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Presented to:
JOHNNIE R. CREAN
ALFA LEISURE, INC.
13501 5TH STREET
CHINO, CALIFORNIA 91710
Presented by:
Deloitte & Touche Corporate Finance
April 23, 1999 [DELOITTE & TOUCHE LOGO]
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CONFIDENTIAL
OVERVIEW
o In order to provide Alfa's management with further detail regarding the
specific steps necessary to create a market for the Company's stock, we have
addressed the following topics:
- The potential value scenarios and implications for Alfa's market value
- A process for creating a market for Alfa's stock
- An overview of the current conditions and trends of the small-cap market
- A summary of our general conclusions
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CONFIDENTIAL
POTENTIAL VALUE SCENARIOS
o The following two slides illustrate Alfa's potential market value over time.
We assume that the Company's shares will trade at multiples similar to
multiples of its industry peers.
o Two potential growth scenarios are considered:
- Scenario 1: Alfa follows its current business plan of entering the low-end
segment of the market.
- Scenario 2: Alfa develops a new aggressive business plan resulting in three
to five times the growth in revenue and profits of the current plan.
- Each scenario assumes the following:
# The stock price increases, allowing Alfa to issue additional shares to
fund the planned expansion at a P/E of 6 times and 9 times.
# The Company raises $2,000,000 (net of underwriting fees of 7%) in year
2000.
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CONFIDENTIAL
POTENTIAL VALUE SCENARIOS - CURRENT BUSINESS PLAN
Scenario 1: Under the current business plan, if Alfa's P/E ratio increases to a
range of 8 to 12 times, the Company's total market capitalization would reach
$8.9 - $13.4 million in 2000 and grow to $24.3 - $36.5 million in 2005.
1999 2000 2001 2002 2003 2004 2005 CAGR
------ ------ ------ ------ ------ ------ ------ ----
Revenue 40,277 43,400 53,333 66,350 77,741 84,173 90,648 14%
Income 1,041 1,122 1,211 1,314 2,198 2,501 3,042 20%
Weighted Average Shares Outstanding (a) 3,048 4,017 4,017 4,017 4,017 4,017 4,017
Projected Earnings per Share 0.34 0.28 0.30 0.33 0.55 0.62 0.76 14%
Implied Price per Share at P/E ratio of 8 (b) 2.24 2.41 2.62 4.38 4.98 6.06 22%
Implied Market Value at P/E ratio of 8 (b) 8,980 9,684 10,515 17,586 20,010 24,337 22%
Weighted Average Shares Outstanding (c) 3,048 3,694 3,694 3,694 3,694 3,694 3,694
Projected Earnings per Share 0.34 0.30 0.33 0.36 0.60 0.68 0.82 16%
Implied Price per Share at P/E ratio of 12(b) 3.65 3.93 4.27 7.14 8.13 9.88 22%
Implied Market Value at P/E ratio of 12(b) 13,469 14,526 15,773 26,378 30,015 36,505 22%
Notes:
(a) assumes that 968,576 shares will be required to raise $2,000,000, based on
EPS of $0.37 and P/E of 6 times before issuance of new shares
(b) 8 to 12 represents the trading multiple range for comparable companies,
after applying a 25% new issue discount the range narrows to 6 to 9
(c) assumes that 645,718 shares will be required to raise $2,000,000, based
on EPS of $0.37 and P/E of 9 times before issuance of new shares
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CONFIDENTIAL
POTENTIAL VALUE SCENARIOS - ACCELERATED BUSINESS PLAN
Scenario 2 - Assuming that Alfa pursues a more aggressive, accelerated business
plan, with revenue and profits increasing three to five times the level of the
current plan, and the Company's P/E ratio increases to a range of 8 to 12 times,
Alfa's total market capitalization would reach $27 - $67 million in 2000 and
grow to $73 - $183 million in 2005.
1999 2000 2001 2002 2003 2004 2005 CAGR
------ ------- ------- ------- ------- ------- ------- ----
Revenue (a) 40,277 130,200 160,000 199,050 233,222 252,518 271,944 37%
Income (a) 1,041 3,367 3,632 3,943 6,595 7,504 9,126 44%
Implied Market Value at P/E ratio of 8 (a) 26,939 29,052 31,546 52,757 60,030 73,011 22%
Implied Market Value at P/E ratio of 12 (a) 40,408 43,578 47,318 79,135 90,045 109,516 22%
Revenue (b) 40,277 217,000 266,667 331,750 388,703 420,864 453,239 50%
Income (b) 1,041 5,612 6,053 6,572 10,991 12,506 15,211 56%
Implied Market Value at P/E ratio of 8 (b) 44,898 48,420 52,576 87,928 100,050 121,684 22%
Implied Market Value at P/E ratio of 12 (b) 67,346 72,630 78,864 131,892 150,074 182,527 22%
Notes:
(a) assumes revenue 3 times greater than that of the current business plan
(b) assumes revenue 5 times greater than that of the current business plan
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CONFIDENTIAL
PROCESS FOR CREATING A MARKET FOR ALFA'S STOCK - OVERVIEW
o In order for Alfa to issue new shares in the year 2000 at a P/E between 6 and
9 times, as demonstrated in the previous slides, and maintain those multiples
over the long run, the Company's stock must achieve certain characteristics to
increase its perceived value in the market place.
o The most important characteristic for a stock is a high degree of liquidity.
Liquidity is the number one attraction for investors. They are seeking stock
investments that can be bought and sold very easily.
o Other characteristics include high earnings growth potential, confidence in
earnings stream and sizable investment potential, all attributes which are
factors driving the creation of liquidity.
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CONFIDENTIAL
PROCESS FOR CREATING A MARKET FOR ALFA'S STOCK - GENERAL STEPS
o In order to create a market for Alfa's stock, the Company needs to define
liquidity as its primary goal.
o Liquidity will be positively impacted by:
- (1) an increase in Alfa's float (total shares less shares owned by
insiders)
- (2) a decrease of the majority shareholder's ownership (Johnnie)
- (3) an increase in the perceived value of the stock
o First, to achieve both an increase in Alfa's float and a decrease in Johnnie's
ownership, the Company can issue new shares and/or Johnnie can sell a
significant portion of his current shares.
- In our interviews, analysts have indicated that the majority shareholder
should hold no more than 30% to 50% of the outstanding stock. Investors are
more comfortable investing in a stock when the ownership is diversified and
the direction of the company is not controlled by one or two individuals.
- Given that Alfa's goal is to create a market for its stock today, the
Company should not repurchase shares or do a reverse stock split, as that
would decrease the float.
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CONFIDENTIAL
PROCESS FOR CREATING A MARKET FOR ALFA'S STOCK - GENERAL STEPS
o Second, to increase the perceived value of the stock, Alfa could
embark on the following steps:
- Define and support the elements of a compelling story to take to the
market place.
- Map out a well crafted investor relations program to facilitate
communication with market makers, institutional investors, current
stockholders, and future stockholders.
- Identify potential market makers who will support the stock long-term.
- Design a plan to gain the interest of the potential market makers and
their institutional and private investor following.
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CONFIDENTIAL
DEVELOP AND SUPPORT THE ELEMENTS OF A COMPELLING STORY
o Feedback from market makers and analysts has revealed that a compelling
story must include some or all of the following characteristics:
- Dynamic growth: revenue and profit growth in excess of 20% to 25%
- Consolidation: roll-up of a fragmented industry
- Diversification: an increase in product breadth through internal
growth or acquisition
- Favorable demographics: exploitation of positive market trends,
such as an exponentially growing segment of the marketplace, i.e.
the baby boomer generation
- Strong and differentiated competitive position: perception as the
market leader in terms of size and/or strategy
- Recognized and experienced management team: proven track record of
creating value
- High valuations: total valuations in excess of $50 million+ and
growing
o Alfa must develop a strong business plan that supports the projected
growth. The business plan must include a well defined, credible road
map for achieving the projected growth as well as contingency plans
should market conditions change.
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CONFIDENTIAL
MAP OUT A WELL-DEFINED INVESTOR RELATIONS PROGRAM
o Alfa must develop the appropriate channels to communicate effectively
with the investor community.
- This includes identifying the specific analysts, market makers and
institutional investors that would support the Company's stock over
the long run.
- The target investors that are most likely to be interested in
Alfa's stock are those focused on value. Value investors are
interested in low risk, stable companies as opposed to high risk,
volatile companies.
- Alfa must be wary of "bucket shops" that run up the price of the
stock immediately following a transaction and only focus on
profiting for the short-term.
o Alfa must develop the appropriate material to communicate effectively
with the investor community.
- Alfa needs to build and communicate its story through regular
press releases, annual reports, and investor conference calls and
meetings.
- The story must be designed with the investing profile of the
target investor groups in mind.
o If Alfa does not have the in-house capabilities to effectively manage an
investor relations program, an outside investor relations consultant could
cost between $150,000 to $250,000 per annum.
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CONFIDENTIAL
IDENTIFY POTENTIAL SMALL-CAP MARKET MAKERS
o Sampling of regional small-cap market makers
- Van Kasper & Company, Los Angeles
- Crowell, Weeden & Co., Los Angeles
- Cruttenden Roth, Inc., Irvine
- Wedbush Morgan Securities, Los Angeles
- Everen Securities, Los Angeles
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CONFIDENTIAL
DESIGN A PLAN TO GAIN AND KEEP INSTITUTIONAL INVESTORS' INTEREST
Institutional investors create a solid foundation for the value of a company's
stock, while individual investors tend to be more fickle, concerned primarily
with short term profits. Institutional investors generally believe in a firm's
value and have the patience to wait for long term results. Investor relations
consultants suggest that individuals, institutions and the majority owner should
own 40%, 30% and 30% of the shares respectively.
The following is a list of key drivers to attract institutional investors:
o Attract multiple analysts to cover Alfa's performance
- Analysts strongly impact the decisions of institutional investors
- Analysts are attracted to companies that communicate compelling
value propositions and offer significant investor returns
o Communicate results regularly with analysts, including:
- Financial and operational results: annual reports, quarterly earnings
- Growth plans: new product introductions, key executive hires
- Change in strategy: any news that would materially impact the company's
performance
o Support large trading volumes
- Institutional investors must be able to purchase blocks of stock large
enough to impact their portfolios without impacting the price of the
individual stock
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CONFIDENTIAL
PROCESS FOR CREATING A MARKET FOR ALFA'S STOCK - GENERAL CONCLUSIONS
o The preceding slides outlined the general steps necessary to achieve
liquidity in the market place. Execution of these steps could help Alfa
create a market for its stock.
o Investor relations consultants estimate that the overall process would take at
least six months to one year before Alfa would realize an improvement in
value.
o Depending on the effectiveness of the campaign, the stock price could
potentially trade at ratios similar to ratios of comparable companies. Given
the current business plan, the market capitalization could exceed $12 to $13
million, which is significantly greater than today's market cap of $3 to $4
million.
o The ability to achieve these positive results is dependant upon market timing
and the market perception of small-cap stocks.
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CONFIDENTIAL
CURRENT OUTLOOK OF SMALL-CAP MARKET - DEFINITIONS
o Ibbotson Associates (research organization involved in valuations of small-cap
firms) defines the following segments based on market capitalization ranges:
- Micro-caps: market capitalization up to $250 million
- Small-caps: market capitalization between $250 million and $1
billion
- Mid-caps: market capitalization between $1 billion to $4 billion
- Large-caps: market capitalization greater than $4 billion
o Analysts and market makers generally define small-caps as firms with a market
capitalization of at least $100 million or greater.
o The following slides provide an overview of recent trends impacting small-cap
companies. The impact is most severe for those companies falling at the low
end of the small-cap and micro-cap market capitalization ranges.
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CONFIDENTIAL
CURRENT OUTLOOK OF SMALL-CAP MARKET - OVERVIEW
o The majority of small-cap stocks have fallen out of favor in the
marketplace.
- Although small-cap stocks have traditionally outpaced large-cap
stocks in terms of investor returns, the current market conditions are not
so favorable. To date, the Dow has climbed 8% versus the Russell 2000's
decline of 5%. (Time, 4/12/99)
o The run up in today's stock market is largely attributed to large-cap and
Internet stocks with the majority of small-caps barely participating.
- The 100 largest companies in the S&P 500-stock index have contributed
roughly 90% of that index' 6.8% gain this year, according to Morgan
Stanley.
o As stated previously, liquidity is the investors' primary concern. Investors
are pouring cash into stocks that can be easily bought and sold.
- Mutual-fund investors have pulled some $8 billion out of small-cap
funds so far this year.
- Most small-cap issues are so thinly traded that investors cannot buy
large blocks without affecting the stock price.
- Furthermore, the popularity of Internet stocks is driving away
capital from otherwise attractive non-Internet stocks.
- Investors are attracted to strong, sustained profit growth. Over the
past five years, earnings at the nation's 30 largest companies have
increased 19.5% on average, compared with 10% for Russell 2000
companies. (Jeremy Siegel, Wharton School Professor).
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CONFIDENTIAL
CURRENT OUTLOOK OF SMALL-CAP MARKET - FUTURE OUTLOOK NOT POSITIVE
o While many analysts believe small-caps should eventually rebound, most do not
expect the small-cap segment to recover in the near future.
- Analysts believe small-caps have been permanently impaired by a shift
in the economics of small-cap investing. (Piper Jaffray's M&A Group
managing director D. Donoghue)
# Institutions are controlling larger and larger pools of money.
# It is harder for them to invest in small-caps, because they can't
buy enough shares to affect their portfolios and they fear lack
of liquidity.
# Indeed, the price of most small-caps would be severely impacted
by the average purchase of a typical institution.
- Furthermore, small-caps are selling for historic lows and the current
supply is far greater than the demand.
# Since 1990, approximately 5,000 companies, virtually all
small-caps, have gone public.
# Total assets in U.S. equity mutual funds have soared almost 30%,
to $2.1 trillion, since the end of 1997, but assets in small-cap
funds have shrunk, from $136.8 billion to $132.5 billion.
(Securities Data Corporation)
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CONFIDENTIAL
CURRENT OUTLOOK OF SMALL-CAP MARKET - HOW CAN SMALL-CAPS SEE VALUE
o Due to the difficulties of the small-cap market today, many companies are not
realizing the benefit of being public - even those companies with solid
revenue and earnings growth. The best way for them to realize value is to go
private or to be purchased. (Marty Wade of Prudential Securities)
o Recent market developments support this theory:
- Acquisitions, either through leveraged buyouts by private equity
funds or in corporate takeovers, have enabled small-caps to achieve
value in today's market.
- In 1998 there were 800 small-cap buyouts, up from around 450 in 1996.
- "There's an incredible amount of money in buyout funds, buying
micro-caps at values well below there private market value."
(Time, Inc. 4/12/99)
- Piper Jaffray estimates that the average small-cap trades at a
significant discount compared to the typical S&P 500 company.
o The main issue is that the small-cap company has to be a willing seller,
since insiders often control the majority of the stock.
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CONFIDENTIAL
OVERALL CONCLUSIONS
o While Alfa's current business plan presents a solid story of revenue and
profit growth, we have concerns that this story may not be compelling enough
to attract credible analysts and long-term investors.
o Alfa's story may not be compelling enough to create liquidity and thus create
a market for its stock for the following reasons:
- Alfa would still have a very small market capitalization even if its
shares were to trade at significantly higher multiples.
- The projected 15% to 20% annual revenue and profit growth is
favorable, however, given the absolute size of the company, the
dollar value of the float may not be enough to attract investors in
today's market.
- Analysts and market makers have stated that the minimum deal size
for a secondary offering or an additional equity issue needs to be
at least $15 to $20 million. For deals smaller than this, it would
be very difficult to attract credible investors.
- This range could actually be higher for more mature, highly
competitive, non-technology industries. For Alfa this would imply a
business plan that supported a total company valuation five to ten
times the current preliminary range of values.
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CONFIDENTIAL
OVERALL CONCLUSIONS - CONTINUED
o In order to create liquidity and a market for Alfa's stock, the Company would
need to build a more compelling story for analysts and investors.
o Alfa could create a more compelling story by capitalizing on its current
strengths, such as:
- superior knowledge of its industry
- high quality product line
- recognized brand name
- strong reputation among customers
- solid cash flows
o The elements of a more compelling story could include:
- An aggressive roll-up strategy
# By joining with an equity partner, Alfa could pursue acquisitions
and internal development at a much faster pace. A reputable equity
partner would support the Company through additional access to
both debt and equity capital as well as through other related
strategic investments.
- More dramatic exploitation of favorable market demographics
# Alfa could take advantage of its expanding customer base (the
aging baby boomers) and pursue multiple new product lines and/or
enter new geographic markets.
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CONFIDENTIAL
OVERALL CONCLUSIONS - CONTINUED
o Based on Alfa's current market position, the Company has a variety of options
to consider that could create and maximize shareholder value.
o If the Company decides to pursue a strategy aimed at creating a market for the
stock in today's public environment, we would advise the shareholders to
reconsider their current business plan and to develop a plan that would entice
greater interest from the investment community.
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CONFIDENTIAL
REFERENCES
o Marty Taleo
- Investor Relation Resources, 949.376.4458
o Omar Sanchez
- OVS Incorporated Financial Communications, 949.361.4007
o Marty Wade
- Prudential Securities, 212.778.2805
o Byron Roth
- Cruttenden Roth, Inc., 949.720.5721
o John Murphy
- NationsBanc Montgomery Securities, 213.228.3313
o David Horwich
- Van Kasper & Company, 310.209.2200
o Dave Enzler
- Everen Securities, 310.277.6868
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