EXHIBIT 99
[LETTERHEAD]
December 15, 1996
Board of Directors of
COLOR SPOT NURSERIES, INC.
3478 Boskirk Avenue
Pleasant Hill, CA 94523
Dear Sirs:
This letter is being provided by Valuation Research Corporation ("Valuation")
reporting the performance of certain limited procedures at the request of
Color Spot Nurseries, Inc. ("Color Spot" or the "Company"). These procedures
include conducting certain due diligence activities, preparing certain
analyses and conducting a limited scope appraisal assignment in order to make
a determination relative to the Fair Market Value of the Company's Business
Enterprise as of December 10, 1997 ("Appraisal Date").
The purpose of this appraisal is to express our opinion as to the value of
825,000 shares of common stock of Color Spot being issued in conjunction with
a $40.0 million Units Offering (the "Units Offering") for Series A Preferred
Stock with Warrants. We recognize that this report will be used to assist
management with certain financial reporting requirements. We also recognize
and hereby give permission to the Company's auditors to rely on this opinion
in conducting any accounting procedures they may be undertaking for the
Company directly related to the Units Offering.
Fair Market Value is defined as the amount at which a property would change
hands between a willing buyer and a willing seller, both being adequately
informed of the relevant facts, neither being under any compulsion to act,
and with equity to both.
For the purposes of this report Business Enterprise is defined as the
invested capital of the Company. Invested capital reflects the investment in
the business by all investors including both debt and equity.
COLOR DESCRIPTION
Color Spot is the largest wholesale nursery in the United States, based on
revenue and greenhouse square footage. The Company provides a wide assortment
of high quality plants as well as extensive merchandising services primarily
to leading home centers and mass merchants, such as Home Depot, Home Base,
Wal-Mart and Kmart. The Company distributes products to over 850 retail and
commercial customers, representing over 8,000 locations, primarily in the
western and southwestern regions of the United States. Since June 30, 1996,
the Company has completed 13 acquisitions, making it a leading consolidator
in the wholesale nursery industry, based on acquisitions completed by major
competitors. On a pro forma basis, the Company generated approximately $183.1
million in net sales and $22.7 million in EBITDA (as defined) in fiscal 1997.
The Company believes it is one of the few wholesale nurseries that has the
scale and distribution capabilities necessary to provide large volumes of
high quality product to its retail customers on a multi-regional basis. The
Company produces over 2,000 varieties of live plants, including bedding
plants, shrubs, potted flowering plants, ground cover and fresh cut Christmas
trees. Through its 200 person salesforce, Color Spot also provides its retail
customers with a broad array of value-added services, such as in-store
merchandising, product display and maintenance, promotional planning and
product reordering. The Company believes that providing these services
differentiates it from its competitors and helps to establish Color Spot as a
preferred supplier in the industry. Color Spot operates 19 production
facilities located in California, Arizona, Texas, Oregon and Washington.
COMPANY HISTORY
Color Spot America was founded in 1983 by Michael F. Vukelich, the Company's
current Chief Executive Officer, and it grew to become one of the largest
bedding plant producers in California. In February 1989, Color Spot America,
through a wholly owned subsidiary, acquired one of the largest competitors
for which PacifiCorp provided the acquisition financing. Immediately upon
closing of this financing, Color Spot America was in default of certain
financial covenants under the PacifiCorp financing. Other than the imposition
of a default rate of interest, PacifiCorp did not take any action with respect
to these financial covenant defaults until January 1991. At that time, Mr.
Vukelich left Color Spot America and PacifiCorp installed new management. In
1993, Color Spot America sold substantially all of its assets and
liabilities to Color Spot Oregon, a corporation controlled by PacifiCorp. Net
sales and profitability of Color Spot America and Color Spot Oregon declined
between 1992 and 1995.
In September 1995, the Company was formed to acquire the assets of Color Spot
Oregon from PacifiCorp by Heler, Mr. Vukelich and Jerry L. Halamuda, who had
previously worked with Mr. Vukelich at Color Spot America. With Mr. Vukelich
as Chief Executive Officer and Mr. Halamuda as President, management
implemented a number of strategic and operational programs designed to
improve the Company's customer relationship and financial results. These
initiatives included revamping the Company's
2
merchandising programs, decentralizing its operations, revising its pricing
strategies, renewing its focus on operating efficiencies and restructuring
its sales organization. As a result of these strategies, the Company has
experienced significant improvements in net sales and operating results. With
the improvement of its financial results, Color Spot embarked on an
aggressive acquisition strategy and has completed 13 acquisitions since June
30, 1996.
TRANSACTION DESCRIPTION
Simultaneously with the completion of the Units Offering, the Company will
enter into the New Loan Agreement which will provide three facilities,
including (i) a $75.0 million acquisition term loan facility, (ii) a $40.0
million revolving credit facility and (iii) a $35.0 million supplemental
facility. At the option of the Company, part of the supplemental facility can
be designated as an acquisition term loan facility or a revolving credit
facility. The New Loan Agreement will provide the Company with a source of
funds for working capital and future acquisitions.
In order to provide a stronger financial foundation for the Company and its
acquisition plan, Color Spot decided to refinance its existing debt (the
"Refinancing"). In connection with the Refinancing Color Spot is (i)
offering (the "Notes Offering") $85.0 million of senior subordinated notes
due 2007 (the "Notes"). These Notes, along with the $40.0 million Units
Offering will provide $125.0 in funds to (i) repay approximately $117.1
million of existing bank debt, (ii) pay estimated fees and expenses of $5.0
associated with the Refinancing and (iii) provide $2.9 million of funds for
general corporate purposes.
Because the Units will include Warrants for 825,000 shares, the Company is
required to account for the value of the Warrants separate from the value of
the Series A Preferred Stock. Because they have an exercise price of $.01 per
share, the value of the Warrants is essentially equal to the value of the
underlying common stock.
3
VALUATION
In expressing its Opinion, Valuation has relied on information and analyses
furnished by and/or discussions held with Management, its accountants, and
advisors, which information and analyses Valuation has reviewed and which has
been the subject of discussion and inquiry. Valuation does not assume any
responsibility for the sufficiency and accuracy of the information. Nothing
has come to Valuation's attention in the course of its engagement which would
lead it to believe that any such information is incorrect in any material
respect or that it was unreasonable for Valuation to utilize and rely upon
the information. Such data has been accepted as reasonably reflecting the
financial condition of the Company and its past and future operations. All
items subject to audit pursuant to generally accepted auditing standards and
in conformity with generally accepted accounting principles ("GAAP") have
been relied upon without review, check, or verification, and nothing has come
to our attention that would cause us to believe the information is incorrect
in any material respect or that it was unreasonable for Valuation to utilize
and rely upon the information. Valuation has performed certain analyses,
studies, and investigations more fully described herein in support of its
Opinion. Further, the Opinion expressed herein is subject to the General
Limiting Conditions and Assumptions attached hereto.
Valuation has reviewed financial statements of Color Spot in addition to
background data and material considered appropriate to the Opinion expressed.
Such areas of investigation include but are not limited to:
- Read the audited financial statements for Color Spot for the fiscal
years ended June 30, 1996 and 1997.
- Read the unaudited financial statements for Color Spot for the periods
ending September 26, 1996 and September 27, 1997.
- Read Amendment No. 3 to Form S-1 for Color Spots Notes Offering and
Units Offering.
- Review of the gardening and nursery industry, including an analysis
of companies engaged in similar lines of business as Color Spot.
- Inquiries of Management as to the impact of future trends on the
business and its industry including the expected future operating
performance of the Company, future levels of working capital and
capital expenditures; competitive conditions and advantages;
strategic positioning; and key actions to be taken in the near
term, among other factors.
- Review of business data and information made available to Valuation,
including historical and pro forma financial information for each sales
category.
4
- Review of Color Spot's forecast (the "Forecasts").
- Preparation of a limited scope appraisal.
Valuation has discussed financial and operating matters of the Company with
Management and their advisors. Valuation has reviewed the Forecasts of
earnings, income, cash flows, and balance sheets prepared by Management and
discussed such Forecasts with Management. This review included, but was not
limited to, discussions of basic assumptions made in the preparation of the
forecasts relating to the type of business; key markets; economic conditions;
reinvestment requirements; new unit acquisition; and strategic positioning. We
consider such forecasts to be reasonable and attainable in light of current
and near term economic expectation and nothing has come to our attention that
would cause us to believe the basic assumptions used in the Forecasts are
unreasonable.
In conducting the limited scope appraisal the procedures used in valuing the
Company conform with the standards promulgated by the American Society of
Appraisers and consider all of the factors described in Revenue Ruling 59-60,
1959-1, C.B. 237, as modified by Revenue Ruling 65-193, 1965-2 C.B.370, as
well as all other relevant factors. Such factors included:
(a) The nature of the business and the history of the enterprise from its
inception;
(b) The economic outlook in general and the condition and outlook of
the specific industry in particular;
(c) The book value of the securities and the financial condition of the
business (Book Value Approach);
(d) Sales of the stock and the size of the block of stock being valued;
(e) The market price of securities of corporations engaged in the same
or a similar line of business, which are actively traded in a free
and open market, either on an exchange or over-the-counter. This
method is commonly referred to as the Market Comparable or
Guideline Approach;
(f) The dividend-paying and earnings capacity of the company (the Income
Approach);
(g) Whether or not the enterprise has goodwill or other intangible
value.
5
We have considered each of the factors outlined above in our analysis and
selected the Book Value, Market Comparable and Income Approaches for
presentation in this report.
The Income Approach measures the dividend paying and earnings capacity of a
firm. This approach utilized cash flow projections discounted to a present
value. The discount rates selected were based on risk and return requirements
deemed appropriate by Valuation, given the facts and circumstances existing
as of the appraisal date. The discount rates utilized in our analysis
considered the Company's weighted average cost of capital, rates of returns
on alternative investments and the specific risk inherent in the investment
under consideration. Based on this analysis (Exhibit 3) we concluded that the
appropriate discount rates to use in this analysis was in the range of 14.8%
to 16.8%. The results of this approach have been summarized in Exhibit 4 and
support a Fair Market Value in the range of $228 million to $271 million
using a discount rate of 15% and between $211 million and $251 million using
a discount rate of 17%.
The Market Approach is a valuation technique in which the estimated market
value is based on market prices in actual transactions. The technique
consists of undertaking a detailed market analysis of publicly-traded
companies and acquisitions of companies that provide a reasonable basis for
comparison to the relative investment characteristics of the subject entity.
Valuation ratios derived from the guideline companies are then selected and
applied to the subject entity after consideration of adjustments for
dissimilarities in financial position, growth, markets, profitability, and
other factors. The companies reviewed were engaged in (i) operating lawn and
garden center, (ii) selling lawn and garden products as part of their sales,
or (iii) were industry consolidators operating in different industries but
with similar growth characteristics and acquisition strategies as Color Spot.
Relevant statistics for the guideline companies are shown in Exhibit 5. As
can be seen from this Exhibit, many of the companies are in different
industries than Color Spot. These consolidators have very high growth rates
(in most cases fueled by acquisitions). The business enterprise to EBITDA
market multiples range from 7.7 to 16.8 and average 12.1. The average market
multiple for Central Garden & Pet, Scotts Company and General Host is 10.6. As
these three companies are most similar in terms of their ultimate customers,
all of whom purchase products for gardening, we believe that this market
multiple is the most appropriate to apply to Color Spot to indicate a value
for the Company.
Because the guideline companies are publicly traded and Color Spot is not, a
discount for lack of marketability needs to be applied.
The concept of marketability deals with liquidity, or at its most basic level,
how quickly and certainly an interest in an enterprise can be converted to
cash at the owner's discretion. The owner of a publicly-traded security can
typically pick up the phone and sell such interest within minutes. The owner
of a privately-held interest usually is not afforded this status and the
"lack of marketability" discount addresses this disadvantage.
6
It has been widely and increasingly recognized by investors, the courts and
others, that stocks which lack this dual status should be valued at a
discount from their publicly-traded counterparts. More than twenty five years
of empirical market evidence has clearly established impressive support
regarding benchmarks for lack of marketability discounts in the 20% to 40%
range.
Many of these discount studies involve restricted stock in public companies.
The stock we are valuing deserves a lower discount for lack of marketability
because the Warrant Agreement provides Registration Rights which includes
registration in connection with any public offering of stock as well as
provides a Demand Registration Right at a latter date.
Giving effect to these Registration Rights it is our opinion that a discount
for lack of marketability should be reduced to 10%. Applying this 10%
discount to our previously estimated market multiple of 10.64, indicates an
adjusted multiple of 9.58.
In Exhibit 6 we have applied Color Spot's estimated EBITDA for the latest 12
months to the average market multiples for the three companies we believe to
be most comparable (after marketability adjustments) and arrive at a value of
$227.3 million. This value falls within the estimated range of values for the
Company indicated by the Income Approach.
Based on our analysis and a consideration of the facts and circumstances
existing as of the Appraisal Date we are of the opinion that the value of the
Business Enterprise is $230.0 million.
Subtracting from this the total long-term debt and preferred stock of $137.1
indicates a common equity value of $92.9.
Dividing this by the total number of common shares that would be issued and
outstanding if managements options were exercised and giving effect to the
exercise of the Warrant for 825,000 shares (see Exhibit 7) we arrive at a
value of $10.0 per share.
Based on the foregoing review, procedures and analyses, it is our opinion
that the Fair Market Value of the 825,000 shares of Color Spot's common stock
subject to the previous described Warrants is:
$10.00/per share
as of the Appraisal Date.
This letter is for the information of and assistance to the Company and its
auditors; provided, that we agree that this report may be filed as an exhibit
to the Company's Registration Statement on Form S-1 for the Units Offering
and summarized therein, and a copy of this report may be supplied to the SEC.
Any other use is expressly prohibited and neither this letter nor any of its
parts may be circulated, quoted, or otherwise referred
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to for any other purpose without the prior review and written consent of
Valuation, which will not be unreasonably withheld.
Valuation has no responsibility to update the opinion stated herein for
events and circumstances occurring after the date of this letter.
Respectfully submitted,
VALUATION RESEARCH CORPORATION
/s/ Valuation Research Corporation
Engagement Number: 04-2842-00
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GENERAL LIMITING CONDITIONS AND ASSUMPTIONS
In accordance with recognized professional standards as generally practiced
in the valuation industry, the fee for these services is not contingent upon
the conclusions of value contained herein. Valuation has determined to the
best of its knowledge and in good faith that neither it nor any of its agents
or employees have any material financial interest in the Company.
Neither Valuation, nor its agents or employees, assume any responsibility for
matters legal in nature, nor do they tender any opinion as to any title to,
or legal status of, property which may be involved, both real and personal,
tangible and intangible.
Valuation assumes that all laws, statutes, ordinances, or other regulations, or
regulations of any governmental authority relevant to and in connection with
this engagement are complied with by each relevant party other than Valuation
unless express written noncompliance is brought to the attention of Valuation
and is stated and defined by those relied on by Valuation.
Valuation has relied on certain information furnished by others, including
but not limited to the Company, without verification, other than the
procedures specified in Valuation's letter attached hereto. Valuation
believes such information to be reliable as to accuracy and completeness but
offers no warranty or representation to that effect; however, nothing has
come to our attention in the course of this engagement that would cause us to
believe that any information is inaccurate in any material respect or that it
is unreasonable to utilize and rely upon such information. The information
relied upon generally includes, but is not limited to, financial analyses and
forecasts; historical, pro forma, audited and unaudited financial statements;
and Management analyses and forecasts.
Valuation has not made a land survey of the property, but has relied on
information furnished by the Company. It is assumed that there are no hidden
or inapparent conditions of the property, subsoil, or structures thereon that
render it more or less valuable except as disclosed in environmental
reports. No responsibility is assumed for such conditions or for arranging
for engineering studies that may be required to discover them.
Valuation assumes in the case of leases of real and other property that the
Units Offering will not trigger any renegotiations of such leases to market
rates based upon the change in the financial condition of the Company arising
out of the transactions that would, in the aggregate, be material to the
Company. In connection with this matter, we have no reason to believe that
there will be any material adverse effect on the Company arising from the
consummation of the Units Offering.
9
Valuation is not an environmental consultant or auditor, and it takes no
responsibility for any actual or potential environmental liabilities.
Valuation does not conduct or provide environmental assessments and has not
performed one for the Company.
We have not made a specific compliance survey or analysis of the subject
properties to determine whether they are subject to or in compliance with the
Americans with Disability Act of 1990 (ADA) and this opinion does not
consider the impact, if any, of non-compliance in estimating the value of the
properties.
In some instances, public information and statistical information have been
obtained from sources Valuation reasonably believes to be reliable. These
sources include annual reports to shareholders, the Form k's and Form q's
filed with the Securities and Exchange Commission of companies reviewed
within the various industries in which the Company operates INFOVEST, VALUE
LINE INVESTMENT SURVEY, Standard & Poor's Industry Surveys; however,
Valuation makes no representation as to the accuracy or completeness of such
information and has accepted the information without further verification.
Valuation provided the Opinion for tax reporting purposes only as it relates
to the Units Offering and for no other purpose. Valuation's Opinion is in no
way given as an indication of the fairness of the transactions to any
investor in the Units Offering.
Any further consultation, testimony, attendance or research in reference to
the present engagement beyond the Opinion expressed herein as of the date of
valuation are subject to agreement by Valuation in specific written
arrangements between the parties.
No representation is made herein as to the legal sufficiency of the above
definitions (term definitions contained in the body of the Opinion) for any
purpose; such definitions are used solely for setting forth the scope of this
Opinion and Valuation believes such definitions to be reasonable for the
purposes of rendering this Opinion.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on the date of this letter. While various judgments
and estimates which we consider reasonable and appropriate under the
circumstances were made by us in the determination of value, no assurance
can be given by us that the sale price which might ultimately be realized in
any actual transaction, if and when effected, will be at the Fair Market
Value concluded in our analysis.
Our conclusion of Fair Market Value of assets is for the aggregate or total
assets of the Company.
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EXHIBIT 1
SUMMARY FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company commenced operations on SePtember 8, 1995 through the
purchase of certain assets of Color Sport, Inc. in a transaction accounted
for under the purpose method of accounting. Color Spot, Inc. commenced
operations on March 1, 1993 through the purchase of certain assets of Color
Spot America, Inc., in a transaction accounted for under the purchase method
of accounting. On December 31, 1996, an affiliate of Kohlberg & Company, LLC
acquired control of the Company through a series of stock transactions
accounted for as a recapitalization. As a result of these transaction and the
Company's ongoing acquisition program, the financial information presented
below is not comparable in certain respects.
The financial information of the Company presented below as of June 30,
1997 and for the fiscal year ended June 30, 1997 and for the period from
September 8, 1995 through June 30, 1996 is derived from the audited financial
statements of the Company appearing elsewhere in this Prospectus. The
financial information of Color Spot, Inc. for the period from January 1,
1995 through September 8, 1995 and the year ended December 31, 1994 is
derived from the audited financial statements of Color Spot, Inc. The
financial information of the Company as of September 25, 1997 and for the
periods from July 1, 1996 through September 26, 1996 and July 1, 1997
through September 25, 1997 is derived from the unaudited interim financial
statements of the Company, which, in the opinion of management, contain all
adjustments (including those of a normal recurring nature) necessary to
present fairly the financial position and results of perations of the
Company as of and for the periods presented.
The pro forma information presented below gives effect to the 13
acquisitions completed by the Company since June 30, 1996. See "Unaudited
Consolidated Statements of Operations."
The Predecessor The Company
--------------------- ---------------------------------------------------------
Pro Forma
1/1/95 9/8/95 Fiscal Year Fiscal Year 7/2/96 7/1/97
Year Ended through through Ended Ended through through
12/31/94 9/8/95 6/30/96(1) 6/30/97(2) 6/30/97 9/25/96 9/25/97(3)
----------- --------- ---------- --------- ----------- --------- ----------
(Unaudited) (Unaudited) (Unaudited)
STATEMENT OF OPERATIONS DATA:
Net sales................................ $39,411 $28,991 $51,995 $113,400 $183,074 $13,437 $25,482
Gross profit............................. 14,995 11,491 24,310 49,374 75,171 4,579 7,464
Operating expenses ...................... 17,869 14,438 18,475 39,458 59,997 6,048 11,682
Income (loss) from operations............ (2,874) (2,947) 5,835 9,916 15,174 (1,469) (4,218)
Interest expense......................... 3,170 2,576 687 4,179 10,378 133 2,392
Income tax provision (benefit)........... 2,269 2,830 2,269 (760) (3,021)
Income (loss) before extraordinary loss.. (5,947) (5,485) 2,788 3,055 2,784(4) (820) (3,691)
Extraordinary loss....................... 215
Net income (loss)........................ (5,947) (5,485) 2,788 2,340 2,784 (820) (3,691)
OPERATING DATA:
EBITDA(5)................................ $(1,619) $(2,022) $6,433 $13,357 $22,662 $(1,170) $(2,898)
Cash flows from operating activities..... (2,720) (5,220) (3,485) (4,093) 847 2,043
Cash flows from investing activities..... (609) (260) (9,660) (58,234) (1,184) (43,369)
Cash flows from financing activities..... 3,715 5,387 13,846 64,388 557 40,445
Depreciation and amortization............ 1,255 925 598 3,441 7,488 299 1,320
Capital expenditures..................... 668 250 1,529 6,181 10,450 1,263 3,050
Ratio of earnings to fixed charges(4)(6). 4.68 2.10 1.42
Number of production facilities(7)....... 6 6 6 13 19 7 19
September 25, 1997
-------------------------
Actual Adjusted(8)
--------- -------------
BALANCE SHEET DATA:
Working capital.................................................................................. $585 $20,453
Total assets..................................................................................... 183,743 183,525
Long-term debt, excluding current portion........................................................ 111,335 96,178
Stockholders' equity............................................................................. 5,897 10,627
(FOOTNOTES ON FOLLOWING PAGE)
EXHIBIT 2
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
INCOME STATEMENT
FOR THE LATEST TWELVE MONTHS ENDED DECEMBER 31, 1997
LTM 12/31/97
PRO FORMA-BANK
$ %
NET SALES 191,827 100.0%
COST OF SALES 110,189 57.4%
GROSS PROFIT 81,638 42.6%
DELIVERY EXPENSE 28,344 14.8%
FACILITIES G&A 1,661 0.9%
CONTRIBUTION MARGIN 51,633 26.9%
SELLING & MARKETING 16,016 8.3%
CORP. GENERAL & ADMIN 11,892 6.2%
EBITDA 23,725 12.4%
EXHIBIT 3
Weighted Average Cost of Capital for Color Spot Nurseries, Inc.
After-tax Weighted
As a % of Required Required Average
Capital Return Return Cost of
Capital
Heller Notes and Non-Competes $ 12,149 5.3% 8.5% 5.1% 0.3%
Senior Sub Notes $ 85,000 37.4% 10.5% 6.3% 2.4%
Series A Preferred Stock $ 40,000 17.6% 13.0% 13.0% 2.3%
Common Equity (1) $ 90,000 39.6% 25.0% 25.0% 9.9%
-------------------
$ 227,149 100.0% WACC 14.8%
-------------------
Taxes Rat 40%
Weighted Average Cost of Capital for Color Spot Nurseries, Inc.
After-tax Weighted
As a % of Required Required Average
Capital Return Return Cost of
Capital
Heller Notes and Non-Competes $ 12,149 5.3% 8.5% 5.1% 0.3%
Senior Sub Notes $ 85,000 37.4% 10.5% 6.3% 2.4%
Series A Preferred Stock $ 40,000 17.6% 13.0% 13.0% 2.3%
Common Equity (1) $ 90,000 39.6% 30.0% 30.0% 11.9%
-------------------
$ 227,149 100.0% WACC 16.8%
-------------------
Taxes Rat 40%
Footnote:
(1) Investors in this type of transactions would expect returns of between
25% and 30% on their equity
--------
Discount Rate 14.0% Discounted Cash Flow Analysis EXHIBIT 4
--------
Residual Multiple 7.00 COLOR SPOT NURSERIES, INC.
--------
Taxes 40.0%
--------
Year 0.3 1.0 2.0 3.0 4.0
Year Ending 6/30,... 1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
Sales 184.0 206.0 253.6 321.8 402.3 502.9
Cost of Sales (% of Sales) 103.3 115.3 139.7 178.0 222.7 278.6
----- ----- ----- ----- ----- -----
Gross Margin 80.7 90.7 113.9 143.8 179.6 224.3
Other 0.0 0.0 0.0 0.0 0.0 0.0
--- --- --- --- --- ---
Total Gross Profit 80.7 90.7 113.9 143.8 179.6 224.3
Selling and Marketing 15.2 18.8 23.0 29.4 36.8 45.9
Total G&A 12.6 11.6 14.2 18.1 22.7 28.3
Delivery 27.6 30.6 37.5 47.8 59.8 74.7
---- ---- ---- ---- ---- ----
EBITDA 25.3 29.7 39.2 48.5 60.3 75.4
Continuing Ops Depreciation 5.0 4.8 5.8 7.1 8.4 10.1
Non-Continuing Depreciation 0.0 0.0 0.0 0.0 0.0 0.0
EBITA 20.3 24.9 33.4 41.4 51.9 65.3
Goodwill Amortization 2.3 2.2 2.2 2.4 2.7 2.8
--- --- --- --- --- ---
EBIT 18.0 22.7 31.2 39.0 49.2 62.5
Other 0.0 0.0 0.0 0.0 0.0 0.0
Other 0.0 0.0 0.0 0.0 0.0 0.0
--- --- --- --- --- ---
Pretax Income 18.0 22.7 31.2 39.0 49.2 62.5
Taxes Paid 7.2 9.1 12.5 15.6 19.7 25.0
--- --- ---- ---- ---- ----
Net Income (Debt Free) 10.8 13.6 18.7 23.4 29.5 37.5
Other 0.0 0.0 0.0 0.0 0.0 0.0
--- --- --- --- --- ---
Net Available to Common 10.8 13.6 18.7 23.4 29.5 37.5
Plus: Depreciation 5.0 4.8 5.8 7.1 8.4 10.1
Plus: Amortization 2.3 2.2 2.2 2.4 2.7 2.8
(Increase)/Decrease in W.C. 0.0 -7.8 -11.2 -18.4 -21.3 -27.1
Other 0.0 0.0 0.0 0.0 0.0 0.0
Normal Cap Ex -9.6 -41.2 -28.6 -34.5 -43.1 -50.8
Transition Cap Ex 0.0 0.0 0.0 0.0 0.0 0.0
Decrease in Pre-Funded Capex Cash 0.0 0.0 0.0 0.0 0.0 0.0
Proceeds on sale of assets 0.0 0.0 0.0 0.0 0.0 0.0
Loss/(Gain) on sales of assets 0.0 0.0 0.0 0.0 0.0 0.0
--- --- --- --- --- ---
Net Cash Flow Before Fncg Activ. 8.5 -28.4 -13.1 -20.0 -23.8 -27.5
Partial Year -16.6
Discount Factor 1.000 0.963 0.878 0.770 0.676 0.593
Discounted Net Cash Flow 0.0 (15.9) (11.5) (15.4) (16.1) (16.3)
-------- --------
Total Discounted Cash Flow (75.2) EBITDA 75.4 Current Multiple 9.4
-------- --------
Residual (EBITDA) 312.8 Year 2002 Exit Multiple 7.0
--------
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BEV (12/05/97) 237.6
- ----------------------------------------------
LTD Outstanding @ Closing (112.4) 112.4
Indicated Equity Value (Including ----------------
40 of preferred) 125.2 Base Case
- ---------------------------------------------- ----------------
7.0 14%
----------------
Debt Free Value Table Discount Rate 7.0 14%
- --------------------- -------------
14.0% 15.0% 16.0% 17.0%
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Exit 7.0 238 228 219 211 The lowest market multiple was 7.7 times EBITDA
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Multiple 7.5 260 250 240 231 A 10% discount from this would be 7 X
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8.0 282 271 261 251 The Average multiple of the three Comps was 10.6 X
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8.5 305 293 282 271 A 10% discount from this would be 9.6 X
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9.0 327 315 303 291 The Lowest of the 3 Specific Comps was 8.45 X
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EXHIBIT 5
12/09/97 Weighted Market Total Invested LTM LTM EBITDA Invested Cap/
Stock Price Shares O/S Capitalization LTD CPLTD Capital EBITDA Revenues Revenues EBITDA
----------- ---------- -------------- ------ ----- -------------- ------ -------- -------- -------------
Central Garden
& Pet $28.56 16.3 465.3 115.2 0.1 580.6 42.3 841.0 5.03% 13.73
Corporate Express $14.94 132.8 1,984.6 637.6 26.0 2,648.2 158.0 3,645.2 4.34% 16.76
General Host $5.13 24.4 125.1 191.5 2.3 318.9 32.8 535.2 6.12% 9.73
Palex Inc. $11.50 9.8 113.3 14.0 0.1 127.3 10.3 130.9 7.84% 12.41
Rental Service $26.00 12.7 331.2 224.5 0.0 555.7 62.3 207.6 30.03% 8.92
Scotts Company $29.44 29.3 862.6 219.8 1.5 1,083.9 128.3 902.5 14.22% 8.45
US Filter $32.56 75.4 2,454.9 590.9 12.5 3,058.3 162.0 2,218.2 7.31% 18.87
US Rentals $27.38 30.7 841.7 159.3 0.0 1,001.0 129.6 380.8 34.02% 7.73
Average 12.07
Median 11.07
Average of Central Garden + General Host + Scotts 10.64
EXHIBIT 6
ADJUSTED ENTERPRISE VALUE BASED ON A MARKET APPROACH
Average of Central Garden + General Host + Scotts 10.64
Discount for Lack of Marketability 10.00%
Adjusted EBITDA Market Multiple 9.58
Latest 12 months ended 12/31/97 EBITDA $23,725
Indicated Value $227,286
EXHIBIT 7
Common Value
CALCULATION OF COMMON EQUITY VALUE
Enterprise Value $230,000
Less:
Notes $ 85,000
Other Debt $ 12,149
Preferred Stock $ 40,000
Total Debt & Preferred $137,149
Common Equity $ 92,851
Total Common Shares* 9345.948
Market Value Per share $ 9.93
--------
(Rounded) $ 10.00
--------
Total Common Shares*
excludes Heller shares as we include Heller Debt, and Value assumes no
conversion as Hellers exercise price is out of money.