INTERCO CASE STUDY
QUESTION
TABLE A: PERCENT OF SALES BY OPERATING GROUP, 1998 AND 1984 1988 1984 24% 33% 16 26 27 21 33 20 EXHIBIT 3: COMMON STOCK PRICE HISTORY (MONTHLY) MONTH-END PRICES (ADJUSTED FOR STOCK SPLITS) 1987 35.125 1/31/87 39 2/27/87 39.25 3/31/87 39.625 4/30/87 43.5 5/29/87 47.188 6/30/87 41.375 7/31/87 43.75 8/31/87 40 9/30/87 43.75 10/30/87 44.125 11/30/87 36.875 12/31/87 EXHIBIT 4: CONSUMER STICK PRICE HISTORY (DAILY) DAILY CLOSING PRICES 5/26/88 5/27/88 5/30/88 N.A 5/31/88 6/1/88 6/2/88 6/3/88 6/6/88 6/7/88 6/8/88 6/9/88 6/10/88 6/13/88 6/14/88 6/15/88 6/16/88 6/17/88 6/20/88 APPAREL GENERAL RETAIL FOOTWEAR FURNITURE 1986 1/31/86 2/28/86 3/31/86 4/30/86 5/30/86 6/30/86 7/31/86 8/26/86 9/30/86 10/31/86 11/28/86 12/31/86 5/2/88 5/3/88 5/4/88 5/5/88 5/6/88 5/9/88 5/10/88 5/11/88 5/12/88 5/13/88 5/16/88 5/17/88 5/18/88 5/19/88 5/20/88 5/23/88 5/24/88 5/25/88 40.25 41.5 41 41.625 40.625 40.875 41.75 41.625 42 42.125 42.25 42 41.5 40.625 40.625 40.375 41.5 42.5 39.75 42.625 44.125 39.625 40.125 45.375 51.25 53.25 47.5 36 30 32.25 42.625 41.25 43.875 43.5 42.875 44.125 43.25 42 43.875 43.375 43.375 43.5 43.625 42.5 42.875 43.625 43.25 1988 1/29/88 2/29/88 3/31/88 4/29/88 5/31/88 6/30/88 7/29/88 6/21/88 6/22/88 6/23/88 6/24/88 6/27/88 6/28/88 6/29/88 6/30/88 7/1/88 7/4/88 N.A. 7/5/88 7/6/88 7/7/88 7/8/88 7/11/88 7/12/88 7/13/88 7/14/88 37.125 42 42 41.125 43.875 44.75 68.5 43.125 43.75 43.625 43.5 43.625 44 44 44.75 44.625 45.375 44.5 44.625 45 45.25 45.375 46.375 49 7/15/88 7/18/88 7/19/88 7/20/88 7/21/88 7/22/88 7/25/88 7/26/88 7/27/88 7/28/88 7/29/88 8/1/88 8/2/88 8/3/88 8/4/88 8/5/88 8/8/88 54.375 54.5 58.375 58.125 57.875 57.25 58 58.875 59.375 67.75 68.5 68.875 67.625 67 67.375 68.25 72.5 EXHIBIT 6: INTERCO'S CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS EXCPET PER SHARE DATA) FEBRUARY 28 1986 1987 1988 1987 CURRENT ASSETS CASH $ 29,700.00 $ MARKETABLE SECURITIES $ 16,856.00 $ 127,341.00 $ 402,225.00 $ 647,116.00 RECEIVABLE, NET 16,631.00 $ 20,849.00 $ 63,747.00 $ 11,033.00 $ 57,789.00 $ 446,755.00 $ 486,657.00 $ 431,743.00 $ 733,907.00 $ 805,095.00 $ 786,792.00 $ 25,614.00 $ 35,665.00 $ 25,622.00 $ 1,286,654.00 $1,359,299.00 $1,331,646.00 $ INVENTORIES $ PREPAID EXPENSES AND OTHER CURRENT ASSETS TOTAL CURRENT ASSETS 22,547.00 $ 1,216,085.00 $ PROPERTY PLANT AND EQUIPMENT LAND 26,770.00 $ $ BUILDINGS AND IMPROVEMENTS 32,266.00 $ 32,525.00 $ 465,811.00 $ 471,787.00 $ 364,499.00 $ 380,402.00 $ 437,812.00 $ 320,256.00 $ $ MACHINERY AND EQUIPMENT $ 784,838.00 $ LESS ACCUMULATED DEPRECIATION NET PROPERTY PLANT AND EQUIPMENT 343,018.00 $ 441,820.00 $ 99,238.00 $ 1,757,143.00 $ 862,576.00 $ 884,714.00 $ 868,670.00 $ 377,226.00 $ 405,215.00 $ 386,762.00 $ 485,350.00 $ 479,499.00 $ 481,908.00 $ 153,383.00 $ 146,788.00 $ 149,170.00 $ 1,925,387.00 $1,985,586.00 $1,962,724.00 $ OTHER ASSETS $ TOTAL ASSETS $ CURRENT LIABILITES NOTES PAYABLE $ $ $ 9,647.00 $ CURRENT MATURITIES OF LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS ACCOUNTS PATABLE AND ACCRUED EXPENSES 216,365.00 $ 68,840.00 $ 70,517.00 $ 97,297.00 $ 11,915.00 $ 8,172.00 $ 9,288.00 $ 239,513.00 $ 278,847.00 $ 17,327.00 $ 4,402.00 $ 15,294.00 $ 358,226.00 $ 373,343.00 $ 400,726.00 $ 135,019.00 $ 257,327.00 $ 133,403.00 $ INCOME TAXES 184,032.00 $ 12,699.00 $ 249,587.00 $ 127,409.00 $ 56,495.00 $ TOTAL CURRENT LIABILITIES LONG-TERM DEBT, LESS CURRENT LIABILITIES OBLIGATIONS UNDER CAPITAL LEASES, LESS CURRENT MATURITIES 50,546.00 $ 41,813.00 $ 49,270.00 $ OTHER LONG-TERM LIABILITRIES 43,249.00 $ 55,381.00 $ 61,766.00 $ 56,410.00 $ SHAREHOLDERS' EQUITY PREFERRED STOCK, NO PAR VALUE 66,027.00 $ COMMON STOCK $ 3.75 STATED VALUE 163,765.00 $ CAPITAL SURPLUS (41,356,847 SHARES ISSUED) RETAINED EARNINGS 104,205.00 $ 1,027,895.00 $ 1,361,892.00 $ 61,795.00 $ 57,113.00 $ 61,285.00 $ 163,643.00 $ 155,088.00 $ 155,088.00 $ 98,246.00 $ 44,539.00 $ 49,149.00 $ 1,099,006.00 $1,179,964.00 $1,111,527.00 $ 1,422,690.00 $1,436,704.00 $1,377,049.00 $ 96,475.00 $ 185,367.00 $ 54,134.00 $ 1,326,215.00 $1,251,337.00 $1,322,915.00 $ 1,925,387.00 $1,985,586.00 $1,962,724.00 $ LESS 5,173,811 TREASURY SHARES TOTAL SHAREHOLDERS' EQUITY TOTAL LIABILITIES AND NET WORTH 81,739.00 $ 1,280,153.00 $ 1,756,893.00 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ MAY 31 1988 19,622.00 16,366.00 460,759.00 872,135.00 44,959.00 1,413,841.00 890,887.00 412,332.00 478,555.00 146,878.00 2,039,274.00 146,016.00 8,900.00 292,051.00 5,463.00 452,430.00 255,279.00 40,032.00 63,484.00 36,721.00 155,088.00 32,117.00 1,194,884.00 1,418,810.00 190,762.00 1,228,048.00 2,039,273.00 EXHIBIT 8: BUSINESS EGMENT INFORMATION YEAR ENDED FEBRUARY 28, 1986 907,833.00 $ 461,785.00 $ 55,286.00 $ 904,480.00 $ 2,329,384.00 $ 66,716.00 $ 32,085.00 $ 48,475.00 $ 105,111.00 $ 252,387.00 $ 36,140.00 $ (34,147.00) $ 254,380.00 $ (25,523.00) $ 228,857.00 $ 456,972.00 $ 234,004.00 $ 291,292.00 $ 618,980.00 $ 1,601,248.00 $ 155,645.00 $ 1,756,893.00 $ 11,965.00 $ 8,294.00 $ 8,286.00 $ 20,971.00 $ 13,433.00 $ 6,169.00 $ 8,114.00 $ 27,278.00 $ SALES TO UNAFFILIATED CUSTOMERS APPAREL $ GENERAL RETAIL $ FOOTWEAR $ FURNITIRE $ TOTAL $ OPERATING EARNINGS APPAREL $ GENERAL RETAIL $ FOOTWEAR $ FURNITURE $ TOTAL $ NET INCOME $ CORPORATE EXPENSE $ EARNIGS BEFORE INTEREST AND TAXES $ INTEREST EXPENSE $ EARNINGS BEFORE INCOME TAXES $ APPAREL GENERAL RETAIL FOOTWEAR FURNITURE CORPORATE ASSETS TOTAL DEPRECIATION EXPENSE APPAEAL GENERAL RETAIL FOOTWEAR FURNITURE CAPITAL EXPENDITURES APPAREL GENERAL RETAIL FOOTWEAR FURNITIRE FIRST QUARTER ENDED MAY 31, 1987 1988 1987 817,660.00 $ 813,198.00 $ 160,339.00 $ 498,324.00 $ 532,251.00 $ 148,138.00 $ 663,521.00 $ 890,411.00 $ 209,535.00 $ 967,397.00 $1,105,563.00 $ 263,409.00 $ 2,946,902.00 $3,341,423.00 $ 781,421.00 $ 47,269.00 $ 20,240.00 $ (670.00) $ 40,610.00 $ 39,101.00 $ 14,136.00 $ 52,136.00 $ 92,204.00 $ 15,777.00 $ 123,766.00 $ 149,000.00 $ 38,319.00 $ 263,781.00 $ 300,545.00 $ 67,562.00 $ 32,175.00 $ 29,237.00 $ 6,293.00 $ (30,163.00) $ (42,877.00) $ (14,228.00) $ 265,793.00 $ 286,995.00 $ 59,627.00 $ (28,082.00) $ (33,535.00) $ (7,351.00) $ 237,711.00 $ 253,460.00 $ 52,276.00 $ 465,601.00 $ 425,350.00 248,639.00 $ 252,195.00 497,706.00 $ 595,861.00 640,106.00 $ 688,853.00 1,852,052.00 $1,962,259.00 73,335.00 $ 23,327.00 1,925,387.00 $1,985,586.00 12,123.00 $ 12,521.00 9,079.00 $ 9,681.00 10,638.00 $ 13,107.00 21,675.00 $ 26,208.00 8,869.00 $ 9,220.00 8,167.00 $ 10,735.00 7,486.00 $ 9,236.00 24,720.00 $ 36,188.00 JUSTIFIABLE ASSETS AT YEAR END $ $ $ $ $ $ $ $ $ $ $ $ $ $ 1988 138,836.00 149,209.00 226,672.00 263,390.00 778,107.00 (247.00) 12,498.00 19,700.00 32,196.00 64,147.00 6,864.00 (9,928.00) 61,083.00 (9,179.00) 51,904.00 EXHIBIT 9: SUMMARY OF TAKEOVER OFFER CITY CAPITAL ASSOCIATES, L.P. IFFER DATE 8-Aug-88 PRICE PER SHARE $70 PREMIUM TO STOC 17.90% PREMIUM TO STOCK 59.10% PREIMUM TO 52-W 137.30% PREMIUM TO 52-W 17.20% VALUE OF EQUITY NET DEBT $ 2,622.8 MM 318.5 MM VALUE OF FIRM $ 2,941.3 MM SALES YEAR ENDING 2/29/0.9X ESTIMATE OF YEAR-E 0.9 1ST QUARTER 1988 19 2ND QUARTER 1988 9 3RD QUARTER 1988 12 1988 40 RALES VALUE OF FIRM AS A MULTIPLE OF: OPERATING CASH FL OPERATING INCOME 9.2X 11.4X 8.8 10.7 AVERAGE PREMIUM PAID OVER STOCK PRICE 1 DAY 4 WEEKS 62.30% 68.6 36.5 56 17.9 EXHIBIT 10: PREMIUM PAID ANALYSIS # DEALS 95.50% 91.3 49.9 80.9 59.1 VALUE OF EQUITY AS A MULTIPLE OF: NET INCOME BOOK VALUE 18.1X 2.2X 17 2.2 52-WEEK LOW 159.50% 182.8 181.3 171.3 137.3 52-WEEK HIGH 16.70% 31.5 2 15.8 17.2 1ST QUARTER 1988 2ND QUARTER 1988 3RD QUARTER 1988 1988 RALES ANNOUNCEMENT DATE 12/14/87 11/17/86 8/12/86 6/3/86 8/8/88 ANNOUNCEMENT DATE 4/25/88 6/3/87 3/10/87 9/18/86 7/31/86 8/8/88 APPAREL COMPANIES ANNOUNCEMENT DATE 4/28/88 2/2/88 3/17/86 11/4/85 8/8/88 ANNOUNCEMENT DATE 6/24/88 8/8/88 EXHIBIT 10: PREMIUM PAID ANALYSIS AVERAGE PREMIUM PAID OVER STOCK PRICE 1 DAY #DEALS 19 159.50% 62.30% 68.6 36.5 95.50% 91.3 16.70% 31.5 9 182.8 12 49.9 181.3 2 40 56 80.9 171.3 15.8 17.9 59.1 137.3 17.2 EXHIBIT 11: COMPARABLE TRANSACTION ANALYSIS; PURCHASE PRISE MULTIPLES BY BUSINESS SEGMENT; FURNITURE MANUFACTURING COMPANIES PURCHASE PRICE MULTIPLIER ACQUIROR/TARGET LA-Z-BOY/KINCAID AGGREGATE PRICE (SMM) NET INCOME $63.5 BOOK VALUE 2.1X OPERATING INCOME OPERATING CASH FLOW 11.7X 8.1X 22.0X SALES 0.8X 2.8 1.8 INTERCO/LANE 19.3 1.6 9.6 523.7 89.3 11.1 12 CHICAGO PACIFIC/GENERAL MILL FURNITURE 14.1 1 9.9 MASCO/HENREDON 260.9 31.6 2.6 2.1 20.3 15.8 9.2 RALES PROPOSAL $ 2941.3 18.1 2.2 0.9 11.4 EXHIBIT 11: FOOTWEAR MANUFACTURING COMPANIES PURCHASE PRICE MULTIPLIER ACQUIROR/TARGET OPERATING INCOME OPERATING CASH FLOW AGGREGATE PRICE ($MM) NET INCOME $95 NIKE/COLE HAAN 36.2x 14.1 12.2 312.5 0.5 13 9.2 MOACQ/MORSE SHOE REEBOK/AVIA 191 2.1 24.6 23.3 REEBOK/ROCKPORT 146.1 1.7 26 23.9 INTERCO/CONVERSE 202.7 0.9 24.7 18.2 RALES PROPOSAL $2941.3 0.9 11.4 9.2 PURCHASE PRICE MULTIPLIER AGGREGATE PRICE ($MM) $ 157.4 OPERATING INCOME OPERATING CASH FLOW 24.0X 13.7X ACQUIROR/TARGET WESRAY/WILLIAM CARTER SALANT/MANHATTAN INDUS W ACQUISITION/WARNCO 129.7 N.M. 0.4 N.M. N.M. 504.7 21.0X 0.9 10.6 9.2 551.9 0.6 10.6 9.2 WEST POINY PEPPERALL / CLUETT, PEABODY RALES PROPOSAL $ 2,941.3 0.9 11.4 9.2 CENTRAL HARDWARE DIVISION PURCHASE PRICE MULTIPLIER ACQUIROR/TARGET AGGREGATE PRICE ($MM) NET INCOME 22.0X OPERATING INCOME OPERATING CASH FLOW 13.1X 9.2X MANAGEMENT GROUP/PAYLESS CASHWAYS $1,189.4 RALES PROPOSAL $2,941.3 0.9 11.4 9.2 4 WEEKS NET INCOME N.M. 19.6 18.1 52-WEEK LOW 2.5 40.6 30.7 N.M. 37.1 18.1 18.1 BOOK VALUE N.M. BOOK VALUE 1.6X BOOK VALUE 2.3X 1.8 6.7 1.8 2.2 1.4 2.5 1.5 2.2 2.2 52-WEEK HIGH SALES 1.5x SALES 0.8X SALES 0.6X EXHIBIT 11: VALUE RANGES BY BUSINESS SEGMENT 1988 SALES $813.2 532.3 890.4 $1,105.6 1988 OPERATING INCOME $ $ $ $ 1988 OPERATING CASH FLOW $ $ $ $ BUSINESS SEGMENT APPAREL GENERAL RETAIL FOOTWEAR FURNITURE BUSINESS SEGMENT APPAREL GENERAL RETAIL FOOTWEAR FURNITURE BUSINESS SEGMENT APPAREL GENERAL RETAIL FOOTWEAR FURNITURE ASSUMPTIONS FURNITIRE GROUP SALES GROWTH 7.70% OPERATING MARGIN RANGE 13.1% -14.1% CAPITAL EXPENDITURES 1X INCREASE IN WORKING INVESTMENT 12.50% TAX RATE 14.0X TERMINAL VALUE ($ MILLIONS) IMPLIED STOCK PRICE $ DISCOUNR RATE 10.00% $ 11.00% $ 12.00% $ 13.00% $ MULTIPLE RANGE .4-.9 .6-.6 .6-2.1 .8-2.1 MULTIPLE RANGE 20.20 10.6-24.0 39.10 13.1 13.1 92.20 13.0-26.0 149.10 11.1 -20.3 32.70 9.2-13.7 48.80 9.2-9.2 105.30 9.2-23.9 175.30 8.1-15.8 EXHIBIT 12: DISCOUNTED CASH FLOW ANALYSIS MULTIPLE RANGE FOOTWEAR GROUP 9.1% 10.4% 1X MULTIPLE CASH FLOW IN YEAR 10 15.0X 4,746.00 $ 80.00 $ 74.00 $ 68.00 $ 63.00 $ 6.30% 12.50% VALUE RANGE $325.3-$731.9 319.4 319.4 445.2-1,869.8 884.5-2,321.8 $ 1,974.4 -$5,242.9 MEDIAN VALUE $ 214.10 VALUE RANGE $214.1-$484.8 512.2-512.2 1,198.6-2,397.2 $ $ 512.20 2,268.10 1,655.0-3,020.7 $ 1,766.80 $ 2,579.9-$6,420.9 $ 4,761.20 MEDIAN VALUE $ 300.80 $ 448.90 VALUE RANGE $300.8-$448.- 448.9-448.9 968.2-2,516.7 1,419.9-2,769.7 $ $3,138.4-$6,183.3 $ $ 970.70 2,709.30 3,429.60 APPAREL GROUP 6.4% -7.09% 1X 16.0X 5,085.00 $ 84.00 $ 77.00 $ 72.00 $ 66.00 $ MEDIAN VALUE $569.2 7.10% 7.50% 5,424.00 88.00 81.00 75.00 69.00 319.4 1,335.60 1437.3 3,661.50 RETAIL GROUP 6.5% -7.5% 1X 7.60% 7.50% TOTAL 9.2% -10.1% 1X 7.20% 11.60% 41.00% Exhibit 12 Data Assumptions for Valuation of Interco: Discounted Cash Flow Analysis Sales Growth Operating Margin 1989 Projection 1998 Projection Capital Expenditure Increase in Working Investment Discount Rate 10% 11% 12% 13% Furniture Group 7.7% 13.1% 14.1% 1 12.5% $14.00 $74.00 $68.00 $63.00 $80.00 Footwear Group 6.3% 9.1% 10.4% 1 12.5% Terminal Multiple $15.00 $84.00 $77.00 $72.00 $66.00 Apparel Group 7.1% 6.4% 7.0% 1 12.5% $16.00 $81.00 $75.00 $69.00 $88.00 Retail Group 7.6% 6.5% 7.5% 1 7.5% Total Company 7.2% 9.2% 10.1% 1 11.6% Apparel Sales EBITDA Tax WC Inv FCFE Apparel Terminal Multiple Used General Retail Sales EBITDA Tax WC Inv FCFE Gen Retail Terminal Multiple Used Footwear Sales EBITDA Tax WC Inv FCFE Footwear Terminal Multiple Used 42.8% 10% 11% 12% 13% 42.8% 10% 11% 12% 13% 42.8% 10% 11% 12% 13% $ $ $ 1988 1989 813,198 20.240 8,663 Present Value At Feb 1988 14 15 1989 532,251 39,101 16,735 Present Value At Feb 1988 14 15 1989 890,411 92,204 39,463 Present Value At Feb 1988 14 15 1988 1988 1990 1990 1990 16 16 16 1991 1991 1991 1992 1992 1992 1993 1993 1993 1994 #VALUE! 1994 #VALUE! 1994 #VALUE! 1995 #VALUE! 1995 #VALUE! 1995 #VALUE! 1996 #VALUE! 1996 #VALUE! 1996 #VALUE! 1997 #VALUE! 1997 #VALUE! 1997 #VALUE! 1998 #VALUE! 1998 #VALUE! 1998 #VALUE! 1999 & After 1999 & After 1999 & After Furniture Sales EBITDA Tax WC Inv FCFE Furniture Terminal Multiple Used Aggregate Present Value Terminal Multiple Used Total Company Sales EBITDA Tax WC Inv FCFE Interco Terminal Multiple Used Shares Outstanding 42.8% 10% 11% 12% 13% 10% 11% 12% 13% 42.8% 10% 11% 12% 13% $ $ 1988 1,105,563 149,090 63,811 1989 Present Value At Feb 1988 14 15 Present Value At Feb 1988 14 15 1988 1989 3,341,423 253,460 108,481 Present Value at Feb 1989 14 15 37,500,000 1990 1990 16 16 16 1991 1991 14 14 1992 Stock Price 15 1992 Stock Price 15 1993 1993 16 16 1994 #VALUE! 1994 #VALUE! 1995 #VALUE! 1995 #VALUE! 1996 #VALUE! 1996 #VALUE! 1997 #VALUE! 1997 #VALUE! 1998 #VALUE! 1998 #VALUE! 1999 & After 1999 & After Operating Margin: Linear Growth Apparel Group General Retail Footwear Furniture Total Company 6.40% 6.50% 9.10% 13.10% 9.20% 6.47% 6.61% 9.24% 13.21% 9.30% 6.53% 6.72% 9.39% 13.32% 9.40% 6.60% 6.83% 9.53% 13.43% 9.50% 6.67% 6.94% 9.68% 13.54% 9.60% 6.73% 7.06% 9.82% 13.66% 9.70% 6.80% 7.17% 9.97% 13.77% 9.80% 6.87% 7.28% 10.11% 13.88% 9.90% 6.93% 7.39% 10.26% 13.99% 10.00% 7.00% 7.50% 10.40% 14.10% 10.10% Valuation Based on Multiples for Interco as of Feb 1988 Acquirer/Target Furniture Group Masco/Henredon Chicago Pacific/General Mills Furniture Interco/Lane La-Z-Boy/Kincaid Average Multiple Furniture Group Price Average Price Interco No. of Shares Price per Share Footwear Group Interco/Converse Reebok/Rockport Reebok/Avia Moacq/Morse Shoe Nike/Cole Haan Average Multiple Footwear Group Price Average Price Interco No. of Shares Price per Share Net Income Purchase Price as Multiple of Sales Book Value 31.6 2.6 2.1 14.1 1.8 1 19.3 2.8 1.6 22 2.1 0.8 $85,279.48 $688,853.00 $1,105,563.00 #VALUE! 37.1 1.8 0.9 30.7 0 1.7 40.6 6.7 2.1 2.5 1.8 0.5 36.2 0 1.5 $52,740.69 $595,861.00 $890,411.00 37,500,000 Operating Income 20.3 12 11.1 11.7 $149,090.00 24.7 26 24.6 13 12.2 $92,204.00 Operating Cash Flow 15.8 9.9 9.6 8.1 $139,110.00 18.2 23.9 23.3 9.2 8.1 $96,075.00 Apparel Group West Point Pepperall/Cluett, Peabody W. Acquisition/Warnco Salant/Manhattan Indus. Wesray/Wm. Carter Average Multiple Apparel Group Price Average Price Interco No. of Shares Price per Share Central Hardware Group Management Group/Payless Cashways Average Multiple Gen Retail Price Average Price Interco No. of Shares Price per Share Aggregate Price Stock Price 19.6 1.5 0.6 21 2.5 0.9 0 1.4 0.4 0 1.6 0.8 $11,577.28 $425,350.00 $813,198.00 37,500,000 22 2.3 0.6 $22,365.77 $252,195.00 $532,251.00 37,500,000 10.6 10.6 0 24 $20,240.00 13.1 $39,101.00 0.2 9.2 0 13.7 $23,541.00 9.2 $38,047.00 Interco BETA Date 5/2/88 5/3/88 5/4/88 5/5/88 5/6/88 5/9/88 5/10/88 5/11/88 5/12/88 5/13/88 5/16/88 5/17/88 5/18/88 5/19/88 5/20/88 5/23/88 5/24/88 5/25/88 5/26/88 5/27/88 5/31/88 6/1/88 6/2/88 6/3/88 6/6/88 6/7/88 6/8/88 6/9/88 6/10/88 6/13/88 6/14/88 6/15/88 6/16/88 6/17/88 6/20/88 Asset Return Interco Daily Stock Price $40.250 $41.500 $41.000 $41.625 $40.625 $40.875 $41.750 $41.625 $42.000 $42.125 $42.250 $42.000 $41.500 $40.625 $40.625 $40.375 $41.500 $42.500 $42.625 $41.250 $43.875 $43.500 $42.875 $44.125 $43.250 $42.000 $43.875 $43.375 $43.375 $43.500 $43.625 $42.500 $42.875 $43.625 $43.250 Daily Return 3.11% -1.20% 1.52% -2.40% 0.62% 2.14% -0.30% 0.90% 0.30% 0.30% -0.59% -1.19% -2.11% 0.00% -0.62% 2.79% 2.41% 0.29% -3.23% 6.36% -0.85% -1.44% 2.92% -1.98% -2.89% 4.46% -1.14% 0.00% 0.29% 0.29% -2.58% 0.88% 1.75% -0.86% Market Return S&P 500 261.56 263.00 260.32 258.79 257.48 256.54 257.62 253.31 253.85 256.78 258.71 255.39 251.35 252.57 253.02 250.83 253.51 253.76 254.63 253.42 262.16 266.69 265.33 266.45 267.05 265.17 271.52 270.20 271.26 271.43 274.30 274.45 269.77 270.68 268.94 Daily Net Daily Gross Return 0.55% 100.55% -1.02% 98.98% -0.59% 99.41% -0.51% 99.49% -0.37% 99.63% 0.42% 100.42% -1.67% 98.33% 0.21% 100.21% 1.15% 101.15% 0.75% 100.75% -1.28% 98.72% -1.58% 98.42% 0.49% 100.49% 0.18% 100.18% -0.87% 99.13% 1.07% 101.07% 0.10% 100.10% 0.34% 100.34% -0.48% 99.52% 3.45% 103.45% 1.73% 101.73% -0.51% 99.49% 0.42% 100.42% 0.23% 100.23% -0.70% 99.30% 2.39% 102.39% -0.49% 99.51% 0.39% 100.39% 0.06% 100.06% 1.06% 101.06% 0.05% 100.05% -1.71% 98.29% 0.34% 100.34% -0.64% 99.36% Return 6/21/88 6/22/88 6/23/88 6/24/88 6/27/88 6/28/88 6/29/88 6/30/88 7/1/88 7/5/88 7/6/88 7/7/88 7/8/88 7/11/88 7/12/88 7/13/88 7/14/88 7/15/88 7/18/88 7/19/88 7/20/88 7/21/88 7/22/88 7/25/88 7/26/88 7/27/88 7/28/88 7/29/88 8/1/88 8/2/88 8/3/88 8/4/88 8/5/88 8/8/88 $43.125 $43.750 $43.625 $43.500 $43.625 $44.000 $44.000 $44.750 $44.625 $45.375 $44.500 $44.625 $45.000 $45.250 $45.375 $46.375 $49.000 $54.375 $54.500 $58.375 $58.125 $57.875 $57.250 $58.000 $58.875 $59.375 $67.750 $68.500 $68.875 $67.625 $67.000 $67.375 $68.250 $72.500 -0.29% 1.45% -0.29% -0.29% 0.29% 0.86% 0.00% 1.70% -0.28% 1.68% -1.93% 0.28% 0.84% 0.56% 0.28% 2.20% 5.66% 10.97% 0.23% 7.11% -0.43% -0.43% -1.08% 1.31% 1.51% 0.85% 14.11% 1.11% 0.55% -1.81% -0.92% 0.56% 1.30% 6.23% 271.67 275.66 274.82 273.78 269.06 272.31 270.98 273.50 271.78 275.81 272.02 271.78 270.02 270.55 267.85 269.32 270.26 272.05 270.51 268.47 270.00 266.66 263.50 264.68 265.68 265.19 262.50 266.02 272.02 272.21 272.06 272.98 271.93 271.15 1.02% 101.02% 1.47% 101.47% -0.30% 99.70% -0.38% 99.62% -1.72% 98.28% 1.21% 101.21% -0.49% 99.51% 0.93% 100.93% -0.63% 99.37% 1.48% 101.48% -1.37% 98.63% -0.09% 99.91% -0.65% 99.35% 0.20% 100.20% -1.00% 99.00% 0.55% 100.55% 0.35% 100.35% 0.66% 100.66% -0.57% 99.43% -0.75% 99.25% 0.57% 100.57% -1.24% 98.76% -1.19% 98.81% 0.45% 100.45% 0.38% 100.38% -0.18% 99.82% -1.01% 98.99% 1.34% 101.34% 2.26% 102.26% 0.07% 100.07% -0.06% 99.94% 0.34% 100.34% -0.38% 99.62% -0.29% 99.71% Standard Deviation of Asset Return 2.92% 14.50% 13.24% (Arithmetic Ave. Return) Standard Deviation of Market Return (Geometric Mean Return) 1.01% cov (ri, rM) var (rM) beta CAPM Risk free rate R (Interco) Cost of Equity of Interco Mean Market Return or Arithmetic Average Retu Geometric Mean Return 0.0000679422 0.0001007835 = covariance variance 10 year Treasury bonds RF + + + or = 0.0000679422 0.0001007835 0.67414 0.06% X 0.05% X 0.67414 0.1450 (RM -RF) ( 250 days 250 days = 14.50% 13.24% TABLE A: PERCENT OF SALES BY OPERATING GROUP, 1998 AND 1984 1988 1984 24% 33% 16 26 27 21 33 20 EXHIBIT 3: COMMON STOCK PRICE HISTORY (MONTHLY) MONTH-END PRICES (ADJUSTED FOR STOCK SPLITS) 1987 35.125 1/31/87 39 2/27/87 39.25 3/31/87 39.625 4/30/87 43.5 5/29/87 47.188 6/30/87 41.375 7/31/87 43.75 8/31/87 40 9/30/87 43.75 10/30/87 44.125 11/30/87 36.875 12/31/87 EXHIBIT 4: CONSUMER STICK PRICE HISTORY (DAILY) DAILY CLOSING PRICES 5/26/88 5/27/88 5/30/88 N.A 5/31/88 6/1/88 6/2/88 6/3/88 6/6/88 6/7/88 6/8/88 6/9/88 6/10/88 6/13/88 6/14/88 6/15/88 6/16/88 6/17/88 6/20/88 APPAREL GENERAL RETAIL FOOTWEAR FURNITURE 1986 1/31/86 2/28/86 3/31/86 4/30/86 5/30/86 6/30/86 7/31/86 8/26/86 9/30/86 10/31/86 11/28/86 12/31/86 5/2/88 5/3/88 5/4/88 5/5/88 5/6/88 5/9/88 5/10/88 5/11/88 5/12/88 5/13/88 5/16/88 5/17/88 5/18/88 5/19/88 5/20/88 5/23/88 5/24/88 5/25/88 40.25 41.5 41 41.625 40.625 40.875 41.75 41.625 42 42.125 42.25 42 41.5 40.625 40.625 40.375 41.5 42.5 39.75 42.625 44.125 39.625 40.125 45.375 51.25 53.25 47.5 36 30 32.25 42.625 41.25 43.875 43.5 42.875 44.125 43.25 42 43.875 43.375 43.375 43.5 43.625 42.5 42.875 43.625 43.25 1988 1/29/88 2/29/88 3/31/88 4/29/88 5/31/88 6/30/88 7/29/88 6/21/88 6/22/88 6/23/88 6/24/88 6/27/88 6/28/88 6/29/88 6/30/88 7/1/88 7/4/88 N.A. 7/5/88 7/6/88 7/7/88 7/8/88 7/11/88 7/12/88 7/13/88 7/14/88 37.125 42 42 41.125 43.875 44.75 68.5 43.125 43.75 43.625 43.5 43.625 44 44 44.75 44.625 45.375 44.5 44.625 45 45.25 45.375 46.375 49 7/15/88 7/18/88 7/19/88 7/20/88 7/21/88 7/22/88 7/25/88 7/26/88 7/27/88 7/28/88 7/29/88 8/1/88 8/2/88 8/3/88 8/4/88 8/5/88 8/8/88 54.375 54.5 58.375 58.125 57.875 57.25 58 58.875 59.375 67.75 68.5 68.875 67.625 67 67.375 68.25 72.5 EXHIBIT 6: INTERCO'S CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS EXCPET PER SHARE DATA) FEBRUARY 28 1986 1987 1988 1987 CURRENT ASSETS CASH $ 29,700.00 $ MARKETABLE SECURITIES $ 16,856.00 $ 127,341.00 $ 402,225.00 $ 647,116.00 RECEIVABLE, NET 16,631.00 $ 20,849.00 $ 63,747.00 $ 11,033.00 $ 57,789.00 $ 446,755.00 $ 486,657.00 $ 431,743.00 $ 733,907.00 $ 805,095.00 $ 786,792.00 $ 25,614.00 $ 35,665.00 $ 25,622.00 $ 1,286,654.00 $1,359,299.00 $1,331,646.00 $ INVENTORIES $ PREPAID EXPENSES AND OTHER CURRENT ASSETS TOTAL CURRENT ASSETS 22,547.00 $ 1,216,085.00 $ PROPERTY PLANT AND EQUIPMENT LAND 26,770.00 $ $ BUILDINGS AND IMPROVEMENTS 32,266.00 $ 32,525.00 $ 465,811.00 $ 471,787.00 $ 364,499.00 $ 380,402.00 $ 437,812.00 $ 320,256.00 $ $ MACHINERY AND EQUIPMENT $ 784,838.00 $ LESS ACCUMULATED DEPRECIATION NET PROPERTY PLANT AND EQUIPMENT 343,018.00 $ 441,820.00 $ 99,238.00 $ 1,757,143.00 $ 862,576.00 $ 884,714.00 $ 868,670.00 $ 377,226.00 $ 405,215.00 $ 386,762.00 $ 485,350.00 $ 479,499.00 $ 481,908.00 $ 153,383.00 $ 146,788.00 $ 149,170.00 $ 1,925,387.00 $1,985,586.00 $1,962,724.00 $ OTHER ASSETS $ TOTAL ASSETS $ CURRENT LIABILITES NOTES PAYABLE $ $ $ 9,647.00 $ CURRENT MATURITIES OF LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS ACCOUNTS PATABLE AND ACCRUED EXPENSES 216,365.00 $ 68,840.00 $ 70,517.00 $ 97,297.00 $ 11,915.00 $ 8,172.00 $ 9,288.00 $ 239,513.00 $ 278,847.00 $ 17,327.00 $ 4,402.00 $ 15,294.00 $ 358,226.00 $ 373,343.00 $ 400,726.00 $ 135,019.00 $ 257,327.00 $ 133,403.00 $ INCOME TAXES 184,032.00 $ 12,699.00 $ 249,587.00 $ 127,409.00 $ 56,495.00 $ TOTAL CURRENT LIABILITIES LONG-TERM DEBT, LESS CURRENT LIABILITIES OBLIGATIONS UNDER CAPITAL LEASES, LESS CURRENT MATURITIES 50,546.00 $ 41,813.00 $ 49,270.00 $ OTHER LONG-TERM LIABILITRIES 43,249.00 $ 55,381.00 $ 61,766.00 $ 56,410.00 $ SHAREHOLDERS' EQUITY PREFERRED STOCK, NO PAR VALUE 66,027.00 $ COMMON STOCK $ 3.75 STATED VALUE 163,765.00 $ CAPITAL SURPLUS (41,356,847 SHARES ISSUED) RETAINED EARNINGS 104,205.00 $ 1,027,895.00 $ 1,361,892.00 $ 61,795.00 $ 57,113.00 $ 61,285.00 $ 163,643.00 $ 155,088.00 $ 155,088.00 $ 98,246.00 $ 44,539.00 $ 49,149.00 $ 1,099,006.00 $1,179,964.00 $1,111,527.00 $ 1,422,690.00 $1,436,704.00 $1,377,049.00 $ 96,475.00 $ 185,367.00 $ 54,134.00 $ 1,326,215.00 $1,251,337.00 $1,322,915.00 $ 1,925,387.00 $1,985,586.00 $1,962,724.00 $ LESS 5,173,811 TREASURY SHARES TOTAL SHAREHOLDERS' EQUITY TOTAL LIABILITIES AND NET WORTH 81,739.00 $ 1,280,153.00 $ 1,756,893.00 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ MAY 31 1988 19,622.00 16,366.00 460,759.00 872,135.00 44,959.00 1,413,841.00 890,887.00 412,332.00 478,555.00 146,878.00 2,039,274.00 146,016.00 8,900.00 292,051.00 5,463.00 452,430.00 255,279.00 40,032.00 63,484.00 36,721.00 155,088.00 32,117.00 1,194,884.00 1,418,810.00 190,762.00 1,228,048.00 2,039,273.00 EXHIBIT 8: BUSINESS EGMENT INFORMATION YEAR ENDED FEBRUARY 28, 1986 907,833.00 $ 461,785.00 $ 55,286.00 $ 904,480.00 $ 2,329,384.00 $ 66,716.00 $ 32,085.00 $ 48,475.00 $ 105,111.00 $ 252,387.00 $ 36,140.00 $ (34,147.00) $ 254,380.00 $ (25,523.00) $ 228,857.00 $ 456,972.00 $ 234,004.00 $ 291,292.00 $ 618,980.00 $ 1,601,248.00 $ 155,645.00 $ 1,756,893.00 $ 11,965.00 $ 8,294.00 $ 8,286.00 $ 20,971.00 $ 13,433.00 $ 6,169.00 $ 8,114.00 $ 27,278.00 $ SALES TO UNAFFILIATED CUSTOMERS APPAREL $ GENERAL RETAIL $ FOOTWEAR $ FURNITIRE $ TOTAL $ OPERATING EARNINGS APPAREL $ GENERAL RETAIL $ FOOTWEAR $ FURNITURE $ TOTAL $ NET INCOME $ CORPORATE EXPENSE $ EARNIGS BEFORE INTEREST AND TAXES $ INTEREST EXPENSE $ EARNINGS BEFORE INCOME TAXES $ APPAREL GENERAL RETAIL FOOTWEAR FURNITURE CORPORATE ASSETS TOTAL DEPRECIATION EXPENSE APPAEAL GENERAL RETAIL FOOTWEAR FURNITURE CAPITAL EXPENDITURES APPAREL GENERAL RETAIL FOOTWEAR FURNITIRE FIRST QUARTER ENDED MAY 31, 1987 1988 1987 817,660.00 $ 813,198.00 $ 160,339.00 $ 498,324.00 $ 532,251.00 $ 148,138.00 $ 663,521.00 $ 890,411.00 $ 209,535.00 $ 967,397.00 $1,105,563.00 $ 263,409.00 $ 2,946,902.00 $3,341,423.00 $ 781,421.00 $ 47,269.00 $ 20,240.00 $ (670.00) $ 40,610.00 $ 39,101.00 $ 14,136.00 $ 52,136.00 $ 92,204.00 $ 15,777.00 $ 123,766.00 $ 149,000.00 $ 38,319.00 $ 263,781.00 $ 300,545.00 $ 67,562.00 $ 32,175.00 $ 29,237.00 $ 6,293.00 $ (30,163.00) $ (42,877.00) $ (14,228.00) $ 265,793.00 $ 286,995.00 $ 59,627.00 $ (28,082.00) $ (33,535.00) $ (7,351.00) $ 237,711.00 $ 253,460.00 $ 52,276.00 $ 465,601.00 $ 425,350.00 248,639.00 $ 252,195.00 497,706.00 $ 595,861.00 640,106.00 $ 688,853.00 1,852,052.00 $1,962,259.00 73,335.00 $ 23,327.00 1,925,387.00 $1,985,586.00 12,123.00 $ 12,521.00 9,079.00 $ 9,681.00 10,638.00 $ 13,107.00 21,675.00 $ 26,208.00 8,869.00 $ 9,220.00 8,167.00 $ 10,735.00 7,486.00 $ 9,236.00 24,720.00 $ 36,188.00 JUSTIFIABLE ASSETS AT YEAR END $ $ $ $ $ $ $ $ $ $ $ $ $ $ 1988 138,836.00 149,209.00 226,672.00 263,390.00 778,107.00 (247.00) 12,498.00 19,700.00 32,196.00 64,147.00 6,864.00 (9,928.00) 61,083.00 (9,179.00) 51,904.00 EXHIBIT 9: SUMMARY OF TAKEOVER OFFER CITY CAPITAL ASSOCIATES, L.P. IFFER DATE 8-Aug-88 PRICE PER SHARE $70 PREMIUM TO STOC 17.90% PREMIUM TO STOCK 59.10% PREIMUM TO 52-W 137.30% PREMIUM TO 52-W 17.20% VALUE OF EQUITY NET DEBT $ 2,622.8 MM 318.5 MM VALUE OF FIRM $ 2,941.3 MM SALES YEAR ENDING 2/29/0.9X ESTIMATE OF YEAR-E 0.9 1ST QUARTER 1988 19 2ND QUARTER 1988 9 3RD QUARTER 1988 12 1988 40 RALES VALUE OF FIRM AS A MULTIPLE OF: OPERATING CASH FL OPERATING INCOME 9.2X 11.4X 8.8 10.7 AVERAGE PREMIUM PAID OVER STOCK PRICE 1 DAY 4 WEEKS 62.30% 68.6 36.5 56 17.9 EXHIBIT 10: PREMIUM PAID ANALYSIS # DEALS 95.50% 91.3 49.9 80.9 59.1 VALUE OF EQUITY AS A MULTIPLE OF: NET INCOME BOOK VALUE 18.1X 2.2X 17 2.2 52-WEEK LOW 159.50% 182.8 181.3 171.3 137.3 52-WEEK HIGH 16.70% 31.5 2 15.8 17.2 1ST QUARTER 1988 2ND QUARTER 1988 3RD QUARTER 1988 1988 RALES ANNOUNCEMENT DATE 12/14/87 11/17/86 8/12/86 6/3/86 8/8/88 ANNOUNCEMENT DATE 4/25/88 6/3/87 3/10/87 9/18/86 7/31/86 8/8/88 APPAREL COMPANIES ANNOUNCEMENT DATE 4/28/88 2/2/88 3/17/86 11/4/85 8/8/88 ANNOUNCEMENT DATE 6/24/88 8/8/88 EXHIBIT 10: PREMIUM PAID ANALYSIS AVERAGE PREMIUM PAID OVER STOCK PRICE 1 DAY #DEALS 19 159.50% 62.30% 68.6 36.5 95.50% 91.3 16.70% 31.5 9 182.8 12 49.9 181.3 2 40 56 80.9 171.3 15.8 17.9 59.1 137.3 17.2 EXHIBIT 11: COMPARABLE TRANSACTION ANALYSIS; PURCHASE PRISE MULTIPLES BY BUSINESS SEGMENT; FURNITURE MANUFACTURING COMPANIES PURCHASE PRICE MULTIPLIER ACQUIROR/TARGET LA-Z-BOY/KINCAID AGGREGATE PRICE (SMM) NET INCOME $63.5 BOOK VALUE 2.1X OPERATING INCOME OPERATING CASH FLOW 11.7X 8.1X 22.0X SALES 0.8X 2.8 1.8 INTERCO/LANE 19.3 1.6 9.6 523.7 89.3 11.1 12 CHICAGO PACIFIC/GENERAL MILL FURNITURE 14.1 1 9.9 MASCO/HENREDON 260.9 31.6 2.6 2.1 20.3 15.8 9.2 RALES PROPOSAL $ 2941.3 18.1 2.2 0.9 11.4 EXHIBIT 11: FOOTWEAR MANUFACTURING COMPANIES PURCHASE PRICE MULTIPLIER ACQUIROR/TARGET OPERATING INCOME OPERATING CASH FLOW AGGREGATE PRICE ($MM) NET INCOME $95 NIKE/COLE HAAN 36.2x 14.1 12.2 312.5 0.5 13 9.2 MOACQ/MORSE SHOE REEBOK/AVIA 191 2.1 24.6 23.3 REEBOK/ROCKPORT 146.1 1.7 26 23.9 INTERCO/CONVERSE 202.7 0.9 24.7 18.2 RALES PROPOSAL $2941.3 0.9 11.4 9.2 PURCHASE PRICE MULTIPLIER AGGREGATE PRICE ($MM) $ 157.4 OPERATING INCOME OPERATING CASH FLOW 24.0X 13.7X ACQUIROR/TARGET WESRAY/WILLIAM CARTER SALANT/MANHATTAN INDUS W ACQUISITION/WARNCO 129.7 N.M. 0.4 N.M. N.M. 504.7 21.0X 0.9 10.6 9.2 551.9 0.6 10.6 9.2 WEST POINY PEPPERALL / CLUETT, PEABODY RALES PROPOSAL $ 2,941.3 0.9 11.4 9.2 CENTRAL HARDWARE DIVISION PURCHASE PRICE MULTIPLIER ACQUIROR/TARGET AGGREGATE PRICE ($MM) NET INCOME 22.0X OPERATING INCOME OPERATING CASH FLOW 13.1X 9.2X MANAGEMENT GROUP/PAYLESS CASHWAYS $1,189.4 RALES PROPOSAL $2,941.3 0.9 11.4 9.2 4 WEEKS NET INCOME N.M. 19.6 18.1 52-WEEK LOW 2.5 40.6 30.7 N.M. 37.1 18.1 18.1 BOOK VALUE N.M. BOOK VALUE 1.6X BOOK VALUE 2.3X 1.8 6.7 1.8 2.2 1.4 2.5 1.5 2.2 2.2 52-WEEK HIGH SALES 1.5x SALES 0.8X SALES 0.6X EXHIBIT 11: VALUE RANGES BY BUSINESS SEGMENT 1988 SALES $813.2 532.3 890.4 $1,105.6 1988 OPERATING INCOME $ $ $ $ 1988 OPERATING CASH FLOW $ $ $ $ BUSINESS SEGMENT APPAREL GENERAL RETAIL FOOTWEAR FURNITURE BUSINESS SEGMENT APPAREL GENERAL RETAIL FOOTWEAR FURNITURE BUSINESS SEGMENT APPAREL GENERAL RETAIL FOOTWEAR FURNITURE ASSUMPTIONS FURNITIRE GROUP SALES GROWTH 7.70% OPERATING MARGIN RANGE 13.1% -14.1% CAPITAL EXPENDITURES 1X INCREASE IN WORKING INVESTMENT 12.50% TAX RATE 14.0X TERMINAL VALUE ($ MILLIONS) IMPLIED STOCK PRICE $ DISCOUNR RATE 10.00% $ 11.00% $ 12.00% $ 13.00% $ MULTIPLE RANGE .4-.9 .6-.6 .6-2.1 .8-2.1 MULTIPLE RANGE 20.20 10.6-24.0 39.10 13.1 13.1 92.20 13.0-26.0 149.10 11.1 -20.3 32.70 9.2-13.7 48.80 9.2-9.2 105.30 9.2-23.9 175.30 8.1-15.8 EXHIBIT 12: DISCOUNTED CASH FLOW ANALYSIS MULTIPLE RANGE FOOTWEAR GROUP 9.1% 10.4% 1X MULTIPLE CASH FLOW IN YEAR 10 15.0X 4,746.00 $ 80.00 $ 74.00 $ 68.00 $ 63.00 $ 6.30% 12.50% VALUE RANGE $325.3-$731.9 319.4 319.4 445.2-1,869.8 884.5-2,321.8 $ 1,974.4 -$5,242.9 MEDIAN VALUE $ 214.10 VALUE RANGE $214.1-$484.8 512.2-512.2 1,198.6-2,397.2 $ $ 512.20 2,268.10 1,655.0-3,020.7 $ 1,766.80 $ 2,579.9-$6,420.9 $ 4,761.20 MEDIAN VALUE $ 300.80 $ 448.90 VALUE RANGE $300.8-$448.- 448.9-448.9 968.2-2,516.7 1,419.9-2,769.7 $ $3,138.4-$6,183.3 $ $ 970.70 2,709.30 3,429.60 APPAREL GROUP 6.4% -7.09% 1X 16.0X 5,085.00 $ 84.00 $ 77.00 $ 72.00 $ 66.00 $ MEDIAN VALUE $569.2 7.10% 7.50% 5,424.00 88.00 81.00 75.00 69.00 319.4 1,335.60 1437.3 3,661.50 RETAIL GROUP 6.5% -7.5% 1X 7.60% 7.50% TOTAL 9.2% -10.1% 1X 7.20% 11.60% 41.00% Exhibit 12 Data Assumptions for Valuation of Interco: Discounted Cash Flow Analysis Sales Growth Operating Margin 1989 Projection 1998 Projection Capital Expenditure Increase in Working Investment Discount Rate 10% 11% 12% 13% Furniture Group 7.7% 13.1% 14.1% 1 12.5% $14.00 $74.00 $68.00 $63.00 $80.00 Footwear Group 6.3% 9.1% 10.4% 1 12.5% Terminal Multiple $15.00 $84.00 $77.00 $72.00 $66.00 Apparel Group 7.1% 6.4% 7.0% 1 12.5% $16.00 $81.00 $75.00 $69.00 $88.00 Retail Group 7.6% 6.5% 7.5% 1 7.5% Total Company 7.2% 9.2% 10.1% 1 11.6% Apparel Sales EBITDA Tax WC Inv FCFE Apparel Terminal Multiple Used General Retail Sales EBITDA Tax WC Inv FCFE Gen Retail Terminal Multiple Used Footwear Sales EBITDA Tax WC Inv FCFE Footwear Terminal Multiple Used 42.8% 10% 11% 12% 13% 42.8% 10% 11% 12% 13% 42.8% 10% 11% 12% 13% $ $ $ 1988 1989 813,198 20.240 8,663 Present Value At Feb 1988 14 15 1989 532,251 39,101 16,735 Present Value At Feb 1988 14 15 1989 890,411 92,204 39,463 Present Value At Feb 1988 14 15 1988 1988 1990 1990 1990 16 16 16 1991 1991 1991 1992 1992 1992 1993 1993 1993 1994 #VALUE! 1994 #VALUE! 1994 #VALUE! 1995 #VALUE! 1995 #VALUE! 1995 #VALUE! 1996 #VALUE! 1996 #VALUE! 1996 #VALUE! 1997 #VALUE! 1997 #VALUE! 1997 #VALUE! 1998 #VALUE! 1998 #VALUE! 1998 #VALUE! 1999 & After 1999 & After 1999 & After Furniture Sales EBITDA Tax WC Inv FCFE Furniture Terminal Multiple Used Aggregate Present Value Terminal Multiple Used Total Company Sales EBITDA Tax WC Inv FCFE Interco Terminal Multiple Used Shares Outstanding 42.8% 10% 11% 12% 13% 10% 11% 12% 13% 42.8% 10% 11% 12% 13% $ $ 1988 1,105,563 149,090 63,811 1989 Present Value At Feb 1988 14 15 Present Value At Feb 1988 14 15 1988 1989 3,341,423 253,460 108,481 Present Value at Feb 1989 14 15 37,500,000 1990 1990 16 16 16 1991 1991 14 14 1992 Stock Price 15 1992 Stock Price 15 1993 1993 16 16 1994 #VALUE! 1994 #VALUE! 1995 #VALUE! 1995 #VALUE! 1996 #VALUE! 1996 #VALUE! 1997 #VALUE! 1997 #VALUE! 1998 #VALUE! 1998 #VALUE! 1999 & After 1999 & After Operating Margin: Linear Growth Apparel Group General Retail Footwear Furniture Total Company 6.40% 6.50% 9.10% 13.10% 9.20% 6.47% 6.61% 9.24% 13.21% 9.30% 6.53% 6.72% 9.39% 13.32% 9.40% 6.60% 6.83% 9.53% 13.43% 9.50% 6.67% 6.94% 9.68% 13.54% 9.60% 6.73% 7.06% 9.82% 13.66% 9.70% 6.80% 7.17% 9.97% 13.77% 9.80% 6.87% 7.28% 10.11% 13.88% 9.90% 6.93% 7.39% 10.26% 13.99% 10.00% 7.00% 7.50% 10.40% 14.10% 10.10% Valuation Based on Multiples for Interco as of Feb 1988 Acquirer/Target Furniture Group Masco/Henredon Chicago Pacific/General Mills Furniture Interco/Lane La-Z-Boy/Kincaid Average Multiple Furniture Group Price Average Price Interco No. of Shares Price per Share Footwear Group Interco/Converse Reebok/Rockport Reebok/Avia Moacq/Morse Shoe Nike/Cole Haan Average Multiple Footwear Group Price Average Price Interco No. of Shares Price per Share Net Income Purchase Price as Multiple of Sales Book Value 31.6 2.6 2.1 14.1 1.8 1 19.3 2.8 1.6 22 2.1 0.8 $85,279.48 $688,853.00 $1,105,563.00 #VALUE! 37.1 1.8 0.9 30.7 0 1.7 40.6 6.7 2.1 2.5 1.8 0.5 36.2 0 1.5 $52,740.69 $595,861.00 $890,411.00 37,500,000 Operating Income 20.3 12 11.1 11.7 $149,090.00 24.7 26 24.6 13 12.2 $92,204.00 Operating Cash Flow 15.8 9.9 9.6 8.1 $139,110.00 18.2 23.9 23.3 9.2 8.1 $96,075.00 Apparel Group West Point Pepperall/Cluett, Peabody W. Acquisition/Warnco Salant/Manhattan Indus. Wesray/Wm. Carter Average Multiple Apparel Group Price Average Price Interco No. of Shares Price per Share Central Hardware Group Management Group/Payless Cashways Average Multiple Gen Retail Price Average Price Interco No. of Shares Price per Share Aggregate Price Stock Price 19.6 1.5 0.6 21 2.5 0.9 0 1.4 0.4 0 1.6 0.8 $11,577.28 $425,350.00 $813,198.00 37,500,000 22 2.3 0.6 $22,365.77 $252,195.00 $532,251.00 37,500,000 10.6 10.6 0 24 $20,240.00 13.1 $39,101.00 0.2 9.2 0 13.7 $23,541.00 9.2 $38,047.00 Interco BETA Date 5/2/88 5/3/88 5/4/88 5/5/88 5/6/88 5/9/88 5/10/88 5/11/88 5/12/88 5/13/88 5/16/88 5/17/88 5/18/88 5/19/88 5/20/88 5/23/88 5/24/88 5/25/88 5/26/88 5/27/88 5/31/88 6/1/88 6/2/88 6/3/88 6/6/88 6/7/88 6/8/88 6/9/88 6/10/88 6/13/88 6/14/88 6/15/88 6/16/88 6/17/88 6/20/88 Asset Return Interco Daily Stock Price $40.250 $41.500 $41.000 $41.625 $40.625 $40.875 $41.750 $41.625 $42.000 $42.125 $42.250 $42.000 $41.500 $40.625 $40.625 $40.375 $41.500 $42.500 $42.625 $41.250 $43.875 $43.500 $42.875 $44.125 $43.250 $42.000 $43.875 $43.375 $43.375 $43.500 $43.625 $42.500 $42.875 $43.625 $43.250 Daily Return 3.11% -1.20% 1.52% -2.40% 0.62% 2.14% -0.30% 0.90% 0.30% 0.30% -0.59% -1.19% -2.11% 0.00% -0.62% 2.79% 2.41% 0.29% -3.23% 6.36% -0.85% -1.44% 2.92% -1.98% -2.89% 4.46% -1.14% 0.00% 0.29% 0.29% -2.58% 0.88% 1.75% -0.86% Market Return S&P 500 261.56 263.00 260.32 258.79 257.48 256.54 257.62 253.31 253.85 256.78 258.71 255.39 251.35 252.57 253.02 250.83 253.51 253.76 254.63 253.42 262.16 266.69 265.33 266.45 267.05 265.17 271.52 270.20 271.26 271.43 274.30 274.45 269.77 270.68 268.94 Daily Net Daily Gross Return 0.55% 100.55% -1.02% 98.98% -0.59% 99.41% -0.51% 99.49% -0.37% 99.63% 0.42% 100.42% -1.67% 98.33% 0.21% 100.21% 1.15% 101.15% 0.75% 100.75% -1.28% 98.72% -1.58% 98.42% 0.49% 100.49% 0.18% 100.18% -0.87% 99.13% 1.07% 101.07% 0.10% 100.10% 0.34% 100.34% -0.48% 99.52% 3.45% 103.45% 1.73% 101.73% -0.51% 99.49% 0.42% 100.42% 0.23% 100.23% -0.70% 99.30% 2.39% 102.39% -0.49% 99.51% 0.39% 100.39% 0.06% 100.06% 1.06% 101.06% 0.05% 100.05% -1.71% 98.29% 0.34% 100.34% -0.64% 99.36% Return 6/21/88 6/22/88 6/23/88 6/24/88 6/27/88 6/28/88 6/29/88 6/30/88 7/1/88 7/5/88 7/6/88 7/7/88 7/8/88 7/11/88 7/12/88 7/13/88 7/14/88 7/15/88 7/18/88 7/19/88 7/20/88 7/21/88 7/22/88 7/25/88 7/26/88 7/27/88 7/28/88 7/29/88 8/1/88 8/2/88 8/3/88 8/4/88 8/5/88 8/8/88 $43.125 $43.750 $43.625 $43.500 $43.625 $44.000 $44.000 $44.750 $44.625 $45.375 $44.500 $44.625 $45.000 $45.250 $45.375 $46.375 $49.000 $54.375 $54.500 $58.375 $58.125 $57.875 $57.250 $58.000 $58.875 $59.375 $67.750 $68.500 $68.875 $67.625 $67.000 $67.375 $68.250 $72.500 -0.29% 1.45% -0.29% -0.29% 0.29% 0.86% 0.00% 1.70% -0.28% 1.68% -1.93% 0.28% 0.84% 0.56% 0.28% 2.20% 5.66% 10.97% 0.23% 7.11% -0.43% -0.43% -1.08% 1.31% 1.51% 0.85% 14.11% 1.11% 0.55% -1.81% -0.92% 0.56% 1.30% 6.23% 271.67 275.66 274.82 273.78 269.06 272.31 270.98 273.50 271.78 275.81 272.02 271.78 270.02 270.55 267.85 269.32 270.26 272.05 270.51 268.47 270.00 266.66 263.50 264.68 265.68 265.19 262.50 266.02 272.02 272.21 272.06 272.98 271.93 271.15 1.02% 101.02% 1.47% 101.47% -0.30% 99.70% -0.38% 99.62% -1.72% 98.28% 1.21% 101.21% -0.49% 99.51% 0.93% 100.93% -0.63% 99.37% 1.48% 101.48% -1.37% 98.63% -0.09% 99.91% -0.65% 99.35% 0.20% 100.20% -1.00% 99.00% 0.55% 100.55% 0.35% 100.35% 0.66% 100.66% -0.57% 99.43% -0.75% 99.25% 0.57% 100.57% -1.24% 98.76% -1.19% 98.81% 0.45% 100.45% 0.38% 100.38% -0.18% 99.82% -1.01% 98.99% 1.34% 101.34% 2.26% 102.26% 0.07% 100.07% -0.06% 99.94% 0.34% 100.34% -0.38% 99.62% -0.29% 99.71% Standard Deviation of Asset Return 2.92% 14.50% 13.24% (Arithmetic Ave. Return) Standard Deviation of Market Return (Geometric Mean Return) 1.01% cov (ri, rM) var (rM) beta CAPM Risk free rate R (Interco) Cost of Equity of Interco Mean Market Return or Arithmetic Average Retu Geometric Mean Return 0.0000679422 0.0001007835 = covariance variance 10 year Treasury bonds RF + + + or = 0.0000679422 0.0001007835 0.67414 0.06% X 0.05% X 0.67414 0.1450 (RM -RF) ( 250 days 250 days = 14.50% 13.24%
