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CONFIDENTIAL
VALUATION
PREPARED EXCLUSIVELY FOR
THE BOARD OF DIRECTORS OF
MARKET AMERICA, INC.
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BURNHAM SECURITIES INC.
JUNE 18, 2001
RICHARD LEWISOHN, III
SENIOR MANAGING DIRECTOR
CALVIN CHIN
ASSOCIATE
ROBERT GERSTENFELD
ASSOCIATE
[LOGO] BURNHAM SECURITIES INC.
TABLE OF CONTENTS
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1. SUMMARY
OVERVIEW
CRITERIA FOR COMPARATIVE INCLUSION
2. VALUATION ANALYSIS
PREFACE
METHODOLOGY
MARKET MULTIPLE ANALYSIS
PERFORMANCE RATIO ANALYSIS
COMPARABLE TRANSACTIONS MULTIPLE
DISCOUNTED CASH FLOW ANALYSIS
STOCK BUYBACK ANALYSIS
3. VALUATION ESTIMATES
4. MARKET MULTIPLE ANALYSIS
DESCRIPTION OF COMPARABLE COMPANIES
5. PERFORMANCE RATIO ANALYSIS
6. COMPARABLE TRANSACTIONS MULTIPLE
DESCRIPTION OF TRANSACTIONS
7. DISCOUNTED CASH FLOW ANALYSIS
8. STOCK BUYBACK ANALYSIS
STOCK CHARTS
9. VALUATION SUMMARY
10. KEY CONSIDERATIONS AND CONCLUSION
EXHIBIT A
COMPANY PROFILES
EXHIBIT B
ENGAGEMENT LETTER
2
SUMMARY
As of May 23, 2001, Burnham Securities Inc. ("Burnham", or "BSI") was engaged by
the management of Market America, Inc. (the "Company", or "MA") to conduct a
valuation analysis of the Company. In undertaking our analysis as to the
valuation of the Company, we relied on certain valuation techniques. These
include:
evaluating the likelihood of achieving the business goals and financial
projections prepared by the management of MA and the impact such
results might have on the implied market valuation of the Company;
the relative financial comparisons between MA and other public
companies that BSI deems to be comparable;
evaluations of transactions in the public markets undertaken by
unrelated third parties, who were knowledgeable and willing buyers and
sellers;
consideration of stock repurchases by the Company from shareholders who
were knowledgeable regarding MA's activities at the time they sold
shares to the Company;
consideration of the closely-held nature of MA's common stock;
consideration of the historical trading activity of the common stock of
MA; and
preparation of a discounted cash flow model based on MA's historical
results as well as the Company's 2002 internal budget and from
projections and assumptions prepared by and provided to BSI by the
management of MA.
During the course of our engagement, we have, among other things:
reviewed publicly available information concerning the Company; which
included analysis of MA's financial statements from 1996, its 10K's for
the fiscal years ended 4/30/97 through 4/30/00, preliminary, unaudited
4/30/01 financial statements and a review of the Company's 10Q's filed
for the first three quarters of fiscal 2001;
discussed with management the anticipated results for the year ended
4/30/01 as well as reviewed with management its budget for the year to
end 4/30/02 and its assumptions for successive fiscal years based on
selected operating scenarios;
discussed the past and current operations and financial condition of MA
with senior executives of the Company;
compared the financial performance of MA and the prices, trading
activity and market valuations of certain other comparable
publicly-traded companies and their securities; and
3
conducted other financial studies and analyses and performed such other
investigations and took into account such other factors as we deemed
necessary or appropriate for purposes of preparing our valuation
herein.
In preparing our analysis, we have assumed and relied upon, without independent
verification, the accuracy and completeness of all of the financial and other
information, which we received in connection with this valuation. With respect
to the projected financial information and business prospects, we have assumed
that such information reflects the best currently available estimates and
judgments of the Company's management as to the expected future financial
performance. Our valuation is necessarily based on economics, market and other
conditions as they exist and as they can be evaluated as of the date of this
valuation analysis.
We were retained by the Company in connection with this valuation and will
receive a fee for our services, a portion of which has already been paid. Prior
to this engagement, BSI has not provided financial advisory or financing
services to the Company, nor has it received any fees from the Company, or any
of its affiliates.
It is understood that this valuation analysis and supporting information and
data is for the exclusive use of the management and Board of Directors of Market
America, Inc. in its deliberations and may not be used for any other purpose
without our prior written consent.
Very truly yours,
BURNHAM SECURITIES INC.
4
CRITERIA FOR COMPARATIVE INCLUSION
In determining those companies most comparable to Market America, Inc. for our
valuation models, we selected entities that most resemble MA from a universe of
publicly owned companies. Our criteria for the selected grouping of these
companies include a number of characteristics such as:
o Direct selling by individuals to end-users
o Commissions are earned by sales representatives selling products
o Sales representatives also generate revenues through recruitment
activities
o Products sold are predominantly proprietary
o Multiple sales channels available (direct, telemarketing, Internet)
o Majority of products sold are lifestyle enhancing, convenience
enabling, impulse satisfying
o Strong corporate infrastructure in place
o Short sales cycle
o Similar sales levels
o Generally comparable margins
o Low relative distribution costs
o High potential for re-order
SELECTED INDUSTRIES
o home/family care
o personal care
o wellness/nutrition
o leisure
o educational
o technology/telecommunications
o gifts
5
VALUATION ANALYSIS
PREFACE
The following analyses are based, in part, upon information provided to us by
the management of MA. Certain other information regarding comparable companies
has been obtained through publicly available databases. We have reviewed
management's budgets and have relied upon such budgets without independent
verification. Our valuation is based upon economic, market and financial
information available as of the date of our valuation.
METHODOLOGY
The following is a brief description of the methods used to estimate the value
of the Company.
1. MARKET MULTIPLE ANALYSIS
This method utilizes certain market information from selected companies that
possess comparable businesses characteristics, including sales levels, growth
prospects and overall profit margins.
Based on generally accepted measures of value in the public equity markets, the
following market valuation parameters were considered:
o Price to Sales
o Enterprise Value to EBITDA
o Price to Earnings
o Price to Operating Cash Flow
o Price to Book
Each market parameter (or "multiple") is calculated and represents an average of
comparable companies that is adjusted and normalized for market extremes. In
order to make the multiples meaningful, certain multiples are mathematically
adjusted to smooth out companies for which the values may be unrealistically
high or low. This can occur during periods of extreme market optimism or
pessimism.
2. PERFORMANCE RATIO ANALYSIS
This method analyzes financial ratios from selected companies to determine their
use of cash, operating margins, liquidity, and ability to pay debt. The analysis
provides further empirical evidence for the higher weighting we gave the Market
Multiple Analysis.
3. COMPARABLE TRANSACTIONS MULTIPLE
This method is based on a review of comparable transactions, over a two-year
period, in the household furnishings, personal care products,
wellness/nutrition, food retailers, leisure, educational,
technology/telecommunications and catalog/specialty distribution category that
exhibit similar financial and operating characteristics to MA and that sell to
comparable customer bases. Of the transactions we analyzed, there were two that
involved companies going private. These transactions provide us with a better
picture of how companies were actually valued by market participants with regard
to the size, structure, and value based on the implied and explicit multiples.
These transactions were based on the actual considerations paid for a comparable
business or segment thereof. The following multiple is generally accepted as
meaningful in the marketplace:
6
o Total Invested Capital to Revenues
The total invested capital represents the total amount of capital including debt
and equity offered in the transaction. Each market parameter (or "multiple") is
calculated and represents an average of comparable transactions based on actual
transactions. Market conditions aside, transactions are executed for a myriad of
reasons (e.g. market share motivations, portfolio fit, buy-versus-build).
4. DISCOUNTED CASH FLOW ANALYSIS
This analysis involves a review of the Company's internal forecasts and
projections regarding its future operations and the cash flows derived therefrom
in order to value the shares of the Company. In general, the free operating cash
flows of the business are discounted and are then adjusted for special items as
deemed appropriate. In order to arrive at the free cash flow estimates by year,
after-tax free cash flows from operations are utilized and adjusted for capital
expenditures, changes in working capital and other appropriate adjustments. This
provides a measure of the Company's ability to generate consistent free cash
flows for the benefit of its shareholders.
Once each year's free cash flows are determined, a discount rate, or Weighted
Average Cost of Capital ("WACC"), which takes into account risk-free interest
rates, equity risk premiums, and the volatility of the company relative to the
S&P 500 ("beta") is applied to such cash flows to provide a result when
aggregated, will result in the present value of those future cash flows.
IN ORDER TO PRODUCE A MEANINGFUL DISCOUNTED CASH FLOW ANALYSIS, CONSIDERATION
MUST BE GIVEN TO THE MOST RECENT FIVE YEARS' ACTUAL RESULTS AND THE PROSPECTIVE
FIVE YEARS' PROJECTIONS. THE MANAGEMENT OF MA HAS NEVER PREPARED FIVE-YEAR
PROJECTIONS. MA'S MANAGEMENT HAS USED ITS ANNUAL BUDGETING PROCESS MORE AS A
MOTIVATIONAL TOOL FOR ITS DISTRIBUTORS. THE APRIL 30, 2001 UNAUDITED RESULTS
FELL ABOUT 32% SHORT OF ITS 2001 BUDGET PROJECTION. IT IS BECAUSE OF THIS
DRAMATIC SHORTFALL THAT WE ARE DISCOUNTING THE COMPANY'S 2002 BUDGET PROJECTIONS
IN OUR ANALYSIS.
WE DID NOT THINK IT WOULD BE PRUDENT TO IMPOSE ON MA'S MANAGEMENT AN EXERCISE IN
FORECASTING FIVE YEARS HENCE. INSTEAD, WE HAVE ACCEPTED THE COMPANY'S UNAUDITED
4/30/01 RESULTS AND (FOR PURPOSES OF OUR DISCOUNTED CASH FLOW MODEL) ASSUMED A
9.9% PER ANNUM COMPOUNDED AVERAGE GROWTH RATE TO ARRIVE AT OUR RESULTS. WHILE WE
BELIEVE THAT THIS IS REALISTIC BASED UPON MA'S MANAGEMENT DISCLOSURE THAT ITS
FUTURE GROWTH WILL NOT BE AS ROBUST AS ITS PAST GROWTH AND A CONSENSUS OF
ECONOMIC PREDICTORS, WE HAVE, NONETHELESS, DIMINISHED THE WEIGHTING OF THE
DISCOUNTED CASH FLOW ANALYSIS IN ARRIVING AT OUR VALUATION FOR MA.
7
5. STOCK BUYBACK MULTIPLE
An analyst or shareholder can presume that when a Company buys back its shares
in the public market it is signaling that this is a prioritized use of available
cash. A Company's management and directors are in a position to evaluate the
company's current and future operating prospects to make such a decision.
Conversely, the selling shareholders also believe that the price, at the time of
transaction, is a fair value. Therefore, in most situations, stock buybacks are
a measurement of the fair market value of outstanding shares as determined by
those most intimate with overall operations and future prospects.
HOWEVER, WE DO NOT ASSIGN MUCH SIGNIFICANCE TO THE PURCHASES BY MA DUE TO THE
FACT THAT, IN THESE THREE CASES, THE SELLER HAD EXTRANEOUS REASONS FOR LIQUIDITY
AND MA, WITH AN ABUNDANCE OF AVAILABLE CASH, WAS WILLING TO BE ACCOMMODATING.
FURTHERMORE, WHILE THE SALES WERE CONSUMMATED ON DIFFERENT DATES, IN EACH
INSTANCE THE SELLER WAS THE SAME INDIVIDUAL.
8
VALUATION ESTIMATES
In order to determine the overall valuation, we used the following five methods:
the Market Multiple Analysis, Comparable Transactions Multiple Analysis,
Performance Ratio Analysis, Discounted Cash Flow Analysis and Stock Buyback
Analysis. After we arrived at our valuations, we then weighted each estimate
according to its relative importance.
The following weights were applied for each method: Market Multiple 40%,
Comparable Transactions 30%, Performance Ratio Analysis not weighted but
considered, Discounted Cash Flow 25% and Stock Buyback Analysis 5%. We granted
the Market Multiple and Comparable Transactions Multiple greater weightings than
the other methods because we believe that the public markets and the multiples
paid for comparable businesses in similar sectors in recent transactions are
more efficient in valuing companies than the Discounted Cash Flow and Stock
Buyback analyses.
The following sections contain the analysis and details of our valuation
methods:
o Market Multiple Analysis 4
o Performance Ratio Analysis 5
o Comparable Transactions Analysis 6
o Discounted Cash Flow Analysis 7
o Stock Buyback Analysis 8
9
1. Market Multiple Analysis:
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The most logical universe of comparative public companies would be MA's
competitors, or peer group.
We did select eight publicly traded entities with characteristics most similar
to Market America. Using the market multiple method, we derived a valuation
range from $67.5 million to $234.7 million or $3.48 to $12.09 per share by
compiling a list of average trailing historical multiples that were based upon
historical financial information from our composite group of companies.
Multiple: Average
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Price / Sales 0.49 x
Enterprise Value / EBITDA 5.17x
Price / Earnings 11.64x
Price / Operating Cash Flow 8.24x
Price / Book 1.77x
These multiples were applied against management's operating statistics to derive
an estimated value for each parameter. We are valuing the equity of MA by using
its unaudited results at the end of the Fiscal Year 2001 (and these multiples
were derived from each comparable company's latest twelve months results).
10
DESCRIPTION OF COMPARABLE COMPANIES
Overview
ADVANTAGE MARKETING SYSTEMS, INC. (AMEX:AMM) markets a product line consisting
of approximately 100 products in three categories: weight management, dietary
supplement and personal care products. The products are manufactured by various
manufacturers pursuant to formulations developed for the Company and are sold to
its independent distributors located in all 50 states and the District of
Columbia. The Company also derives revenues from the sale of various educational
and promotional materials designed to aid its distributors in maintaining and
building their businesses. These products are marketed through independent
distributors who purchase products for resale to retail customers as well as for
their own personal use. The number of active distributors was approximately
86,600 on December 31, 2000. (An "active" distributor is one who purchased $15
on auto-ship or at least $50 if not on auto-ship of the Company's products
within the preceding 12 months). Distributors may elect to work on a full-time
or part-time basis. A majority of the Company's distributors sell its products
on a part-time basis.
HERBALIFE INTERNATIONAL, INC. (NASDAQ:HERBA), which began operations in February
1980 as a limited partnership, is a network marketing company that sells a wide
range of weight management products, food and dietary supplements and personal
care products worldwide. The Company currently markets 171 products. The
Company's products are marketed through distributors, who are generally
independent contractors, and who purchase products for resale to retail
consumers and other distributors. Distributors may elect to work on a full-time
or part-time basis.
For the last three years, approximately 40% of the Company's sales were derived
from its 15 weight management products and approximately 20% were derived from
the Company's Formula 1 Protein Mix. The Company's dietary and nutritional
supplements are targeted to specific consumer groups and several antioxidants
are offered. The Company also sells educational and promotional materials,
including sales aids, informational videotapes and cassette recordings. In
addition, the Company sells distributor kits at a worldwide average cost of
approximately $77 per kit, which an individual must purchase in order to become
one of the Company's distributors (except in South Korea, where there is no
charge for a distributor kit). Sales of distributor kits are not subject to
distributor allowances. Accordingly, the Company receives the entire retail
sales amount from the sale of the distributor kits. The Company's network
marketing system consists of over one million distributors as of November of
2000.
MANNATECH, INC. (NASDAQ:MTEX) develops and sells proprietary nutritional
supplements and topical products through a network marketing system. The Company
sells its products in the United States, Canada, Australia and the United
Kingdom through a network of approximately 269,000 active associates as of March
9, 2000. An "active" associate is one who has purchased products within the last
12 months. The Company's subsidiaries are: Mannatech Australia Pty Limited, a
limited service provider; Mannatech Ltd., a limited service provider; and
Internet Health Group Inc., a marketer of the Company's proprietary products,
specially developed nutritional supplements, and sports nutrition products over
the Internet, through its Web site at www.clickwell.com.
11
Mannatech focuses its development efforts primarily in the area of carbohydrate
technology with its proprietary ingredient, Ambrotose(R) complex, which combines
certain naturally occurring sugars required to support optimal cell-to-cell
communication. Mannatech's products are primarily based on scientific advances
in the emerging field of phytochemistry. This field has identified certain
naturally-occurring components of various plants, known as "phytochemicals,"
which, while not essential to sustain life, are believed fundamental for optimal
health.
NATURES SUNSHINE PRODUCTS INC. (NASDAQ:NATR) incorporated in 1976, and its
subsidiaries are primarily engaged in the manufacturing and marketing of
nutritional and personal care products. The Company's operations are conducted
in the United States as well as in certain other countries and it exports its
products to several other countries. The Company's line of over 500 products
includes herbal products, vitamins, mineral supplements and homeopathic
products.
Natures manufactures a wide selection of herbal products that are sold in the
form of capsules or tablets. The Company manufactures a wide variety of single
vitamins that are sold as chewable or non-chewable tablets. Natures manufactures
or contracts with independent manufacturers to supply a variety of personal care
products for external use. The Company also markets a line of more than 40
distinctive homeopathic products.
Demand for the Company's products is created from approximately 589,000 active
distributors at December 31, 2000, which include approximately 216,000 in the
United States. An individual can become a distributor by applying to the Company
under the sponsorship of someone who is already a distributor. Each distributor
is required to renew his/her distributorship on a yearly basis. Approximately 30
percent renew annually. Many distributors sell the Company's products on a
part-time basis or consume the products themselves. A distributor interested in
earning additional income by committing more time and effort to selling the
Company's products may be appointed to "Manager" status which is contingent upon
attaining certain purchase volume levels, recruiting additional distributors and
demonstrating leadership abilities. Managers numbered approximately 16,100 at
December 31, 2000, including approximately 5,900 in the United States.
NU SKIN ENTERPRISES (NYSE:NUS) is a global direct selling company that develops
and distributes premium-quality, innovative personal care and nutritional
products. The Company also markets and distributes technology, Internet and
telecommunications services and products. Nu Skin Enterprises currently operates
in 31 countries throughout Asia, North and South America and Europe. The Company
distributes its products exclusively through a network marketing system. The
Company currently has a network of approximately 500,000 active distributors,
defined as being resident in the countries where the Company has been operating
for at least three months. The Company manages its business based on product
lines and currently has three operating divisions in the United States: Nu Skin,
which offers personal care products; Pharmanex, which offers nutritional
supplements; and Big Planet, which offers technology, Internet and
telecommunications products and services. Each of the Company's product-based
divisions offers a distinct business opportunity for its distributors. Each
division is managed and directed by a distinct management team. The Company has
subsequently introduced its divisional strategy into certain Asian markets by
launching the Pharmanex business in February 2000.
12
RELIV INTERNATIONAL, INC., (NASDAQ:RELV) produces a line of food products
including nutritional supplements, weight management products, functional foods,
a line of granola bars and a sports drink mix. Nutritional supplements include
vitamins, minerals, dietary supplements, herbs and compounds derived therefrom.
Functional foods are products designed to influence specific functions of the
body. These products are sold by subsidiaries of the Company to a sales force of
independent distributors who sell products directly to consumers.
The Company's products are distributed primarily through a network marketing
system --a system in which distributors sell products directly to retail
customers and sponsor other individuals as distributors. Distributors derive
compensation both from the direct sales of products and from sales volume
generated by sponsored distributors. As of December 31, 2000, 37,200 persons or
entities were registered as distributors of Company subsidiaries of which 5,004
were Master Affiliates.
TUPPERWARE CORPORATION (NYSE:TUP) is a multinational direct selling consumer
products company that was organized on February 8, 1996. The Company is engaged
in the worldwide manufacture and sale of a broad line of high-quality consumer
products for the home. The core of Tupperware's product line consists of food
storage containers that preserve freshness through the well-known Tupperware
seals and it also has an established line of children's educational toys,
serving products and gifts. Tupperware's products are distributed worldwide
primarily through the "direct selling" method of distribution, in which products
are sold to consumers outside traditional retail store channels. The
distributorship system is intended to facilitate the timely distribution of
products to the consumer, and to establish uniform practices regarding the use
of Tupperware trademarks and the administrative arrangements with Tupperware,
such as order entry and delivery, compensation, recruitment, and training of
dealers.
Distributors are granted the right to market Tupperware products using party
plan, demonstration as well as other non-traditional retail methods and to
utilize the Tupperware trademark. The vast majority of Tupperware's
distributorship system is composed of distributors, managers and dealers (known
as consultants) who are independent contractors and not employees of Tupperware.
In certain circumstances, Tupperware initiates ownership of distributorships for
a period of time, until an independent distributor can be installed, in order to
establish market presence. As of December 30, 2000, the Tupperware distribution
system had 1,846 distributors, 53,914 managers, and 1,036,651 dealers worldwide.
Tupperware's business is operated on the basis of four geographic segments:
Europe, Asia Pacific, Latin America, and the United States.
USANA HEALTH SCIENCES, INC. (NASDAQ:USNA), incorporated in 1992, develops and
manufactures high-quality nutritional, personal care and weight-management
products. The Company's three primary product lines consist of USANA
Nutritional, LEAN Lifelong and Sense. The Company distributes its products
through a network marketing system. As of December 30, 2000, the Company had
approximately 93,000 Associates (independent distributors) in the United States,
Canada, Australia, New Zealand, Hong Kong, Japan and the United Kingdom. The
Company believes that network marketing is an effective way to distribute its
products because network marketing allows person-to-person product education,
which is not readily available through traditional distribution channels. The
Company also offers a Preferred Customer program, specifically designed for
customers that desire to purchase USANA's products for personal use. This
product line includes antioxidants, minerals, vitamins and other nutritional
supplements.
13
USANA has also developed and made available to Associates a number of materials
to assist them in building their business and selling the products. These
resource materials or sales aids, which may be purchased from USANA, include
product brochures and business forms designed by USANA and printed by outside
vendors. In addition, USANA writes and develops materials for audio and
videotapes that are produced by third parties.
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SELECTED COMPANIES FOR PROJECT YACHT
AS OF CLOSING PRICES FOR JUNE 14, 2001
Net Dil
Income EPS
Common Current Net Bef Before Current
Insider Closing Shares Market Total Sales EBITDA Extra Extras Price/
Ticker Company Name Hldgs Price Outstdg Value Assets LTM LTM LTM LTM Earnings
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NUS NU SKIN ENTERPRISES 47% 7.700 83.9 646.2 567.1 876.4 130.0 59.4 0.70 10.98
NATR NATURES SUNSHINE PRODS INC 41% 11.680 16.3 190.0 124.4 315.1 34.3 16.7 1.00 11.67
AMM ADVANTAGE MARKETING SYS INC 24% 2.850 4.4 12.4 14.7 26.8 1.4 0.2 0.04 60.64
HERBA HERBALIFE INTL INC 76% 8.500 29.1 247.7 395.1 908.9 85.9 40.6 1.32 6.21
TUP TUPPERWARE CORP 36% 22.830 57.9 1321.3 831.6 1063.7 186.2 73.6 1.27 17.81
RELV RELIV INTERNATIONAL INC 54% 1.250 9.7 12.1 19.0 59.9 0.6 -1.1 -0.12 NA
MTEX MANNATECH INC 80% 1.300 24.8 32.2 35.7 144.5 -3.1 -6.8 -0.27 NA
USNA USANA HEALTH SCIENCES INC 52% 1.940 9.7 18.8 34.2 119.1 8.5 2.0 0.20 9.51
Average 19.47
Harmonic Average 11.64
Maximum 60.64
Median 11.33
Minimum 6.21
Standard Deviation 20.52
Statistical Test of Standard Deviation/Average(1) 105%
MARK MARKET AMERICA INC 80% 4.050 19.4 78.7 81.4 139.4 30.3 18.7 0.96 4.24
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More than 50% owned by insiders
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HERBA HERBALIFE INTL INC 76% 8.500 29.1 247.7 395.1 908.9 85.9 40.6 1.32 6.21
RELV RELIV INTERNATIONAL INC 54% 1.250 9.7 12.1 19.0 59.9 0.6 -1.1 -0.12 NA
MTEX MANNATECH INC 80% 1.300 24.8 32.2 35.7 144.5 -3.1 -6.8 -0.27 NA
USNA USANA HEALTH SCIENCES INC 52% 1.940 9.7 18.8 34.2 119.1 8.5 2.0 0.20 9.51
Average 7.86
Harmonic Average 7.52
Maximum 9.51
Median 7.86
Minimum 6.21
Standard Deviation 2.33
Statistical Test of Standard Deviation/Average(1) 30%
MARK MARKET AMERICA INC 80% 4.050 19.4 78.7 81.4 139.4 30.3 18.7 0.96 4.24
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Less than 50% owned by insiders
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NUS NU SKIN ENTERPRISES 47% 7.700 83.9 646.2 567.1 876.4 130.0 59.4 0.70 10.98
NATR NATURES SUNSHINE PRODS INC 41% 11.680 16.3 190.0 124.4 315.1 34.3 16.7 1.00 11.67
AMM ADVANTAGE MARKETING SYS INC 24% 2.850 4.4 12.4 14.7 26.8 1.4 0.2 0.04 60.64
TUP TUPPERWARE CORP 36% 22.830 57.9 1321.3 831.6 1063.7 186.2 73.6 1.27 17.81
Average 25.27
Harmonic Average 16.04
Maximum 60.64
Median 14.74
Minimum 10.98
Standard Deviation 23.77
Statistical Test of Standard Deviation/Average(1) 94%
MARK MARKET AMERICA INC 80% 4.050 19.4 78.7 81.4 139.4 30.3 18.7 0.96 4.24
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Enter- Opera-
prise ting Gross Latest Mkt. Cap/
Current Price/ Value/ Expense Income Qtrly Revs Revenues
Ticker Company Name Oper. Cash Flow Book Value Sales EBITDA Ratio Margin Revs LQA LQA
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NUS NU SKIN ENTERPRISES 10.24 1.77 0.74 5.17 0.89 82.0 210.3 841.0 0.77
NATR NATURES SUNSHINE PRODS INC 6.65 2.20 0.60 4.58 0.91 82.3 81.7 326.8 0.58
AMM ADVANTAGE MARKETING SYS INC 15.39 1.19 0.46 10.71 0.98 32.7 7.1 28.4 0.44
HERBA HERBALIFE INTL INC 3.30 1.10 0.27 1.77 0.92 73.2 245.8 983.0 0.25
TUP TUPPERWARE CORP 13.42 11.20 1.24 9.13 0.87 66.8 263.7 1054.8 1.25
RELV RELIV INTERNATIONAL INC 6.40 2.25 0.20 26.31 1.01 62.3 14.1 56.2 0.21
MTEX MANNATECH INC NA 1.77 0.22 NA 1.05 41.2 34.2 136.8 0.24
USNA USANA HEALTH SCIENCES INC 2.30 1.44 0.16 3.38 0.96 31.6 27.6 110.5 0.17
Average 8.24 2.86 0.49 8.72 0.95 59.04 0.49
Harmonic Average 5.46 1.75 0.31 4.62 0.95 51.47 0.32
Maximum 15.39 11.20 1.24 26.31 1.05 82.32 1.25
Median 6.65 1.77 0.37 5.17 0.94 64.59 0.34
Minimum 2.30 1.10 0.16 1.77 0.87 31.64 0.17
Standard Deviation 4.96 3.39 0.37 8.37 0.06 21.05 0.37
Statistical Test of Standard Deviation/
Average(1) 60% 118% 76% 96% 6% 36% 76%
MARK MARKET AMERICA INC 4.55 1.13 0.56 1.08 0.79 73.6 32.6 130.3 0.60
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More than 50% owned by insiders
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HERBA HERBALIFE INTL INC 3.30 1.10 0.27 1.77 0.92 73.2 245.8 983.0 0.25
RELV RELIV INTERNATIONAL INC 6.40 2.25 0.20 26.31 1.01 62.3 14.1 56.2 0.21
MTEX MANNATECH INC NA 1.77 0.22 NA 1.05 41.2 34.2 136.8 0.24
USNA USANA HEALTH SCIENCES INC 2.30 1.44 0.16 3.38 0.96 31.6 27.6 110.5 0.17
Average 4.00 1.64 0.21 10.49 0.98 52.09 0.22
Harmonic Average 3.35 1.53 0.21 3.34 0.98 46.74 0.21
Maximum 6.40 2.25 0.27 26.31 1.05 73.18 0.25
Median 3.30 1.61 0.21 3.38 0.98 51.78 0.23
Minimum 2.30 1.10 0.16 1.77 0.92 31.64 0.17
Standard Deviation 2.14 0.49 0.05 13.73 0.05 19.03 0.04
Statistical Test of Standard Deviation/
Average(1) 53% 30% 22% 131% 5% 37% 16%
MARK MARKET AMERICA INC 4.55 1.13 0.56 1.08 0.79 73.6 32.6 130.3 0.60
- ------------------------------------------------------------------------------------------------------------------------------------
Less than 50% owned by insiders
- -------------------------------
NUS NU SKIN ENTERPRISES 10.24 1.77 0.74 5.17 0.89 82.0 210.3 841.0 0.77
NATR NATURES SUNSHINE PRODS INC 6.65 2.20 0.60 4.58 0.91 82.3 81.7 326.8 0.58
AMM ADVANTAGE MARKETING SYS INC 15.39 1.19 0.46 10.71 0.98 32.7 7.1 28.4 0.44
TUP TUPPERWARE CORP 13.42 11.20 1.24 9.13 0.87 66.8 263.7 1054.8 1.25
Average 11.43 4.09 0.76 7.40 0.92 65.98 0.76
Harmonic Average 10.32 2.05 0.67 6.50 0.91 57.27 0.66
Maximum 15.39 11.20 1.24 10.71 0.98 82.32 1.25
Median 11.83 1.99 0.67 7.15 0.90 74.43 0.67
Minimum 6.65 1.19 0.46 4.58 0.87 32.74 0.44
Standard Deviation 3.82 4.76 0.34 3.00 0.05 23.31 0.36
Statistical Test of Standard Deviation/
Average(1) 33% 116% 44% 41% 5% 35% 47%
MARK MARKET AMERICA INC 4.55 1.13 0.56 1.08 0.79 73.6 32.6 130.3 0.60
1 We use a test to determine if the average is an accurate measure of the sample
of data. If the standard deviation divided by the average is greater than 78%
then it is not a good measure of the sample. Therefore, in certain cases, we
used the higher of the median or harmonic average to determine the true average
of the data.
14a
MARKET AMERICA, INC.
MARKET MULTIPLE
($ IN THOUSANDS EXCEPT FOR PER SHARE INFORMATION)
SELECTED FINANCIAL DATA: ESTIMATED VALUATION: 163,060.8
04/30/01 ESTIMATED VALUATION PER SHARE: 8.40
Revenues 138,513.7 VALUATION RANGE BASED ON MARKET MULTIPLES:
EBITDA 26,048.6 $ VALUE PER SHARE
EBIT 25,111.4 HIGH $234,768 12.09
Pretax Income (Loss) 29,091.0 LOW $67,543 3.48
Net Income (Loss) 20,169.8
Operating Cash Flow 17,695.5 Based on 19.42 million shares outstanding
Adj'd Book Value @ 4/30/01 76,057.9
Long Term Debt @4/30/01 2,035.8
MULTIPLES USED:
- ---------------
PRICE/SALES MULTIPLE 0.49
ENTERPRISE VALUE/EBITDA 5.17
PRICE/EARNINGS 11.64
PRICE/OPERATING CASH FLOW 8.24
PRICE/BOOK 1.77
MARKET VALUATIONS: 4/30/2001 PER SHARE
- ------------------ --------- ---------
PRICE/SALES MULTIPLE 67,543.0 3.48
ENTERPRISE VALUE/EBITDA 132,511.7 6.82
PRICE/EARNINGS 234,768.1 12.09
PRICE/OPERATING CASH FLOW 145,849.1 7.51
PRICE/BOOK 134,658.2 6.93
PROBTY WGTD AVG - NOMINAL 163,060.8 8.40
14b
2. Performance Ratio Analysis
--------------------------
The following table highlights the most recent twelve months and trailing
three-year average performances of MA versus our universe of comparable
companies.
It is readily apparent that Market America is undervalued based upon its
performance statistics. MA maintains the highest current and quick ratios
amongst its peers, giving testimony to MA's highly liquid financial condition
and cash generation capabilities.
Since MA has de minimis obligations, its debt to equity and interest coverage
ratios would assumably and reciprocally reflect what the quick and current
ratios do.
In the past two fiscal years, MA has acquired more than $12 million of net fixed
assets, which reconciles the decline in Return on Average Assets from a 3-year
average of 34.5% to 26.3% at 4/30/01. Nonetheless, MA's Return on Average Assets
exceeds all others in its peer group, and is twice as great as its nearest
comparable, Natures Sunshine Products.
Similarly, the Company's most recent and 3-year Average Return on Shareholders
Equity exceeds all others, except Tupperware Corp., an established multinational
billion dollar (sales) company.
While MA's operating margins compare favorably with some comparable companies,
it falls short of others in our selected grouping. This is most likely a
reflection of MA's rapid growth, its aggressive introduction of new products and
its focus on recruiting new distributors, who require about three months to
qualify as "mature".
Despite the average comparisons of operating margins, MA rises to the top when
its 3-year Average Net Income Margins (12.8%) and Last Twelve Months Net Income
Margins (13.4%) are held to its peer group. In both categories, the net margins
are twice as high as the next best.
This leads us to conclude that the management of MA has demonstrated superior
skills at building and operating its business with a focus on cash generation
and profitability. The lack of recognition for its common stock is hypothesized
elsewhere in this valuation, but the inherent value of MA is undeniably
discounted in the marketplace. One might inflect a scintilla of criticism about
the build-up of excess cash by the Company. However, such sums could provide a
healthy war chest for expansion, acquisition and vertical integration, among
other uses in the future, especially if management does not wish to utilize the
depressed currency of its common stock.
15
PERFORMANCE RATIO ANALYSIS
SELECTED COMPANIES FOR PROJECT YACHT
AS OF CLOSING PRICES FOR JUNE 14, 2001
Current Pretax
Company Closing Market Total Current Quick Debt to Equity Interest
Symbol Company Name Price Value Assets Ratio Ratio (In %) Coverage
- -----------------------------------------------------------------------------------------------------------------------------
AMM ADVANTAGE MARKETING SYS INC 2.850 12.4 14.7 2.9 2.1 27.21 NA
HERBA HERBALIFE INTL INC -CL A 8.500 247.7 395.1 2.1 1.4 5.04 32.1
MTEX MANNATECH INC 1.300 32.2 35.7 1.5 0.6 1.94 -129.3
NATR NATURES SUNSHINE PRODS INC 11.680 190.0 124.4 2.3 1.6 0.27 1397.0
NUS NU SKIN ENTERPRISES -CL A 7.700 646.2 567.1 2.4 1.5 21.04 NA
RELV RELIV INTERNATIONAL INC 1.250 12.1 19.0 1.0 0.5 113.82 -0.5
TUP TUPPERWARE CORP 22.830 1321.3 831.6 1.3 0.8 343.73 5.7
USNA USANA HEALTH SCIENCES INC 1.940 18.8 34.2 1.0 0.3 96.05 3.7
AVERAGE 1.8 1.1 76.1 218.1
MAXIMUM 2.9 2.1 343.7 1397.0
MEDIAN 1.8 1.1 24.1 4.7
MINIMUM 1.0 0.3 0.3 -129.3
STANDARD DEVIATION 0.7 0.6 116.6 580.3
MARK MARKET AMERICA INC 4.050 78.7 81.4 6.5 6.1 2.96 221.1
---------------------------------IN%--------------------------------------
Return 3 Yr Avg Return 3 Yr Avg 3 Yr Avg 3 Yr Avg 3 Yr Avg
on Avg Return on Avg Return Average Net Net Gross Gross
Total on Avg Total on Avg Oper Oper Income Income Income Income
Assets Assets Equity Equity Margin Margin Margin Margin Margin Margin
-------------------------------------------------------------------------------------------
AMM ADVANTAGE MARKETING SYS INC 1.6 6.4 2.0 7.5 1.2 5.1 0.8 3.5 32.7 31.8
HERBA HERBALIFE INTL IN -CL A 10.3 13.1 18.8 26.8 34.8 37.4 4.5 5.3 73.2 73.7
MTEX MANNATECH INC -17.2 18.8 -30.0 161.5 16.2 21.1 -4.7 2.4 41.2 42.3
NATR NATURES SUNSHINE PRODS INC 13.7 18.5 19.9 25.9 52.4 54.7 5.3 6.4 82.3 82.6
NUS NU SKIN ENTERPRISES -CL A 10.4 15.0 17.2 36.7 48.6 52.6 6.8 9.5 82.0 81.0
RELV RELIV INTERNATIONAL INC -5.7 -0.9 -18.4 -4.3 27.1 27.3 -1.9 -0.2 62.3 59.3
TUP TUPPERWARE CORP 9.1 9.0 55.0 50.4 12.8 12.1 6.9 6.9 66.8 65.2
USNA USANA HEALTH SCIENCES INC 5.4 17.4 15.6 29.4 3.6 9.0 1.7 4.7 31.6 33.5
AVERAGE 3.4 12.2 10.0 41.7 24.6 27.4 2.4 4.8 59.0 58.7
MAXIMUM 13.7 18.8 55.0 161.5 52.4 54.7 6.9 9.5 82.3 82.6
MEDIAN 7.3 14.1 16.4 28.1 21.7 24.2 3.1 5.0 64.6 62.2
MINIMUM -17.2 -0.9 -30.0 -4.3 1.2 5.1 -4.7 -0.2 31.6 31.8
STANDARD DEVIATION 10.4 6.9 26.1 51.2 19.5 19.2 4.2 3.0 21.1 20.6
MARK MARKET AMERICA INC 26.3 34.5 30.7 44.9 18.4 19.3 13.4 12.8 73.6 74.9
15a
3. Comparable Transactions Multiple:
---------------------------------
These multiples were applied against management's operating statistics to derive
an estimated value for each parameter. In order to arrive at an average
valuation, we took the weighted average value based on these buyback multiples.
Overview
- --------
The universe of comparable transactions that we selected for this analysis is
limited. During the process, we reviewed over 265 transactions that involved
companies in the household furnishings, food retailers, personal care products
and catalog specialty distribution category that exhibit similar financial and
operating characteristics to MA and that sell to comparable customer bases. Some
of the transactions included comparable companies from the Market Multiple
analysis, such as: TUPPERWARE, AMERICAN MARKETING SYSTEMS, NUSKIN, HERBALIFE
INTERNATIONAL, INC., and a former competitor BEAUTICONTROL COSMETICS INC.
previously noted in the Company's filings (FORMERLY TRADED UNDER THE TICKER
BUTI). Active participants in buying and selling companies, it may be concluded
that these entities paid, or received, fair market values in their respective
transactions.
We have also considered that these companies may have been executing acquisition
or roll-up strategies and were able to pay a premium while achieving that goal.
We also examined other traits such as: common stock and cash were used as
acquisition currency; premiums were paid for strategic benefits to be realized
by the acquirer; and, in the case of ADVANTAGE MARKETING SYSTEM's acquisition of
UNIVERSAL NUTRITION CORP., and also in the case of NUSKIN ENTERPRISES, INC.,
which made four acquisitions over a two-year period from 1998 to 1999, certain
pertinent historical data was unavailable to us. However, it should be noted
that these comparable companies were actively making acquisitions. A description
of the seven transaction we found comparable are listed below:
The Transactions
- ----------------
NATURES BOUNTY (NASDAQ:NBTY) is a New York-based vertically integrated
manufacturer, marketer and retailer of a broad line of high quality,
value-priced nutritional supplements in the U.S., U.K. and internationally. It
acquired NATURESMART INC., a Colorado-based developer of nutritional supplements
including vitamins, minerals, herbs and personal care products, for $28 million
in May of 2001. The target had trailing twelve-months revenues of $59 million.
NBTY'S total invested capital was 0.47 times revenues. NBTY has been pursuing an
acquisition strategy over the last two years, executing six transactions.
ADVANTAGE MARKETING SYSTEMS, INC. (AMEX:AMM) is a direct marketer of weight
management, dietary supplement and personal care products. In January of 2001,
ADVANTAGE acquired LIFESCIENCE TECHNOLOGY CORP., which had trailing
twelve-months revenue of $6.9 million, for a total invested capital of $1.5
million. ADVANTAGE paid a multiple of 0.22 times sales.
VITAMIN SHOPPE INDUSTRIES acquired the remaining 35.7% of VITAMINSHOPPE.COM that
it did not already own for $7.3 million in cash. VITAMIN SHOPPE INDUSTRIES made
this offer in December of 2000 for its online store. VITAMINSHOPPE.COM had
trailing twelve-months revenue of $30.2 million at the time of the transaction
and a negative EBITDA of $41.6 million. By extrapolation, VITAMIN SHOPPE
INDUSTRIES paid a multiple of 0.68 times sales.
16
TUPPERWARE CORPORATION (NYSE:TUP) is a multinational manufacturer and direct
seller of consumer goods products. TUPPERWARE acquired BEAUTICONTROL COSMETICS
INC., a manufacturer and direct marketer of skin care, nutritional supplements,
and cosmetics, in October of 2000. BEAUTICONTROL had trailing twelve-months
revenue of $59.2 million and a negative EBITDA of $7.4 million. TUPPERWARE paid
a total invested capital of $60.4 million resulting in a multiple of 0.94 times
sales.
REXALL SUNDOWN INC. (REXALL) is a developer, manufacturer, and marketer of
vitamins, nutritional supplements, and consumer health products through
retailers, independent distributors, and mail order. REXALL acquired Largo,
Florida -based WORLDWIDE SPORT NUTRITIONAL SUPPLEMENTS in March of 2000. At the
time of the transaction, WORLDWIDE, which reported trailing twelve-months
revenue of $42 million, was best known for its leading branded sports nutrition
supplements. This acquisition was to help REXALL expand its reach into the
sports and active nutrition category and part of its strategy to become a leader
in multiple segments.
NBTY, in April of 2000, acquired the catalog division of REXALL SUNDOWN INC., a
company comparable to Market America, and NBTY had made a total of six
acquisitions since 1998. Again, certain pertinent historical data was
unavailable to us in many of these transactions.
KONINKLIJKE (ROYAL) NUMICO N.V., is a Dutch company with over $4.4 billion in
sales for 2000, and is a growing worldwide leader in specialized nutrition. It
acquired Boca Raton-based REXALL SUNDOWN INC. for a total consideration of $1.7
billion plus the assumption of $114 million of debt. This move was to enhance
its presence in the US dietary supplements market and to strengthen its position
as a leader in nutritional products. REXALL, at the time of the acquisition,
reported trailing twelve-months revenue of $653 million and an EBITDA of $116
million. KONINKLIJKE paid 15.5 times EBITDA and 1.7 times revenue. KONINKLIJKE
had also acquired a health supplements and vitamins retailer, General Nutrition
Corp., in 1999.
A private group, led by HERBALIFE INTERNATIONAL INC. founder Mark Hughes,
withdrew an offer to acquire the outstanding Class A and Class B shares of
HERBALIFE INTERNATIONAL INC. that they did not own for $210.78 million. The
offer was accepted by the board of directors of Herbalife on September 13th of
1999, however the group eventually had to withdraw its offer on April 10, 2000
due to difficulty in securing high yield financing. HERBALIFE, at the time of
the offer, had trailing twelve-months revenue of $1.7 billion and a positive
EBITDA of $87.6 million. The total invested capital paid would have been 5.6
times EBITDA and 0.29 times revenues. HERBALIFE remains a publicly traded
company as of the date of this valuation.
The seven comparable transactions we reviewed all represent buyout transactions
between willing and knowledgeable buyers and sellers concluded within the most
recent two years. Two transactions were management buyout offers
(VITAMINSHOPPE.COM AND HERBALIFE INTERNATIONAL INC.). Our selection of
transactions was reduced from a universe of approximately 265 publicly disclosed
acquisitions concluded in the past two years. In selecting the representative
transactions we considered a number of criteria. They include: industry
similarities, size of transaction, closely held companies and date of
transaction (most recent being preferable).
17
The seven transactions that we used in our valuation analysis reflected the
following multiple of revenues:
Multiple: Average
- ----------------------------------------------------------------
Multiple of Revenues 1.01x
We applied this multiple of revenues against MA's operating statistics to derive
an estimated value. Due to the absence of sufficient additional data points, we
believe that the multiple of revenues is the only statistically valid measure of
value.
Therefore, the Comparable Transactions Multiple reflects a valuation estimate of
$139.5 million or $7.18 per share for Market America, Inc.
Premiums Analysis for publicly traded targets
- ---------------------------------------------
The table below lists the one-day, five day's, and thirty day's premium, for
each respective publicly-traded stock prior to the announcement of the offer.
- ------------------------------------- ------------ --------------------- ----------------- -----------------
Transaction Price/ 1- Day 5-Day 30 Day
Share Premium Premium Premium
- ------------------------------------- ------------ --------------------- ----------------- -----------------
VitaminShoppe.com (VSHP) $1.00 223% ($0.31) 113%($0.47) 59%($0.63)
- ------------------------------------- ------------ --------------------- ----------------- -----------------
BeautiControl (BUTI) $7.00 87%($3.75) 115%($3.25) 115%($3.25)
- ------------------------------------- ------------ --------------------- ----------------- -----------------
HerbaLife (HERBA) $17.00 39%($12.18) 42%($11.94) 47%($11.56)
- ------------------------------------- ------------ --------------------- ----------------- -----------------
Average 116% 90% 74%
- ------------------------------------- ------------ --------------------- ----------------- -----------------
18
COMPARABLE TRANSACTIONS SUMMARY FOR MARKET AMERICA, INC.
Buyer
Announce/ Seller
Close Unit Synopsis
- -------------------------------------------------------------------------------------------------------------------------------
5/11/01 NBTY Inc NBTY Inc agreed to acquire NatureSmart Inc through Whole Foods
Whole Foods Market Inc Market Inc. Consideration is $28.00M in cash.
NatureSmart Inc
1/9/01 Advantage Marketing Systems Advantage Marketing Systems Inc acquired LifeScience
1/9/01 LifeScience Technologies Hldgs. Technologies Holdings LP. Consideration $1.50M of which $1M is
in cash and $500,000 is a promissory note.
12/19/00 Vitamin Shoppe Industries Inc Vitamin Shoppe Industries acquired the remaining 35.7% of
1/12/01 VitaminShoppe.com Inc VitaminShoppe.com that it does not already own for $7.3
million in cash.
9/13/00 Tupperware Corp. Tupperware acquired BeautiControl, a direct seller of beauty
10/18/00 Beauticontrol Cosmetics Inc. and nutritional products, for $50.6 million in a cash tender offer
in a move to add a separate beauty business.
5/1/00 Koninklijke Numico NV Numico acquired Rexall Sundown for a total cash consideration of
5/26/00 Rexall Sundown Inc $1.7 billion plus the assumption of $114 million in debt to enhance
its presence in the US dietary supplements market and further
strengthen its position as a leader in nutritional products.
2/23/00 Rexall Sundown Inc Rexall Sundown acquired Worldwide Sport Nutritional Supplements
3/23/00 Worldwide Sport Nutritional for $71.5 million in cash. The acquisition will expand Rexalls reach
Supp. within the sports and active nutrition category and reflects its
strategy of becoming a leader across multiple segments.
9/13/99 Private Group A private group led by Herbalife founder Mark Hughes cancelled an
Herbalife International Inc offer to acquire the remaining Class A and Class B shares that he
didnt already own in Herbalife International for $210.8 million in
cash. The deal was terminated due to difficulty in securing high
Buyer Deal Revenue
Announce/ Seller Size LTM EBITDA
Close Unit Unit Product Line ($mm) ($mm) ($mm)
- ------------------------------------------------------------------------------------------------------------------------------------
5/11/01 NBTY Inc Develops nutritional supplements including 28.00 59.00 NA
Whole Foods Market Inc vitamins, minerals, herbs and personal care
NatureSmart Inc products
1/9/01 Advantage Marketing Systems Markets and sells a line of scientifically 1.50 6.88 -1.78
1/9/01 LifeScience Technologies Hldgs. researched and designed adaptogen,
nutritional personal care, weight mngt
12/19/00 Vitamin Shoppe Industries Inc Operates an on-line store for products and 7.28 30.18 -41.61
1/12/01 VitaminShoppe.com Inc content related to vitamins, nutritional
supplements and minerals
9/13/00 Tupperware Corp. Manufacture and sells skin care, nutritional 50.62 64.24 -7.4
10/18/00 Beauticontrol Cosmetics Inc. supplements, cosmetics, nail care, toiletries,
and beauty supplements
5/1/00 Koninklijke Numico NV Makes and sells vitamins, nutritional 1682.47 653.04 115.98
5/26/00 Rexall Sundown Inc supplements, and consumer health products
2/23/00 Rexall Sundown Inc Distributes nutritional vitamins 71.50 42.00 NA
3/23/00 Worldwide Sport Nutritional and supplements
Supp.
9/13/99 Private Group Markets weight management products, 210.78 1702.81 87.55
Herbalife International Inc products, food and dietary supplements,
and a line of personal care products
-----------------------------------------------------------------------------
DEAL AVERAGES 293.16 365.45 30.55
-----------------------------------------------------------------------------
Total
Buyer Invested
Announce/ Seller Deal Capital TIC/ TIC/
Close Unit Type ($mm) EBITDA Revenue
- ---------------------------------------------------------------------------------------------
5/11/01 NBTY Inc Acq. 28.00 NA 0.47
Whole Foods Market Inc
NatureSmart Inc
1/9/01 Advantage Marketing Systems Acq 1.50 NA 0.22
1/9/01 LifeScience Technologies Hldgs.
12/19/00 Vitamin Shoppe Industries Inc Acq-MBO 7.28 NA 0.68
1/12/01 VitaminShoppe.com Inc
9/13/00 Tupperware Corp. Acq. 60.42 NA 0.94
10/18/00 Beauticontrol Cosmetics Inc.
5/1/00 Koninklijke Numico NV Acq-TO 1796.47 15.49 2.75
5/26/00 Rexall Sundown Inc
2/23/00 Rexall Sundown Inc Acq 71.50 NA 1.70
3/23/00 Worldwide Sport Nutritional
Supp.
9/13/99 Private Group Acq-MBO 210.78 5.56 0.29
Herbalife International Inc
-------------------------------------------------------------
DEAL AVERAGES 310.85 10.53 1.01
-------------------------------------------------------------
18a
MARKET AMERICA, INC.
COMPARABLE TRANSACTIONS
($ IN THOUSANDS EXCEPT FOR PER SHARE INFORMATION)
SELECTED FINANCIAL DATA:
- ------------------------ ESTIMATED VALUATION: 139,503.1
ESTIMATED VALUATION PER SHARE: 7.18
---------------
04/30/01 Based on 19.42 million shares outstanding
---------------
Revenues 138,513.7
EBITDA 26,048.6
EBIT 25,111.4
Pretax Income (Loss) 29,091.0
Net Income (Loss) 20,169.8
Operating Cash Flow 17,695.5
Adj'd Book Value 76,057.9
Long Term Debt 2,035.8
MULTIPLES USED:
- ---------------
TIC/SALES MULTIPLE 1.01
TIC/EBITDA NA
--------------- -----------
MARKET VALUATIONS: APRIL 30, 2001 PER SHARE
--------------- -----------
TIC/SALES MULTIPLE 139,503.1 7.18
TIC/EBITDA NA
- ------------------------------------------------------
PROBTY WGTD AVG - NOMINAL 139,503.1 7.18
- ------------------------------------------------------
19,420.3
NA = Information Not Available
18b
4. Discounted Cash Flow Analysis:
------------------------------
The Company has not previously made financial forecasts beyond one year. After
analyzing and comparing MA's 4/30/01 internal budget to actual results and
finding that the Company missed projections by 32% we have discounted
management's forecast for 4/30/02. These assumptions were made after carefully
analyzing current and future economic, industry and company trends. Historical
results were also considered as a frame of reference. We have analyzed the
Company's prospects from three scenarios: base case, slow growth case and high
growth case.
MA has a large cash position (including marketable securities) as a percentage
of the firm's total value (market value of equity plus debt). As of 4/30/01 cash
was 84.22% of the firm's total value. Cash is different from other assets in
that its value is constant and has no associated risk. Therefore, we have
separated the cash from the Company's assets for purposes of independently
valuing the free cash flows to the firm ("FCFF").
FCFF (after eliminating accrued interest earned from the cash) was discounted
for each year using MA's weighted average cost of capital ("WACC") of 15.13%.
FCFF is defined as Earnings Before Interest and Taxes (without interest income)
multiplied by one minus the effective tax rate and adjusted for depreciation and
amortization, capital expenditures and changes in working capital that is
available to stakeholders (creditors and equity owners). Since we are valuing
the Company's assets without the stability of cash, the Company's beta was
increased, thereby increasing the WACC. After arriving at the present value of
the FCFF, we then add back the current cash balance to arrive at the value of
the firm.
We did not think it would be prudent to impose on MA's management an exercise in
forecasting five years hence. Instead, we have accepted the Company's unaudited
4/30/01 results and (for purposes of our discounted cash flow model) assumed a
compounded growth rate of 9.9% to arrive at our base case results. While we
believe that this is realistic based upon a consensus of economic predictors, we
have, nonetheless, diminished the weighting of the discounted cash flow analysis
in arriving at our valuation for MA.
BASE CASE
- ---------
For our base case scenario we assumed a compounded annual growth rate of 9.9%
(2002-2005) and a terminal growth rate of 6%. The base case yielded a firm
value, independent of cash, of $189.9 million or $9.78 per share. The Cash value
as of 4/30/01 was $66.8 million or $3.44 per share. Adding the firm value and
the cash value gave us $256.7 million or $13.22 per share.
SLOW GROWTH CASE
- ----------------
It is possible that the Company's future results may diminish due to a myriad of
reasons. In this scenario, we have assumed an annual growth rate of 4%
(2002-2005) and a terminal value of 2% while maintaining the base scenario's
capital expenditures and depreciation and amortization levels at a constant
percentage of revenues. This slow growth scenario gave us a valuation estimate
of $191.0 million or $9.84 per share (this includes cash value of $3.44 per
share).
19
HIGH GROWTH CASE
- ----------------
It is possible that the Company's prospects in the future may continue to
accelerate at high rates. In this scenario, we have assumed an annual growth
rate of 20% (2002-2005) and a terminal value of 9%. We increased the levels for
capital expenditures and depreciation and amortization as a higher percentage of
revenues to cover investments and acquisitions. This high growth scenario gave
us a valuation estimate of $393.7 million or $20.27 per share (this includes
cash value of $3.44 per share).
The discounted cash flow analysis provided us with a range of valuation of
$191.0 million to $393.7 million or $9.84 to $20.27 per share.
20
-----------------------------------------------
MARKET AMERICA, INC.
INCOME STATEMENT AND FORECAST
BASE CASE
-----------------------------------------------
A - Actual
E - Estimated
All data in millions of $, except per share information
------------------------------------------------------------------------------
04/30/96 04/30/97 04/30/98 04/30/99 04/30/00
------------------------------------------------------------------------------
Sales 42,479.9 66,281.7 87,531.0 110,347.8 135,965.3
Yr-toYr % Change 117% 56% 32% 26% 23%
NET REVENUES $42,479.9 $66,281.7 $87,531.0 $110,347.8 $135,965.3
Yr-toYr % Change 56% 32% 26% 23%
Cost of Sales 9,173.7 12,249.1 19,272.3 28,071.2 33,913.3
Gross Margin 78.4% 81.5% 78.0% 74.6% 75.1%
GROSS PROFIT 33,306.24 54,032.55 68,258.68 82,276.59 102,051.93
Commissions 18,643.9 29,645.9 39,061.2 49,692.8 60,580.7
% of Revenues 43.9% 44.7% 44.6% 45.0% 44.6%
Sales Tax 238.9 383.6 1,985.5 358.7 212.8
% of Revenues 0.6% 0.6% 2.3% 0.3% 0.2%
Salaries 1,799.3 3,725.0 4,184.5 5,085.1 6,910.8
% of Revenues 4.2% 5.6% 4.8% 4.6% 5.1%
Consulting 885.3 377.2 137.6 266.2 819.1
% of Revenues 2.1% 0.6% 0.2% 0.2% 0.6%
Rents 239.4 389.9 695.5 996.0 1,380.4
% of Revenues 0.6% 0.6% 0.8% 0.9% 1.0%
Depreciation & Amortization 75.3 122.8 167.5 208.9 439.1
% of Revenues 0.2% 0.2% 0.2% 0.2% 0.3%
Other 3,203.5 6,111.5 4,685.3 4,592.2 5,814.3
7.5% 9.2% 5.4% 4.2% 4.3%
-------- -------- -------- -------- --------
TOTAL EXPENSES 25,010.3 40,633.1 50,749.6 60,991.0 75,718.1
======== ======== ======== ======== ========
OPERATING INCOME (EBITDA) 8,295.92 13,399.44 17,509.10 21,285.63 26,333.80
% of Revenues 19.5% 20.2% 20.0% 19.3% 19.4%
Interest Income 232.86 595.65 1,073.58 1,763.31 2,277.91
Interest (Expense) (33.5) (40.7) (93.8) (24.3) (157.1)
Other Income (Expense) 85.2 444.2 461.8 769.9 830.5
PRETAX INCOME 8,505.1 14,275.8 18,783.2 23,585.7 28,846.0
% of Revenues 20.0% 21.5% 21.5% 21.4% 21.2%
Taxes 3,351.9 5,804.6 7,942.7 9,394.6 11,055.1
EffectiveTax Rate 39.4% 40.7% 42.3% 39.8% 38.3%
NET INCOME 5,153.24 8,471.22 10,840.54 14,191.03 17,790.92
Net Margin (% of Revenues) 12.1% 12.8% 12.4% 12.9% 13.1%
Net Income Applicable to Common Shareholders
EARNINGS PER SHARE (BASIC) 0.26 0.42 0.54 0.71 0.89
% Change 545.8% 64.4% 28.0% 30.9% 25.5%
EARNINGS PER SHARE (DILUTED)
% Change
Shs Outstanding - Basic (Millions) 19,950.0 19,950.0 19,950.0 19,950.0 19,936.3
Shs Outstanding - Diluted (Millions)
-----------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
9 Mos Ended
1/31/01 A 04/30/01 4/30/02 E 4/30/03 E 4/30/04 E 4/30/05 E
------------------------------------------------------------------------------------------
Sales 101,416.3 138,513.7 155,135.4 173,751.6 187,651.7 202,663.9
Yr-toYr % Change 2% 12% 12% 8% 8%
NET REVENUES $101,416.3 $138,513.7 $155,135.4 $173,751.6 $187,651.7 $202,663.9
Yr-toYr % Change 2% 12% 12% 8% 8%
Cost of Sales 26,570.1 36,052.3 40,335.2 45,175.4 46,912.9 50,666.0
Gross Margin 73.8% 74.0% 74.0% 74.0% 75.0% 75.0%
GROSS PROFIT 74,846.21 102,461.39 114,800.16 128,576.18 140,738.79 151,997.89
Commissions 44,533.4 59,300.2 69,810.9 78,188.2 84,443.3 91,198.7
% of Revenues 43.9% 42.8% 45.0% 45.0% 45.0% 45.0%
Sales Tax 779.0 620.5 695.0 750.6 810.7
% of Revenues 0.0% 0.6% 0.4% 0.4% 0.4% 0.4%
Salaries 5,171.3 8,900.8 8,377.3 9,382.6 10,320.8 11,146.5
% of Revenues 5.1% 6.4% 5.4% 5.4% 5.5% 5.5%
Consulting 566.9 640.7 465.4 521.3 563.0 608.0
% of Revenues 0.6% 0.5% 0.3% 0.3% 0.3% 0.3%
Rents 914.4 1,193.6 1,551.4 1,737.5 1,876.5 2,026.6
% of Revenues 0.9% 0.9% 1.0% 1.0% 1.0% 1.0%
Depreciation & Amortization 684.4 937.2 775.7 868.8 938.3 1,013.3
% of Revenues 0.7% 0.7% 0.5% 0.5% 0.5% 0.5%
Other 4,848.3 5,598.6 6,515.7 7,297.6 7,881.4 8,511.9
4.8% 4.0% 4.2% 4.2% 4.2% 4.2%
-------- -------- -------- -------- --------- ---------
TOTAL EXPENSES 56,034.3 76,412.8 87,341.2 97,822.1 105,835.6 114,302.4
======== ======== ======== ======== ========= =========
OPERATING INCOME (EBITDA) 18,811.88 26,048.63 27,458.96 30,754.03 34,903.22 37,695.48
% of Revenues 18.5% 18.8% 17.7% 17.7% 18.6% 18.6%
Interest Income 2,121.72 2,870.36 2,327.03 2,606.27 2,814.78 3,039.96
Interest (Expense) (116.8) (173.4) (155.1) (173.8) (187.7) (202.7)
Other Income (Expense) 977.3 1,282.7 930.8 1,042.5 1,125.9 1,216.0
PRETAX INCOME 21,109.7 29,091.0 29,786.0 33,360.3 37,718.0 40,735.4
% of Revenues 20.8% 21.0% 19.2% 19.2% 20.1% 20.1%
Taxes 7,502.1 8,921.2 11,020.8 12,343.3 13,955.7 15,072.1
EffectiveTax Rate 35.5% 30.7% 37.0% 37.0% 37.0% 37.0%
NET INCOME 13,607.61 20,169.80 18,765.17 21,016.99 23,762.34 25,663.32
Net Margin (% of Revenues) 13.4% 14.6% 12.1% 12.1% 12.7% 12.7%
Net Income Applicable to Common
Shareholders
EARNINGS PER SHARE (BASIC) .70 1.04 0.97 1.08 1.22 1.32
% Change 16.4% -7.0% 12.0% 13.1% 8.0%
EARNINGS PER SHARE (DILUTED)
% Change
Shs Outstanding - Basic (Millions) 19,431.1 19,420.0 19,420.0 19,420.0 19,420.0 19,420.0
Shs Outstanding - Diluted (Millions)
-----------------------------------------------------------------------------------------------------------------------------
20a
DISCOUNTED CASH FLOW ANALYSIS - BASE CASE
A - Actual
E - Estimated
All data in thousands of $, except per share information
1997 A 1998 A 1999 A 2000 A
-------------------------------------------
EBIT 14,316.5 18,877.0 23,610.0 29,003.1
EBIT Growth Rates 31.85% 25.07% 22.84%
- - Interest Income from Cash 595.7 1,073.6 1,763.3 2,277.9
EBIT without interest income 13,720.8 17,803.4 21,846.7 26,725.2
-------------------------------------------
-------------------------------------------
EBIT (1-t) 8,141.9 10,275.0 13,144.7 16,482.9
-------------------------------------------
Free Cash Flow to the Firm (FCFF)
PV OF FCFF
2001 E 2002 E 2003 E 2004 E 2005 E
-----------------------------------------------------------------
EBIT 29,264.4 29,941.1 33,534.1 37,905.6 40,938.1
EBIT Growth Rates 0.90% 2.31% 12.00% 13.04% 8.00%
- - Interest Income from Cash 2,870.4 2,327.0 2,606.3 2,814.8 3,040.0
EBIT without interest income 26,394.1 27,614.1 30,927.8 35,090.9 37,898.1
-----------------------------------------------------------------
-----------------------------------------------------------------
EBIT (1-t) 18,299.9 17,396.9 19,484.5 22,107.2 23,875.8 Terminal Value (6%)
----------------------------------------------------------------- -------------------
Free Cash Flow to the Firm (FCFF) $14,593.8 $15,461.6 $19,372.8 $21,676.3 $23,410.5 $256,435.9
PV OF FCFF $13,130.5 $12,083.2 $13,150.2 $12,780.3 $11,988.9 $126,780.4
$ AMOUNT PER SHARE
-------- ---------
Value of the Firm without Cash $189,913.5 $9.78
Value of Cash $ 66,813.2 $3.44
-----------------------------------------------------------
FIRM VALUE $256,726.6 $13.22
-----------------------------------------------------------
Above based on 19.42 million Shares Outstanding 19,420.0
20b
WEIGHTED AVERAGE COST OF CAPITAL CALCULATION
A - Actual
E - Estimated
All data in thousands of $, except per share information
1996 A 1997 A 1998 A 1999 A 2000 A 2001 E
----------------------------------------------------------------- ------------
Cash & Mkt Securities 10,386.1 19,618.8 30,794.6 45,426.9 53,170.6 66,813.2
MV of Equity 199,500.0 84,787.5 104,737.5 81,046.9 79,745.2 77,291.6
Debt 568.2 532.0 316.8 130.0 829.2 2,035.8
Firm Value 200,068.2 85,319.5 105,054.3 81,176.9 80,574.4 79,327.4
----------------------------------------------------------------- ------------
----------------------------------------------------------------- ------------
Cash as % of Firm Value 5.19% 22.99% 29.31% 55.96% 65.99% 84.22%
----------------------------------------------------------------- ------------
----------------------------------------------------------------- ------------
MV of Equity 199,500.0 84,787.5 104,737.5 81,046.9 79,745.2 77,291.6
Debt 568.2 532.0 316.8 130.0 829.2 2,036
----------------------------------------------------------------- ------------
----------------------------------------------------------------- ------------
Debt / Equity Ratio 0.0028 0.0063 0.0030 0.0016 0.0104 0.0263
----------------------------------------------------------------- ------------
COST OF CAPITAL (CAPM)
----------------------
Risk Free @ 6/13 5.24%
Beta 0.60
Market return 14.80%
CAPM = 10.98%
Unlevered Beta for MARK 0.59
Beta of other Assets 0.56
Unlevered Beta of other assets 1.04
Levered Beta without Cash 1.06
COST OF CAPITAL (CAPM) 15.40%
COST OF DEBT 7.63%
After tax Cost of Debt 4.70%
Current Proportion of Equity 97.43%
Current Proportion of Debt 2.57%
- --------------------------------------------------
WACC 15.13%
- --------------------------------------------------
20c
-----------------------------------
MARKET AMERICA, INC.
INCOME STATEMENT AND FORECAST
SLOW GROWTH CASE
-----------------------------------
A - Actual
E - Estimated
All data in millions of $, except per share information
-------------------------------------------------------------------------------
9 Mos Ended
04/30/96 04/30/97 04/30/98 04/30/99 04/30/00 1/31/01 A 04/30/01
-------------------------------------------------------------------------------
Sales 42,479.9 66,281.7 87,531.0 110,347.8 135,965.3 101,416.3 138,513.7
Yr-toYr % Change 117% 56% 32% 26% 23% 2%
NET REVENUES $42,479.9 $66,281.7 $87,531.0 $110,347.8 $135,965.3 $101,416.3 $138,513.7
Yr-toYr % Change 56% 32% 26% 23% 2%
Cost of Sales 9,173.7 12,249.1 19,272.3 28,071.2 33,913.3 26,570.1 36,052.3
Gross Margin 78.4% 81.5% 78.0% 74.6% 75.1% 73.8% 74.0%
GROSS PROFIT 33,306.24 54,032.55 68,258.68 82,276.59 102,051.93 74,846.21 102,461.39
Commissions 18,643.9 29,645.9 39,061.2 49,692.8 60,580.7 44,533.4 59,300.2
% of Revenues 43.9% 44.7% 44.6% 45.0% 44.6% 43.9% 42.8%
Sales Tax 238.9 383.6 1,985.5 358.7 212.8 779.0
% of Revenues 0.6% 0.6% 2.3% 0.3% 0.2% 0.0% 0.6%
Salaries 1,799.3 3,725.0 4,184.5 5,085.1 6,910.8 5,171.3 8,900.8
% of Revenues 4.2% 5.6% 4.8% 4.6% 5.1% 5.1% 6.4%
Consulting 885.3 377.2 137.6 266.2 819.1 566.9 640.7
% of Revenues 2.1% 0.6% 0.2% 0.2% 0.6% 0.6% 0.5%
Rents 239.4 389.9 695.5 996.0 1,380.4 914.4 1,193.6
% of Revenues 0.6% 0.6% 0.8% 0.9% 1.0% 0.9% 0.9%
Depreciation & Amortization 75.3 122.8 167.5 208.9 439.1 684.4 937.2
% of Revenues 0.2% 0.2% 0.2% 0.2% 0.3% 0.7% 0.7%
Other 3,203.5 6,111.5 4,685.3 4,592.2 5,814.3 4,848.3 5,598.6
7.5% 9.2% 5.4% 4.2% 4.3% 4.8% 4.0%
-------------------------------------------------------------------------------
TOTAL EXPENSES 25,010.3 40,633.1 50,749.6 60,991.0 75,718.1 56,034.3 76,412.8
-------------------------------------------------------------------------------
OPERATING INCOME (EBITDA) 8,295.92 13,399.44 17,509.10 21,285.63 26,333.80 18,811.88 26,048.63
% of Revenues 19.5% 20.2% 20.0% 19.3% 19.4% 18.5% 18.8%
Interest Income 232.86 595.65 1,073.58 1,763.31 2,277.91 2,121.72 2,870.36
Interest (Expense) (33.5) (40.7) (93.8) (24.3) (157.1) (116.8) (173.4)
Other Income (Expense) 85.2 444.2 461.8 769.9 830.5 977.3 1,282.7
PRETAX INCOME 8,505.1 14,275.8 18,783.2 23,585.7 28,846.0 21,109.7 29,091.0
% of Revenues 20.0% 21.5% 21.5% 21.4% 21.2% 20.8% 21.0%
Taxes 3,351.9 5,804.6 7,942.7 9,394.6 11,055.1 7,502.1 8,921.2
EffectiveTax Rate 39.4% 40.7% 42.3% 39.8% 38.3% 35.5% 30.7%
NET INCOME 5,153.24 8,471.22 10,840.54 14,191.03 17,790.92 13,607.61 20,169.80
Net Margin (% of Revenues) 12.1% 12.8% 12.4% 12.9% 13.1% 13.4% 14.6%
Net Income Applicable to
Common Shareholders
EARNINGS PER SHARE (BASIC) 0.26 0.42 0.54 0.71 0.89 0.70 1.04
% Change 545.8% 64.4% 28.0% 30.9% 25.5% 16.4%
EARNINGS PER SHARE (DILUTED)
% Change
Shs Outstanding - Basic (Millions) 19,950.0 19,950.0 19,950.0 19,950.0 19,936.3 19,431.1 19,420.0
Shs Outstanding - Diluted (Millions)
-------------------------------------------------------------------------------
-------------------------------------------------
4/30/02 E 4/30/03 E 4/30/04 E 4/30/05 E
-------------------------------------------------
Sales 144,054.3 149,816.4 155,809.1 162,041.4
Yr-toYr % Change 4% 4% 4% 4%
NET REVENUES $144,054.3 $149,816.4 $155,809.1 $162,041.4
Yr-toYr % Change 4% 4% 4% 4%
Cost of Sales 37,454.1 38,952.3 38,952.3 40,510.4
Gross Margin 74.0% 74.0% 75.0% 75.0%
GROSS PROFIT 106,600.15 110,864.15 116,856.81 121,531.08
Commissions 64,824.4 67,417.4 70,114.1 72,918.7
% of Revenues 45.0% 45.0% 45.0% 45.0%
Sales Tax 576.2 599.3 623.2 648.2
% of Revenues 0.4% 0.4% 0.4% 0.4%
Salaries 7,778.9 8,090.1 8,569.5 8,912.3
% of Revenues 5.4% 5.4% 5.5% 5.5%
Consulting 432.2 449.4 467.4 486.1
% of Revenues 0.3% 0.3% 0.3% 0.3%
Rents 1,440.5 1,498.2 1,558.1 1,620.4
% of Revenues 1.0% 1.0% 1.0% 1.0%
Depreciation & Amortization 720.3 749.1 779.0 810.2
% of Revenues 0.5% 0.5% 0.5% 0.5%
Other 6,050.3 6,292.3 6,544.0 6,805.7
4.2% 4.2% 4.2% 4.2%
-------------------------------------------------
TOTAL EXPENSES 81,102.5 84,346.6 87,876.3 91,391.4
-------------------------------------------------
OPERATING INCOME (EBITDA) 25,497.60 26,517.51 28,980.49 30,139.71
% of Revenues 17.7% 17.7% 18.6% 18.6%
Interest Income 2,160.81 2,247.25 2,337.14 2,430.62
Interest (Expense) (144.1) (149.8) (155.8) (162.0)
Other Income (Expense) 864.3 898.9 934.9 972.2
PRETAX INCOME 27,658.4 28,764.8 31,317.6 32,570.3
% of Revenues 19.2% 19.2% 20.1% 20.1%
Taxes 10,233.6 10,643.0 11,587.5 12,051.0
EffectiveTax Rate 37.0% 37.0% 37.0% 37.0%
NET INCOME 17,424.80 18,121.79 19,730.10 20,519.31
Net Margin (% of Revenues) 12.1% 12.1% 12.7% 12.7%
Net Income Applicable to
Common Shareholders
EARNINGS PER SHARE (BASIC) 0.90 0.93 1.02 1.06
% Change -13.6% 4.0% 8.9% 4.0%
EARNINGS PER SHARE (DILUTED)
% Change
Shs Outstanding - Basic (Millions) 19,420.0 19,420.0 19,420.0 19,420.0
Shs Outstanding - Diluted (Millions)
20d
DISCOUNTED CASH FLOW ANALYSIS - SLOW GROWTH CASE
A - Actual
E - Estimated
All data in thousands of $, except per share information
1997 A 1998 A 1999 A 2000 A 2001 E
---------------------------------------------------------------------------
EBIT 14,316.5 18,877.0 23,610.0 29,003.1 29,264.4
EBIT Growth Rates 31.85% 25.07% 22.84% 0.90%
- - Interest Income from Cash 595.7 1,073.6 1,763.3 2,277.9 2,870.4
EBIT without interest income 13,720.8 17,803.4 21,846.7 26,725.2 26,394.1
------------------------------------------------------------------------
EBIT (1-t) 8,141.9 10,275.0 13,144.7 16,482.9 18,299.9
------------------------------------------------------------------------
Free Cash Flow to the Firm (FCFF) $14,593.8
PV OF FCFF $13,130.5
2002 E 2003 E 2004 E 2005 E
---------------------------------------------------------
EBIT 27,802.5 28,914.6 31,473.4 32,732.4
EBIT Growth Rates -5.00% 4.00% 8.85% 4.00%
- - Interest Income from Cash 2,160.8 2,247.2 2,337.1 2,430.6
EBIT without interest income 25,641.7 26,667.3 29,136.3 30,301.8
---------------------------------------------------------
EBIT (1-t) 16,154.2 16,800.4 18,355.9 19,090.1 Terminal Value (2%)
--------------------------------------------------------- -------------------
Free Cash Flow to the Firm (FCFF) $13,831.1 $16,189.6 $17,720.6 $18,429.5 $140,370.5
PV OF FCFF $10,809.0 $10,989.5 $10,448.0 $9,438.1 $ 69,398.3
$ AMOUNT PER SHARE
---------- ---------
Value of the Firm without Cash $124,213.4 $6.40
Value of Cash $66,813.2 $3.44
-------------------------------------------------------------
FIRM VALUE $191,026.5 $9.84
-------------------------------------------------------------
Above based on 19.42 million Shares Outstanding
20e
MARKET AMERICA, INC.
INCOME STATEMENT AND FORECAST
HIGH GROWTH CASE
A - Actual
E - Estimated
All data in millions of $, except per share information
04/30/96 04/30/97 04/30/98 04/30/99 04/30/00
---------------------------------------------------------------------------
Sales 42,479.9 66,281.7 87,531.0 110,347.8 135,965.3
Yr-toYr % Change 117% 56% 32% 26% 23%
NET REVENUES $ 42,479.9 $ 66,281.7 $ 87,531.0 $110,347.8 $135,965.3
Yr-toYr % Change 56% 32% 26% 23%
Cost of Sales 9,173.7 12,249.1 19,272.3 28,071.2 33,913.3
Gross Margin 78.4% 81.5% 78.0% 74.6% 75.1%
GROSS PROFIT 33,306.24 54,032.55 68,258.68 82,276.59 102,051.93
Commissions 18,643.9 29,645.9 39,061.2 49,692.8 60,580.7
% of Revenues 43.9% 44.7% 44.6% 45.0% 44.6%
Sales Tax 238.9 383.6 1,985.5 358.7 212.8
% of Revenues 0.6% 0.6% 2.3% 0.3% 0.2%
Salaries 1,799.3 3,725.0 4,184.5 5,085.1 6,910.8
% of Revenues 4.2% 5.6% 4.8% 4.6% 5.1%
Consulting 885.3 377.2 137.6 266.2 819.1
% of Revenues 2.1% 0.6% 0.2% 0.2% 0.6%
Rents 239.4 389.9 695.5 996.0 1,380.4
% of Revenues 0.6% 0.6% 0.8% 0.9% 1.0%
Depreciation & Amortization 75.3 122.8 167.5 208.9 439.1
% of Revenues 0.2% 0.2% 0.2% 0.2% 0.3%
Other 3,203.5 6,111.5 4,685.3 4,592.2 5,814.3
7.5% 9.2% 5.4% 4.2% 4.3%
---------------------------------------------------------------------------
TOTAL EXPENSES 25,010.3 40,633.1 50,749.6 60,991.0 75,718.1
---------------------------------------------------------------------------
OPERATING INCOME (EBITDA) 8,295.92 13,399.44 17,509.10 21,285.63 26,333.80
% of Revenues 19.5% 20.2% 20.0% 19.3% 19.4%
Interest Income 232.86 595.65 1,073.58 1,763.31 2,277.91
Interest (Expense) (33.5) (40.7) (93.8) (24.3) (157.1)
Other Income (Expense) 85.2 444.2 461.8 769.9 830.5
PRETAX INCOME 8,505.1 14,275.8 18,783.2 23,585.7 28,846.0
% of Revenues 20.0% 21.5% 21.5% 21.4% 21.2%
Taxes 3,351.9 5,804.6 7,942.7 9,394.6 11,055.1
EffectiveTax Rate 39.4% 40.7% 42.3% 39.8% 38.3%
NET INCOME 5,153.24 8,471.22 10,840.54 14,191.03 17,790.92
Net Margin (% of Revenues) 12.1% 12.8% 12.4% 12.9% 13.1%
Net Income Applicable to Common
Shareholders
EARNINGS PER SHARE (BASIC) 0.26 0.42 0.54 0.71 0.89
% Change 545.8% 64.4% 28.0% 30.9% 25.5%
EARNINGS PER SHARE (DILUTED)
% Change
Shs Outstanding - Basic (Mi1lions) 9,950.0 19,950.0 19,950.0 19,950.0 19,936.3
Shs Outstanding - Diluted (Millions)
9 Mos Ended
1/31/01 A 04/30/01 4/30/02E 4/30/03E 4/30/04E 4/30/05E
----------------------------------------------------------------------------------------------
Sales 101,416.3 138,513.7 166,216.4 199,459.7 239,351.7 287,222.0
Yr-toYr % Change 2% 20% 20% 20% 20%
NET REVENUES $ 101,416.3 $ 138,513.7 $ 166,216.4 $ 199,459.7 $ 239,351.7 $ 287,222.0
Yr-toYr % Change 2% 20% 20% 20% 20%
Cost of Sales 26,570.1 36,052.3 43,216.3 51,859.5 59,837.9 71,805.5
Gross Margin 73.8% 74.0% 74.0% 74.0% 75.0% 75.0%
GROSS PROFIT 74,846.21 102,461.39 123,000.17 147,600.21 179,513.76 215,416.52
Commissions 44,533.4 59,300.2 74,797.4 89,756.9 107,708.3 129,249.9
% of Revenues 43.9% 42.8% 45.0% 45.0% 45.0% 45.0%
Sales Tax 779.0 664.9 797.8 957.4 1,148.9
% of Revenues 0.0% 0.6% 0.4% 0.4% 0.4% 0.4%
Salaries 5,171.3 8,900.8 8,975.7 10,770.8 13,164.3 15,797.2
% of Revenues 5.1% 6.4% 5.4% 5.4% 5.5% 5.5%
Consulting 566.9 640.7 498.6 598.4 718.1 861.7
% of Revenues 0.6% 0.5% 0.3% 0.3% 0.3% 0.3%
Rents 914.4 1,193.6 1,662.2 1,994.6 2,393.5 2,872.2
% of Revenues 0.9% 0.9% 1.0% 1.0% 1.0% 1.0%
Depreciation & Amortization 684.4 937.2 4,986.5 5,983.8 7,180.6 8,616.7
% of Revenues 0.7% 0.7% 3.0% 3.0% 3.0% 3.0%
Other 4,848.3 5,598.6 6,981.1 8,377.3 10,052.8 12,063.3
4.8% 4.0% 4.2% 4.2% 4.2% 4.2%
---------------------------------------------------------------------------------------------
TOTAL EXPENSES 56,034.3 76,412.8 93,579.9 112,295.8 134,994.3 161,993.2
---------------------------------------------------------------------------------------------
OPERATING INCOME (EBITDA) 18,811.88 26,048.63 29,420.31 35,304.37 44,519.41 53,423.30
% of Revenues 18.5% 18.8% 17.7% 17.7% 18.6% 18.6%
Interest Income 2,121.72 2,870.36 2,493.25 2,991.90 3,590.28 4,308.33
Interest (Expense) (116.8) (173.4) (166.2) (199.5) (239.4) (287.2)
Other Income (Expense) 977.3 1,282.7 997.3 1,196.8 1,436.1 1,723.3
PRETAX INCOME 21,109.7 29,091.0 27,758.1 33,309.8 42,125.9 50,551.1
% of Revenues 20.8% 21.0% 16.7% 16.7% 17.6% 17.6%
Taxes 7,502.1 8,921.2 10,270.5 12,324.6 15,586.6 18,703.9
EffectiveTax Rate 35.5% 30.7% 37.0% 37.0% 37.0% 37.0%
NET INCOME 13,607.61 20,169.80 17,487.63 20,985.16 26,539.31 31,847.18
Net Margin (% of Revenues) 13.4% 14.6% 10.5% 10.5% 11.1% 11.1%
Net Income Applicable to Common
Shareholders
EARNINGS PER SHARE (BASIC) 0.70 1.04 0.90 1.08 1.37 1.64
% Change 16.4% -13.3% 20.0% 26.5% 20.0%
EARNINGS PER SHARE (DILUTED)
% Change
Shs Outstanding - Basic (Mi1lions) 19,431.1 19,420.0 19,420.0 19,420.0 19,420.0 19,420.0
Shs Outstanding - Diluted
(Millions)
20f
DISCOUNTED CASH FLOW ANALYSIS - HIGH GROWTH CASE
A - Actual
E - Estimated
All data in thousands of $, except per share information
1997 A 1998 A 1999 A 2000 A 2001 E
---------------------------------------------------------------------------
EBIT 14,316.5 18,877.0 23,610.0 29,003.1 29,264.4
EBIT Growth Rates 31.85% 25.07% 22.84% 0.90%
- - Interest Income from Cash 595.7 1,073.6 1,763.3 2,277.9 2,870.4
EBIT without interest income 13,720.8 17,803.4 21,846.7 26,725.2 26,394.1
------------------------------------------------------------------------
EBIT (1-t) 8,141.9 10,275.0 13,144.7 16,482.9 18,299.9
------------------------------------------------------------------------
Free Cash Flow to the Firm (FCFF) 13,208.7
PV OF FCFF $11,884.2
2002E 2003E 2004E 2005E
---------------------------------------------------------
EBIT 27,924.4 33,509.2 42,365.2 50,838.3
EBIT Growth Rates -4.58% 20.00% 26.43% 20.00%
- - Interest Income from Cash 2,493.2 2,991.9 3,590.3 4,308.3
EBIT without interest income 25,431.1 30,517.3 38,775.0 46,530.0
---------------------------------------------------------
EBIT (1-t) 16,021.6 19,225.9 24,428.2 29,313.9 Terminal Value (9%)
--------------------------------------------------------- -------------------
Free Cash Flow to the Firm (FCFF) 16,967.4 20,888.1 26,422.8 31,707.4 $517,320.2
PV OF FCFF $13,259.9 $14,178.8 $15,578.8 $15,237.9 $255,760.1
$ AMOUNT PER SHARE
---------- ---------
Value of the Firm without Cash $326,899.7 $16.83
Value of Cash $ 66,813.2 $ 3.44
----------------------------------------------------------------------
FIRM VALUE $393,712.9 $20.27
----------------------------------------------------------------------
Above based on 19.42 million Shares Outstanding
20g
5. Stock Buyback Analysis
----------------------
We derived a valuation range of $48.3 million ($2.49 per share) to $109.1
million ($5.62 per share) based on an analysis of management's three separate
buybacks of stock from an investor during the 2000 fiscal year and the first
quarter of the 2001 fiscal year. The Company purchased, in aggregate, 530,000
shares at an average price of $2.73 per share.
The seller had been an original shareholder of MA. When the seller sold the
shares, an analyst might assume that the seller believed that they were
receiving the best possible price at the time of the transactions. The average
price reflects an aggregate price that a sophisticated and knowledgeable seller
received for his shares over a measurable period of time (as opposed to a single
transaction, that could be influenced by a specific event).
Based on this average price and the Company's 19,420,300 outstanding shares,
this would provide us with a valuation of $81.2 million or $4.18 per share.
21
MARKET AMERICA, INC.
STOCK BUYBACK
($ IN THOUSANDS EXCEPT FOR PER SHARE INFORMATION)
SELECTED FINANCIAL DATA: ESTIMATED VALUATION: 81,213.4
04/30/01 ESTIMATED VALUATION PER SHARE: 4.18
Revenues 138,513.7 VALUATION RANGE BASED ON MARKET MULTIPLES:
EBITDA 26,048.6 $ VALUE PER SHARE
EBIT 25,111.4 HIGH $109,054 5.62
Pretax Income (Loss) 29,091.0 LOW $48,332 2.49
Net Income (Loss) 20,169.8
Operating Cash Flow 17,695.5 Based on 19.42 million shares outstanding
Adj'd Book Value @ 4/30/01 76,057.9
Long Term Debt @4/30/01 2,035.8
MULTIPLES USED:
- ---------------
PRICE/SALES MULTIPLE 0.53
ENTERPRISE VALUE/EBITDA 1.93
PRICE/EARNINGS 4.10
PRICE/OPERATING CASH FLOW 3.76
PRICE/BOOK 1.43
MARKET VALUATIONS: 4/30/2001 PER SHARE
- ------------------ --------- ---------
PRICE/SALES MULTIPLE 73,190.8 3.77
ENTERPRISE VALUE/EBITDA 48,331.7 2.49
PRICE/EARNINGS 82,647.0 4.26
PRICE/OPERATING CASH FLOW 66,505.5 3.42
PRICE/BOOK 109,053.6 5.62
PROBTY WGTD AVG - NOMINAL 81,213.4 4.18
21a
VALUATION SUMMARY
Based on our analyses of the range of valuations derived from the preceding five
methods (Market Multiple Analysis, Comparable Transactions Analysis, Ratio
Performance Analysis, Discounted Cash Flow Analysis and Stock Buyback Analysis),
we arrived at an estimated valuation range of $119.0 million or $6.13 per share
to $239.6 million or $12.34 per share.
After arriving at our valuations, each estimate was weighted according to its
relative importance. The following weights were applied for each method: Market
Multiple 40%, Comparable Transactions Multiple 30%, Discounted Cash Flow 25% and
Stock Buyback 5%. As noted earlier, the Performance Ratio Analysis was
considered in our deliberations and conclusions, but not weighted in our
calculations.
22
KEY CONSIDERATIONS AND CONCLUSION
Founded in 1992 by James H. Ridinger, Market America, Inc. has become a
formidable factor in forging a successful hybrid model for direct sales.
Premised on the hypothesis that traditional models for direct selling would
ultimately "flat line" through saturation, Ridinger developed and then
implemented the concept of "unfranchising". The Market America "UnFranchise"
system combines the benefits of franchising, but eliminates the costs of
becoming a franchisee. Essentially, MA is a broker providing proprietary
products to a network approximating 85,000 exclusive distributors. In turn,
these distributors are positioned to develop one-on-one relationships with their
clients whose demographic information and ordering patterns are processed by MA.
The processing of the data provided from distributors results in new product
offerings from MA that will have high acceptance quotients with the more than
800,000 end users currently serviced by MA's distributors. Management monikers
this as "mass customization". MA's "Mall without Walls" concept currently offers
a breadth of products, including: automotive lubricants, enzyme-activated
cleaning and soil conditioning products, biologically activated hydrocarbon
remediation products, water filters, household cleaning products, frozen gourmet
meals, gourmet coffee, flower arrangements, dietary and nutritional supplements,
vitamins, photographic services, personal protection devices, jewelry, custom
blended cosmetics for adults and teenagers, personal care products, personal
development products and customized apparel. If there does not appear to be a
common thread throughout, it is because MA's strategy for product success comes
from "measuring, monitoring, adjusting and controlling".
For the past four fiscal years one supplier has provided MA with vitamin
compounds and nutritional supplements that accounted for more than 40% of annual
gross revenues in each fiscal year. During this same period the number of
Company distributors has grown from approximately 59,000 to 85,000. MA's
compensation plan to its distributors is a function of cumulative distributor
purchases over a calendar year and commissions are paid bi-weekly.
Last year, the Company created an Internet Advisory Board, which established a
corporate web site that links seamlessly to the web sites of its distributors,
thus creating an e-commerce selling capability for all of MA's distributors. To
date, about 8,000 distributors are "linked". Each distributor pays for all
marketing and sales materials received from the Company, including admission to
regional leadership and marketing conferences and annual meetings, usually held
in Greensboro, NC, where MA is headquartered.
The Company does not manufacture any of the products it sells. In its capacity
as a broker/distributor, it has been able to avoid material expenditures to
comply with various government environmental requirements. MA is obliged to
comply with regulations established by the FDA, FTC, EPA and Consumer Product
Safety Commission regarding product labeling, distribution, packaging,
advertising and content. MA also possesses a $20 million product liability
insurance policy, against which no claims have ever been asserted.
Market America became a public company in 1994 by merging with a "shell"
corporation. Since that time Mr. Ridinger and his family have owned 80% of the
outstanding shares of the Company's voting stock. There are currently 19.4
million shares outstanding.
23
Over the past five years, MA has recorded an impressive skein of increasing
revenues, earnings and cash flow. Net revenues have compounded at a rate of
26.6% since April 1996 when they were $42.5 million. For the year ended 4/30/01
revenues were $138.5 million. Net income has almost quadrupled since '96 - from
$5.2 million to $20.2 million. For the April year just ended, MA generated
EBITDA of $ 26.0 million, or $ 1.34 per share. The Company's balance sheet is
highly liquid. At April 30, 2001, MA reflected quick assets of $66.8 million,
which included cash aggregating $48.0 million, to cover total liabilities of
$16.1 million. The Company's book value per share at fiscal yearend was $3.92.
Despite its strong balance sheet and enviable record of growing sales and
earnings, MA's stock has been in general decline since 1996. For the past twelve
months, MA common stock has traded in a range between $2.88 and $5.13. This may
be a function of the general stock market. It could be symptomatic of the
decline of investor interest in direct sales companies. Another explanation
might be the absolute control exerted by Mr. Ridinger's 80% ownership. The value
of the public float is approximately $16 million. Notwithstanding the merits of
investing in quality small cap companies, the major markets are dominated by
institutional investors who require liquidity as a primary essential to stock
selection. This, too, could account for the lack of recognition for MA's
business achievements.
Prior to determining a range of value for Market America, we considered,
analyzed and evaluated numerous aspects of:
o the Company
o its business model
o the direct selling industry
o publicly owned comparable and competitive companies, including the
lower valuations afforded those most closely held
o transactions in the public markets undertaken by unrelated,
knowledgeable and willing buyers and sellers o recent stock
repurchases by the Company from shareholders who were knowledgeable
regarding MA's activities at the time they sold shares to the Company
o the concentration of ownership held by (the) Ridinger family
(interests)
o a discounted cash flow analysis prepared by Burnham utilizing
projections and assumptions provided by the Company
Market America has consistently demonstrated standards of excellence and
operating results that place it in the upper echelons of direct selling
companies.
A unique, hybrid business model hypothesized and implemented by its founder,
James H. Ridinger, appears to have incorporated and captured the benefits of a
pure franchising model and neutralized the pitfalls that can piggyback the
concept of franchising. Ridinger has written a script that continually leverages
the Company and its distributors in tandem.
Consumer advocates, regulatory agencies and disgruntled distributors have
leveled much criticism at direct selling companies in recent years. By
extrapolation, this has negatively impacted stock market valuations of entities
that are simon pure. Notwithstanding the naysayers, reputable direct sellers
provide quality products at fair prices to tens of millions of consumers and
afford legitimate full-time occupational opportunities to hundreds of thousands
of self-styled entrepreneurs.
24
We have compared the current and historical results of Market America with eight
publicly traded companies whose operating characteristics and results are most
similar to the Company. Those comparisons are detailed in the Market Multiples
Analysis section of this valuation report. In addition to the statistical
results of that study, we wish to highlight two beliefs. First, those companies
whose ownership control exceeds 50% are afforded lower marketplace valuations
than those companies whose ownership is more diversified. Second (and applicable
to Market America), a company that exhibits and has historically demonstrated
superior performance must ultimately be afforded a premium valuation from an
independent evaluator. Market America is deserving of such a premium.
Burnham reviewed more than 265 transactions involving comparable companies. We
considered and evaluated seven that we deem to involve entities similar to MA
and that occurred within the past two years. We conclude that, based solely upon
the cumulative results of this select universe, the value of Market America
would be $7.18 per share.
Within the past two years, Market America has repurchased shares for its
Treasury from shareholders who were knowledgeable of the Company's activities at
the time they sold shares to MA. In the first instance during 2000 fiscal year,
the Company purchased 400,000 shares at $3.09 when the stock's 52-week low and
high was $3.75 and $10.00. In the second instance shortly after MA closed its
fiscal year for April 30, 2000, the Company reacquired an additional 100,000
shares at $3.09 when the stock's 90-day low and high was $3.44 and $5.13. MA's
last repurchased stock at $2.00 per share occurred on July 26, 2000 when the
stock, on the public market, closed at $4.125. We do not assign much
significance to these purchases by MA due to the fact that, in these three
cases, the sellers had extraneous reasons for liquidity and MA, with an
abundance of available cash, was willing to be accommodating.
As noted previously, (the) Ridinger family (interests) have historically owned
80% of Market America's outstanding shares. Based upon the Company's operating
performance, this has benefited all shareholders. Reciprocally, such a high
concentration of control appears to negatively impact the marketplace valuation
of the Company's shares.
Our discounted Cash Flow Analysis was based upon management's budget for 2002,
which we diminished due to the historical relationship between management's one
year forecast and actual results. Taking into account certain assumptions and
strategies articulated by management, we created three similarly discounted
scenarios for projected results through fiscal 2006. Our base case scenario
suggests a present value of Market America of $256.7 million or $13.22 per
share.
25
In tabular format we are pleased to present our independent valuation findings
for the common shares of Market America on the succeeding page. The range of
valuation presented takes into account a number of important factors, many
previously articulated, including:
o the exemplary operating results of MA;
o the 80% ownership position of the Ridingers;
o the tangible book value of each share of common stock;
o the high level of cash reflected on MA's balance sheet;
o the consideration that there have been no dividends paid or declared;
and
o the results of our various analyses presented elsewhere in this
report.
In consideration of the aforementioned, Burnham has concluded that, based upon
information available to us as of the date of this valuation report, the range
of value for the common shares is between $6.13 and $12.34.
Respectfully submitted,
BURNHAM SECURITIES INC.
26
MARKET AMERICA, INC.
VALUATION ANALYSIS SUMMARY
VALUATION DATE: JUNE 18, 2001
($ IN THOUSANDS)
VALUATION
ESTIMATED WEIGHTED VALUATION RANGE
BASED ON THE METHODS: WEIGHTS VALUATION VALUATION HIGH LOW
- --------------------- -------------------------------------------------------------------
MARKET MULTIPLES 40.0% $163,060.8 $65,224.3 $234,768.1 $67,543.0
COMPARABLE TRANSACTIONS 30.0% $139,503.1 $41,850.9 $139,503.1 $139,503.1
DISCOUNTED FREE CASH FLOWS 25.0% $256,726.6 $64,181.7 $393,712.9 $191,026.5
STOCK BUY-BACKS 5.0% $81,213.4 $4,060.7 $109,053.6 $48,331.7
ESTIMATED WEIGHTED AVERAGE VALUATION $175,317.6 $239,639.1 $119,041.3
SUMMARY -- VALUATIONS PER SHARE (BASED ON 19.42 MILLION SHARES OUTSTANDING):
HIGH LOW
---- ---
MARKET MULTIPLES $8.40 12.09 3.48
COMPARABLE TRANSACTIONS $7.18 7.18 7.18
DISCOUNTED FREE CASH FLOWS $13.22 20.27 9.84
STOCK BUY-BACKS $4.18 5.62 2.49
ESTIMATED WEIGHTED AVERAGE VALUATION $9.03 12.34 6.13
27