 30 to 34 years 0.65 0.51 35 to 39 years 0.65 0.47

CFA Institute Research Challenge December 12, 2011

Exhibit 4: Zipcar city statistics show that Zipcar targets cities with median incomes between $34,400 and $71,745 and high population density.

Top 10 US Cities Min Max Median All US Cities Min Max Median Population 66,194 8,175,133 619,278 Population 1,357 8,175,133 71,943 Population Density Population Density 3,153 27,016 10,590 62 228,330 3,263 (people/sq mile) (people/sq mile) Number of Universities 12 45 18 Number of Universities 0 45 3 Median Income ($USD) 34,400 71,745 47,134 Median Income ($USD) 13,385 200,001 39,427 People between 20 and 39 160,206 2,622,437 245,390 People between 20 and 39 420 2,944,154 33,485

Exhibit 5: Zipcar is led by experienced executives whose compensation is directly tied to firm performance. The CFO, Ed Goldfinger, has experience with data analytics, which he can apply to the decade of data Zipcar has collected. The COO, Mark Norman, has experience with highly rapid growth in his prior car sharing company, which he may apply to Zipcar in managing its expansion. Source: Zipcar Form 424-B4

Name and Title Background Leadership Examples Individual Compensation Objectives in 2010 (20% of total bonus) Scott Griffith  Boeing In 2009, anticipated growth of 15-25% over the  General oversight of the senior management team Chairman & CEO  Information next five years and so far ZIP has achieved  IPO readiness and execution America 41.9% and 36.0% YOY growth in revenues  Increasing brand awareness  The Parthenon and 54.7% and 20.4% membership growth in  Received a $360,000 bonus Group 2010 and 2011. Source: FastCompany.com Mark Norman  Flexcar Mr. Norman was previously the CEO of  Establishing and maintaining initiatives regarding President & COO  DaimlerChrysler Flexcar, which was acquired by Zipcar in 2007. operational excellence  Ford Flexcar, a problematic company that expanded  Improving the field operations structure too quickly before operations were finalized (20  Management of our ongoing efforts to improve cities in five years) and had technology the customer experience implementation setbacks.  Received a $159,670 bonus Source: Zipcar Form 424-B4 and David Brook’s “Car Sharing in North America” Ed Goldfinger  KPMG Mr. Goldfinger was the CEO of Empirix, a  IPO readiness CFO  PepsiCo company that provided corporations “with  Obtaining and maintaining debt facilities  Spotfire products and solutions in the areas of  Establishing a public- company level finance team  Empirix functional and regression testing, load  Received a bonus of $119,753  Sapient testing, monitoring and management.” This makes him a good fit for analyzing data collected by Zipcar and implementing appropriate actions. Source: Frost and Sullivan, Movers and Shakers Interview, September 2005.

CFA Institute Research Challenge December 12, 2011

Exhibit 6: Management has been consistent with reaching performance targets that drive the top line and have been focusing on improving profitability. 2010 Target vs. Attained: Revenue $187.9mm vs. $187.5mm, EBITDA $15.5mm vs. $16.1mm, Operating Income $5.2mm vs. $4.9mm.

2010 Performance Targets vs. Attained (Target = 100%) 106% 104% 102% 100% 98% 96% 94% 92% 90% 88% Revenue EBITDA Operating Income Target Attained

Exhibit 7: Profitability has seen a significant improvement historically and should continue to improve as management focuses on these performance metrics, which are tied to their compensation.

Profitability Margins (2005-2011E) 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% 2005 2006 2007 2008 2009 2010 2011E

Operating Income Margin EBITDA margin Net Income Margin

CFA Institute Research Challenge December 12, 2011

Exhibit 8: Car sharing companies launches have increased significantly over the last decade (ZIP was founded in 2000). Number of Car Companies Launched Per Year (1990-2011) 3.5 3 2.5 2 1.5 1 0.5 0 1985 1990 1995 2000 2005 2010 2015

Abroad US

Exhibit 9: Porter's Five Forces Analysis suggests that the car sharing industry is currently a profitable industry for incumbents, but these forces may change for the worse as industry rivalry increases with the entrance of more players. Buyer power will also increase as customers will have more car sharing companies to choose from. Additionally, the high threat of substitution demands that car sharing companies keep pricing from getting too high. Nonetheless, being an early mover is an important advantage because while entry costs are low, brand and reach are important factors to customers.

CFA Institute Research Challenge December 12, 2011

Exhibit 10: The average delay per traveler in the US per year has increase drastically, especially in cities with larger population sizes. As city governments attempt to address this problem, car sharing seems like a viable option. Source: US Department of Transportation

Yearly Hours of Delay per Traveler by City Population Size (1982-2002) 70 60 50 40

30 Hours 20 10 0 Small Medium Large Very Large

1982 1992 2002

Exhibit 11: Food and gas prices have increased 198.5% and 31.7% respectively since 1990, increasing the cost of living and making car sharing an attractive cost saving proposition

Fuel and Food Prices (1990-2010) 250 3.5 3 200 2.5 150 2

100 1.5

1 Food PriceFood Indices 50

0.5 Gas and ($)Price

0 0 Cars to CarsNumber of People 1990 2000 2010 Food Price Indices Gas Prices

Exhibit 12: Yelp ratings from top Zipcar cities show a generally favorable perception about company, but about 30% of customers are dissatisfied with its services, suggesting that management must lower this number in order to retain members who may now go to one of the many other car sharing companies.

City 5 Stars 4 Stars 3 Stars 2 Stars 1 Star Total Ratings Boston 41 24 11 6 23 105 39.0% 22.9% 10.5% 5.7% 21.9% 100.0% NY 21 18 16 11 15 81 25.9% 22.2% 19.8% 13.6% 18.5% 100.0% San Francisco 123 68 43 22 78 334 36.8% 20.4% 12.9% 6.6% 23.4% 100.0% Chicago 41 30 10 17 15 113 36.3% 26.5% 8.8% 15.0% 13.3% 100.0% Total 226 140 80 56 131 633 35.7% 22.1% 12.6% 8.8% 20.7% 100.0%

CFA Institute Research Challenge December 12, 2011

Exhibit 13: We conducted a survey with 141 respondents, which enabled us to determine key metrics and assumptions, such as net promoter scores, user utilization rates, and preferences.

Key Statistics from Zipcar Survey Total Percentage Total Completed Surveys 129 141 91.49%

Total Zipsters 45 129 34.88% NPS (Net Promoter Score) 41 44 93.18%

Frequency of Use Whole day Average Usage 9% Most Popular Cars 1-3 4-5 times/month times/week 6-8 hours Mini 16% 0% 7% Cooper 2-3 9.1% times/week 4-6 hours 1-2 hours 0% 2% 18% Toyota Nissan Hybrid No longer Sedan Less than 1 36.4% use 18.2% 21% time/month 58% 2-4 hours BMW Once a week Sedan 2% 64% 5+ 36.4% times/week 3%

Exhibit 14: Europe is the best market for Zipcar to enter in the near future, as it is full of countries and cities with favorable characteristics adjacent to each other. In comparison, Asia only has three cities with these important characteristics, and they are not geographically close, which would make achieving economies of scale more difficult. Top locations were chosen based on income (ideal range in current cities is between $3 4,000 and $70,000, based on data in Exhibit 4) and large presence of cars. Source: World Data Bank and NYC.gov.

Potential Countries for Zipcar (2008) $70 900 $60 800 700 $50 600 $40 500 $30 400 300 $20 200 $10

100 People Cars/Thousand of

$- 0 GDP/Cap. (USD Thousands)(USD GDP/Cap.

GDP per capita (current US$) Motor vehicles (per 1,000 people)

Potential Cities for Zipcar (2008) $80 700 $70 600 $60 500 $50 400 $40 300 $30 $20 200 $10 100 People Cars/Thousand of

GDP/Cap. (USD Thousands)(USD GDP/Cap. $0 0

GDP per capita (current US$) Motor vehicles (per 1,000 people)

CFA Institute Research Challenge December 12, 2011

Exhibit 15: We used the EV/Revenue multiple because of the high correlation between sales growth and this multipl e.

EV/Revenue and Sales growth relationship 16.0x LNKD 14.0x R² = 0.7154 12.0x

10.0x

8.0x AWAY

6.0x OPEN

EV/Revenuemultiple 4.0x CHH MHGC 2.0x HTZ ZIP DTG UHAL NFLX 0.0x -20% 0% 20% 40% 60% 80% 100% 120% 140% Sales growth

Exhibit 16: Upon analyzing trading multiples of companies that are comparable to Zipcar in different areas, we computed a median EV/Revenue multiple of 2.1x. This median is a conservative estimate since companies demonstra ting our 21% revenue growth forecast trade at levels over 3.0x, selecting a target multiple appropriate for Zipcar’s revenue growth (see Exhibit 15). Numbers below are as of 12/09/11.

Company Price Market Total LTM EBITDA 1Yr Sales EV/ Cap EV Revenue Margin Growth Revenue Zipcar, Inc. (NasdaqGS: ZIP) $14.28 561 549 231 10.8% 36.0% 2.4x

Traditional Car Rental AMERCO (NasdaqGS: UHAL) $83.24 1,632 2,577 2,365 25.2% 11.0% 1.1x Avis Budget Group (NasdaqGS: CAR) $11.70 1,229 8,862 5,495 15.5% 7.3% 1.6x Dollar Thrifty Automotive Group (NYSE: $69.58 2,020 2,849 1,544 21.5% 0.7% 1.8x DTG) Hertz Global Holdings (NYSE: HTZ) $11.57 4,821 16,936 8,120 15.2% 8.7% 2.1x Traditional Car Rental Median 1.7x

Hotels & Time share HomeAway, Inc. (NasdaqGS: AWAY) $25.11 2,023 1,851 217 16.6% 39.6% 8.5x Choice Hotels International (NYSE: CHH) $37.44 2,193 2,321 628 29.2% 7.9% 3.7x Morgans Hotels Group (NasdaqGM: $5.99 184 666 220 9.3% -5.9% 3.0x MHGC) Starwood Hotels & Resorts (NYSE: HOT) $48.37 9,295 11,492 5,433 16.0% 9.2% 2.1x Hotels Median 3.4x

Market Disrupters LinkedIn (NYSE: LNKD) $71.89 7,013 6,626 436 12.2% 117.3% 15.2x Netflix (NasdaqGS: NFLX) $70.89 3,925 3,793 2,925 14.8% 45.4% 1.3x OpenTable (NasdaqGS: OPEN) $35.73 849 769 133 28.1% 52.3% 5.8x Market Disrupters Median 5.8x

Trading Multiples Median 2.1x

CFA Institute Research Challenge December 12, 2011

Exhibit 17: We analyzed 22 precedent transactions to market premiums paid for companies which we believe are similar to Zipcar in different ways. This resulted in a median multiple of 30x.

Announced Close Date Target Buyer Seller Size Implied Implied Total Implied Date (USD EV Equity Consider EV/Rev. mm) Value ation Hotels 29-Mar-11 15-Apr-11 One Park Boulevard Sunstone Hotel Hilton Worldwide 422 475 231 174 4.7x Partnership 16 -May-11 1-Jun-11 Radisson Lexington Diamondrock Several financial 435 430 335 335 8.5x Hotel Hospitality Co. holdings 4-Apr-11 23-May-11 Royalton & Morgans FelCor Lodging Morgans Hotel 140 140 140 140 NA Hotels Trust Inc. Group 4-May-11 10-May-11 W Chicago City Chesapeake Lodging Starwood Hotels & 129 129 128 128 4.2x Center Trust Resorts 28 -Mar-11 6-Apr-11 The Westin Gaslamp Pebblebrook Hotel Starwood CMBS I, 110 110 110 110 4.0x Quarter Trust LLC 10 -May-11 27-May-11 Westin Pasadena HEI Hospitality MPG Office Trust 92 92 92 92 4.5x Hotel 28-Feb-11 30-Jun-11 NJA Hotel, LLC Chesapeake Lodging Sagamore Capital, 67 67 29 29 5.3x Trust LLC Median 4.6X Car rental and Leasing 3 -Dec-11 31-Dec-10 JJ Motorcars, Inc Tourism Holdings D. Schneider & H. 16 16 9 9 0.8x Ltd. Hagner 16-Dec-10 28-Jan-11 Scully Ryder System, Inc. NA 86 86 71 71 0.5x Transportation 17-Jul-11 1-Sep-11 Donlen Corporation The Hertz G. Rappeport, N. 947 947 NA NA 2.7x Corporation Liace, etc. 14 -Jun-11 3-Oct-11 Avis Europe plc Avis Budget Car D Ieteren Car Rental, 1,325 1,209 636 636 0.9x Rental etc. Median 0.8x Auto Manufacturers 3-May-11 6-Jun-11 Wheeler Bros., Inc VSE Corp Wheeler Family and 220 182 162 162 1.2x others 21-Jul-11 21-Jul-11 Chrysler Group LLC Fiat North America additional 12.31% 625 7,305 5,077 625 0.2x LLC 7 -Mar-11 1-Apr-11 Classic Fire LLC Spartan Motors Inc NA 5 5 5 5 0.5x Median 0.5x IT Market Disrupters 10-May-11 13-Oct-11 Skype Global Microsoft Group of investors 9,225 9,082 8,500 8,500 10.6x Corporation 27 -Apr-11 15-Jul-11 SAVVIS, Inc CenturyLink, Inc Investment fund 3,084 2,963 2,301 2,301 3.0x 24 -Mar-11 12-Apr-11 Mortgagebot, LLC Davis + Handerson Spectrum Equity 232 232 232 232 6.1x Corp Investors 1-Feb-11 21-Apr-11 NaviSite, Inc Time Warner Cable Group of investors 332 327 208 208 2.5x Inc 5-Jul-11 7-Nov-11 Travelex Global Western Union Co. Travelex Group 606 606 606 606 4.3x Business Limited 28-Mar-11 17-Jun-11 GSI Commerce, Inc eBay Inc. NA 2,381 2,139 2,215 2,215 1.6x 20 -Jul-11 10-Nov-11 Insider Guides, Inc Quepasa Corp Group of investors 100 100 NA NA 3.7x Median 3.7x Zipcar 20-Apr-10 20-Apr-10 Streetcar Limited Zipcar, Inc. Group of investors 50 50 50 50 2.2x 3.7x

CFA Institute Research Challenge December 12, 2011

Exhibit 18: We determined membership growth by analyzing the markets that Zipcar is in and the ones that it plans to enter. For European cities, we assume that the Company will enter two cities per year, based on previously established metrics (such as income), starting with the cities with the highest population. We also used historical penetrations rates at a declining rate for established markets and constant penetration rates for the remaining markets. Total membership is forecasted to grow at a CAGR of 17.0%.

United States 10yr Pop 1YR 2011P 2012P 2013P 2014P 2015P 2016P 2010 Population CAGR penetration members members members members members members Established markets Greater Boston Area 4,552,402 0.4% NM NM NM NM NM NM NM New York City 18,897,109 0.3% NM NM NM NM NM NM NM San Francisco Bay Area 4,335,391 0.5% NM NM NM NM NM NM NM Washington Metro Area 5,582,170 1.5% NM NM NM NM NM NM NM Established Total 33,367,072 0.5% +0.25% 389,134 474,892 550,946 617,187 673,507 719,795 Other ~120 Zipcar Cities 113,078,131 0.5% +0.02% 130,110 152,302 174,605 197,019 219,546 242,185 Total US members 519,244 627,194 725,551 814,207 893,053 961,980 Annual Decrease in Penetration Rate 0.03% 2011E US members 519,244 5yr Organic Growth CAGR (US) 13.1% *Market penetration rates as well as membership by segments are proprietory estimates of Boston University team.

Canada 3yr Pop 1YR 2011P 2012P 2013P 2014P 2015P 2016P 2010 Population CAGR penetration members members members members members members Toronto 5,741,419 1.8% NM NM NM NM NM NM NM Vancouver 2,391,252 2.3% NM NM NM NM NM NM NM Total Canada members 8,132,671 2.0% +0.15% 40,444 53,026 65,859 78,946 92,293 105,905

2011E US members 40,444 5yr Organic Growth CAGR (US) 21.2% *Market penetration rates as well as membership by segments are proprietory estimates of Boston University team.

United Kingdom 9yr Pop 1YR 2011P 2012P 2013P 2014P 2015P 2016P 2010 Population CAGR penetration members members members members members members Brighton 155,919 1.7% NM NM NM NM NM NM NM Bristol 441,300 0.5% NM NM NM NM NM NM NM Cambridge 125,700 1.1% NM NM NM NM NM NM NM Edinburgh 486,120 1.4% NM NM NM NM NM NM NM Greater London 7,825,200 1.0% NM NM NM NM NM NM NM Maidstone 91,042 0.2% NM NM NM NM NM NM NM Oxford 165,000 2.3% NM NM NM NM NM NM NM Total UK members 9,290,281 1.0% +0.12% 115,393 126,623 137,967 149,424 160,997 172,686

2011E US members 115,393 5yr Organic Growth CAGR (US) 8.4% *Market penetration rates as well as membership by segments are proprietory estimates of Boston University team.

Europe - New markets 2 cities per year Year 5 penetration target 1.0% Annual population growth 0.5% Density 2010 Median 2012P 2013P 2014P 2015P 2016P City Country (per sq. mile) Population Income members members members members members Paris France 54,300 10,354,675 $ 56,000 20,917 42,043 63,380 84,929 106,692 Berlin Germany 10,082 3,471,756 $ 32,000 7,013 14,096 21,250 28,475 35,772 Madrid Spain 13,994 3,273,049 $ 40,000 NA 6,645 13,356 20,134 26,980 Barcelona Spain 41,417 3,218,071 $ 49,000 NA 6,533 13,132 19,796 26,527 Rome Italy 5,565 2,761,477 $ 34,000 NA NA 5,634 11,325 17,072 Vienna Austria 10,707 1,714,142 $ 41,000 NA NA 3,497 7,030 10,597 Munich Germany 11,290 1,353,186 $ 44,000 NA NA NA 2,775 5,577 Milan Italy 19,010 1,334,077 $ 47,000 NA NA NA 2,736 5,498 Brussels Belgium 16,857 1,089,538 $ 43,000 NA NA NA NA 2,245 Basel Switzerland 19,301 169,536 $ 42,000 NA NA NA NA 349 Total Europe members 27,930 69,317 120,250 177,199 237,311

2010A 2011E 2012P 2013P 2014P 2015P 2016P Total Zipsters 540,484 675,081 834,774 998,693 1,162,826 1,323,542 1,477,882 YoY Growth 25% 24% 20% 16% 14% 12% 5yr CAGR 17.0%

CFA Institute Research Challenge December 12, 2011

Exhibit 19: We calculated the beta for Zipcar by using an average of three different betas versus the S&P500. We used a levered beta based on comparable companies, a BARRA Beta, and a regression beta based on Zipcar’s historical prices starting from its IPO date in April. Source: BARRA and CapitalIQ.

Levered Beta 1.19 BARRA Beta 1.35 Regression Beta 0.97

Average 1.17

Exhibit 20: Our sensitivity analysis shows that Zipcar's forecasted share price is most sen sitive to changes in expenses, reflecting the fact that the Company has such high operating leverage.

Sensitivity Analysis on Weighted Valuation

Current Price Forecasted Price

WACC (+/-100 bps) $18.19 $21.19

Perpetuity Growth (+/-50 bps) $19.08 $19.89

EV/Revenue (+/-0.25x) $18.40 $20.50

Revenue (+/-150 bps) $17.85 $21.03

Expenses (+/- 75 bps) $10.78 $26.43

Best/Worst Case (Assumes all $8.21 $34.65 of above)

$6.00 $11.00 $16.00 $21.00 $26.00 $31.00 ZIP Price per Share

Exhibit 21: The Company can easily access more credit to support expansion and operations plans through its large revolving credit line. Outstanding Principle Amount as of Description Type Effective FYE2009 FYE2010 Mar- Jun- Sep- Coupon/Base Adjusted Floating Maturity From 31- 30- 30- rate Rates Rate 2011 2011 2011 ABS Note A Revolving May-10 - 18,867 16,275 43,000 50,000 2% + 30-day 3.50% Yes -- Credit Commercial Paper ABS Note B Revolving May-10 - 10,000 10,000 - - 9.00% 9.00% No -- Credit Capital Leases Capital NA 3,249 27,604 23,421 26,342 25,343 3.80 - 13.50% 10.00% Yes 2015 Lease Loan and Term Loans May-08 8,216 4,984 10,000 - - 11.20% 11.20% No Jun-12 Security Agreement Loan and Term Loans Jun-09 4,000 8,534 10,000 - - 16.80% 16.80% No Jul-13 Security Agreement Loan and Term Loans Mar-10 - 20,000 20,000 - - 15.80% 15.80% No 2013 Security Agreement Notes Payable Bonds and Apr-10 - 5,000 5,000 - - 12.20% 12.20% No 2013 Notes Total Principal 15,465 94,989 94,696 69,342 75,343 Amount

 Interest rate on ABS facility is 2% plus 30-day Commercial Paper conduit interest rate. The lender charges additional 1% on undrawn amount of the $50.0 million credit line. Zipcar annually buys a 3.5% interest rate cap.  Interest rates under Capital Lease Obligations are floating, and estimated to be in the range of 3.8 to 13.5%. We analyzed Zipcar’s historical debt structure, and concluded that the average of interest rates should be close to 10.0%.

CFA Institute Research Challenge December 12, 2011

Exhibit 22: In order to analyze ZIP’s ability to repay debt, we used the traditional car rental industry as the closest industry comparable to assess Zip’s DEBT/EBITDA, which is calculated at 3.0x. Since the industry’s leverage coverage ratio is 7.1x, we believe Zipcar is more than capable of paying off its current debt relative to the industry and achieve a cheaper cost of debt in the future from better credit ratings.

Leverage Coverage Ratios Latest LTM DEBT/ Company Name Debt EBTIDA EBTIDA

Zipcar, Inc. (NasdaqGS:ZIP) 75.3 25.0 3.0

Traditional Car Rental Industry AMERCO (NasdaqGS:UHAL) 1,545.4 595.5 2.6x Avis Budget Group, Inc. 8,635.0 852.0 10.1x (NasdaqGS:CAR) Dollar Thrifty Automotive Group 1,329.4 331.7 4.0x Inc. (NYSE:DTG)

Hertz Global Holdings, Inc. 12,507.2 1,233.4 10.1x (NYSE:HTZ) Median 7.1x

Exhibit 23: The biggest risk to our target price is the failure to increase capacity utilization, which could lead to a target price of $12.48.

Investment Risks for Weighted Valuation

Current Price Forecasted Price

Failure to Increase Capacity $19.45 Utilization (35%) $12.48

Increased Competition (30%) $13.70 $19.45

Failure to Penetrate New Markets $15.95 $19.45 (EU) (20%)

Input Costs (15%) $16.55 $19.45

Reference Range $14.15 $19.45

$12.00 $14.00 $16.00 $18.00 $20.00 ZIP Price per Share

CFA Institute Research Challenge December 12, 2011

Exhibit 24: In our forecasted income statement, membership drives top line revenue growth , increased utilization improves operating margins, and growing fee revenue enhances both. We forecast a gradual improvement in EBIT margins while net income margins will only turn positive in 2014.

Income Statement FYE 2009 FYE 2010 2011E 2012P 2013P 2014P 2015P 2016P (Thousands) Revenue 131,182 186,101 242,125 305,763 387,985 465,165 543,385 621,015 Growth 24% 42% 30% 26% 27% 20% 17% 14% Total Revenue $131,182 $ 186,101 $ 242,125 $ 305,763 $ 387,985 $ 465,165 $ 543,385 $ 621,015

Costs and expenses Costs of Goods Sold Fleet operations 93,367 122,634 158,782 195,928 243,571 286,906 330,804 374,958 Member services and 10,414 15,114 19,891 24,741 31,592 37,910 44,167 50,552 fulfillment Total COGS 103,781 137,748 178,672 220,669 275,163 324,816 374,970 425,510 Gross Profit $ 27,401 $48,353 $63,453 $85,094 $112,822 $140,349 $168,414 $195,504 % margin 21% 26% 26% 28% 29% 30% 31% 31%

Other Operating Expenses Research and 2,314 3,170 4,151 4,631 5,474 6,081 6,540 6,831 development Selling, general, and 29,973 49,172 58,625 74,034 94,136 113,095 132,655 152,228 administrative Amortization of 990 3,414 4,122 5,206 6,605 7,919 9,251 10,573 acquired intangibles Total other operating $33,277 $55,756 $66,899 $83,870 $106,216 $127,095 $148,447 $169,632 expenses

Total Operating Expenses 137,058 193,504 245,571 304,540 381,379 451,911 523,417 595,142 (COGS + Other) EBIT/Operating Income $ (5,876) $ (7,403) $(3,446) $1,224 $6,606 $13,254 $19,968 $25,873 % margin -4% -4% -1% 0% 2% 3% 4% 4%

Interest income 60 47 87 109 139 166 194 222 Interest expense (2,457) (8,185) (8,605) (9,548) (10,594) (11,754) (13,040) (14,465) Other income, net 3,690 1,731 801 917 1,164 1,349 1,521 1,242 Net Interest Expense $1,293 $ (6,407) $ (7,717) $ (8,522) $ (9,292) $ (10,239) $ (11,324) $ (13,001)

EBT Excl. Unusual Items $(4,583) $ (13,810) $ (11,163) $ (7,298) $ (2,685) $3,015 $8,644 $12,872

Loss attributable to no 23 (4) 1 - - - - - controlling interest EBT Incl. Unusual Items $ (4,606) $(13,806) $(11,164) $(7,298) $(2,685) $3,015 $8,644 $12,872

Provision for income taxes 84 311 (264) - - (1,055) (3,025) (4,505) % taxes 2% 2% -2% 0% 0% 35% 35% 35% Net Income/Loss $ (4,644) $ (14,125) $ (10,898) $(7,298) $ (2,685) $4,071 $11,669 $17,377

Preferred dividends ------

Net Income to Common Excl. $ (4,667) $ (14,121) $ (10,899) $ (7,298) $ (2,685) $ 4,071 $ 11,669 $ 17,377 Unusual Items Net Income to Common Incl. $ (4,690) $ (14,117) $ (10,900) $ (7,298) $ (2,685) $ 4,071 $ 11,669 $ 17,377 Unusual Items

Per Share Items Basic EPS ($1.13) ($0.49) ($0.28) ($0.19) ($0.07) $0.10 $0.30 $0.45 Weighted Average Shares 4,167,887 29,031,776 38,904,375 38,904,375 38,904,375 38,904,375 38,904,375 38,904,375 Outstanding (Basic) Diluted EPS ($1.13) ($0.49) ($0.26) ($0.17) ($0.06) $0.10 $0.27 $0.41 Weighted Average Shares 4,167,887 29,031,776 42,479,718 42,479,718 42,479,718 42,479,718 42,479,718 42,479,718 Outstanding (Diluted)

Supplemental EBITDA Adjustment: EBIT (5,876) (7,403) (3,446) 1,224 6,606 13,254 19,968 25,873 +D&A 5,310 13,602 27,297 37,429 47,529 57,534 66,894 75,085 EBITDA $ (566) $ 6,199 $ 23,851 $ 38,652 $ 54,136 $ 70,788 $ 86,862 $ 100,958 % growth NM NM 285% 62% 40% 31% 23% 16% % margin 0% 3% 10% 13% 14% 15% 16% 16% Revenue 131,182 186,101 242,125 305,763 387,985 465,165 543,385 621,015

CFA Institute Research Challenge December 12, 2011

Exhibit 25: Zipcar is well positioned to build strong asset base while maintain ing healthy levels of capitalization.

Balance Sheet (Thousands) FYE 2009 FYE 2010 2011E 2012P 2013P 2014P 2015P 2016P ASSETS Current Assets Cash and cash equivalents 19,228 43,005 48,497 35,368 30,730 40,698 68,515 114,400 ST marketable securities - - 32,152 32,152 32,152 32,152 32,152 32,152 Accounts receivable, net 2,816 4,223 5,640 6,727 8,536 10,234 11,954 13,662 Restricted cash 48 900 1,800 1,103 1,376 1,624 1,875 2,128 Inventory ------Prepaid expenses and other 5,037 9,905 11,104 12,610 16,510 19,489 22,498 25,531 current assets Total current assets 27,129 58,033 99,193 87,960 89,303 104,196 136,995 187,873

Non-Current Assets PPE 18,604 77,288 147,630 202,424 264,193 328,946 393,720 455,328 Depreciation 9,178 6,371 33,668 71,097 118,626 176,160 243,054 318,139 Property and equipment, net 9,426 70,917 113,962 131,327 145,567 152,787 150,666 137,189 Goodwill 41,871 99,750 102,826 108,627 109,153 108,425 104,808 97,785 Intangible assets 1,385 8,527 5,668 5,951 6,249 6,561 6,889 7,234 Restricted cash 5,750 3,503 4,115 3,001 2,608 3,453 5,814 9,707 Deposits and other non- 4,346 8,198 4,743 3,459 3,005 3,980 6,701 11,188 current assets LT marketable securities - - 5,042 - - - - - TOTAL ASSETS 89,907 248,928 335,548 340,325 355,885 379,404 411,873 450,976

LIABILITIES Current Liabilities Accounts payable 3,953 6,247 8,266 10,209 12,731 15,028 17,348 19,687 Accrued expenses and other 8,207 16,594 18,807 22,729 26,691 31,507 36,372 41,274 liabilities Deferred revenue 9,763 14,261 12,983 11,832 14,755 17,417 20,106 22,816 Current portion of capital 6,984 26,041 15,796 21,125 20,578 23,074 26,133 28,018 lease obligations and other debt Total current liabilities 28,907 63,143 55,853 65,896 74,754 87,026 99,959 111,795

Non-current liabilities Capital lease obligations and 8,228 68,022 59,547 61,752 70,587 77,208 84,177 93,323 other debt, net of current portion Deferred revenue, net of 3,145 3,651 2,516 2,341 2,822 3,201 3,840 4,305 current portion Redeemable convertible 400 478 ------preferred stock warrants Other liabilities 764 1,975 2,456 2,578 2,649 2,825 3,084 3,364 Total Liabilities 41,444 137,269 120,370 132,567 150,812 170,260 191,060 212,787

SHAREHOLDER'S EQUITY Redeemable non-controlling 111 277 492 492 492 492 492 492 interest Redeemable convertible 95,715 116,683 ------preferred stock Total Stockholder's Equity 95,826 116,960 492 492 492 492 492 492

SHAREHOLDER'S DEFICIT Common stock 4 6 39 39 39 39 39 39 APIC 4,017 59,647 290,519 290,519 290,519 290,519 290,519 290,519 Accumulated deficit/income (51,093) (65,380) (76,493) (83,792) (86,477) (82,406) (70,737) (53,360) Accumulated other (291) 426 621 500 500 500 500 500 comprehensive loss Total Stockholder's Deficit (47,363) (5,301) 214,686 207,266 204,581 208,652 220,321 237,698

Total Stockholder's 48,463 111,659 215,178 207,758 205,073 209,144 220,813 238,190 Equity/Deficit Accrued expenses TOTAL LIABILITIES AND $89,907 $248,928 $335,548 $340,325 $355,885 $379,404 $411,873 $450,976 STOCKHOLDER'S DEFICIT TOTAL ASSETS $89,907 $248,928 $335,548 $340,325 $355,885 $379,404 $411,873 $450,976 ASSETS

CFA Institute Research Challenge December 12, 2011

Exhibit 26: Zipcar’s margin expansions will help fuel out growth projections.

Statement of Cash Flows (USD in thousands) FYE 2009 FYE 2010 2011E 2012P 2013P 2014P 2015P 2016P Operating Activities Net Income/Loss ($4,690) ($14,117) ($10,900) ($7,298) ($2,685) $4,071 $11,669 $17,377 D&A 5,310 13,602 27,297 37,429 47,529 57,534 66,894 75,085 Stock-based compensation expense 1,692 2,774 3,627 2,500 2,500 2,500 2,500 2,500 Other operating cash flows 586 1,400 4,610 1,500 1,500 1,500 1,500 1,500 Changes in Net Working Capital Accounts receivable (633) (516) (1,382) (1,087) (1,809) (1,698) (1,721) (1,708) Prepaid expenses and other assets (1,429) (3,776) (1,725) (1,507) (3,899) (2,979) (3,009) (3,032) Accounts payable 785 891 2,015 1,943 2,521 2,297 2,320 2,338 Accrued expenses and other liabilities 1,864 8,000 3,757 3,922 3,962 4,816 4,865 4,902 Deferred revenue 2,906 4,956 (134) (1,150) 2,922 2,662 2,689 2,710 Net Cash flow from operating activities $6,391 $13,214 $27,165 $34,131 $48,844 $65,604 $82,563 $96,462

Investing activities Proceeds from sale of PPE 2,009 8,424 12,299 15,531 19,708 23,628 27,601 31,545 Purchases of PPE (6,755) (42,376) (69,310) (70,326) (81,477) (88,381) (92,375) (93,152) Other investing activities (3,973) (6,625) (41,259) - - - - - Net Cash flow from investing activities ($8,719) ($40,577) ($98,270) ($54,794) ($61,769) ($64,753) ($64,774) ($61,608)

Financing activities Proceeds from issuance of debt, net of principal payments 250 29,833 (36,099) 7,534 8,288 9,117 10,028 11,031 Proceeds from sale of Series G redeemable convertible pref stock - 20,935 ------Other financing activities 83 298 113,291 - - - - - Net Cash flow from financing activities $333 $51,066 $77,192 $7,534 $8,288 $9,117 $10,028 $11,031

Net increase/decrease in cash and cash equivalents (1,995) 23,703 6,087 (13,129) (4,637) 9,968 27,817 45,885

Cash and cash equivalents Beginning of period 21,351 19,356 43,059 48,497 35,368 30,730 40,698 68,515 End of period 19,356 43,059 48,497 35,368 30,730 40,698 68,515 114,400

Exhibit 27: Zipcar is an aggressively expanding company in an industry that is still in the growth stage, thus it will continue to see aggressive growth numbers in the near future before achieving a perpetual stable growth rate. We assumed a two-stage growth model utilizing 30% free cash flow growth for the first five years after 2016 and 3% perpetual growth thereafter to calculate the terminal value. It should be noted that the terminal value given by this two - stage perpetuity model is in line with the exit multiple terminal value, despite d epressed current market conditions.

Intrinsic DCF Analysis 2009A 2010A 2011E 2012P 2013P 2014P 2015P 2016P (USD in thousands) EBIT (5,876) (7,403) (3,446) 1,224 6,606 13,254 19,968 25,873 - Taxes - - - 428 2,312 4,639 6,989 9,055 Tax Effected EBIT (5,876) (7,403) (3,446) 795 4,294 8,615 12,979 16,817 + D&A 5,310 13,602 27,297 37,429 47,529 57,534 66,894 75,085 - CapEx (net) (4,746) (33,952) (57,011) (54,794) (61,769) (64,753) (64,774) (61,608) - ∆ NWC 3,493 9,555 2,531 2,121 3,697 5,099 5,145 5,210 Unlevered FCF (8,805) (37,308) (35,691) (18,691) (13,643) (3,703) 9,955 25,084 TV: Perpetuity 1,338,293 Total Cash Flow -35,691 -18,691 -13,643 -3,703 9,955 1,363,377 TV: Mult. (EV/Rev) 1,313,595 Total Cash Flow -35,691 -18,691 -13,643 -3,703 9,955 1,338,679

CFA Institute Research Challenge December 12, 2011

Exhibit 28: Key vehicle metrics from September 2009 through September 2011 help explain the feasibility of organic growth in Zipcar’s business.

Key Metrics Sep-30- Dec-31- Mar-31- Jun-30- Sep-30- Dec-31- Mar-31- Jun-30- Sep-30- 2009 2009 2010 2010 2010 2010 2011 2011 2011 Ending members 329,381 348,932 366,535 470,320 521,035 540,484 576,914 604,571 649,627 Quarterly growth 5.94% 5.04% 28.32% 10.78% 3.73% 6.74% 4.79% 7.45% Ending vehicles 6,488 6,210 6,085 8,860 8,541 8,250 8,216 9,480 9,489 Quarterly growth -4.28% -2.01% 45.60% -3.60% -3.41% -0.41% 15.38% 0.09% Usage revenue per 55 55 54 59 60 59 57 65 65 vehicle per day Total revenue per $118.0 $104.0 $92.0 $104.0 $109.0 $97.0 $87.0 $ 103.0 $108.0 member per period Cost per new account 40 52 55 66 45 49 53 70 55 Average monthly 97.7% 97.8% 98.3% 97.9% 97.8% 97.9% 98.2% 97.8% 97.3% member retention Adjusted EBITDA (in 555 -316 -2,601 323 2,924 3,575 -1,885 2,316 4,567 thousands)

Vehicles Owned vehicles 202 112 113 545 1,692 2,011 2,424 3,684 4,592 Capital lease vehicles 489 407 586 1,703 1,632 1,700 1,509 1,621 1,608 Operating lease vehicles 5,797 5,691 5,386 6,612 5,217 4,539 4,283 4,175 3,289 Ending vehicles 6,488 6,210 6,085 8,860 8,541 8,250 8,216 9,480 9,489

Exhibit 29: Vehicle and revenue forecasts are based on membership growth and assumed member/vehicle ratios. Usage revenue per vehicle per day is determined by linear regression (see Figure 3). We also used a regression to forecast an increase in the member/vehicle ratio. We established a cap on this ratio by assuming that if Zipcar plans to have each car used for 9 hours per day, and that members use cars an average of 36 hours per year (determined through survey) then the maximum ratio of members/car they can maintain is about 91. We also assumed that by 2016, fee revenue would not reach management’s targeted goal of 17% share, so we discounted this number by 10%.

3 months 3 months 12 months 12 months 12 months 12 months 12 months Sep-30-2011 Dec-31- 2012P 2013P 2014P 2015P 2016P 2011E Ending Members 649,627 675,081 834,774 998,693 1,162,826 1,323,542 1,477,882 Members/vehicle 73 74 78 82 86 90 Ending vehicles for the 9,480 9,489 9,186 11,344 12,855 14,216 15,408 16,421 period

Usage revenue per day $65.00 $65.00 $65.11 $70.18 $75.24 $80.31 $85.38 $90.44 per vehicle 7.8% 7.2% 6.7% 6.3% 5.9%

Total usage revenue $58,779,000 $54,719,027 $262,938,24 $332,292,23 $396,772,38 $461,597,45 $525,378,36 per period 7 0 4 2 4 % of total revenue 86% 86% 86% 86% 85% 85% 85% assumption

Fee revenue $9,227,000 $8,591,875 $42,519,056 $55,305,016 $67,927,830 $81,244,031 $95,015,236 % of total revenue 14% 14% 13.9% 14.3% 14.6% 15.0% 15% assumption

Other Revenue $53,000 $63,374 $305,763 $387,985 $465,165 $543,385 $621,015 % of total revenue 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% assumption Total Zipcar Revenue $68,059,000 $63,374,277 $305,763,06 $387,985,23 $465,165,37 $543,384,86 $621,014,61 6 1 9 8 5

CFA Institute Research Challenge December 12, 2011

Exhibit30: Our return of 36% definitely corresponds with a BUY recommendation since it is above the 10 year standard deviation of returns of the Small Cap S&P600 Index.

Year S&P600 Annual Returns 2001 232.2 6% 2002 196.6 -15% 2003 270.4 38% 2004 328.8 22% 2005 350.7 7% 2006 400.0 14% 2007 395.1 -1% 2008 268.7 -32% 2009 332.6 24% 2010 415.7 25% 2011 414.5 0% Standard Deviation 10 Year 20%

Exhibit31: While debt is increasing, there is sufficient growth in operating cash flows to sustain strong liquidity and solvency ratios.

Ratios 2009A 2010A 2011E 2012P 2013P 2014P 2015P 2016P Liquidity COGS/365 $284 $377 $490 $605 $754 $890 $1,027 $1,166 Days AR 47 44 43 45 45 45 45 45 Days AP 14 17 38 38 35 35 35 35 Asset Adequacy Current Ratio 0.94x 0.92x 1.78x 1.33x 1.19x 1.2x 1.37x 1.68x Quick Ratio 0.94x 0.92x 1.78x 1.33x 1.19x 1.2x 1.37x 1.68x Cash Adequacy OCF/Debt coming due 0.92x 0.51x 1.72x 1.62x 2.37x 2.84x 3.16x 3.44x OCF/Current Liabilities 0.22x 0.21x 0.49x 0.52x 0.65x 0.75x 0.83x 0.86x

Solvency Cash Adequacy OCF/Total Liabilities 0.15x 0.10x 0.23x 0.26x 0.32x 0.39x 0.43x 0.45x D/E 0.33x 0.86x 0.36x 0.41x 0.46x 0.49x 0.51x 0.52x Asset Adequacy Total Liabilities/Total Assets 0.46x 0.55x 0.36x 0.39x 0.42x 0.45x 0.46x 0.47x Coverage LTD/SE 0.19x 0.63x 0.29x 0.31x 0.36x 0.38x 0.4x 0.41x Interest Coverage Ratio NM 3.06x 4.52x 5.01x 6.26x 7.41x 8.29x 8.42x

Profitability/Growth Sales Growth 24% 42% 30% 26% 27% 20% 17% 14% ROE -10% -13% -5% -4% -1% 2% 5% 7% ATO 1.48x 1.1x 0.83x 0.9x 1.11x 1.27x 1.37x 1.44x Net Income Margin -4% -8% -5% -2% -1% 1% 2% 3% ROA -5% -6% -3% -2% -1% 1% 3% 4% Gross Margin 21% 26% 26% 28% 29% 30% 31% 31% EBITDA Margin 0% 3% 10% 13% 14% 15% 16% 16% COGS % Rev. 79% 74% 74% 72% 71% 70% 69% 69% Op. Exp. % Rev. 104% 104% 101% 100% 98% 97% 96% 96% OCF/Sales 5% 7% 11% 11% 13% 14% 15% 16%

CFA Institute Research Challenge December 12, 2011

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CFA Institute Research Challenge December 12, 2011

Disclosures: Ownership and material conflicts of interest: None of the authors, or a member of their household, of this report holds a financial interest in the securities of this company. None of the author(s), or a member of their household, of this report knows of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The authors, or a member of their household, do not serve as an officer, director or advisory board member of the subject company. Market making: The authors does not act as a market maker in the subject company’s securities. Ratings key: Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater over the next twelve month period, and recommends that investors take a position above the security’s weight in the S&P 500, or any other relevant index. A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with BSAS or the BSAS New England Investment Research Challenge with regard to this company’s stock.