CONFIDENTIAL
FAIRNESS OPINION
PREPARED EXCLUSIVELY FOR
SPECIAL COMMITTEE
THE BOARD OF DIRECTORS
SPECIALTY CATALOG CORP.
BURNHAM SECURITIES INC.
MAY 4, 2001 RICHARD LEWISOHN, III
SENIOR MANAGING DIRECTOR
CALVIN CHIN
ASSOCIATE
ROBERT GERSTENFELD
ASSOCIATE
TABLE OF CONTENTS
TAB
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1. SUMMARY
COMPANY OVERVIEW
2. VALUATION ANALYSIS
PREFACE
METHODOLOGY
MARKET MULTIPLE ANALYSIS
COMPARABLE TRANSACTIONS MULTIPLE
DISCOUNTED CASH FLOW
STOCK BUYBACK
3. VALUATION ESTIMATES
4. MARKET MULTIPLE
DESCRIPTION OF COMPARABLE COMPANIES
COMPANY PROFILES
5. COMPARABLE TRANSACTIONS MULTIPLE
6. DISCOUNTED CASH FLOW
7. STOCK BUYBACK
8. VALUATION SUMMARY
9. KEY CONSIDERATIONS AND CONCLUSION
EXHIBITS
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A. STOCK CHART AND TRADING HISTORY
B. LETTER OF ENGAGEMENT
C. FAIRNESS OPINION
D. COMPANY ANNUAL REPORT FOR THE YEAR ENDING DECEMBER 31, 2000 (INSERTION)
SUMMARY
As of April 30, 2001 Burnham Securities Inc. ("Burnham") was engaged by the
Independent Committee of the Board of Directors of Specialty Catalog Corp. ("SC"
or the "Company") to render a fairness opinion with regard to the contemplated
acquisition for cash ($3.75 per share) by an entity formed by Mr. Guy Naggar and
certain other shareholders of the Company (the "Purchaser") of all the
outstanding shares of the Company not presently owned by Mr. Naggar and such
other shareholders (the "Proposed Transaction").
Specialty Catalog targets niche consumer categories, primarily via direct
marketing. SC Direct, its principal operating subsidiary in the United States,
is the leading retailer of women's wigs and hairpieces in the U.S. Daxbourne
International ("Daxbourne"), acquired by SC in 1997, is a leading United Kingdom
retailer and wholesaler of women's wigs and hairpieces. SC Publishing, another
subsidiary of SC Direct, sells continuing education courses to nurses and CPA's.
In September, 1999 it acquired Maryland-based American Healthcare Institute, a
sponsor of approximately 600 continuing education seminars annually for nurses
and other medical professionals.
Financial Summary
The Company's 10K for the year ended 12/30/00 reflected annual revenues of $60.9
million as compared with $54.5 million for the previous year. Operating income
rose 27.1% to $2.86 million as compared with $2.25 million a year earlier.
Overall, the firm had fully diluted net earnings of $1.1 million, or $0.25 per
share on 4,530,750 common shares outstanding, versus net income of $799,486, or
$0.17 per share on 4,684,874 common shares outstanding in the prior period.
As reported by the Company on April 25, first quarter results compared favorably
with the initial three months of fiscal 2000. Revenues rose de minimisly to
$16.5 million from $16.1 million. However, cost cutting efforts lowered
operating expenses by 8% which resulted in operating income of $930,000 versus
$149,000 last year. Net income after taxes and adjustments was $240,000, or $
0.09, compared with a loss of one cent in 2000.
The improved results this year were a function of reduced operating expense
ratios and lower merchandise return rates in SC's estimable wig and hairpiece
entity, Paula Young, as well as a more focused advertising budget. The Company's
Afro-American catalog, Especially Yours, generated improved results, while SC's
British subsidiary, benefiting from the recent acquisition of the Company's
European licensee, increased its EBITDA contribution by 15%. American Healthcare
Institute, Inc. ("AHI"), one of SC's continuing education schools, was burdened
with re-location expenses to South Easton, MA of $200,000. From a balance sheet
perspective, as of 4/1/01, SC's Shareholder Equity rose year-to-year by $1.3
million to $9 million, or $2.00 per share.
Due to the recent restructuring of the Company's financing accommodations with
its bank, SC reflected a positive working capital of $1.6 million versus last
year's deficit of $3.3 million, a meaningful improvement year-to-year.
Notwithstanding this improvement, it appears that SC will require additional
capital if it is to profitably sustain a growing level of sales in the future.
To an extent, fiscal year 2000 and the first quarter of this year have been a
period of transition and repositioning for SC. In the fourth quarter of 1999,
the Company discontinued a product line, Paula's Hatbox, and incurred a pre-tax
write-off of $730,000. Also, a newly installed MIS, that was scheduled to be
operational late in 1999, did not become functional until the first quarter
of 2000. In addition, the Company had to absorb almost $700,000 of expenses due
to a proposed acquisition of SC at $5 per share that terminated in the first
quarter of 2000. Furthermore, the Company expended significant resources in its
unsuccessful attempt to acquire Hair Club for Men. Notwithstanding the
aforementioned, SC functioned with a CEO-in-name-only until July, 2000 when Mr.
Joseph Grabowski was hired to shepherd the corporation. Pre-tax recruiting and
severance costs of $500,000 were incurred. Also, in December of 2000, the
Company entered into a $12.25 million credit agreement with Fleet National Bank,
for the purpose of refinancing its existing senior debt and to provide for
corporate working capital needs.
Under Mr. Grabowski's stewardship, SC has implemented a specific set of programs
to stem the tide of returns which were occurring in excess of 50% on certain
product lines last Fall. Also, Wigs by Paula, the Company's flagship catalogue,
de-emphasized "beauty, fashion and fun" and took on a more focused, hard-hitting
approach that produced commendable fourth quarter results. Fixed salary overhead
was diminished by 14%; AHI was relocated to South Easton (in early 2001); and,
as noted earlier, a more flexible credit line was negotiated with SC's bank.
In undertaking our analysis as to the fairness of the Proposed Transaction, we
have relied on traditional valuation techniques, 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
the opinion expressed herein, including:
1. publicly available information concerning SC since 12/31/95;
2. certain financial statements and other financial and operating data
concerning SC prepared by the management of the Company;
3. certain financial projections prepared by the management of SC with regard
to its business prospects;
4. discussing the past and current operations and financial condition and the
prospects of SC with senior executives of SC;
5. visiting the South Easton, MA facility of SC and engaging in discussions
with management;
6. comparing the financial performance of SC and the prices and trading
activity of SC Common Stock with that of certain other comparable
publicly-traded companies and their securities;
7. comparing the Proposed Transaction with other transactions involving
public and private companies that we deemed to be comparable;
8. the average price per share paid by SC for the 144,000 shares purchased in
the open market in 1999 and 2000;
9. analyzing transactions concluded by SC (Daxbourne and AHI);
10. the dearth of interest in acquiring SC by 53 candidates less than two
years ago and the failed acquisition of the Company last year;
11. the potential consequences to SC shareholders if the notice to delist SC
shares from NASDAQ were to become effective; and
12. the public announcements and filings relating to the Proposed Transaction
and the drafts of the Merger Agreement as they became available and
certain related documents.
VALUATION ANALYSIS
PREFACE
The following analyses are based upon information provided to us by the
management of SC. Certain other information regarding comparable companies has
been obtained through publicly available databases. We have reviewed
management's projections without adjustments and have relied upon such
projections without independent verification. We believe that management's view
of its business plans and forecasts are realistic and achievable, presuming that
their assumptions come to pass. Our valuation is based upon economic, market and
financial information available as of the date of our fairness opinion.
METHODOLOGY
The following is a brief description of the methods used to estimate the
valuation range fairness of the consideration to be received by the shareholders
of SC.
1. MARKET MULTIPLE ANALYSIS
This method utilizes certain market information from selected comparable
companies that are in comparable businesses and have similar 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 used:
o Price to Sales
o Enterprise Value to EBITDA
o Price to Earnings
o Price to 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. COMPARABLE TRANSACTIONS MULTIPLE
This method is based on a review of comparable transactions in the
catalog/specialty distributor industry over a two-year period. 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 multiples are generally accepted as meaningful in the marketplace:
o Total Invested Capital to Revenues
o Total Invested Capital to EBITDA
Deal equity is defined as the cash or shares offered for the targeted company in
a proposed or completed transaction. The total invested capital represents the
total amount of capital including debt and equity offered in the deal.
Each market parameter (or "multiple") is calculated and represents an average of
comparable transactions that is adjusted for marketplace conditions based on
actual transactions. In order to make the multiples meaningful, certain
multiples are mathematically adjusted to smooth out transaction values for which
the deal parameters may be unrealistically high or low. Market conditions aside,
transactions are executed for a myriad of reasons (e.g. market share
motivations, portfolio fit, buy-versus-build strategy, roll-up or consolidation
play, synergies, etc.) and may not necessarily be appropriate in every scenario.
3. 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 is applied to
such cash flows to provide a result that, when aggregated, will result in the
present value of those future cash flows. The discount rate utilized generally
encompasses a range from 10% to 20%. Sensitivity tables have been included to
provide a range of valuations based on this method. A central value estimate has
also been provided to show the best mean estimate assuming current equity risk
premiums for comparable companies in the industry at the present time.
WE HAVE UNDERWEIGHTED THIS MEASURE DUE TO THE PREFERENCE OF SMALL, SPECIALTY
CATALOG COMPANIES TO CONSIDER HISTORICAL AND CURRENT CASH FLOWS FROM OPERATIONS
MORE IMPORTANTLY THAN PROJECTED RESULTS WHEN EVALUATING PROSPECTIVE ACQUISITIONS
OR STRATEGIC ALLIANCES.
4. STOCK BUYBACK
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 the best 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, will be the best value they can receive. This is especially true
when it involves long-term shareholders. Therefore, stock buybacks are a good
measurement of the fair market value of outstanding shares as determined by
those most intimate with overall operations and future prospects.
WE HAVE UNDERWEIGHTED THIS MEASURE IN OUR ANALYSIS PRIMARILY DUE TO THE
RELATIVELY LOW PERCENTAGE OF OUTSTANDING SHARES RE-ACQUIRED BY THE COMPANY AS
WELL AS THE TIMING OF ITS PURCHASES, BUT NOT DUE TO THE SIGNIFICANCE OF THE
EVENT WHICH TOOK PLACE, FOR OUR CONSIDERATION, OVER TWO FISCAL YEARS, 1999 AND
2000.
VALUATION ESTIMATES
In order to determine the overall valuation, we used the following four methods:
the Market Multiple Analysis, Comparable Transactions Multiple 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 - 35%,
Comparable Transactions Multiple - 25%, Discounted Cash Flow - 20%, and Stock
Buyback - 20%. We granted the Market Multiple and Comparable Transactions
Analyses greater weightings than the other two methods because we believe that
the markets' current assessments of comparable companies and transactions are
more efficient in valuing ongoing businesses. The following sections contain the
analysis and details of our valuation methods:
o Market Multiple 4
o Comparable Transactions Multiple 5
o Discounted Cash Flow 6
o Stock Buyback 7
1. Market Multiple Analysis:
We derived a valuation range from $10.5 million to $18.2 million by compiling a
list of average trailing historical multiples that were based upon historical
financial information from our composite group of companies. We used SC's actual
fiscal results for the year ended 12/31/2000 to derive the following multiples:
Multiple: Adjusted Average
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Price/Sales 0.29x
Enterprise Value/EBITDA 5.58x
Price/Earnings 13.21x
Price/ Operating Cash Flow 5.83x
Price/Book 1.21x
These multiples were applied against management's operating statistics to derive
an estimated value for each parameter.
A composite valuation was determined by weighing each multiple parameter by its
relative importance as a valuation measure.
DESCRIPTION OF COMPARABLE COMPANIES
BLAIR CORPORATION (AMEX:BL) Blair Corporation's business consists of the sale of
fashion apparel for men and women, plus a wide range of home products that are
primarily marketed through direct mail merchandising. The Company's targeted
customers are from over "50, low-to-moderate income" market. The Company
operates three retail stores, two in Pennsylvania and one in Delaware, and two
outlet stores in Pennsylvania. The Company markets a wide range of merchandise,
manufactured by a number of independent suppliers, both domestic and foreign.
Catalogs and letters containing color folders depict the current styles of
womenswear, menswear and home products, and are mailed directly to existing and
prospective customers. The Company reported revenues of $574 million over its
last twelve months.
CONCEPTS DIRECT, INC. (NASDAQ:CDIR) Concepts Direct, Inc. is a direct marketing
company that owns and operates five catalog titles and related niche marketing
vehicles. Concepts Direct's five primary direct marketing vehicles are the
Colorful Images, Linda Anderson, Snoopy etc., A catalog with character, Linda
Anderson's Collectibles and the Music Stand catalogs. Through these media and
Internet sites associated with Linda Anderson and the Music Stand, the Company
currently sells personalized paper products and a diverse line of merchandise,
including collectibles, gift items, home decorative items and casual apparel.
Concepts Direct, Inc. is a direct marketing company that sells personalized
paper products and a diverse line of merchandise (gift items, home decorative
items and apparel). The Company's reported revenues of $55.5 million over its
last twelve months.
GAIAM, INC. (NASDAQNM:GAIA) Gaiam, Inc. is a multi-channel lifestyle company
dedicated to providing a broad selection of natural and healthy alternatives to
traditional information, goods and services. The Company uses a multi-channel
marketing approach, through catalogs, e-commerce, business-to-business channels,
media broadcasts and 21,000 retail points, including Discovery, Borders,
Musicland, Dicks, Amazon.com, Target and Whole Foods. The Company reported
revenues of $60.6 million over its last twelve months.
INTEGRITY INCORPORATED (NASDAQ:ITGR) Integrity, Inc. is a producer and publisher
of Christian lifestyle products developed to facilitate worship, entertainment
and education. The Company produces Christian music ranging from praise and
worship music (its largest category) to other styles of adult contemporary
Christian music and children's music. Integrity's recorded music products fall
into two broad categories: concept products, which are centered on a specific
theme, such as praise and worship music and artist products, in which the artist
is the focal point. In addition to recorded music, Integrity produces Christian
music video products, including children's music series and praise and worship
music recorded specifically for aerobic exercises. Integrity's products also
include printed music, such as songbooks and sheet music, designed primarily for
distribution to churches and choral groups. ITGR is engaged in the production,
distribution and publishing of music cassette tapes and compact discs, printed
music and related products, primarily by direct to consumer marketing and
wholesale trade methods. It has niche consumer product lines targeting customers
who are budget-conscious (Fairhope), African-American (Urban Praise), and
greeting cards. Products are driven by "celebrity" figures in the Christian
community. The Company reported revenues of $51.8 million over its last twelve
months.
J. JILL GROUP, INC. (NASDAQ:JILL) The J. Jill Group, Inc. is a specialty
marketer of high quality women's apparel, accessories and gifts. The Company
previously marketed its products through two catalog concepts, J. Jill and
Nicole Summers but had decided to discontinue Nicole Summers in order to
concentrate its resources on the J. Jill brand. J. Jill is characterized by the
simple, comfortable, versatile style of its apparel offerings, which range from
relaxed career wear to weekend wear. These apparel offerings are almost entirely
private label, with emphasis on natural fibers and unique details. J. Jill's
target customers are active, affluent women age 35 to 55. The Company markets
its products through the J. Jill catalog, retail stores and the Internet. J.
Jill Group reported revenues of $248.3 million over its last twelve months.
MOVIE STAR, INC. (AMEX:MSI) Movie Star, Inc. designs, manufactures, markets and
sells an extensive line of ladies' sleepwear, robes, leisurewear, loungewear,
panties and daywear. The Company's products consist of ladies' pajamas,
nightgowns, baby dolls, nightshirts, dusters, shifts, caftans, sundresses,
rompers, short sets, beachwear, peignoir ensembles, robes, leisurewear, panties
and daywear consisting of bodysuits, soft bras, slips, half-slips, teddies,
camisoles and cami top sets. These products are manufactured in various fabrics,
designs, colors and styles depending upon seasonal requirements, changes in
fashion and customer demand. Prices range from $3 to $90. The Company also
operates retail stores under the names Movie Star Factory Stores, Bobby's
Menswear and A Little Xtra from Movie Star. As of June 30, 2000, the Company
operates 20 stores. The Company reported revenues of $65.6 million over its last
twelve months.
RIGHT START, INC. (NASDAQ:RTST) The Right Start, Inc. is a specialty retailer of
high quality, developmental, educational and care products for infants and
children. RightStart.com is the Company's majority-owned online subsidiary.
Together, the Company markets its products through its 58 retail stores, as of
December 2000, located throughout the United States. RightStart.com's nationally
distributed catalog, and RightStart.com's online store are located at
www.rightstart.com. The Company offers approximately 1,500 items targeting
infants and children through age three in its 53 retail stores. RightStart.com
offers approximately 4,500 items for infants and children through age 12. The
stores' product mix includes a wide variety of items to meet the needs of
parents of infants and small children up to age three, all presented within a
store designed to provide a safe, baby-friendly environment for the shopping
ease of new parents. The Company reported revenues of $46.7 million over its
last twelve months.
SPECIALTY CATALOG CORP.
MARKET MULTIPLE
($ IN THOUSANDS EXCEPT FOR PER SHARE INFORMATION)
SELECTED FINANCIAL DATA:
- ------------------------
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FYE 12/30/00
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Revenues 60,892.1
EBITDA 4,549.3
EBIT 2,859.1
Pretax Income (Loss) 1,885.5
Net Income (Loss) 1,112.1
Cash Flow from Operations 2,277.0
Adj'd Book Value 8,700.0
Long Term Debt 7,200.0
MULTIPLES USED:
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PRICE / SALES MULTIPLE 0.29
ENTERPRISE VALUE / EBITDA 5.58
PRICE / EARNINGS 13.21
PRICE / OPERATING CASH FLOW 5.83
PRICE / BOOK 1.21
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MARKET VALUATIONS: FYE 12/30/00 PER SHARE
- ------------------ --------------- ------------
PRICE / SALES MULTIPLE 17,498.0 3.67
ENTERPRISE VALUE / EBITDA 18,170.7 3.81
PRICE / EARNINGS 14,687.7 3.08
PRICE / OPERATING CASH FLOW 13,280.5 2.79
PRICE / BOOK 10,535.2 2.21
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PROBTY WGTD AVG - NOMINAL 15,362.2 3.22
- -------------------------------------------------------------
- ------------------------------------------------------
ESTIMATED VALUATION: 15,362.2
- ------------------------------------------------------
ESTIMATED VALUATION Per Share: 3.22
- ------------------------------------------------------
VALUATION RANGE BASED ON MARKET MULTIPLES:
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$ VALUE PER SHARE
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HIGH $18,171 3.81
LOW $10,535 2.21
Per share data based on 4.768 million fully diluted shares
SELECTED COMPANIES FOR SPECIALTY CATALOG
Information as of the market close on April 27, 2001
(Dollars in millions)
LTM - (Last Twelve Months)
LQA - (Latest Quarterly Annualized)
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COMMON NET DIL EPS
SHARES CURRENT NET INCOME BEFORE
CLOSING OUTSTDG MARKET TOTAL SALES EBITDA BEF EXTRA EXTRAS
TICKER COMPANY NAME PRICE (M VAL) VALUE ASSETS LTM LTM LTM LTM
- ----------------------------------------------------------------------------------------------------------------------------------
BL BLAIR CORP 18.100 8.0 144.2 356.5 574.6 41.4 21.1 2.63
CDIR CONCEPTS DIRECT INC 2.575 5.0 12.9 27.6 55.5 2.8 0.1 0.01
GAIA GAIAM INC 10.690 10.9 116.2 48.5 60.6 5.6 2.6 0.23
ITGR INTEGRITY INC -CL A 3.590 5.6 20.2 27.2 51.8 8.9 1.9 0.28
JILL J JILL GROUP INC 18.550 10.2 188.4 130.1 246.3 29.1 12.8 1.24
MSI MOVIE STAR INC 0.700 14.9 10.4 27.6 65.6 4.9 1.6 0.17
RTST RIGHT START INC 1.540 5.6 8.7 23.7 46.7 -9.0 -11.4 -2.14
CTLG SPECIALTY CATALOG CORP 3.050 4.3 13.2 23.7 60.9 4.5 1.1 0.25
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CURRENT CURRENT MKT
CURRENT PRICE/ PRICE/ CURRENT ENTERPRISE OPERATING GROSS CAP /
PRICE/ OPERATING BOOK PRICE/ VALUE/ EXPENSE INCOME RUN
TICKER EARNS CASH FLOW VALUE SALES EBITDA RATIO MARGIN SALES
- ------------------------------------------------------------------------------------------------------------------------------------
BL 6.88 5.99 0.61 0.25 3.91 0.94 50.9 0.20
CDIR 321.87 NA 1.16 0.23 7.77 0.99 41.1 0.16
GAIA 43.99 NA 6.42 1.92 20.24 0.93 60.7 1.26
ITGR 11.89 2.25 1.26 0.39 2.71 0.95 47.8 0.40
JILL 14.53 11.16 2.72 0.76 7.15 0.90 34.7 0.54
MSI 6.42 3.92 0.82 0.16 4.01 0.93 30.4 0.13
RTST NA NA NA 0.19 NA 1.24 44.6 0.22
CTLG SPECIALTY CATALOG CORP 11.87 5.82 1.52 0.22 #DIV/0!
AVERAGE 67.60 5.83 2.17 0.56 7.63
HARMONIC AVERAGE 12.51 4.19 1.19 0.29 5.03
MAXIMUM 321.87 11.16 6.42 1.92 20.24
MEDIAN 13.21 4.96 1.21 0.25 5.58
MINIMUM 6.42 2.25 0.61 0.16 2.71
STANDARD DEVIATION 125.35 3.87 2.21 0.63 6.49
Statistical Test of
Standard Deviation/Average(1) 185% 66% 102% 114% 85%
NA = Not Applicable
(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
75% 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.
2. Comparable Transactions Analysis
The number of comparable transactions that we selected to compare with the
Proposed Transaction is limited. During our deliberations, we reviewed over 77
transactions under $50 million in total invested capital (total invested capital
is defined as the total amount of capital including debt and equity offered in
the deal) that involved companies in the catalog and specialty distribution
category that exhibited similar financial and operating characteristics and that
sell to similar niche customer bases as does SC. These companies cater to
"communities" such as musicians or artists and craftspeople or have products
that meet the lifestyle needs of conservationists or the health conscious. The
six transactions we considered included entities comparable to SC such as:
GAIAM, INC. (NASDAQ:GAIA), CONCEPTS DIRECT INC. (NASDAQ:CDIR), and a former
competitor (previously noted in SC's filings) REAL GOODS TRADING COMPANY
(FORMERLY TRADED UNDER TICKER RGTC). Being 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 in attempting to achieve
that goal. Other similarities to the Proposed Transaction include: 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 Concepts Direct's
acquisition of The Music Stand catalog, certain pertinent historical data was
unavailable to us, preventing us from extracting comparative data.
GAIAM, INC. (NASDAQ:GAIA), based in Broomfield, Colorado, is a leading direct
marketer (e.g., catalog and online) of alternative energy products such as
battery storage systems, solar heaters and refrigerators. In January, 2001,
Gaiam, Inc. acquired the publicly traded Real Goods Trading Corp, which had
trailing twelve-month revenues of $18.0 million, for a total invested capital of
$11.73 million. Gaiam, Inc. paid a multiple of 0.65 to revenues to acquire RGTC.
ADVANTAGE MARKETING SYSTEM, (AMEX:AMM), based in Oklahoma City, Oklahoma, is a
direct marketer of weight management, dietary supplement and personal care
products. It reported nine-month revenues of $27.1 million as of September,
2000. It has been pursuing an expansion strategy for its network of independent
distributors and acquired Life Science Technologies, Inc., another marketing
company, to execute that strategy. Advantage Marketing System paid 0.22 times
revenues to acquire Life Science Technologies, Inc.
NATURAL WONDERS INC. (NASDAQ:NATWQ), based in Fremont, California, is a
specialty retailer of unique and affordable gifts inspired by the wonders of
science and nature. Natural Wonders Inc. reported 1999 revenues of over $147.1
million and in September, 2000 acquired World of Science stores for a total of
$10.55 million (a combination of $5.4 million in cash and assumption of
liabilities of $5.1 million). Natural Wonders Inc. paid World of Science
shareholders a multiple of 2.93 to EBITDA and a multiple of 0.18 to revenues.
POTPOURRI HOLDINGS, INC., based in Medfield, Massachusetts, is a leading
home/gift and knitting craft cataloger. Potpourri Holdings, Inc., which is
privately held, distributes more than 30 million catalogs per year and reported
2000 revenues of over $100 million. Potpourri Holdings, Inc. has acquired 11
companies since 1998 including its October, 1999 purchase of Catalog
Ventures from ValueVision for $10.5 million. Catalog Vision had trailing
twelve-month revenues, at the time of the acquisition, of over $31 million.
Potpourri paid a multiple of 0.3 times revenues. This acquisition was expected
to help extend Potpourri's catalog business.
In June, 1999, GUITAR CENTER (NASDAQ:GTRC), a retailer of musical instruments
based in Agoura Hills, California, acquired Musician's Friend Inc. for $29.9
million in stock plus $18.4 million in assumption of debt. Musician's Friends,
Inc. is a retailer of music products through mail order, catalog, and the
Internet. Guitar Center paid a multiple of 0.5 to revenues to expand its reach
into more diversified sales channels.
In March, 1999, INTERIORS, INC. (NASDAQOTC:INTXA), based in Mount Vernon, New
York, acquired Petals Inc. for a total of $8.4 million ($6 million in cash and
assumption of $2.4 million of liabilities). Interiors, which reported 2000
revenues of over $96 million, is in the decorative accessories business. Petals,
which had trailing twelve month revenues of $39.6 million at the time of the
acquisition also manufactures, markets, and distributes decorative silk flowers.
Interiors, Inc. paid 3.23 times EBITDA and 0.21 times revenues.
The summary of Comparable Transactions analyzed by us appear on the following
page. We have also presented comparisons with the Purchaser's offer of $3.75 for
each share not owned by, or affiliates of, the Purchaser.
None of the Comparable Transactions are representative of a "Going Private"
transaction. Nonetheless, they all represent buyout transactions between willing
and knowledgeable buyers and sellers concluded within the most recent two years.
We believe that they are representative of, and most closely resemble, the
Purchaser's offer. 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).
Burnham Securities compared multiples for the Merger implied by the Merger
Consideration and certain financial data of SC to the corresponding multiples in
the selected merger and acquisition transactions. In this portion of its
analysis, Burnham Securities focused on (i) total invested capital to revenues
for the respective transaction as a multiple of revenues for the latest twelve
months preceding the transaction and (ii) total invested capital as a multiple
of EBITDA for the last twelve months preceding the respective transaction. The
transactions that we used reflected the following multiples:
Multiple: Adjusted Average
- -------------------------------------------------------------------------------
Total Invested Capital/Revenues 0.35x
Total Invested Capital/EBITDA 3.07x
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 average value based on the comparable transactions'
multiples.
Using the Comparable Transactions Multiple, we derived a valuation range from
$6.8 million to $ 21.0 million.
BURNHAM SECURITIES - CONFIDENTIAL
SPECIALTY CATALOG CORP.
COMPARABLE TRANSACTIONS
($ IN THOUSANDS EXCEPT FOR PER SHARE INFORMATION)
SELECTED FINANCIAL DATA:
- ------------------------
---------------
FYE 12/30/00
---------------
Revenues 60,892.1
EBITDA 4,549.3
EBIT 2,859.1
Pretax Income (Loss) 1,885.5
Net Income (Loss) 1,112.1
Free Cash Flow (4,421.1)
Adj'd Book Value 8,700.0
Long Term Debt 7,200.0
MULTIPLES USED:
- ---------------
TIC/SALES MULTIPLE 0.35
TIC/EBITDA 3.07
--------------- ------------
MARKET VALUATIONS: FYE 12/30/00 PER SHARE
- ------------------ --------------- ------------
TIC/SALES MULTIPLE 21,042.6 4.41
TIC/EBITDA 6,758.8 1.42
- -----------------------------------------------------------
PROBTY WGTD AVG - NOMINAL 17,570.0 3.68
- -----------------------------------------------------------
- ------------------------------------------------------
ESTIMATED VALUATION: 17,570.0
- ------------------------------------------------------
ESTIMATED VALUATION PER SHARE: 3.68
- ------------------------------------------------------
VALUATION RANGE BASED ON COMPARABLE TRANSACTIONS:
------------- -------------
$ VALUE PER SHARE
------------- -------------
HIGH $21,043 4.41
LOW $6,759 1.42
Per share data based on 4.768 million fully diluted shares
- -----------------------------------------------------------------------------------------------------------------
BUYER
CLOSE SELLER
DATE UNIT SYNOPSIS
- -----------------------------------------------------------------------------------------------------------------
Jan. 2001 Gaiam Inc Gaiam acquired real goods trading for $6.9 million in stock, plus
Real Goods Trading Corp $4.8 million in gift certificates. The acquisition will help Gaiam
expand its presence in the lifestyles of health and sustainability
industry.
Jan. 2001 Advantage Marketing Advantage Marketing Systems Inc. acquired LifeScience Technologies
LifeScience Technologies Holdings LP, Consideration of $1.50 million.
Sept. 2000 Natural Wonders Inc Natural Wonders acquired World of Science for $5.4 million in cash.
World of Science Inc The acquisition will give Natural Wonders a store base of 261 regular
stores and 19 seasonal stores.
Oct. 1999 Potpourri Holdings Inc. Potpourri agreed to acquire Catalog Ventures from ValueVision for
Value Vision International $10.5 mm. The deal will help extend Potpourri's catalog business.
Jun. 1999 Guitar Center Inc Guitar Center acquired Musician's Friend for $29.9 million in stock
Musician's Friend Inc plus $18.4 million in assumed debt. Guitar Center will be the largest
multi-channel retailer of musical instruments in the world with 61
Mar. 1999 Interiors Inc Interiors acquired Petals for $6 million in cash and a note plus
Petals Inc assumed $2.4 million in debt, expanding its position in the
decorative accessories industry. Petals had 1997 revenues of $42mm.
- ---------------------------------------------------------------
CLOSE
DATE UNIT PRODUCT LINE
- ---------------------------------------------------------------
Jan. 2001 Offers alternative energy products such as
battery storage systems, solar heaters and
refrigerators through mail order catalogs
and its Internet web sute.
Jan. 2001 Markets and sells a line of scientifically
researched and designed nutrititonal, personal
care, weight management.
Sept. 2000 Retails traditional and distinctive
science and nature products
Oct. 1999 Provides catalog and direct mail services
Jun. 1999 Retails music products through mail order,
catalogs, and the internet
Mar. 1999 Manufactures, markets, and distributes
decorative silk flowers
- ------------------------------------------------------------------------------------------------------
TOTAL
DEAL REV DEAL INVESTED
CLOSE SIZE LTM EBITDA PRICE/ CAPITAL TIC / TIC /
DATE ($MM) ($MM) ($MM) REVENUES ($MM) EBITDA REV.
- ------------------------------------------------------------------------------------------------------
Jan. 2001 6.92 18.06 -1.33 0.38 11.73 NA 0.65
Jan. 2001 1.50 6.88 -1.78 0.22 1.50 NA 0.22
Sept. 2000 5.45 59.16 3.60 0.09 10.55 2.93 0.18
Oct. 1999 10.5 31.7 NA 0.33 10.5 NA 0.30
Jun. 1999 48.3 94.1 -7.8 0.51 48.3 NA 0.51
Mar. 1999 8.4 39.6 2.6 0.21 8.4 3.21 0.21
- ------------------------------------------------------------------------------------------------------
AVERAGE 13.51 41.58 NA 0.29 15.16 3.07 0.35
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
SPECIALTY CATALOG 18.75 60.9 4.54 0.31 18.75 4.13 0.31
- ------------------------------------------------------------------------------------------------------
3. Discounted Cash Flow Analysis:
We derived a valuation range from $19.3 million to $28.5 million based on an
analysis of management's projections from fiscal years 2001 to 2005. Given our
current assessment of the industry that SC competes in and the overall economy
we have assumed management's projections to be acceptable and consistent with
previous projections we have evaluated as well as with projections periodically
presented to SC's Board of Directors. Management projects the Company's revenue
growth will compound annually from 2001-2005 at approximately 5%.
Historical results were also provided as a frame of reference. After-tax free
cash flows were discounted for each year using SC's weighted average cost of
capital of 14.03%. After-tax free cash flows are defined as Earnings before
Interest and Taxes (EBIT) multiplied by one minus the tax-rate adjusted for
depreciation and amortization, capital expenditures and changes in working
capital available to stakeholders: both creditors and equity holders.
Due to the recent history of SC and its utilization of leverage (in the form of
a senior credit facility), SC currently has a Net Operating Loss Carryforward of
$9 million. The Company is limited to use $1.55 million annually to offset
operating profit. We have considered management's estimates of the company's
(NOL) into our analysis.
SPECIALTY CATALOG CORP.
INCOME STATEMENT AND FORECAST
A - Actual
E - Estimated
All data in thousands of $, except per share information
Per Company
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ending 01/02/99 01/01/00 12/30/00 03/31/01 Jan-02
- -----------------------------------------------------------------------------------------------------------------------------------
Effective Year 1998 A 1999 A 2000 A 1Q 2001 2001 P
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues 48,884.0 45,022.0 53,313.0 14,268.8 52,857.0
Yr-toYr % Change 13% -8% 18% -1%
NET REVENUES $48,884.0 $45,022.0 $53,313.0 $14,268.8 $52,857.0
Yr-toYr % Change 13% -8% 18% -1%
Cost of Sales 17,918.0 13,429.0 16,345.0 4,637.3 16,802.0
Gross Margin 63.3% 70.2% 69.3% 67.5% 68.2%
GROSS PROFIT 30,966.00 31,593.00 36,968.00 9,631.51 36,055.00
As % of revenues 63.3% 70.2% 69.3% 67.5% 68.2%
Operating Expenses / SG&A 26,692.0 28,277.2 32,419.0 8,251.1 29,239.0
% of Revenues 54.6% 62.8% 60.8% 57.8% 55.3%
OPERATING INCOME (EBITDA) 4,274.00 3,315.78 4,549.00 1,380.42 6,816.00
% of Revenues 8.7% 7.4% 8.5% 9.7% 12.9%
Depreciation and Amortization 746.0 1,069.2 1,690.2 450.2 1,585.7
% of Revenues 1.5% 2.4% 3.2% 3.0%
EBIT 3,528.0 2,246.6 2,858.8 930.26 5,230.3
% of Revenues 7.2% 4.6% 5.8% 1.9% 10.7%
Interest Income (Expense) (871.9) (794.2) (973.6) (216.3) (1,000.00)
PRETAX INCOME 2,656.1 1,452.5 1,885.2 714.0 4,230.3
% of Revenues 5.4% 3.2% 3.5% 5.0% 8.0%
Taxes 1,096.0 653.0 773.4 292.7 1,734.4
EffectiveTax Rate 41.3% 45.0% 41.0% 41.0% 41.0%
NET INCOME 1,560.10 799.48 1,111.81 421.26 2,495.87
% of Revenues 3.2% 1.8% 2.1% 3.0% 4.7%
EARNINGS PER SHARE (BASIC) 0.31 0.18 0.26 0.10 0.58
% Change -41% 41% 124.7%
EARNINGS PER SHARE (DILUTED) 0.28 0.17 0.25 0.09 0.52
% Change -40% 44% 113.3%
Weighted Avg. Shs Outstanding - Basic 5,033.8 4,400.9 4,341.9 4,337.9 4,337.9
Weighted Avg. Shs Outstanding - Diluted 5,495.0 4,684.9 4,530.8 4,497.1 4,768.0
- -----------------------------------------------------------------------------------------------------------------------------------
EBIT 3,528.00 2,246.62 2,858.77 5,230.29
EBIT (1-T) 2,072.22 1,236.62 1,685.98 3,085.87
+ Depreciation & Amortization 746.00 1,069.16 1,690.23 1,585.71
- Capital Expenditures 1,694.05 3,168.35 1,377.01 1,374.28
+ / - Change in Working Capital (1,271.50) (2,195.67) 6,420.72 52.55
FREE CASH FLOW 2,395.68 1,333.10 (4,421.52) 3,244.75
--------- --------- ---------- ---------
- -----------------------------------------------------------------------------------------------------------------------
Fiscal Year Ending Jan-03 Jan-04 Jan-05 Jan-06
- -----------------------------------------------------------------------------------------------------------------------
Effective Year 2002 P 2003 P 2004 P 2005 P
- -----------------------------------------------------------------------------------------------------------------------
Revenues 54,437.4 59,296.0 63,082.0 68,311.5
Yr-toYr % Change 3% 9% 6% 8%
NET REVENUES $54,437.4 $59,296.0 $63,082.0 $68,311.5
Yr-toYr % Change 3% 9% 6% 8%
Cost of Sales 16,942.0 18,282.0 19,523.0 21,160.0
Gross Margin 68.9% 69.2% 69.1% 69.0%
GROSS PROFIT 37,495.42 41,013.96 43,559.01 47,151.51
As % of revenues 68.9% 69.2% 69.1% 69.0%
Operating Expenses / SG&A 30,922.0 34,114.0 36,458.0 39,715.0
% of Revenues 56.8% 57.5% 57.8% 58.1%
OPERATING INCOME (EBITDA) 6,573.42 6,899.96 7,101.01 7,436.51
% of Revenues 12.1% 11.6% 11.3% 10.9%
Depreciation and Amortization 1,633.1 1,778.9 1,892.5 2,049.3
% of Revenues 3.0% 3.0% 3.0% 3.0%
EBIT 4,940.3 5,121.1 5,208.6 5,387.2
% of Revenues 10.1% 10.5% 10.7% 11.0%
Interest Income (Expense) (1,000.0) (1,000.0) (1,000.0) (1,000.0)
PRETAX INCOME 3,940.3 4,121.1 4,208.6 4,387.2
% of Revenues 7.2% 7.0% 6.7% 6.4%
Taxes 1,615.5 1,689.6 1,725.5 1,798.7
EffectiveTax Rate 41.0% 41.0% 41.0% 41.0%
NET INCOME 2,324.78 2,431.44 2,483.05 2,588.43
% of Revenues 4.3% 4.1% 3.9% 3.8%
EARNINGS PER SHARE (BASIC) 0.54 0.56 0.57 0.60
% Change -6.9% 4.6% 2.1% 4.2%
EARNINGS PER SHARE (DILUTED) 0.49 0.51 0.52 0.54
% Change -6.9% 4.6% 2.1% 4.2%
Weighted Avg. Shs Outstanding - Basic 4,337.9 4,337.9 4,337.9 4,337.9
Weighted Avg. Shs Outstanding - Diluted 4,768.0 4,768.0 4,768.0 4,768.0
- -----------------------------------------------------------------------------------------------------------------------
EBIT 4,940.30 5,121.09 5,208.55 5,387.17
EBIT (1-T) 2,914.78 3,021.44 3,073.05 3,178.43
+ Depreciation & Amortization 1,633.12 1,778.88 1,892.46 2,049.35
- Capital Expenditures 1,415.37 1,541.70 1,640.13 1,776.10
+ / - Change in Working Capital 164.36 505.29 393.75 680.49
FREE CASH FLOW 2,968.16 2,753.34 2,931.62 2,771.18
--------- --------- --------- --------
SPECIALTY CATALOG CORP. CAPITAL COST ANALYSIS
(US$ IN THOUSANDS) ACTUAL
EFFECTIVE YEAR 12/30/00
-------------- -----------------
Debt $9,135.57
Equity $14,620.00
-----------------
Total Capital $23,755.57
Debt/Capital 38.5%
Equity/Capital 61.5%
Debt/Equity 62.5%
----------------------------------------------------------------------------------------
EFFECTIVE YEAR 2000 A 2001 P 2002 P 2003 P 2004 P 2005 P
-------------- ----------------------------------------------------------------------------------------
Operating Income (EBIT) $2,858.77 $5,230.29 $4,940.30 $5,121.09 $5,208.55 $5,387.17
YTY Growth Rate 83% -6% 4% 2% 3%
-----------------
GROWTH RATE (GEOMETRIC) 16.1%
-----------------
Pretax Income $1,885.19 $4,230.29 $3,940.30 $4,121.09 $4,208.55 $4,387.17
Taxes $773.39 $1,734.42 $1,615.52 $1,689.65 $1,725.51 $1,798.74
Net Income $1,111.81 $2,495.87 $2,324.78 $2,431.44 $2,483.05 $2,588.43
YTY Growth Rate -124% -7% 5% 2% 4%
-----------------
GROWTH RATE (GEOMETRIC) 21.7%
-----------------
Mean Operating Income (2001-2005) $5,177.48
Std Deviation $163.67
-----------------
COEFF OF VARIATION 0.03
-----------------
- --------------------------------------------------------------------------
ESTIMATED BETA FACTOR
- --------------------------------------------------------------------------
Constant Variable Extension
------------------------------------------
Beta Regress Constant 0.98 1.00 0.98
Coeff of Variation 0.08 0.03 0.00
Dividend Yield -0.13 0.00 0.00
Debt/Equity Ratio 0.15 0.62 0.09
Growth in Earnings 0.03 0.16 0.01
Total Assets ($-000's) 0.00 23.70 0.00
- --------------------------------------------------------------------------
CALCULATED BETA/UNLEVERED 1.08
- --------------------------------------------------------------------------
- ----------------------------------------------
COST OF DEBT
- ----------------------------------------------
Current Debt ($-m) $9,135.6
Cost of Debt (1-T) 5.52% 0.0935
- ----------------------------------------------
- ------------------------------------------------------------------
CAPITAL ASSET PRICING MODEL
- ------------------------------------------------------------------
Avg Return S&P (1994-2000) 18.26%
Bond Rate - 10 year UST (4/30) 5.33% at 4/30
---------
Equity Risk Premium 12.93%
Company Risk Premium 14.02%
Bond Rate 5.33%
- ------------------------------------------------------------------
COMPANY COST OF EQUITY 19.35%
- ------------------------------------------------------------------
- -----------------------------------------------------------------------------
WGTD AVG COST OF CAPITAL CALCULATIONS
- -----------------------------------------------------------------------------
Cost % % of Capital Extension
-----------------------------------------
Cost of Debt 0.06 0.38 0.02
Cost of Equity 0.19 0.62 0.12
- -----------------------------------------------------------------------------
WGTD AVG COST OF CAPITAL 14.03%
- -----------------------------------------------------------------------------
Discounted Cash Flow
CALCULATION OF WACC
Required Return on Equity
---------------------------------------------
Risk Free Rate (1) 5.3%
Beta 1.08
Historic Risk Premium (2) 12.9%
---------------------------------------------
Cost of Equity 19.4%
Cost of Debt 9.4%
After tax Cost of Debt 5.5%
Capital Structure
Debt (38.5%) 9,135.57
Equity (61.5%) 14,620.00
---------------------------------------------
WACC 14.03%
---------------------------------------------
(1) Risk Free Rate equals the 10 year treasury note as of 4/30
(2) Based on an 18.26% average return for the S&P 500 from 1994-2000
All data in thousands of $, except per share information
YEAR 2001 P 2002 P 2003 P 2004 P 2005 P
------------------------------------------------------------------------------------------------
FREE CASH FLOWS (FCF) 3,244.75 2,968.16 2,753.34 2,931.62 2,771.18
PRESENT VALUE 2,940.41 2,358.76 1,918.77 1,791.60 1,485.14
DCF Calculations (using nominal rates)
Present Value of FCF 10,494.68
Terminal Growth Rate 2%
----------------------------
PV of Terminal Value 12,588.90
Total Present Value 23,083.59
----------------------------
Per Share Dilluted 4.84
----------------------------
Shs Outstanding Diluted 4,768
- ---------------------------------------------------------------------------------------------------------
WACC SENSITIVITY ANALYSIS
- ---------------------------------------------------------------------------------------------------------
HIGH LOW
WACC 14.03% 16.54% 11.61%
Beta 1.08 1.40 0.78
- ---------------------------------------------------------------------------------------------------------
Discounted Cash Flow 23,083.59 19,354.80 28,519.47
Per Share 4.84 4.06 5.98
Present Value of FCF 10,494.68 9,961.15 11,059.66
PV of Terminal Value 12,588.90 9,393.65 17,459.82
Total Present Value 23,083.59 19,354.80 28,519.47
Per Share (Diluted) 4.84 4.06 5.98
Shares Outstanding 4,768
SPECIALTY CATALOG CORP.
BALANCE SHEET
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ending 1/2/99 1/1/00 12/30/00 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06
- ------------------------------------------------------------------------------------------------------------------------------------
Effective Year 1998A 1999A 2000A 2001E 2002E 2003E 2004E 2005E
- ------------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Current Assets (Excl. Cash)
Accounts Receivable 1,220.7 1,206.5 1,521.5 1,532.9 1,578.7 1,719.6 1,829.4 1,981.0
Inventory 5,388.4 5,626.3 5,324.5 5,814.3 5,988.1 6,522.6 6,939.0 7,514.3
Prepaid Expenses 3,810.7 4,012.5 3,561.3 3,964.3 4,082.8 4,447.2 4,731.2 5,123.4
Other Current Assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
-----------------------------------------------------------------------------------------
Total Current Assets 10,419.9 10,845.3 10,407.2 11,311.4 11,649.6 12,689.3 13,499.6 14,618.7
ADJUSTED CURRENT LIABILITIES
Current Liabilities
Bank Loan (Revolver)
Notes Payable 5,097.1 6,401.2 788.1 785.0 785.0 785.0 785.0 785.0
Accounts Payable 3,779.3 4,261.4 3,656.8 4,228.6 4,355.0 4,743.7 5,046.6 5,328.3
Liabilities to Customers 676.4 1,169.3 925.9 1,110.0 1,143.2 1,245.2 1,324.7 1,434.5
Income Taxes 269.2 449.6 376.9 475.7 489.9 533.7 567.7 614.8
Current Portion of LTD 1,963.3 2,125.0 1,800.0 1,800.0 1,800.0 1,800.0 1,800.0 1,800.0
Total Current Liabilities 11,785.3 14,406.5 7,547.7 8,399.3 8,573.1 9,107.6 9,524.0 9,962.6
NORMALIZED NET WORKING CAPITAL -1,365.5 -3,561.1 2,859.6 2,912.1 3,076.5 3,581.8 3,975.5 4,656.0
CHANGE IN NORMALIZED NET WORKING CAPITAL -2,195.7 6,420.7 52.5 164.4 505.3 393.7 680.5
4. Stock Buyback Analysis:
We derived a valuation of $16.9 million based on an analysis of management's
fifteen separate buybacks of stock from institutional investors during 1999 and
2000. The Company purchased 144,000 shares at an average price of $3.56 per
share.
The institutions (please see the stock buyback summary sheet which follows this
page) that sold their shares in these transactions had been shareholders of SC
for some time. When these institutions sold their shares, an analyst might
assume that the sellers believed that they were receiving the best possible
price at the time of the transactions. The average price reflects an aggregate
price that a number of sophisticated and knowledgeable sellers received for
their 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 4,768,000 outstanding shares involved in the
Proposed Transaction, this would provide us with a valuation of $16.9 million.
SPECIALTY CATALOG CORP.
TREASURY STOCK BUYBACK PROGRAM
REPURCHASED FROM DATE SHARES PRICE AMOUNT
---------------- ------ ------ ----- ------
1999
-----
Q1'99
-----
Oppenheimer & Close, Inc. February 3, 1999 61,700 $ 3.500 $ 215,950
GKN Securities February 8, 1999 1,500 $ 3.560 5,340
GKN Securities February 16, 1999 200 $ 3.625 725
GKN Securities April 1, 1999 1,000 $ 3.328 3,328
------ -----
Total Q1'99 Stock Buybacks 64,400 225,343
------- -------
Q2'99
-----
GKN Securities April 5, 1999 6,000 $ 3.315 19,890
------ ------
Total Q2'99 Stock Buybacks 6,000 19,890
------ ------
Q3'99
-----
GKN Securities July 9, 1999 600 $ 3.963 2,378
Hambrecht & Quist July 15, 1999 9,100 $ 3.875 35,266
Hambrecht & Quist September 2, 1999 2,000 $ 3.752 7,504
Hambrecht & Quist September 20, 1999 15,000 $ 3.875 58,129
Hambrecht & Quist September 23, 1999 4,500 $ 3.877 17,445
Hambrecht & Quist October 1, 1999 2,000 $ 3.877 7,754
------ -----
Total Q3'99 Stock Buybacks 33,200 128,476
------- -------
Q4'99
-----
Hambrecht & Quist October 4, 1999 25,000 $ 3.875 96,879
Hambrecht & Quist October 6, 1999 2,000 $ 3.752 7,504
------ -----
Total Q4'99 Stock Buybacks 27,000 104,383
------- -------
TOTAL 1999 STOCK BUYBACKS 130,600 $ 3.661 $ 478,092
======== =========
Q2'2000
-------
Chase/Hambrecht & Quist April 17, 2000 5,000 $ 2.626 $ 13,129
Chase/Hambrecht & Quist April 18, 2000 8,500 $ 2.625 $ 22,316
------ --------
TOTAL Q2'2000 STOCK BUYBACKS 13,500 $ 35,445
======= ========
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FOR 1999 - 2000 STOCK BUYBACKS 144,100 $3.56 513,537.00
- -----------------------------------------------------------------------------------------------------------------------------------
Remaining Authorized Buybacks $ 486,463
=========
Total Amount in Treasury Stock 901,888 $ 2,867,178
======== ===========
VALUATION SUMMARY
Based on our analysis of the range of valuations derived from the preceding four
methods (Market Multiple Analysis, Comparable Transactions Multiple Analysis,
Discounted Cash Flow Analysis, and Stock Buyback Analysis), we arrived at a
weighted average valuation range from $2.65 to $4.35, on a per share basis,
respectively.
After arriving at our valuations, each estimate was weighted according to its
relative importance. The following weights were applied for each method: Market
Multiple - 35%, Comparable Transactions Multiple - 25%, Discounted Cash Flow -
20%, and Stock Buyback - 20%.
Specialty Catalog Corp.
Valuation Analysis Summary
Valuation Date: April 30, 2001
($ in Thousands)
$ VALUATION
Based on the Methods: Estimated Weighted
- -------------------- Weights Valuation Valuation High Low
-----------------------------------------------------------------------------------
MARKET MULTIPLES 35.0% $15,362.2 $5,376.8 $18,170.74 $10,535.23
DISCOUNTED FREE CASH FLOWS 20.0% $23,083.6 $4,616.7 $28,519.47 $19,354.80
COMPARABLE TRANSACTIONS 25.0% $17,570.0 $4,392.5 $21,042.57 $6,758.83
STOCK BUY BACKS 20.0% $16,974.1 $3,394.8 $16,974.08 $16,974.08
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
ESTIMATED WEIGHTED AVERAGE VALUATION $17,780.8
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
SUMMARY -- VALUATIONS PER SHARE (BASED ON 4.768 MILLION SHARES OUTSTANDING):
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
-------------------------------
-------------------------------
HIGH LOW
-------------------------------
-------------------------------
MARKET MULTIPLES $3.22 3.81 2.21
DISCOUNTED FREE CASH FLOWS $4.84 5.98 4.06
COMPARABLE TRANSACTIONS $3.68 4.41 1.42
STOCK BUY BACKS $3.56 3.56 3.56
ESTIMATED WEIGHTED AVERAGE VALUATION $3.73 4.35 2.65
KEY CONSIDERATIONS AND CONCLUSION
Ever since Specialty Catalog emerged from bankruptcy in the early 1990's, it has
been insufficiently capitalized to achieve both its stated objectives and its
potential. Even its emergence as a public company in 1996 did not allay SC's
capital needs, since a significant portion of the public offering proceeds was
utilized to settle debts and other obligations.
Early in its life as a public company, SC was hindered by postal rate increases
and rising paper costs. More recently, it has been hampered by costly management
turnover, failed acquisition expenses (incurred in attempting to acquire other
companies and to be acquired itself), higher than anticipated costs to convert
to an updated management information system and abnormally high returns on an
expanded line of human hair wigs.
From an external perspective, SC has suffered along with many other small-cap
public companies from inattention by the financial community. The major markets
are dominated by institutional investors that require liquidity as a primary
essential to stock selection. With approximately 1 million shares of common
stock in the public float, including 500,000 shares owned by one institution, SC
has never attracted the attention of large investors. This fact has recently
been exacerbated by a notice in April, 2001 from the NASD that the market value
of the Company's float no longer meets the NASDAQ requirements for continued
listing.
Historically, Wigs by Paula has been SC's mainstay and has generated the lion's
share of revenues and cash flow for the Company. Management believed that it
could leverage Wigs by Paula and create a larger mass through acquisitions. To
its credit, the Company acquired Daxbourne International in 1997, a leading
British retailer of women's wigs. And in 2000, Daxbourne acquired SC's European
licensee. In 1999, SC added to its portfolio of continuing education
correspondence schools by purchasing American Healthcare Institute. AHI was
recently relocated to South Easton at a cost of $200,000. Notwithstanding these
two additions, SC has not been a competitive factor in the active market for
niche catalog companies. This is a function of its own financial constraints and
resulting inability to either borrow funds from its banks or tap the equity
markets for capital at attractive prices.
In early 1999, the board of SC authorized the repurchase of the Company's shares
in the open market, inferring (if not announcing) that shareholder value would
best be served by buying back its shares. Throughout 1999 and 2000, SC
re-acquired a total of 144,000 shares at an average price of $3.56. This
decision by the board followed a lengthy process by a highly reputable
investment bank that, over a period lasting six months, had been engaged to
identify a purchaser for all the shares of SC Corp. Over the course of the
engagement, fifty-three prospective purchasers (many of them being highly
regarded and active acquirers of companies) were contacted and presented with
detailed information concerning the Company's history, current operations and
future prospects. According to management not one bona fide proposal was
forthcoming. During the course of the engagement, which had been publicly
announced, SC's shares traded in a range between $3 and $4.
More recently, SC has been diminished by the perception, if not the reality, of
instability. A former President was terminated in the Summer of 1998.
Subsequently, its former Chairman announced his resignation in the Summer of
1999, but his successor did not emerge until July, 2000 after the aborted
takeover attempt of SC in the first quarter of 2000. Significant amounts of
effort, energy and resources were expended over many months on a prospective
acquisition of a complementary company that was terminated in the Fall of 1999.
The Company's much awaited MIS system was not operational on schedule and
impeded operations and customer service until the first quarter of 2000.
Concurrently, the former management of SC determined to discontinue the
operations of Paula's Hatbox, a two year old apparel and accessory catalog,
resulting in a six-figure write off for fiscal 1999 which ended 1/2/00.
Mr. Naggar and his affiliated compatriots collectively own more than 70% of the
outstanding shares of SC. Personally, and through trusts controlled by him, Mr.
Naggar owns 29% of SC. Mr. Naggar's significant equity interest in SC dates to
February 1989. Mr. Naggar publicly announced his intentions on April 30, after
filing a 13D on April 25. This announcement followed by one week a notice
received by SC from the NASD that the value of the Company's public "float" no
longer met minimum requirements. Failure to cure this deficiency would cause
NASDAQ to de-list SC and relegate its shares to trade on the NASDAQ SmallCap
Market, a significantly less reliable exchange for existing and prospective
shareholders. Immediately prior to Naggar's 13D filing, SC stock closed at
$2.63, a 30% discount from the $3.75 proposed acquisition price. Reciprocally
stated, the proposed tender price represents a 43% premium to the last sale
prior to the public filing. The Company's press release was made on Monday,
April 30. The last reported sale of SC stock prior to the release was $3.05. The
proposed tender price represents a 23% premium to the last sale prior to the
corporate announcement.
Taking into account the following, and other, factors:
o our analyses of publicly available information on SC since 12/31/95;
o our analyses of financial and operating information data concerning SC
prepared by the management of SC;
o our analysis of certain financial projections prepared by the management of
SC with regard its business prospects;
o our discussions with senior management concerning the past and current
operations and financial condition and the prospects of SC;
o our discussions with the management of SC in South Easton, MA;
o our analyses of the financial performance of SC and the prices and trading
activity of SC Common Stock with that of certain other comparable publicly-
traded companies and their securities;
o our analyses of publicly announced and recently closed transactions that we
deem to be comparable with the Proposed Transaction;
o the average price per share paid by SC for 144,000 shares purchased in the
open market in 1999 and 2000; o our analysis of transactions concluded by
SC (Daxbourne and AHI); o our considerations of the dearth of interest in
acquiring SC by 53 candidates less than two years ago and the failed
acquisition of the Company last year; and
o our analysis of the potential consequences to SC shareholders if the notice
to delist SC shares from NASDAQ were to become effective;
o our analysis of the public announcements and filings relating to the
Proposed Transaction and the drafts of the Merger Agreement as they became
available;
o our analysis of other financial studies and analyses that we took into
account along with such other factors as we deemed necessary or appropriate
for our purposes under this engagement; and
we conclude that the consideration to be received by the shareholders of the
Company other than the Purchaser and its shareholders in the Proposed
Transaction is fair from a financial point of view to such shareholders.