EXHIBIT (B)(2)
PRELIMINARY DRAFT/WORK IN PROGRESS
HAMBRECHT & QUIST
Presentation to
FEVER BOARD OF DIRECTORS
REGARDING PROJECT DISCO
October 27, 1997
Preliminary Draft/Work in Progress
TABLE OF CONTENTS
1. Transaction Summary
2. Fever Financial Information
3. Review of Fever Market Performance and Shareholders
4. Analysis of Potential Future Share Prices
5. Indicated Value Based on Publicly Traded Companies
6. Indicated Value Based on Comparable M&A Transactions
7. Discounted Cash Flow Analysis
8. Summary of Implied Equity Valuations
9. Proposed Transaction Multiples
10. Pro Forma Impact on Night
11. Form of Fairness Opinion
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Preliminary Draft/Work in Progress
1.TRANSACTION SUMMARY
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Preliminary Draft/Work in Progress
TRANSACTION SUMMARY
* Disco tender offer to purchase Fever common stock for
$10.68 per share in cash
* Tender offer is conditioned on, among other things, at
least a two-thirds of the outstanding Fever shares being
tendered
* Second-step merger to convert remaining shares into
right to receive $10.68 per share in cash
* Transaction to be accounted for as a purchase
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Preliminary Draft/Work in Progress
TRANSACTION SUMMARY
Continued
* Proceeds from the tender offer or merger to be taxable to the Fever
shareholder (unless otherwise a tax-exempt entity)
* Agreement contains customary "no shop" provision subject to fiduciary
obligations
* Fever stock options to be cashed out at the effective time
* Agreement provides that a "Termination Fee" will be payable to Fever under
certain circumstances
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Preliminary Draft/Work in Progress
TRANSACTION SUMMARY
($MM, Except per share values)
Per share $10.68
Shares outstanding (MM) [a] 4.1
Offer for equity $44.1
LESS CASH [b] (0.1)
PLUS DEBT [b] 1.9
-----------
OFFER FOR ENTERPRISE $46.0
===========
[a] Based on treasury stock method of accounting. Assumes 3.8MM shares and
0.6MM options with an average exercise price of $4.60 per share based on
option schedule dated 10/15/97.
[b] Based on Fever 10Q dated June 30, 1997.
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Preliminary Draft/Work in Progress
IMPLIED EQUITY VALUATION SUMMARY
Category Total Equity Valuation Per Share Valuation
Range ($MM) Range
-----------------------------------------------------------
A. Implied Valuation Based on Comparable Public Companies
Stereo Retailers/Peripherals & Manufactures $ 9.1 - $ 61.0 $2.21 - $14.76
Branded Retail Companies 10.4 - 107.9 2.51 - 26.57
B. Implied Valuation Based on Comparable M&A Transactions
Implied Valuation Based on Comparable Consumer M&A Transactions 28.8 - 99.3 6.97 - 24.04
Implied Valuation Based on Comparable Technology M&A Transactions 26.2 - 70.4 6.35 - 17.04
C. Discounted Cash Flow Analysis 20.8 - 65.0 5.02 - 15.74
D. Implied Valuation Based on 52 Week Trading Range 13.8 - 29.2 3.37 - 7.13
E. Implied Valuation Based on Historic Trading Range 13.3 - 40.0 3.25 - 9.75
F. Implied Valuation Based on Potential Future Share Price Range
Management Estimates 25.0 - 71.7 6.10 - 17.48
H&Q Estimates 17.4 - 42.6 4.25 - 10.40
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Purchase Price for FEVER $ 44.1 $ 10.68
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Preliminary Draft/Work in Progress
IMPLIED EQUITY VALUATION SUMMARY
[GRAPH APPEARS HERE]
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Preliminary Draft/Work in Progress
2. FEVER FINANCIAL INFORMATION
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Preliminary Draft/Work in Progress
FEVER HISTORICAL AND PROJECTED INCOME STATEMENT
($MM)
[GRAPH APPEARS HERE]
Source: FY 1998-2001 estimates derived by H&Q based on discussions with
- -----------------------------------------------------------------------
management.
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Preliminary Draft/Work in Progress
FEVER HISTORICAL AND PROJECTED INCOME STATEMENT
($MM)
[GRAPH APPEARS HERE]
Source: FY 1998-2001 estimates derived by H&Q based on discussions with
management.
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Preliminary Draft/Work in Progress
FEVER HISTORICAL AND PROJECTED INCOME STATEMENT
($MM, except per share values)
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Fiscal Year ended June 30 [a] 1993 1994 1995 1996 1997 1998 E(b) 1999 E(b) 2000 E(b) 20001 E(b)
- --------------------------------------------------------------------------------------------------------------------------------
REVENUES $ 12.6 $ 15.3 $ 27.2 $ 43.6 $ 51.3 $ 79.3 $ 95.5 $ 102.1 $ 108.3
Cost of revenues 5.0 7.8 19.2 25.9 31.0 49.6 59.5 63.4 67.3
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Gross profit 7.6 7.5 8.0 17.7 20.3 29.7 36.0 38.7 41.0
Total operating expenses 6.2 6.5 8.6 17.0 21.1 26.8 30.8 32.8 34.7
EBIT 1.5 0.9 (0.6) 0.7 (0.8) 2.8 5.3 5.9 6.3
Other income (expense) (0.0) 0.1 0.2 (0.3) (0.2) (0.4) (0.7) (0.7) (0.3)
----------------------------------------------------------------------------------------------
PRETAX PROFIT 1.5 1.0 (0.4) 0.4 (1.0) 2.4 4.5 5.2 6.0
Taxes (0.6) (0.4) (0.4) (0.2) 0.4 1.0 1.8 2.1 2.4
----------------------------------------------------------------------------------------------
NET INCOME $ 0.9 $ 0.6 $ 0.8 $ 0.3 ($0.6) $ 1.5 $ 2.7 $ 3.1 $ 3.6
=============================================================================================
EARNINGS PER SHARE $ 0.59 $0.22 ($0.27) $0.09 ($0.19) $0.36 $0.67 $0.78 $0.89
Shares outstanding 1.5 2.6 2.9 2.9 3.2 4.0 4.0 4.0 4.0
Depreciation & amortization $ 0.3 $ 0.6 $ 0.5 $ 0.7 $ 1.1 $ 1.4 $ 2.0 $2.5 $ 2.6
EBITDA 1.7 1.6 (0.1) 1.5 0.3 4.2 7.3 8.4 9.0
Margins
Gross margin 60.4% 48.9% 29.4% 40.6% 39.6% 37.4% 37.7% 37.9% 37.8%
EBITDA margin 13.7% 10.2% (0.3%) 3.4% 0.6% 5.3% 7.6% 8.2% 8.3%
EBIT margin 11.5% 6.1% (2.1%) 1.6% (1.6%) 3.5% 5.5% 5.8% 5.8%
Net margin 6.9% 3.8% (2.8%) 0.6% (1.2%) 1.8% 2.8% 3.1% 3.3%
Effective tax rate nm nm nm nm nm 40.0% 40.0% 40.0% 40.0%
Growth rates
Revenues (95.2%) 20.9% 78.3% 60.2% 17.7% 54.6% 20.4% 7.0% 6.1%
Gross profit (95.5%) (2.1%) 7.1% 121.6% 14.7% 46.0% 21.5% 7.5% 5.9%
EBITDA (96.1%) (9.9%) (104.6%) 2128.4% (80.1%) 1341.7% 73.9% 14.8% 6.9%
EBIT (95.1%) (36.5%) (161.8%) 225.6% (212.0%) 449.3% 86.9% 12.3% 7.3%
Net income (96.7%) (32.9%) (232.7%) 132.5% (345.0%) 316.7% 87.4% 15.4% 14.5%
Earnings per share 8.5% (62.0%) (220.6%) 132.0% (322.3%) 273.7% 87.4% 15.4% 14.5%
[a] Effective March 23, 1995, the Company assumed a June fiscal year end. Fiscal
years prior to that date have been adjusted to reflect a June fiscal year
end.
[b] FY 1998-2001 uses estimates derived by H&Q based on discussions with
management.
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Preliminary Draft/Work in Progress
FEVER HISTORICAL EARNINGS VERSUS H&Q ESTIMATES
[GRAPH APPEARS HERE]
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Preliminary Draft/Work in Progress
FEVER PROJECTED EARNINGS VERSUS H&Q PROJECTED EARNINGS
[GRAPH APPEARS HERE]
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Preliminary Draft/Work in Progress
3. REVIEW OF FEVER MARKET PERFORMANCE AND SHAREHOLDERS
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Preliminary Draft/Work in Progress
REVIEW OF FEVER COMMON STOCK PRICE HISTORY
TRADING PRICE
-------------
52-week high $7.13
52-week low $3.37
All-time high $9.75
All-time low $3.25
AVERAGE CLOSING PRICE /[A]/
---------------------
Previous week $6.95
Previous month $6.14
Previous 3 months $5.29
Previous 6 months $5.16
Previous 12 months $5.13
/[A]/ Assumes average prices as of 10/3/97.
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Preliminary Draft/Work in Progress
STOCK PRICE PERFORMANCE AND VOLUME HISTORY
IPO to 10/3/97
Announcement of discussions with
Night regarding potential acquisition
[GRAPH APPEARS HERE]
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Preliminary Draft/Work in Progress
ANALYSIS OF VOLUME TRADED AT SPECIFIC PRICES
1995 to Present
[GRAPH APPEARS HERE]
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Preliminary Draft/Work in Progress
ANALYSIS OF VOLUME TRADED AT SPECIFIC PRICES
1995 to Present
1997 YTD 1996 1995
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% Total % Total % Total % Total % Total % Total
at or at or at or at or at or at or
Stock Price Range Days below Volume below Days below Volume below Days below Volume below
----------------- ---- ----- ------ ----- ---- ----- ------ ----- ---- ----- ------ -----
$9.70 - $10.00 0 100.0 0 100.0 0 100.0 0 100.0 0 100.0 0 100.0
$9.40 - 9.70 0 100.0 0 100.0 0 100.0 0 100.0 0 100.0 0 100.0
$9.10 - 9.40 0 100.0 0 100.0 0 100.0 0 100.0 0 100.0 0 100.0
$8.80 - 9.10 0 100.0 0 100.0 0 100.0 0 100.0 0 100.0 0 100.0
$8.50 - 8.80 0 100.0 0 100.0 0 100.0 0 100.0 0 100.0 0 100.0
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$8.20 - 8.50 0 100.0 0 100.0 0 100.0 0 100.0 0 100.0 0 100.0
$7.90 - 8.20 0 100.0 0 100.0 0 100.0 0 100.0 0 100.0 0 100.0
$7.60 - 7.90 0 100.0 0 100.0 0 100.0 0 100.0 1 100.0 30,700 100.0
$7.30 - 7.60 0 100.0 0 100.0 0 100.0 0 100.0 3 99.6 89,500 99.4
$7.00 - 7.30 2 100.0 109,500 100.0 0 100.0 0 100.0 7 98.4 48,500 97.6
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$6.70 - 7.00 6 99.0 177,000 97.0 0 100.0 0 100.0 12 95.6 466,600 96.6
$6.40 - 6.70 3 95.8 104,600 92.2 1 100.0 3,600 100.0 24 90.9 692,700 87.4
$6.10 - 6.40 3 94.3 92,500 89.3 6 99.6 120,000 99.9 35 81.3 624,000 73.6
$5.80 - 6.10 1 92.7 39,500 86.8 9 97.2 371,200 95.7 21 67.5 305,500 61.2
$5.50 - 5.80 4 92.2 597,900 85.7 4 93.7 77,900 82.7 32 59.1 508,900 55.2
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$5.20 - 5.50 50 90.1 996,400 69.4 32 92.1 519,700 80.0 66 46.4 987,100 45.0
$4.90 - 5.20 54 64.1 726,300 42.2 21 79.5 248,500 61.9 27 20.2 466,500 25.4
$4.60 - 4.90 42 35.9 306,300 22.4 13 71.3 134,400 53.2 11 9.5 276,200 16.2
$4.30 - 4.60 12 14.1 171,500 14.0 14 66.1 309,200 48.5 6 5.2 141,300 10.7
$4.00 - 4.30 5 7.8 161,300 9.3 29 60.6 280,700 37.7 6 2.8 224,500 7.9
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$3.70 - 4.00 9 5.2 176,400 4.9 85 49.2 566,700 27.9 0 0.4 0 3.4
$3.40 - 3.70 0 0.5 0 0.1 29 15.7 175,400 8.1 1 0.4 171,800 3.4
$3.10 - 3.40 1 0.5 3,700 0.1 11 4.3 58,000 2.0 0 0.0 0 0.0
$2.80 - 3.10 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0
$2.50 - 2.80 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0
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$2.20 - 2.50 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0
$1.90 - 2.20 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0
$1.60 - 1.90 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0
$1.30 - 1.60 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0
$1.00 - 1.30 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0
$0.70 - 1.00 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0
192 3,662,900 254 2,865,300 252 5,033,800
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Preliminary Draft/Work in Progress
ANALYSIS OF FEVER SHAREHOLDERS
Number of % of
Institutions [a] Shares Shares
- -------------------------------- ------------ ----------
Dimensional Funds Advs 104,000 2.7%
Alex Brown, Inc. 10,000 0.3%
Anb Investment Management 2,700 0.1%
------------ ----------
Total Institutional Holdings 116,700 3.1%
Insiders [b,c]
- --------------------------------
Creative Technology Ltd 1,169,608 30.8%
Thomas J. DeVesto 338,605 8.9%
William R. Hambrecht 337,000 8.9%
Henry E. Kloss 322,766 8.5%
Thomas J. Hannaher 25,394 0.7%
Wayne P. Garrett 21,666 0.6%
Sandy Ruby 21,666 0.6%
Robert S. Mainiero 15,000 0.4%
Leo Kahn 14,300 0.4%
Thomas E. Brew, Jr. 8,000 0.2%
Franklin S. Browning, Jr. 8,000 0.2%
Peter B. Seamans 8,000 0.2%
------------ ----------
Total Insider Holdings 2,290,005 60.2%
Total Public Holdings 1,396,322 36.7%
Total Shares Outstanding [d] 3,803,027 100.0%
============ ==========
[a] Based on the latest SEC 13(F) filings of June 30, 1997 of ownership by
major institutions with equity assets of $100MM or more.
[b] Based on shareholder's proxy statement of September 29, 1997.
[c] Includes 230,235 shares issuable upon exercise of options that were
exercisable at June 30, 1997.
[d] As of June 30, 1997 based on Fever 10K.
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Preliminary Draft/Work in Progress
4. ANALYSIS OF POTENTIAL FUTURE SHARE PRICES
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Preliminary Draft/Work in Progress
ANALYSIS OF POTENTIAL FUTURE SHARE PRICES
FUTURE VALUE BASED ON IMPLIED PRESENT VALUE AT SELECTED DISCOUNT RATES
---------------------------------------------------------------------------------------
FISCAL FORWARD P/E MULTIPLE 14.0% 16.0% 18.0%
----------------------------- ----------------------------- ----------------------------- ----------------------------
YEAR EPS 17.0 x 20.0 x 23.0 x 26.0 x 17.0 x 20.0 x 23.0 x 26.0 x 17.0 x 20.0 x 23.0 x 26.0 x 17.0 x 20.0 x 23.0 x 26.0 x
- ------------ ----------------------------- ----------------------------- ----------------------------- ----------------------------
Fever Management Estimates [a]
----------------------------- ----------------------------- ----------------------------
1998 $0.36 $6.10 $7.17 $8.25 $9.33 $6.10 $7.17 $8.25 $9.33 $6.10 $7.17 $8.25 $9.33 $6.10 $7.17 $8.25 $9.33
---------------------- ---------------------- ---------------------
1999 0.67 11.43 13.44 15.46 17.48 10.02 11.79 13.56 15.33 9.85 11.59 13.33 15.07 9.68 11.39 13.10 14.81
------- ------- -------
H&Q Estimates
----------------------------- ----------------------------- ----------------------------
1998 $0.25 $4.25 $5.00 $5.75 $6.50 $4.25 $5.00 $5.75 $6.50 $4.25 $5.00 $5.75 $6.50 $4.25 $5.00 $5.75 $6.50
1999 0.40 6.80 8.00 9.20 10.40 5.96 7.02 8.07 9.12 5.86 6.90 7.93 8.97 5.76 6.78 7.80 8.81
----------------------------- ----------------------------- ----------------------------
Note: Boxed values are below the offer price of $10.68 per share.
[a] Estimates derived by H&Q based on discussions with the Company.
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Preliminary Draft/Work in Progress
5. INDICATED VALUE BASED ON PUBLICLY TRADED COMPANIES
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Preliminary Draft/Work in Progress
INDICATED VALUE BASED ON PUBLICLY TRADED COMPANIES
($MM, except per share data)
Stereo Retailers/Peripherals & Manufacturers
FEVER Implied Implied
LTM Selected Public Enterprise Equity
Financials[a] Stereo Retailers/Peripherals & Manufacturers Value Value [c]
($MM) Multiple [b] ($MM) ($MM)
- ------------------------------------------------------------------------------------------------------------------------------
LTM Revenues $51.3 x 1.1 $56.5 $54.6
LTM EBITDA 0.3 x 12.6 NM NM
LTM EBIT (0.8) x 17.2 NM NM
Projected CY97 Net Income - Mgmt. 0.4 x 22.9 11.0 9.1
Projected CY98 Net Income - Mgmt. 1.9 x 17.4 35.2 33.3
Projected CY97 Net Income - H&Q (0.6) x 22.9 NM NM
Projected CY98 Net Income - H&Q 1.2 x 17.4 22.2 20.4
Book Value (as of 6/30/97) 15.4 x 4.0 62.8 61.0
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PURCHASE PRICE OF FEVER $46.0 $44.1
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Inplied
Equity
Value Per Share [d]
- ----------------------------------------------------------
LTM Revenues $13.22
LTM EBITDA NM
LTM EBIT NM
Projected CY97 Net Income - Mgmt. 2.21
Projected CY98 Net Income - Mgmt. 8.07
Projected CY97 Net Income - H&Q NM
Projected CY98 Net Income - H&Q 4.93
Book Value (as of 6/30/97) 14.76
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PURCHASE PRICE OF FEVER $10.68
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_____________________________________
[a] Information based on projected twelve month results for period ending
6/30/97.
[b] Uses mean value from relevant page.
[c] Equity Value equals Enterprise Value plus $.1 million in cash less $1.9
million in debt.
[d] Assumes 3.8 million shares of FEVER and 0.6 million options with an average
exercise price of $4.60 per share outstanding on the effective date.
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Preliminary Draft/Work in Progress
INDICATED VALUE BASED ON PUBLICLY TRADED
COMPANIES
($MM, except per share data)
Branded Retail Companies
FEVER Implied Implied
LTM Selected Public Enterprise Equity Inplied
Financials [a] Branded Retail Value Value [c] Equity
($MM) Multiple [b] ($MM) ($MM) Value Per Share [d]
- -----------------------------------------------------------------------------------------------------------------------------
LTM Revenues $ 51.3 x 2.1 $109.8 $107.9 $26.57
LTM EBITDA 0.3 x 12.9 NM NM NM
LTM EBIT (0.8) x 17.9 NM NM NM
Projected CY97 Net Income - Mgmt. 0.4 x 25.9 12.2 10.4 2.51
Projected CY98 Net Income - Mgmt. 1.9 x 20.8 41.7 39.8 9.64
Projected CY97 Net Income - H&Q (0.6) x 25.9 NM NM NM
Projected CY98 Net Income - H&Q 1.2 x 20.8 26.2 24.4 5.89
Book Value (as of 6/30/97) 15.4 x 6.2 96.8 95.0 22.99
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PURCHASE PRICE OF FEVER $46.08 $44.1 $10.68
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_____________________________________
[a] Information based on projected twelve month results for period ending
6/30/97.
[b] Uses mean value from relevant page.
[c] Equity Value equals Enterprise Value plus $.1 million in cash less $1.9
million in debt.
[d] Assumes 3.8 million shares of FEVER and 0.6 million options with an average
exercise price of $4.60 per share outstanding on the effective date.
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Preliminar Draft/Work in Progress
TRADING STATISTICS OF SELECTED COMPARABLE
COMPANIES
($MM, except per share values)
Fiscal Shares Market Value on 10/23/97
------------------------------------------
Year Out. Per % of 52 Market
Company Ticker End (MM) Share Wk High Cap.
- -------------------------------------------- -------- -------- -------- ---------- -------- ----------
Stereo Retailers/Peripherals & Manufacturers
Boston Acoustics, Inc. BOSA Mar 3 $31.50 88% $ 104
Circuit City Stores, Inc. [d] CC Feb 98 41.70 92% 4,106
Good Guys, Inc. [e] GGUY Sep 14 7.25 81% 100
Harman International Industries, Inc. HAR Jun 18 53.70 94% 992
Iomega Corp. IOM Dec 130 28.60 95% 3,708
Recoton Corp. RCOT Dec 11 13.50 79% 154
Zenith Electronics Corp. [f] ZE Dec 67 9.40 62% 626
Earnings Per Share [a] P/E Multiples
---------------------------------------- ------------------------
Company CY96 CY97E CY98E CY97E CY98E
- -------------------------------------------- -------- -------- -------- -------- --------
Stereo Retailers/Peripherals & Manufacturers
Boston Acoustics, Inc. $1.28 $1.68 $2.45 18.8 x 12.9 x
Circuit City Stores, Inc. [d] 1.52 1.28 1.45 32.6 28.8
Good Guys, Inc. [e] (0.63) (0.74) na nm na
Harman International Industries, Inc. 3.29 3.08 4.28 17.4 12.5
Iomega Corp. 0.47 0.87 1.22 32.9 23.4
Recoton Corp. 0.72 1.07 1.40 12.6 9.6
Zenith Electronics Corp. [f] na na na na na
-----------------------------------------------
Mean: 22.9 x 17.4 x
Median: 18.8 12.9
-----------------------------------------------
(96-98) 1998
EPS Grow P/E to Enterprise Enterprise Value/LTM [c]
-----------------------------
Company Rate Growth Value [b] Revs EBITDA EBIT
- -------------------------------------------- -------- --------- ------------- -------- ---------- --------
Stereo Retailers/Peripherals & Manufacturers
Boston Acoustics, Inc. 38 % 0.3 x $ 101 2.0 x 10.8 x 12.8 x
Circuit City Stores, Inc. [d] (2) nm 3,812 0.5 11.0 15.7
Good Guys, Inc. [e] nm nm 87 0.1 nm nm
Harman International Industries, Inc. 14 0.9 1,295 0.9 8.4 12.7
Iomega Corp. 61 0.4 3,584 2.4 21.9 27.0
Recoton Corp. 39 0.2 282 1.2 10.8 17.8
Zenith Electronics Corp. [f] nm nm 828 0.6 nm nm
--------------------------------------------------------------------------------
Mean: 30.1 % 0.5 x 1.1 x 12.6 x 17.2 x
Median: 38.3 0.4 1.0 10.8 15.7
--------------------------------------------------------------------------------
Market
Cap/
Book
Company Value
- -------------------------------------------- --------
Stereo Retailers/Peripherals & Manufacturers 6.6 x
Boston Acoustics, Inc. 2.5
Circuit City Stores, Inc. [d] 0.8
Good Guys, Inc. [e] 2.1
Harman International Industries, Inc. 9.6
Iomega Corp. 1.2
Recoton Corp. 4.9
Zenith Electronics Corp. [f]
---------------------
Mean: 4.0 x
Median: 2.3
---------------------
________________________________________
[a] Earnings estimates from H&Q Research where available, otherwise First Call.
[b] Enterprise value equals market value plus long and short-term debt,
capitalized leases, redeemable preferred stock and minority interest less
cash and marketable securities.
[c] Last Twelve Months financial information excludes non-recurring charges.
[d] Information excludes results for CarMax Group Subsidiary.
[e] Operating expenses exclude $3.7 million in early retirement of assets for
FY 1996.
[f] Operating expenses exclude $9.3 million related to severance costs
associated with employment reductions and the shutdown of the Canadian
wholy-owned subsidiary fro FY 1996. Operating expenses exclude income of
$26.3 million from royalty payments related to the tuning system patents for
FY 1996, and $3.1 million for 2Q97.
Fiscal Shares Market Value on 10/23/97
------------------------------------------
Year Out. Per % of 52
Company Ticker End (MM) Share Wk High Total
- -------------------------------------------- -------- -------- -------- ---------- -------- ----------
Branded Retail
Gap GPS Jan 268 $52.10 98% $13,969
Gucci GUC Jan 61 40.25 50% 2,459
Gymboree GYMB Jan 25 24.00 68% 590
Starbucks SBUX Sep 81 36.75 82% 2,988
Tiffany TIF Jan 35 45.25 93% 1,585
Williams-Sonoma WSGC Jan 26 40.25 81% 1,038
- ------------------------------------------------------------------------------------------------------------------------------
Fever [d] Jun 4 $7.13 100% $ 29
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Night Jun 92 $26.38 94% $ 2,437
- ------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share [a] P/E Multiples
---------------------------------------- ------------------------
Company CY96 CY97E CY98E CY97E CY98E
- -------------------------------------------- -------- -------- -------- -------- --------
Branded Retail
Gap $ 1.60 $ 1.92 $ 2.26 27.1 x 23.1 x
Gucci 2.76 3.00 3.40 13.4 11.7
Gymboree 1.24 1.44 1.75 16.7 13.7
Starbucks 0.52 0.80 1.10 45.9 33.4
Tiffany 1.66 2.02 2.35 22.4 19.3
Williams-Sonoma 0.86 1.34 1.68 30.0 24.0
-----------------------------------------------------------
Mean: 25.9 x 20.8 x
Median: 24.8 21.2
-----------------------------------------------------------
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Fever [d] 0.15 ($0.16) $0.30 nm x 23.8 x
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Night 0.00 $2.25 $2.55 11.7 x 10.3 x
- -----------------------------------------------------------------------------------------------------------------------------------
(96-98) 1998
EPS Grow P/E to Enterprise Enterprise Value/LTM [c]
-----------------------------
Company Rate Growth Value [b] Revs EBITDA EBIT
- -------------------------------------------- -------- --------- ------------- -------- ---------- --------
Branded Retail
Gap 19 % 1.2 x $13,801 2.5 x 14.3 x 18.8 x
Gucci 12 1.0 2,267 2.6 9.0 9.5
Gymboree 19 0.7 540 1.6 7.9 9.3
Starbucks 45 0.7 2,825 3.2 21.6 36.5
Tiffany 19 1.0 1,671 1.7 11.4 13.3
Williams-Sonoma 40 0.6 1,101 1.3 13.5 20.2
---------------------------------------------------------------------------------
Mean: 25.6 % 0.9 x 2.1 x 12.9 x 17.9 x
Median: 18.9 0.9 2.1 12.4 16.1
---------------------------------------------------------------------------------
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Fever [d] 41 % 0.6 x $ 31 0.6 x 106.1 x nm x
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Night nm % nm x $ 2,110 1.7 x 16.1 x 19.4 x
- ----------------------------------------------------------------------------------------------------------------------------------
Cap/
Book
Company Value
- -------------------------------------------- --------
Branded Retail
Gap 9.0 x
Gucci 7.5
Gymboree 3.9
Starbucks 5.9
Tiffany 3.9
Williams-Sonoma 6.9
----------------------
Mean: 6.2 x
Median: 6.4
----------------------
- --------------------------------------------------------------------------------
Fever [d] 1.9 x
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Night 9.1
- --------------------------------------------------------------------------------
- --------------------------------------------
[a] Earnings estimates from H&Q Research where available, otherwise First Call.
[b] Enterprise value equals market value plus long and short-term debt,
capitalized leases, redeemable preferred stock and minority interest less
cash and marketable securities.
[c] Last Twelve Months financial information excludes non-recurring charges.
[d] Fever share price based on close at 10/3/97.
Preliminary Draft/Work in Progress
LATEST TWELVE MONTHS OPERATING STATISTICS FOR
SELECTED COMPARABLE COMPANIES
($MM)
Latest
Twelve Latest Twelve Months [a] Margins
----------------------------------------------------------------
Company Ticker Months Revenue EBITDA EBIT Net Gross EBITDA EBIT
- -------------------------------------------- -------- -------- --------- -------- -------- -------- -------- -------- ---------
Stereo Retailers/Peripherals & Manufacturers
Boston Acoustics, Inc. BOSA Jun $51.7 $9.4 $7.9 $5.3 42.8% 18.1% 15.3%
Circuit City Stores, Inc. [d] CC May 7,905.4 347.3 242.5 132.4 23.0 4.4 3.1
Good Guys, Inc. [e] GGUY Jun 898.5 (10.6) (20.3) (11.5) 24.8 (1.2) (2.3)
Harman International Industries, Inc. HAR Jun 1,474.1 155.1 102.0 54.8 28.5 10.5 6.9
Iomega Corp. IOM Jun 1,468.6 164.0 132.5 82.3 28.7 11.2 9.0
Recoton Corp. RCOT Jun 233.8 26.2 15.8 8.9 36.6 11.2 6.8
Zenith Electronics Corp. [f] ZE Jun 1,289.3 (145.1) (179.9) (174.7) 3.0 (11.3) (14.0)
-----------------------------------------
Mean: 26.8 % 6.1% 3.6%
Median: 28.6 10.8 6.8
-----------------------------------------
Operating Costs Balance Sheet Info. CapEx/
-------- ----------------- ----------------------- --------
Company Net R&D S,G&A Cash [b] Debt [c] Sales
- -------------------------------------------- -------- -------- -------- ---------- ------------ --------
Stereo Retailers/Peripherals & Manufacturers
Boston Acoustics, Inc. 10.3% 6.6% 20.8% $5.4 $2.8 3.3%
Circuit City Stores, Inc. [d] 1.7 na 19.9 728.7 434.5 6.9
Good Guys, Inc. [e] (1.3) na 27.0 12.7 0.0 1.2
Harman International Industries, Inc. 3.7 na 21.6 4.2 306.9 4.6
Iomega Corp. 5.6 3.8 15.9 135.4 11.9 4.4
Recoton Corp. 3.8 na 29.9 12.0 139.9 4.1
Zenith Electronics Corp. [f] (13.5) 3.5 13.5 0.0 202.4 12.9
--------------------------------------------------------------------------
Mean: 1.5% nm 21.2% 5.3%
Median: 3.8 nm 21.2 4.3
--------------------------------------------------------------------------
- --------------------------------------------
[a] Last Twelve Months financial information excludes non-recurring charges.
[b] Includes short-term securities.
[c] Includes any short and long-term debt, capitalized leases, redeemable
preferred stock and minority interest.
[d] Information excludes results for CarMax Group Subsidiary.
[e] Operating expenses excludes $3.7 million in early retirement of assets for
FY1996.
[f] Operating expenses exclude $9.3 million related to severance costs
associated with employment reductions and the shutdown of the Canadian
wholy-owned subsidiary fro FY 1996. Operating expenses exclude income of
$26.3 million from royalty payments related to the tuning system patents for
FY1996, and $3.1 Million for 2Q97.
Twelve Latest Twelve Months [a] Margins
-------------------------------------- ---------------------------
Company Ticker Months Revenue EBITDA EBIT Net Gross EBITDA EBIT
- -------------------------------------------- -------- -------- ----------- -------- -------- -------- -------- -------- --------
Branded Retail
Gap GPS Jul $5,627.3 $968.3 $732.9 $459.3 37.1% 17.2% 13.0%
Gucci GUC Jan 880.7 250.6 239.1 168.4 64.5 28.5 27.2
Gymboree GYMB Jul 333.0 68.7 57.8 32.1 44.9 20.6 17.4
Starbucks SBUX Jun 892.6 130.5 77.3 45.7 54.5 14.6 8.7
Tiffany TIF Jul 955.5 146.5 125.3 64.4 54.7 15.3 13.1
Williams-Sonoma WSGC Jul 857.8 81.7 54.6 23.5 39.9 9.5 6.4
----------------------------------------
Mean: 49.3% 17.6% 14.3%
Median: 49.7 16.3 13.1
----------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Fever Jun $ 51.3 $ 0.3 ($0.8) ($0.6) 39.6% 0.6% (1.6)%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Night [d] Mar $1,245.2 $130.9 $109.0 $129.5 21.9% 10.5% 8.8%
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Costs Balance Sheet Info. CapEx/
-------- ----------------- ---------------------
Company Net R&D S,G&A Cash [b] Debt [c] Sales
- -------------------------------------------- -------- -------- -------- ---------- ---------- -------
Branded Retail
Gap 8.2 % na% 24.1 $257.6 $90.2 7.7%
Gucci 19.1 na 37.4 230.9 38.1 1.7
Gymboree 9.6 na 27.6 50.8 0.0 14.3
Starbucks 5.1 na 45.8 182.8 19.9 17.7
Tiffany 6.7 na 41.6 76.5 162.2 3.9
Williams-Sonoma 2.7 na 33.5 27.3 89.7 5.5
----------------------------------------------------------------------
Mean: 8.6% na 35.0% 8.5%
Median: 7.4 na 35.5 6.6
----------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Fever (1.2)% 1.1% 40.0% $0.1 $1.9 4.1%
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Night [d] 10.4% 2.6% 10.5% $338.4 $10.8 2.7%
- -------------------------------------------------------------------------------------------------------
____________________________________________
[a] Last Twelve Months financial information excludes non-recurring charges.
[b] Includes short-term securities.
[c] Includes any short and long-term debt, capitalized leases, redeemable
preferred stock and minority interest.
[d] FY96 Net Income excludes $18.78 million of special one time charges.
- -----------------------------------------------------------------------------H&Q
Preliminary Draft/Work in Progress
6. INDICATED VALUE BASED ON COMPARABLE M&A TRANSACTIONS
- -----------------------------------------------------------------------------H&Q
Preliminary Draft/Work in Progress
INDICATED VALUE BASED ON COMPARABLE TECHNOLOGY
M&A TRANSACTIONS
($MM, except per share data)
FEVER Implied Implied
LTM Selected Enterprise Equity Implied
Financials [a] M&A Transaction Value Value [c] Equity
($MM) Multiple [b] ($MM) ($MM) Value Per Share [d]
- ------------------------------------------------------------------------------------------------------------------------------------
LTM Revenues $51.3 x 1.4 $72.3 $70.4 $17.04
LTM EBITDA 0.3 x 13.5 NM NM NM
LTM EBIT (0.8) x 22.4 NM NM NM
LTM Net Income (0.6) x 33.3 NM NM NM
Book Value (as of 6/30/97) 15.4 x 4.2 66.8 65.0 15.73
Premium One Trading Day Prior to
Announcement (10/03/97) [d] $ 7.1 x 22.8% 38.0 36.2 8.75
Premium Twenty Trading Days Prior to
Announcement (9/04/97) [d] $ 5.0 x 27.1% 28.1 26.2 6.35
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase Price of FEVER $46.0 $44.1 $10.68
- ------------------------------------------------------------------------------------------------------------------------------------
____________________________________
[a] Information based on projected twelve month results for period ending
6/30/97.
[b] Uses mean value from relevant page.
[c] Equity Value equals Enterprise Value plus $.1 million in cash less $1.9
million in debt.
[d] Assumes 4.1 million shares of FEVER and 0.6 million options with an average
exercise price of $4.60 pershare outstanding on the effective date.
- ----------------------------------------------------------------------------H&Q
Preliminary Draft/Work in Progress
INDICATED VALUE BASED ON COMPARABLE CONSUMER
M&A TRANSACTIONS
($MM, except per share data)
FEVER
LTM Selected Implied Implied Implied
Financials [a] M&A Transaction Enterprise Equity Equity
($MM) Multiple [b] Value Value [c] Value Per Share [d]
- --------------------------------------------------------------------------------------------------------------------------------
LTM Revenues $51.3 x 2.0 $101.2 $99.3 $24.04
LTM EBITDA 0.3 x 15.6 NM NM NM
LTM EBIT (0.8) x 20.6 NM NM NM
LTM Net Income (0.6) x 30.0 NM NM NM
Book Value (as of 6/30/97) 15.4 x 4.3 68.7 66.8 16.17
Premium One Trading Day Prior to $7.1 x 25.1% 38.7 36.8 8.92
Announcement (10/03/97) [d]
Premium Twenty Trading Days Prior to $5.0 x 39.4% 30.6 28.8 6.97
Announcement (9/04/97) [d]
- --------------------------------------------------------------------------------------------------------------------------------
PURCHASE PRICE OF FEVER $46.0 $44.1 $10.68
- --------------------------------------------------------------------------------------------------------------------------------
______________________________
(a) Information based on projected twelve month results for period ending
6/30/97.
(b) Uses mean value from relevant page.
(c) Equity Value equals Enterprise Value plus $.1 million in cash less $1.9
million in debt.
(d) Assumes 4.1 million shares of FEVER and 0.6 million options with an average
exercise price of $4.60 per share outstanding on the effective date.
- ---------------------------------------------------------------------------- H&Q
Preliminary Draft/Work in Progress
SELECTED COMPARABLE M&A TRANSACTIONS
- ----------------------------------------
Selected Comparable M&A Transactions [a]
- ----------------------------------------
Date
Ann. Target Acquiror Business of Target
- ---------------------------------------------- ----------------------------- -----------------------------------------------
9/5/97 Stairmaster Sports/Medical Products John Rutledge Partners Mnfr. of fitness equipment (Stairclimbers,
Gravitron)
12/23/96 Starsight Telecast, Inc. Gemstar International, Inc. Pvd cable programming svcs
11/26/96 Armor All Clorox Automotive consumer products
9/12/96 Duracell International, Inc. The Gillette Company Mnfr and sells alkaline batteries.
1/3/96 International Jensen, Inc. Recoton Corporation Mnfr. home & automotoive loudspeakers.
9/28/95 Marietta Corporation BFMA Holding, Corp. Mnfr guest amenity programs to travel & lodging
industry.
9/22/94 Neutrogena Corp. Johnson & Johnson Mnfr and distributes skin care & hair care
products.
5/24/94 Mr. Coffee, Inc. Signature Brands USA, Inc. Mnfr coffee makers
5/21/94 Gerber Products Sandoz Ltd. Produces and distributes baby foods.
8/2/93 Goody Products Newell Co. Mnfr hair care and cosmetic products
Offer for Multiple of: Offer for Multiple of: % Prem. to Mkt.
-------------------------- ---------------------------------------------------------
Equity Net Book Cash Flow Assets [b] Net Oper. (Trading Days)
($MM) Income Value From Oper. ($MM) Revenue EBITDA EBIT Assets 1 Day 20 Days
- -----------------------------------------------------------------------------------------------------------------------------------
Private $42.2 6.8x 2.2x 3.8x $42.0 0.8x 4.5x 5.9x 2.2x nm nm
Public 233.8 nm 11.2x nm 211.8 19.4x nm nm nm 0.7% 25.5%
Public 410.4 52.6x 3.3x 14.6x 355.5 1.9x 22.2x 29.7x 2.9x 9.1% 14.0%
Public 8,773.8 34.1x 6.1x 35.8x 9,342.7 4.0x 16.9x 20.5x 4.6x 43.5% 57.6%
Public 56.8 nm 1.0x nm 102.3 0.4x 15.0x 37.7x 1.0x 63.0% 46.7%
Public $39.6 nm 0.8x 10.3x $77.9 1.0x 23.5x nm 1.7x 13.9% 24.2%
Public 953.0 37.7x 6.9x 71.6x 934.5 3.1x 20.7x 24.0x 7.8x 22.6% 78.5%
Public 136.7 20.5x 2.2x 12.9x 160.0 0.9x 8.2x 10.9x 1.9x nm nm
Public 3,747.4 27.4x 10.3x 27.2x 3,832.1 3.2x 15.4x 18.5x 8.5x 53.1% 68.3%
Public 174.8 nm 2.8x 14.0x 187.7 0.9x 10.6x 20.2x 2.5x 8.2% 8.8%
- ----------------------------------------------------------------------------------------------------------------------------------
Average [c] $719.4 30.0x 4.3x 19.1x $732.7 2.0x 15.6x 20.6x 3.4x 25.1% 39.4%
Median $204.3 30.8x 3.0x 14.3x $199.7 1.5x 15.4x 20.4x 2.5x 18.2% 36.1%
- ----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------
Selected Comparable Technology M&A Transactions
- -----------------------------------------------
09/19/97 Sterling Electronics Corporation [d] Marshall Industries Whl electronic components
07/03/97 Wyle Electronics [d] Raab Karcher, AG Whl high tech electronics
04/10/97 Microcom Compaq Computer Mnfr. Modem and related products
02/26/97 Compression Labs V-TEL Mnfr. videoconferencing equipment
2/26/97 U.S. Robootics 3Com Mnfr. modem and related hardware
10/4/96 Augat, Inc. Thomas & Betts Corp. Mnfr electrical components for elect. industry.
07/01/96 Brooktree Corp. Rockwell International Mnfr ASICs for graphics systems
11/09/96 NetWorth Compaq Dvlps peripheral systems
10/03/95 Conner Peripherals, Inc. Seagate Technology, Inc. Mnfr hard disk drives
4/27/95 Acuity Imaging, Inc. Robotic Visions Systems, Inc. Mnfr machine-vision based inspection and meas.
products
Public $162.3 18.7x 2.7x nm $208.5 0.6x 10.9x 12.6x 2.0x 16% 57%
Public 633.0 17.1x 2.8x 936.4x 751.3 0.6x 9.8x 11.2x 2.2x 17% 35%
Public 360.6 54.3x 3.3x nm 366.2 2.1x 19.7x 39.6x 3.2x 54.8% 41.3%
Public 52.7 nm 4.0x nm 64.7 0.7x nm nm 3.4 -32.4% -34.3%
Public $6,814.1 23.4x 7.9x 145.5x $6,892.3 2.8x 14.7x 15.7x 7.3x 11.9% 0.0%
Public 585.8 52.3x 2.1x 26.7x 624.9 1.1x 14.0x 29.3x 2.0x 35.9% 49.3%
Public 258.5 63.4x 1.8x 83.3x 269.0 1.8x 13.2x 49.2x 13.2x 42.9% 16.5%
Public 350.6 nm 9.1x 120.1x 390.9 6.8x nm nm 16.9x 21.7% 111.3%
Public 322.9 6.1x 0.8x 2.7x 507.9 0.2x 3.2x 7.8x 0.9x -18% -5%
Public 33.4 33.7x 17.7x nm 33.0 1.6x 18.5x 26.1x 22.0x 55.0% 21.9%
- ----------------------------------------------------------------------------------------------------------------------------------
Average [c] $340.8 33.3x 4.2x 93.9x $397.9 1.4x 13.5x 22.4x 6.3x 22.8% 27.1%
Median 336.8 28.6x 3.1x 101.7x 378.5 1.4x 13.6x 20.9x 3.3x 19.2% 28.5%
- ----------------------------------------------------------------------------------------------------------------------------------
_____________________________________________________________________________
[a] Selected consumer and technology deals. Source: SDC, H&Q
[b] Offer for Assets equals Offer for Equity plus debt less cash.
[c] Average excludes the highest and lowest values.
[d] Deal pending.
Preliminary Draft/Work in Progress
7. DISCOUNTED CASH FLOW ANALYSIS
- -----------------------------------------------------------------------------H&Q
Preliminary Draft/Work in Progress
DISCOUNTED CASH FLOW ANALYSIS
($MM)
-------------- -------------- -------------- -------------- ------------
FY 1998 E FY 1999 E FY 2000 E FY 2001 E FY 2002 E
-------------- -------------- -------------- -------------- ------------
Revenue [a] $ 79.3 $ 95.5 $ 102.1 $ 108.3 $ 113.8
EBIT [a]
Taxes at effective rate $ 2.8 $ 5.3 $ 5.9 $ 6.3 $ 6.4
Tax effected EBIT (1.1) (2.1) (2.4) (2.5) (2.6)
--------------- --------------- -------------- -------------- ------------
1.7 3.2 3.5 3.8 3.8
Net changes in working capital [a] (11.2) (6.0) (1.8) (1.9) (2.0)
--------------- --------------- -------------- -------------- ------------
OPERATING CASH FLOW (9.5) (2.8) 1.7 1.9 1.8
+ Depreciation and amortization [a] 1.4 2.0 2.5 2.6 2.8
- - Capital expenditures [a] (1.3) (4.5) (0.8) (0.8) (0.8)
--------------- --------------- -------------- -------------- -----------
FREE CASH FLOW $ (9.4) $ (5.3) $ 3.4 $ 3.7 $ 3.8
=============== =============== ============== ============== ===========
TERMINAL VALUE:
(based on 2002 Revenue)
0.50 x Revenue $ 56.9
0.75 x Revenue 85.3
1.00 x Revenue 113.8
------------------- -------------- ---------------- -----------------
DISCOUNT RATE CALCULATION [B] Equity risk premium Risk free rate Beta Discount rate
------------------- -------------- ---------------- -----------------
(CAPM) 10.79% 5.96% 0.89 15.56%
------------------- -------------- ---------------- -----------------
- -----------------------------------------------------------------------H&Q
Preliminary Draft/Work in Progress
DISCOUNTED CASH FLOW ANALYSIS
($MM)
DISCOUNT RANGE
----------- ---------- -------------- -------- --------
12.0% 14.0% 16.0% 18.0% 20.0%
----------- ---------- -------------- -------- --------
A. Net present value of free cash flow [c] $ (1.5) $ (1.8) $ (2.0) $ (2.2) $ (2.4)
B. Present value or terminal value [c]
----------- ---------- -------------- -------- --------
0.50 x Revenue $ 34.2 $ 31.6 $ 29.2 $ 27.0 $ 25.1
0.75 x Revenue 51.3 47.3 43.8 40.5 37.6
1.00 x Revenue 68.3 63.1 58.4 54.1 50.1
----------- ---------- -------------- -------- --------
C. Total debt less cash and short-term investments $ 1.9 $ 1.9 $ 1.9 $ 1.9 $ 1.9
D. Net present value of equity (A+B-C)
----------- ---------- -------------- -------- --------
0.50 x Revenue $ 30.8 $ 27.9 $ 25.3 $ 22.9 $ 20.8
0.75 x Revenue 47.9 43.7 39.9 36.4 33.3
1.00 x Revenue 65.0 59.5 54.5 50.0 45.8
----------- ---------- -------------- -------- --------
F. Percentage of value derived from terminal value
----------- ---------- -------------- -------- --------
0.50 x Revenue 110.8% 113.0% 115.3% 117.9% 120.7%
0.75 x Revenue 107.0% 108.3% 109.7% 111.3% 112.9%
1.00 x Revenue 105.1% 106.1% 107.1% 108.2% 109.4%
----------- ---------- -------------- -------- --------
______________________
[a] Estimates derived by H&Q based on discussions with management.
[b] Historic market premium on the Nasdaq and other small-cap stocks. Risk free
rate is current yield on 5-year Treasury bond. Beta is from Barra.
[c] Assumes transaction closes at end of CY1997.
- --------------------------------------------------------------------------- H&Q
Preliminary Draft/Work in Progress
8. SUMMARY OF IMPLIED EQUITY VALUATIONS
- -----------------------------------------------------------------------------H&Q
Preliminary Draft/Work in Progress
IMPLIED EQUITY VALUATION SUMMARY
CATEGORY TOTAL EQUITY VALUATION PER SHARE VALUATION
RANGE ($MM) RANGE
-------------------------------------------------------------
A. Implied Valuation Based on Comparable Public Companies
Stereo Retailers/Peripherals & Manufacturers $9.1 - $ 61.0 $2.21 - $14.76
Branded Retail Companies 10.4 - 107.9 2.51 - 26.57
B. Implied Valuation Based on Comparable M&A Transactions
Implied Valuation Based on Comparable Consumer M&A Transactions 28.8 - 99.3 6.97 - 24.04
Implied Valuation Based on Comparable Technology M&A Transactions 26.2 - 70.4 6.35 - 17.04
C. Discounted Cash Flow Analysis 20.8 - 65.0 5.02 - 15.74
D. Implied Valuation Based on 52 Week Trading Range 13.8 - 29.2 3.37 - 7.13
E. Implied Valuation Based on Historic Trading Range 13.3 - 40.0 3.25 - 9.75
F. Implied Valuation Based on Potential Future Share Price Range
Management Estimates 25.0 - 71.7 6.10 - 17.48
H&Q Estimates 17.4 - 42.6 4.25 - 10.40
- ------------------------------------------------------------------------------------------------------------------------------------
PURCHASE PRICE FOR FEVER $ 44.1 $ 10.68
- ------------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------H&Q
Preliminary Draft/Work in Progress
IMPLIED EQUITY VALUATION SUMMARY VALUATION METHODOLOGY
[GRAPH APPEARS HERE]
- -----------------------------------------------------------------------------H&Q
Preliminary Draft/Work in Progress
9. PROPOSED TRANSACTION MULTIPLES
- -----------------------------------------------------------------------------H&Q
Preliminary Draft/Work in Progress
PROPOSED TRANSACTION MULTIPLES
($MM, except per share data)
AVERAGE
CLOSING TRANSACTION
TIME PERIOD PRICE VALUE PREMIUM
- -----------------------------------------------------------------------------
10/3/1997 $7.13 $10.68 50%
Previous week $6.95 $10.68 54%
Previous month $6.14 $10.68 74%
Previous 3 months $5.29 $10.68 102%
Previous 6 months $5.16 $10.68 107%
Previous 12 months $5.13 $10.68 108%
CURRENT
TRADING TRANSACTION
METRIC [A] ($MM) MULTIPLES [B] MULTIPLES PREMIUM
- -----------------------------------------------------------------------------
REVENUES
LTM Results $51.3 0.6x 0.9x 47%
FY 1998 $79.3 0.4x 0.6x 47%
FY 1999 $95.5 0.3x 0.5x 47%
EBIT
LTM Results ($0.8) nm nm nm
FY 1998 $2.8 11.1x 16.3x 47%
FY 1999 $5.3 6.0x 8.7x 47%
NET INCOME
LTM Results ($0.6) nm nm nm
FY 1998 $1.5 20.3x 30.4x 50%
FY 1999 $2.7 11.5x 16.2x 41%
[A] Last twelve months as of June 30, 1997. Projected FY1998 and FY1999 results
based on H&Q/Management Estimates.
[B] Based on a closing market price of $7.13 on 10/3/1997.
- ----------------------------------------------------------------------------H&Q
Preliminary Draft/Work in Progress
10. PRO FORMA IMPACT ON NIGHT
- ----------------------------------------------------------------------------H&Q
Preliminary Draft/Work in Progress
PRO FORMA IMPACT ON NIGHT
Assumptions
($MM, except per share data)
COMPANY NIGHT FEVER
- -------------------------------------------------------------
Closing Price on October 3, 1997 [a] $25.50 $10.68
Shares Outstanding [b] 92.4 3.8
Options [c] 0.4 0.6
Weighted-Average Exercise Price [c] $13.05 $3.92
EPS
FY 1997 [d,e] $1.84 ($0.19)
FY 1998 [d,e] 2.38 $0.36
FY 1999 [d,e] 2.63 $0.67
P/E
FY 1997 13.9x mm
FY 1998 10.7x 29.8x
FY 1999 9.7x 15.9x
ACQUISITION (PURCHASE ACCOUNTING) CASE A CASE B
--------------------------------------------------------------
% Purchased R&D Write-off 20% 30%
Value of Acquisition [f] $45 $45
Less Fever Book Value [g] (15) (15)
--------------------
Excess of Purchase Price over Book Value 29 29
Less Purchased R&D Write-off (6) (9)
--------------------
Goodwill $23 $20
====================
Goodwill Amortization Period 7 7
Annual Goodwill Charge $3 $3
Pretax Opportunity Cost of Cash 5.50%
Tax Rate 10.0%
Annual After-tax Opportunity Cost of Cash $2
[a] Fever price reflects offer price.
[b] Night shares as of March 31, 1997 10Q. Fever shares outstanding as of June
29, 1997 10K.
[c] Night exercisable options outstanding and weighted average exercise price
per June 30, 1996 10K. Fever options outstanding and weighted average
exercise price per Fever June 29, 1997 10K.
[d] Night estimates based on First Call median for fiscal years ending, June.
[e] Estimates derived by H&Q based on discussions with the Company.
[f] Based on $10.68 per share.
[g] Fever book value based on June 29, 1997 10K.
- --------------------------------------------------------------------------- H&Q
Preliminary Draft/Work in Progress
PRO FORMA IMPACT ON NIGHT
Accretion/(Dilution)
($MM, except per share data)
CASE A: 20% R&D WRITE-OFF FY 1998 FY 1999 CASE B: 30% R&D WRITE-OFF FY 1998 FY 1999
- -------------------------------------------------------------- ---------------------------------------------------------------
Acquisition P\E 29.8 x 15.9 x Acquisition P\E 29.8 x 15.9 x
Pro Forma EPS $ 2.33 $ 2.60 Pro Forma EPS $ 2.34 $ 2.60
Accretion/(Dilution)$ ($ 0.05) ($ 0.03) Accretion/(Dilution)$ ($ 0.04) ($ 0.03)
Accretion/(Dilution)% (1.9%) (1.2%) Accretion/(Dilution)% (1.7%) (1.1%)
Pretax Synergies to Break Even [a] $ 4.6 $ 3.3 Pretax Synergies to Break Even [a] $ 4.2 $ 2.8
SYNERGY SENSITIVITY PRICE FY 1998 FY 1999 SYNERGY SENSITIVITY PRICE FY 1998 FY 1999
- -------------------------------------------------------------- ---------------------------------------------------------------
$ 7.13 $ 1.8 $ 0.5 $ 7.13 $ 1.6 $ 0.3
8.13 2.6 1.3 8.13 2.3 1.0
9.13 3.4 2.1 9.13 3.0 1.7
10.13 4.2 2.9 10.13 3.8 2.4
11.13 5.0 3.7 11.13 4.5 3.2
ACCRETION/(DILUTION) SENSITIVITY SYNERGIES FY 1998 FY 1999 ACCRETION/(DILUTION) SENSITIVITY SYNERGIES FY 1998 FY 1999
- -------------------------------------------------------------- ----------------------------------------------------------------
$ 0 (1.9%) (1.2%) $ 0 (1.7%) (1.1%)
5 0.1% 0.6% 5 0.3% 0.8%
10 2.2% 2.5% 10 2.4% 2.6%
15 4.2% 4.3% 15 4.4% 4.5%
20 6.3% 6.2% 20 6.5% 6.4%
[a] Assumes a tax rate of 10.0%
- -----------------------------------------------------------------------------H&Q
Preliminary Draft/Work in Progress
11. FORM OF FAIRNESS OPINION
- -----------------------------------------------------------------------------H&Q
[LETTERHEAD OF HAMBRECHT & QUIST LLC]
DRAFT ONE BUSH STREET
----- SAN FRANCISCO, CA 94104
(415) 576-3300
October 30, 1997
Confidential
- ------------
The Board of Directors
Cambridge SoundWorks, Inc.
333 Needham Street
Newton, Massachusetts 02164
Gentlemen:
You have requested our opinion as to the fairness from a financial point of view
to the holders of the outstanding shares of common stock, no par value per
share (the "Common Stock"), Cambridge Soundworks Inc. (the "Company") of the
consideration to be received by such holders in connection with a proposed
transaction as set forth below.
We understand that the Company, Creative Technology Ltd. ("Creative") and CSW
Acquisition Corporation (the "Purchaser") propose to enter into an Agreement and
Plan of Merger (the "Agreement") dated as of October 30, 1997. The terms of the
Agreement provide, among other things, that (i) the Purchaser will promptly
commence a tender offer (the "Offer") to purchase for cash all of the
outstanding shares of Common Stock at a purchase price of $10.68 per share, net
to the seller in cash, upon the terms and subject to the conditions set forth in
the Agreement and certain ancillary documents to be filed with the Securities
and Exchange Commission; and (ii) the Purchaser will subsequently be merged (the
"Merger") with and into the Company in a transaction which will provide all
remaining holders of shares of Common Stock (other than the Company, Creative
the Purchaser or their respective subsidiaries, and holders who have perfected
their appraisal rights under Massachusetts law) with $10.68 per share in cash.
The Offer and the Merger constitute the "Proposed Transaction."
Hambrecht & Quist LLC ("Hambrecht & Quist"), as part of its investment banking
services, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, strategic transactions,
corporate restructurings, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. We have acted as a financial advisor to the Board of
Directors of the Company in connection with the Proposed Transaction, and we
will receive a fee for our services, which include the rendering of this
opinion.
The Board of Directors
Cambridge SoundWorks, Inc.
Page 2
In the past, we have provided investment banking and other financial advisory
services to the Company and have received fees for rendering these services. In
particular, Hambrecht & Quist acted as lead managing underwriter in the
Company's initial public offering in 1994. In the ordinary course of business,
Hambrecht & Quist acts as a market maker and broker in the publicly traded
securities of the Company and receives customary compensation in connection
therewith, and also provides research coverage for the Company. In the ordinary
course of business, Hambrecht & Quist actively trades in the equity and
derivative securities of the Company for its own account and for the accounts of
its customers and, accordingly, may at any time hold a long or short position in
such securities. In addition, Hambrecht & Quist and its affiliates currently own
approximately 337,000 shares of Company Common Stock.
In connection with our review of the Proposed Transaction, and in arriving at
our opinion, we have, among other things:
(i) reviewed the publicly available consolidated financial statements
of Creative for recent years and interim periods to date and
certain other relevant financial and operating data of Creative
made available to us from published sources;
(ii) reviewed the financial statements of the Company for recent years
and interim periods to date and certain other relevant financial
and operating data of the Company made available to us from
published sources and from the internal records of the Company;
(iii) reviewed certain internal financial and operating information
relating to the Company, including certain financial projections,
prepared by the management of the Company;
(iv) discussed the business, financial condition and prospects of the
Company with certain of its officers;
(v) reviewed the recent reported prices and trading activity for the
common stock of the Company and compared such information and
certain financial information for the Company with similar
information for certain other companies engaged in businesses we
consider comparable;
(vi) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
(vii) reviewed the Agreement; and
(viii) performed such other analyses and examinations and considered such
other information, financial studies, analyses and investigations
and financial, economic and market data as we deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning the Company or Creative
considered in connection with our review of the Proposed Transaction, and we
have not assumed any responsibility for independent verification of such
information. We have not undertaken any independent valuation or appraisal of
any of the assets or liabilities of the Company or Creative; nor have we
conducted a physical inspection of the properties and facilities of either
company. With respect to the financial forecasts and projections used in our
analysis, we have assumed that they reflect the best currently available
estimates and judgments of the expected future financial performance of the
Company. For purposes of this Opinion, we have assumed that neither the Company
nor Creative is a party to any
The Board of Directors
Cambridge SoundWorks, Inc.
Page 3
pending transactions, including external financings, recapitalizations or
material merger discussions, other than the Proposed Transaction and those
activities undertaken in the ordinary course of conducting their respective
businesses. Our opinion is necessarily based upon market, economic, financial
and other conditions as they exist and can be evaluated as of the date of this
letter and any change in such conditions would require a reevaluation of this
opinion. We were not requested to, and did not, formally solicit indications of
interest from any other parties in connection with a possible acquisition of, or
business combination with, the Company.
It is understood that this letter is addressed to and for the information of the
Board of Directors in connection with their evaluation of the Proposed
Transaction and may not be used for any other purpose without our prior written
consent; provided, however, that this letter may be reproduced in full in any
filing with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934. This letter does not constitute a recommendation to any
stockholder of the Company as to whether such stockholder should accept the
Offer.
Based upon and subject to the foregoing and after considering such other matters
as we deem relevant, we are of the opinion that as of the date hereof the
consideration to be received by the holders of Company Common Stock in the
Proposed Transaction is fair to such holders from a financial point of view. We
express no opinion, however, as to the adequacy or financial fairness of any
consideration received in the Proposed Transaction by Creative or any of its
affiliates.
Very truly yours,
HAMBRECHT & QUIST LLC
/s/ David Golden
By ____________________________
David Golden
Managing Director