EX-99.(C)(I) 14 a2101676zex-99_ci.txt EXHIBIT 99.(C)(I) EXHIBIT (c)(i) January 9, 2003 Confidential J.P. Morgan Securities Inc. PROJECT VINEYARD DISCUSSION MATERIALS WORKING DRAFT FOR TEAM DISCUSSION AGENDA CHARDONNAY OVERVIEW Minority shareholder overview Market analysis Appendix PRELIMINARY OBSERVATIONS - Merlot's historical relationship with Chardonnay (commercial and financial) artificially supports Chardonnay's enterprise value - Chardonnay's net debt is high relative to peers - Chardonnay's historical and projected operating performance would not support debt financing in the current market - Chardonnay's price bears no semblance to fundamental value - Merlot management's forecasts suggest negative value - Chardonnay's stock price (and equity value) does not reflect its poor historical financial performance and future liquidity needs - Public market analyst's forecasts are below Merlot's - Public market analysts cite Merlot's support to justify price targets - Chardonnay's market price trades like an option on the survival of the business - Merlot's relationship with Chardonnay also absorbs a disproportionate amount of Merlot resources - Chardonnay capitalization and operating loss issues require senior management attention disproportionate to other Merlot divisions due to its separate operations and publicly traded equity - Vital operational resources are diverted from Merlot's less volatile and more profitable divisions - Chardonnay utilizes significant Merlot financing resources CHARDONNAY OVERVIEW
PUBLIC MARKET OVERVIEW ------------------------------------------------------------------- ------------ Share price (1/6/03) $0.87 % of 52-week high 22.7% 52-week high (1/9/02) $3.83 52-week low (11/11/02) $0.56 Diluted shares outstanding(1) 114.3 ------------ Equity value 99.3 Notes and loans 43.7 Mortgage note 18.3 Tax sharing agreement 29.3 Redeemable convertible preferred stock 83.9 Adjustment for in-the money convertible preferred stock (15.1) Debt(2) 160.1 Cash(2) (39.9) Firm value 219.5 ------------------------------------------------------------------- ------------
RECENT OPERATING PERFORMANCE -------------------------------------------------------------------------------- 1999 2000 2001 2002E(3) --------------------- ------------ ---------- ---------- ---------- Revenues 57.6 150.1 93.2 56.2 % GROWTH NA 160.6% (37.9%) (39.7%) EBITDA (64.1) (55.1) (70.5) (42.1) % MARGIN (111.2%) (36.7%) (75.6%) (74.9%) EBIT (72.9) (68.9) (88.1) (51.5) % MARGIN (126.6%) (45.9%) (94.5%) (91.6%) CAPEX 33.6 15.5 5.0 1.0 Operating cash flow NA (94.4) (86.7) (55.5)
BOARD OF DIRECTORS -------------------------------------------------------------------------------- Name Merlot nominee -------------------------------------------------------------------------------- W. Clay(4) No A. Good(4) No C. Kornblau No G. Benoist(4) Yes P. Latchford No E. Delaney Yes J. Norris No --------------------------------------------------------------------------------
(1) Based on the treasury stock method; including 26.5MM shares issued upon exercise of in-the-money convertible preferred stock (2) Based on the 9/30/02 10-Q adjusted for the 12/18/2002 securities purchase agreement; treats $68.8 of convertible preferred stock (out-of-the-money) as debt (3) Based on Merlot's estimate of full year 2002 performance (4) Replaced Kuznik (class I), Roseland (class II) and Severns (class I) CHARDONNAY HAS UNDER-PERFORMED THE MARKET AND ITS PEERS IN THE LAST YEAR
(Image) DATE CHARDONNAY S&P TECH(1) PEER INDEX(2) S&P 500 ----------------------------------------------------------------------------------------------------------- 1/7/02 100% 100% 100% 100% 1/8/02 111% 101% 100% 100% 1/9/02 105% 100% 99% 99% 1/10/02 102% 99% 96% 99% 1/11/02 97% 97% 95% 98% 1/14/02 91% 96% 90% 98% 1/15/02 87% 96% 92% 98% 1/16/02 85% 93% 87% 97% 1/17/02 89% 95% 92% 98% 1/18/02 83% 92% 88% 97% 1/21/02 83% 92% 88% 97% 1/22/02 61% 88% 84% 96% 1/23/02 64% 90% 86% 97% 1/24/02 71% 92% 87% 97% 1/25/02 68% 92% 86% 97% 1/28/02 74% 93% 87% 97% 1/29/02 70% 90% 83% 94% 1/30/02 67% 92% 83% 96% 1/31/02 68% 93% 84% 97% 2/1/02 63% 92% 83% 96% 2/4/02 62% 89% 80% 94% 2/5/02 52% 88% 78% 94% 2/6/02 56% 88% 77% 93% 2/7/02 61% 85% 77% 93% 2/8/02 65% 86% 79% 94% 2/11/02 64% 89% 82% 95% 2/12/02 63% 88% 81% 95% 2/13/02 53% 89% 80% 96% 2/14/02 56% 88% 79% 96% 2/15/02 56% 86% 76% 95% 2/18/02 56% 86% 76% 95% 2/19/02 54% 83% 74% 93% 2/20/02 52% 83% 75% 94% 2/21/02 50% 79% 72% 93% 2/22/02 52% 79% 73% 94% 2/25/02 53% 82% 75% 95% 2/26/02 52% 81% 75% 95% 2/27/02 47% 80% 75% 95% 2/28/02 50% 78% 73% 95% 3/1/02 50% 84% 78% 97% 3/4/02 48% 88% 82% 99% 3/5/02 50% 89% 83% 98% 3/6/02 55% 89% 85% 100% 3/7/02 59% 89% 84% 99% 3/8/02 55% 93% 87% 100% 3/11/02 57% 92% 87% 100% 3/12/02 54% 90% 83% 100% 3/13/02 49% 87% 81% 99% 3/14/02 50% 86% 80% 99% 3/15/02 50% 87% 81% 100% 3/18/02 51% 87% 82% 100% 3/19/02 49% 88% 79% 100% 3/20/02 46% 85% 76% 99% 3/21/02 48% 87% 79% 99% 3/22/02 47% 86% 79% 99% 3/25/02 45% 84% 78% 97% 3/26/02 44% 85% 79% 98% 3/27/02 43% 84% 79% 98% 3/28/02 45% 86% 81% 98% 3/29/02 45% 86% 81% 98% 4/1/02 44% 88% 82% 98% 4/2/02 48% 85% 79% 98% 4/3/02 43% 84% 79% 97% 4/4/02 43% 85% 78% 97% 4/5/02 41% 83% 77% 96% 4/8/02 43% 82% 77% 97% 4/9/02 40% 79% 76% 96% 4/10/02 41% 80% 76% 97% 4/11/02 39% 78% 73% 95% 4/12/02 39% 79% 74% 95% 4/15/02 36% 79% 78% 95% 4/16/02 42% 83% 83% 97% 4/17/02 42% 84% 81% 97% 4/18/02 39% 83% 80% 97% 4/19/02 38% 83% 80% 97% 4/22/02 36% 81% 77% 95% 4/23/02 37% 79% 76% 95% 4/24/02 36% 78% 74% 94% 4/25/02 32% 78% 76% 94% 4/26/02 28% 76% 74% 92% 4/29/02 32% 76% 73% 91% 4/30/02 30% 77% 74% 92% 5/1/02 29% 76% 74% 93% 5/2/02 30% 74% 70% 93% 5/3/02 30% 72% 68% 92% 5/6/02 30% 70% 67% 90% 5/7/02 29% 70% 66% 90% 5/8/02 30% 78% 72% 93% 5/9/02 31% 76% 69% 92% 5/10/02 28% 73% 66% 91% 5/13/02 27% 76% 70% 92% 5/14/02 26% 80% 74% 94% 5/15/02 27% 80% 74% 94% 5/16/02 32% 81% 75% 94% 5/17/02 37% 82% 75% 95% 5/20/02 50% 80% 74% 94% 5/21/02 56% 78% 72% 93% 5/22/02 50% 79% 71% 93% 5/23/02 45% 79% 72% 94% 5/24/02 43% 77% 70% 93% 5/27/02 43% 77% 70% 93% 5/28/02 47% 76% 71% 92% 5/29/02 47% 74% 70% 92% 5/30/02 48% 75% 69% 91% 5/31/02 54% 74% 69% 92% 6/3/02 59% 72% 67% 89% 6/4/02 59% 73% 68% 89% 6/5/02 56% 73% 66% 90% 6/6/02 53% 71% 62% 88% 6/7/02 51% 69% 62% 88% 6/10/02 47% 68% 62% 88% 6/11/02 45% 66% 61% 87% 6/12/02 42% 67% 61% 88% 6/13/02 43% 66% 59% 87% 6/14/02 41% 66% 59% 86% 6/17/02 39% 68% 61% 89% 6/18/02 37% 67% 60% 89% 6/19/02 37% 64% 57% 88% 6/20/02 37% 61% 56% 86% 6/21/02 40% 60% 56% 85% 6/24/02 34% 61% 56% 85% 6/25/02 34% 59% 55% 84% 6/26/02 35% 59% 53% 84% 6/27/02 34% 61% 53% 85% 6/28/02 31% 61% 53% 85% 7/1/02 46% 58% 53% 83% 7/2/02 43% 56% 50% 81% 7/3/02 40% 58% 50% 82% 7/4/02 40% 58% 50% 82% 7/5/02 38% 62% 53% 85% 7/8/02 43% 60% 51% 84% 7/9/02 40% 59% 51% 82% 7/10/02 39% 57% 49% 79% 7/11/02 43% 59% 50% 80% 7/12/02 42% 60% 52% 79% 7/15/02 45% 62% 52% 79% 7/16/02 43% 61% 54% 77% 7/17/02 45% 61% 55% 78% 7/18/02 41% 60% 55% 76% 7/19/02 40% 58% 54% 73% 7/22/02 37% 56% 53% 70% 7/23/02 34% 54% 49% 68% 7/24/02 35% 56% 49% 72% 7/25/02 34% 52% 45% 72% 7/26/02 32% 52% 45% 73% 7/29/02 33% 56% 48% 77% 7/30/02 30% 57% 50% 77% 7/31/02 27% 56% 49% 78% 8/1/02 27% 53% 47% 76% 8/2/02 25% 51% 46% 74% 8/5/02 28% 49% 43% 72% 8/6/02 28% 51% 46% 74% 8/7/02 25% 53% 46% 75% 8/8/02 27% 55% 48% 78% 8/9/02 25% 54% 48% 78% 8/12/02 25% 54% 48% 78% 8/13/02 23% 53% 47% 76% 8/14/02 25% 56% 48% 79% 8/15/02 23% 57% 46% 80% 8/16/02 22% 58% 47% 80% 8/19/02 23% 60% 47% 82% 8/20/02 34% 59% 46% 80% 8/21/02 38% 60% 49% 81% 8/22/02 44% 61% 50% 83% 8/23/02 38% 58% 48% 81% 8/26/02 40% 59% 48% 81% 8/27/02 36% 56% 46% 80% 8/28/02 34% 55% 45% 79% 8/29/02 34% 55% 45% 79% 8/30/02 30% 54% 44% 79% 9/2/02 30% 54% 44% 79% 9/3/02 30% 52% 42% 75% 9/4/02 31% 53% 45% 77% 9/5/02 30% 51% 44% 75% 9/6/02 31% 53% 45% 77% 9/9/02 30% 53% 45% 78% 9/10/02 31% 54% 45% 78% 9/11/02 30% 54% 46% 78% 9/12/02 29% 52% 44% 76% 9/13/02 30% 52% 45% 76% 9/16/02 30% 51% 44% 76% 9/17/02 28% 50% 44% 75% 9/18/02 28% 49% 44% 75% 9/19/02 28% 47% 45% 72% 9/20/02 27% 47% 45% 73% 9/23/02 34% 46% 44% 72% 9/24/02 28% 45% 42% 70% 9/25/02 27% 48% 43% 72% 9/26/02 30% 47% 45% 73% 9/27/02 26% 45% 44% 71% 9/30/02 24% 44% 43% 70% 10/1/02 24% 46% 44% 73% 10/2/02 27% 45% 44% 71% 10/3/02 24% 44% 46% 70% 10/4/02 24% 42% 48% 69% 10/7/02 23% 42% 47% 67% 10/8/02 22% 41% 49% 69% 10/9/02 22% 41% 48% 67% 10/10/02 23% 43% 50% 69% 10/11/02 24% 46% 52% 72% 10/14/02 23% 46% 50% 72% 10/15/02 25% 49% 53% 76% 10/16/02 25% 45% 49% 74% 10/17/02 24% 48% 49% 75% 10/18/02 22% 49% 46% 76% 10/21/02 22% 50% 46% 77% 10/22/02 21% 49% 47% 76% 10/23/02 23% 51% 48% 77% 10/24/02 21% 50% 49% 76% 10/25/02 22% 52% 49% 77% 10/28/02 21% 52% 49% 76% 10/29/02 20% 51% 49% 76% 10/30/02 20% 53% 52% 76% 10/31/02 20% 53% 52% 76% 11/1/02 20% 55% 54% 77% 11/4/02 21% 58% 56% 78% 11/5/02 20% 57% 54% 79% 11/6/02 24% 58% 55% 79% 11/7/02 22% 56% 53% 77% 11/8/02 21% 55% 53% 77% 11/11/02 18% 53% 51% 75% 11/12/02 20% 55% 52% 76% 11/13/02 20% 55% 53% 76% 11/14/02 21% 58% 54% 78% 11/15/02 20% 58% 55% 78% 11/18/02 19% 58% 56% 77% 11/19/02 19% 56% 57% 77% 11/20/02 20% 59% 58% 78% 11/21/02 20% 63% 61% 80% 11/22/02 19% 62% 61% 80% 11/25/02 21% 64% 59% 80% 11/26/02 34% 62% 60% 78% 11/27/02 34% 65% 63% 81% 11/28/02 34% 65% 63% 81% 11/29/02 34% 64% 63% 80% 12/2/02 33% 65% 63% 80% 12/3/02 31% 62% 61% 79% 12/4/02 27% 60% 60% 79% 12/5/02 25% 59% 58% 78% 12/6/02 23% 59% 60% 78% 12/9/02 22% 56% 57% 77% 12/10/02 25% 58% 58% 78% 12/11/02 27% 58% 59% 78% 12/12/02 26% 58% 59% 77% 12/13/02 25% 56% 59% 76% 12/16/02 26% 58% 60% 78% 12/17/02 25% 57% 60% 78% 12/18/02 24% 55% 58% 76% 12/19/02 26% 55% 58% 76% 12/20/02 27% 55% 58% 77% 12/23/02 28% 56% 60% 77% 12/24/02 25% 55% 60% 77% 12/25/02 25% 55% 60% 77% 12/26/02 26% 55% 60% 76% 12/27/02 26% 54% 60% 75% 12/30/02 25% 53% 62% 75% 12/31/02 25% 53% 62% 76% 1/1/03 25% 53% 62% 76% 1/2/03 28% 56% 62% 78% 1/3/03 27% 57% 65% 78% 1/6/03 27% 59% 65% 80% -----------------------------------------------------------------------------------------------------------
SHARE PRICE RETURNS ----------------------------------------------------------------------------------------------------------- Three months Six months One year ----------------------------------------------------------------------------------------------------------- Chardonnay 17.3% (27.3%) (72.7%) S&P Tech 41.1% (5.5%) (41.1%) Peer Index 39.9% 23.5% (34.5%) S&P 500 18.3% (6.1%) (20.2%) -----------------------------------------------------------------------------------------------------------
Source: IDD (1) S&P Technology Super Composite Index (Source: FactSet) (2) Peer index consists of: ADTRAN Inc.; Advanced Fibre Communications Inc.; Alcatel SA; Copper Mountain Networks Inc.; ECI Telecom; Paradyne Networks Inc.; UT Starcom Inc. OVER 78% OF SHARES TRADED IN LAST TWELVE MONTHS WERE TRADED AT OR BELOW $1.60 PER SHARE
(Image) PERCENTAGE OF SHARES TRADED DURING LAST TWELVE MONTHS AT VARIOUS PRICE RANGES(1) ----------------------------------------------------------------------------------------------------------- 43.3% 34.9% 16.7% 2.4% 2.4% 0.4% $0.40-$1.00 $1.00-$1.60 $1.60-$2.20 $2.20-$2.80 $2.80-$3.40 $3.40-$4.00 % OF VOLUME AT OR BELOW RANGE ----------------------------------------------------------------------------------------------------------- 43.3% 78.2% 94.8% 97.2% 99.6% 100.0% $0.40-$1.00 $1.00-$1.60 $1.60-$2.20 $2.20-$2.80 $2.80-$3.40 $3.40-$4.00
Total shares traded over period = 44.4 million Average price weighted by volume = $1.34 Public float(2) = 15.8 million
(Image) PERCENTAGE OF SHARES TRADED DURING LAST TWO YEARS AT VARIOUS PRICE RANGES(1) ----------------------------------------------------------------------------------------------------------- 58.1% 19.8% 8.2% 8.0% 3.6% 2.2% $0.50-$3.00 $3.00-$5.50 $5.50-$8.00 $8.00-$10.50 $10.50-$13.00 $13.00-$15.50 % OF VOLUME AT OR BELOW RANGE ----------------------------------------------------------------------------------------------------------- 58.1% 78.0% 86.2% 94.2% 97.8% 100.0% $0.50-$3.00 $3.00-$5.50 $5.50-$8.00 $8.00-$10.50 $10.50-$13.00 $13.00-$15.50
Total shares traded over period = 123.8 million Average price weighted by volume = $4.44 Public float(2) = 15.8 million Note: 86.7MM basic shares outstanding as of 9/30/2002 (1) As of 1/6/03 (2) Equals basic shares outstanding less Merlot direct holdings and Kevin Kimberlin holdings INDEPENDENT DIRECTORS Paul S. Latchford Served as the President of the Spencer Trask Media and Director since Communications Group, a technology investment firm, November 1999 since June 1999. From February 1997 to June 1999 served as Principal Vice President of Global Business Development for Bechtel Group, Inc., a telecommunications network engineering and construction company. From February 1995 to February 1997 was Vice President of Business Development and Operations for Bell Atlantic International for the Asia Pacific Region and Executive Director of Business Development from March 1994 to February 1995 Craig Kornblau President of Universal Studios Home Video since Director since March 1999 and also currently holds the title of September 2001 Executive Vice President and General Manager for Universal Music and Video Distribution. Prior to joining the executive office of Universal Music & Video Distribution in January 1988, Mr. Kornblau was Senior Vice President, Worldwide Operations and Logistics, for Buena Vista Home Video Walter Clay Chairman, president and CEO since 1984 of Hutchinson Director since Telephone Company. Member of the board of directors of November 2002 the USTA since 1992, and has served as Secretary of the board and chairman of the board's political action committee. Mr. Clay was also elected to the Minnesota Telephone Association's board in 1998, and was elected that board's vice president in 2002. Mr. Clay is the president of five companies - Hutchinson Telephone Company, Hutchinson Telecommunications, Inc., Hutchinson Cellular, Inc., Independent Emergency Services and Page-All LLC Alex Good Chairman and chief executive of @Link Network. Prior to Director since Link Networks, he was executive vice president of the November 2002 Bell Atlantic Corporation and president and chief executive officer of Bell Atlantic International. At Bell Atlantic he lead dollar mergers of NYNEX and GTE DIRECTORS AFFILIATED WITH MERLOT J. Michael Norris NXTV President and Chief Executive Officer since Chairman of the Board December 2000. Previously Senior Vice President and since April 2001 General Manager of the Network Management Group at Motorola. Mr. Norris was an original founder of Motorola's Network Management Group, responsible for Motorola's Global Cellular Service Operating Joint Ventures worldwide, International Satellite Gateway Operations and Wireless Resale Operations, the domestic wireless business of Motorola. Mr. Norris spent 29 years with Motorola Eugene Delaney Motorola, Inc. President of Asia Pacific and Senior Director since Vice President and General Manager of GRRO, Global November 2000 Relations and Resources Organization. In June 1995 became Vice President and General Manager -- Japan Cellular Infrastructure Division, and in 1997 became Corporate Vice President of Cellular Infrastructure Group. Mr. Delaney has spent the past 25 years at Motorola Gray Benoist Motorola, Inc. corporate vice president of personal communications AGENDA Chardonnay overview MINORITY SHAREHOLDER OVERVIEW Market analysis Appendix SUMMARY CONCLUSIONS REGARDING THE MINORITY SHAREHOLDERS - The tender of a majority of the minority shares is the only "technical" requirement for Merlot to complete the proposed tender offer (even if Merlot would not reach 90% ownership levels) - Following the tender offer, Merlot will have the ability to exercise convertible securities to reach 90% ownership and complete a short- form merger - Chardonnay has 86,692,161 basic shares and 126,949,968 fully diluted shares outstanding (at January 6, 2003 closing price of $0.87) - Fully diluted shares assume all convertible securities in-the-money are exercised for cash (without any treasury-method stock buy-back) - Merlot holds 64,217,245(1) shares directly and 37,457,807(1) additional shares indirectly (underlying in-the-money convertible preferred stock and warrants at $0.87) - At $0.87 per share, the non-Merlot shareholders(1) hold 25,274,916 shares and Merlot would need 12,637,459 shares to receive a majority of the minority on a fully diluted basis - Kevin Kimberlin holds 2,900,000 shares, or 11% of the free float (on a fully diluted basis) - JPMorgan estimates the cost basis of Mr. Kimberlin's current holdings at $0.00 (total proceeds of $181MM realized since initial investment of $10MM on 1/19/98) (1) Note that Merlot ownership levels included above and used for majority of minority calculations include stock and in-the-money options held by any director or named executive officer (Proxy and Forms 3,4 and 5 for ownership and proxy statements for exercise prices) MAJORITY OF MINORITY SHARES AT VARIOUS PRICES $ millions; assumes fully diluted shares (no treasury method stock buy-back)
PREMIUM TO CURRENT SHARE PRICE ----------------------------------------------------------------------- 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% ------------------------------------------------------------------------------------------------------------ Basic shares(1) Implied share price $0.87 $0.91 $0.96 $1.00 $1.04 $1.09 $1.13 Basic shares outstanding 86.7 86.7 86.7 86.7 86.7 86.7 86.7 Merlot basic shares(1) 64.2 64.2 64.2 64.2 64.2 64.2 64.2 % OF TOTAL 74.1% 74.1% 74.1% 74.1% 74.1% 74.1% 74.1% Minority basic shares(1) 22.5 22.5 22.5 22.5 22.5 22.5 22.5 % OF TOTAL 25.9% 25.9% 25.9% 25.9% 25.9% 25.9% 25.9% Majority of the minority shares(3) 11.2 11.2 11.2 11.2 11.2 11.2 11.2 Merlot ownership with majority of 75.4 75.4 75.4 75.4 75.4 75.4 75.4 minority % OWNERSHIP 87.0% 87.0% 87.0% 87.0% 87.0% 87.0% 87.0% Additional shares required to 2.6 2.6 2.6 2.6 2.6 2.6 2.6 reach 90% Diluted shares(1) Fully diluted shares 126.9 126.9 160.4 160.4 160.4 160.4 160.4 outstanding(2) Merlot fully diluted shares 101.7 101.7 131.2 131.2 131.2 131.2 131.2 % OF TOTAL 80.1% 80.1% 81.8% 81.8% 81.8% 81.8% 81.8% Minority fully diluted shares 25.3 25.3 29.2 29.2 29.2 29.2 29.2 % OF TOTAL 19.9% 19.9% 18.2% 18.2% 18.2% 18.2% 18.2% Majority of the minority shares(3) 12.6 12.6 14.6 14.6 14.6 14.6 14.6 Merlot ownership with majority of 114.3 114.3 145.8 145.8 145.8 145.8 145.8 minority % OWNERSHIP 90.0% 90.0% 90.9% 90.9% 90.9% 90.9% 90.9% Additional shares required to 0.0 0.0 0.0 0.0 0.0 0.0 0.0 reach 90% -----------------------------------------------------------------------------------------------------------
(1) Note that Merlot ownership levels included above and used for majority of minority calculations include stock and in-the-money options held by any director or named executive officer (Proxy and Forms 3,4 and 5 for ownership and proxy statements for exercise prices) (2) Includes all outstanding options, warrants and convertible preferred stock; excludes 6.74MM employee options issued since the 2001 Form 10-K for which no exercise prices are available (3) Equals 50% of minority shares plus one share ANALYSIS OF TOP 30 SHAREHOLDERS Basic shares outstanding of 86.7M (as of 9/30/02)
30 LARGEST SHAREHOLDERS(1) ----------------------------------------------------------------------------------------------------------- NAME % BASIC % DILUTED SHARE OWNERSHIP OWNERSHIP(4) ----------------------------------------------------------------------------------------------------------- Merlot(4) 64,103,724 73.9% 79.9% Kevin Kimberlin 2,900,000 3.3% 2.5% Fidelity 1,347,200 1.6% 1.2% Vanguard Group 632,717 0.7% 0.6% CALPERS 465,600 0.5% 0.4% Barclays Global Investors 360,914 0.4% 0.3% Vanguard Total Stock Market Index 322,892 0.4% 0.3% Vanguard Extended Market Index 151,436 0.2% 0.1% Mellon Bank (Private Asset Management) 144,316 0.2% 0.1% Northern Trust Investments 133,326 0.2% 0.1% Florida State Board Of Administration 126,080 0.1% 0.1% College Retirement Equities 104,813 0.1% 0.1% Northern Trust Global Investments 101,109 0.1% 0.1% Cref Stock Account 95,413 0.1% 0.1% Deutsche Asset Management Americas 80,040 0.1% 0.1% Vanguard Small-Cap Index 76,300 0.1% 0.1% Ishares Russell 2000 Index 61,335 0.1% 0.1% Merrill Lynch Investment Managers 47,800 0.1% 0.0% James Wandrey 40,000 0.0% 0.0% T Murat Uraz 36,834 0.0% 0.0% Thomas R Eames 26,500 0.0% 0.0% Galleon Management 26,200 0.0% 0.0% J Michael Norris 26,000 0.0% 0.0% Merrill Lynch & Company 25,451 0.0% 0.0% Ishares Russell 2000 Growth Index 24,022 0.0% 0.0% Pacific Select Va Small-Cap Index 21,600 0.0% 0.0% Credit Suisse First Boston 19,507 0.0% 0.0% Dimensional Fund Advisors 19,000 0.0% 0.0% SG Cowen Securities 18,947 0.0% 0.0% Vanguard Balanced Index 18,900 0.0% 0.0% ----------------------------------------------------------------------------------------------------------- Top 30 holders 71,557,976 82.5% 86.4% Top 30 excl. Merlot & Kimberlin 4,554,252 5.3% 4.0% -----------------------------------------------------------------------------------------------------------
DIRECTORS AND EXECUTIVES PERCENT OWNERSHIP(2), (3) ------------------------------------------------------------------------------------------------------------ Name Direct % Indirect Total Holdings Ownership Holdings Holdings ------------------------------------ ----------------- ----------------- ----------------- ----------------- Directors Clay, Walter 0 0.00% 40,000 40,000 Good, Alexander 0 0.00% 40,000 40,000 Latchford, Paul 200 0.00% 22,918 23,118 McCartney, John 500 0.00% 17,918 18,418 Norris, Michael 26,000 0.03% 225,000 251,000 Executives Ide, James 20,000 0.02% 38,889 58,889 St. Cyr, Ken 0 0.00% 200,000 200,000 Sheppard, Steve 0 0.00% 50,000 50,000 Uraz, T. Murat 36,834 0.04% 409,644 446,478 Weeks, William 6,210 0.01% 381,517 387,727 Van Welzen, Hans 4,664 0.01% 237,249 241,913 Zar, Keith 6,813 0.01% 300,762 307,575 ----------------------------------------------------------------------------------------------------------- Total insiders and executives 101,221 0.12% 1,963,897 2,065,118 -----------------------------------------------------------------------------------------------------------
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INVESTOR STYLE ANALYSIS (13-F FILERS)(5) ----------------------------------------------------------------------------------------------------------- Index Growth Value 93% 6% 1% ----------------------------------------------------------------------------------------------------------- Total shares held by 13-F filers = 2.3MM; -----------------------------------------------------------------------------------------------------------
(1) Source: Geo Carson (2) Source: 5/29/02 Proxy Statements and Form-4 fillings (3) Indirect holdings represent total equity derivatives. Based on 15.95MM total options outstanding, all of which are underwater (2001 Form 10-K). In a 12/10/02 secretary's certificate, Chardonnay represented that 22.69MM employee options are outstanding. No exercise price information is available on additional options (4) Diluted ownership calculations using the treasury stock method; including shares issued upon exercise of in-the-money convertible preferred stock (5) Percent based on institutional owners (excludes insiders and strategic holders) AGENDA Chardonnay overview Minority shareholder overview MARKET ANALYSIS Appendix TRANSACTION OVERVIEW: - STRUCTURE - Tender offer for all shares of Chardonnay common stock not owned by Merlot - CONSIDERATION - 100% Cash - OFFER PRICE - $[TBD] for each Chardonnay common share - IMPLIED PREMIUM TO ONE DAY PRIOR AND 20 TRADING DAY AVERAGE - _% and _%, respectively - CONDITIONS - - Conditioned on tender of a majority of the minority shares, 90% tender (waivable) and other customary conditions - IMPLIED OFFER VALUE - The implied equity value of the minority interest is [$TBD] - TIMING - During the week of January 13, 2003, simultaneous public announcement and notice to Chardonnay Board; commence tender within 7-to-10 days thereafter - CHARDONNAY BOARD - The offer is not conditioned on the approval of Chardonnay's Board - TAX - Tender by any Chardonnay shareholder will represent a taxable disposition PRICING METRICS SUMMARY $ price per share (Image)
HIGH LOW ------------------------------------------------------------------------------ Comparable publicly traded 0.5-1.0x CY 2003E rev. of 100MM (Merlot(2)) ($0.41) ($0.98) companies 0.5-1.0x CY2003E rev. of $67MM (Wall Street(3)) ($0.79) ($1.17) |X| Merlot high case DCF(4) |X| 3% growth |X| 17% to 19% WACC ($0.77) ($1.00) |X| Merlot base case |X| 3% growth |X| 17% to 19% WACC ($2.67) ($2.69) Precedent minority buy-in 10%-20% offer premium to current price(5) $1.04 $0.96 transactions Equity research analyst price targets(1) $1.00 $0.25 52-week high-low $3.83 $0.56 Current share price = $0.87
(1) Based on Needham and CSFB research reports from 10/24/02 and 10/8/02, respectively (2) Based on Merlot base case; using Merlot low case the per share price range would be ($0.12) - ($1.10) (3) Represents an average of available Wall Street research (4) Merlot and JPMorgan also developed a "low" case, but due to unprofitability and high funding requirements, JPMorgan and Merlot determined that it was not a viable business model (5) Premium to Chardonnay closing price on 1/6/03 of $0.87 ANALYSIS AT VARIOUS PRICES $ millions, except per share data
SELECTED PREMIUM TO SHARE PRICE ---------------------------------------------------------------------------- 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% ------------------------------------------------------------------------------------------------------------- Implied share price $0.87 $0.91 $0.96 $1.00 $1.04 $1.09 $1.13 PREMIUM TO: 52-week low 55.2% 62.9% 70.7% 78.5% 86.2% 94.0% 101.7% ($0.56) 52-week high (77.3%) (76.2%) (75.0%) (73.9%) (72.8%) (71.6%) (70.5%) ($3.83) 5 days prior average 1.8% 6.8% 11.9% 17.0% 22.1% 27.2% 32.3% ($0.85) 20 days prior average 4.9% 10.1% 15.3% 20.6% 25.8% 31.1% 36.3% ($0.83) 90 days prior average 8.5% 14.0% 19.4% 24.8% 30.3% 35.7% 41.1% ($0.80) ---------------------------------------------------------------------------- EQUITY VALUE(1) 99.3 104.9 133.2 140.2 147.1 154.1 161.1 DEBT(2) 160.1 160.1 145.0 145.0 145.0 145.0 145.0 Cash(2) (39.9) (39.9) (39.9) (39.9) (39.9) (39.9) (39.9) ---------------------------------------------------------------------------- FIRM VALUE 219.5 225.0 238.3 245.2 252.2 259.2 266.2 Total equity value of minority 20.0 21.1 22.2 23.5 24.8 26.0 27.3 interest(4) FV/2002E REVENUE(3) WALL STREET CASE 3.8x 3.9x 4.1x 4.3x 4.4x 4.5x 4.6x Merlot low case 3.9 4.0 4.2 4.4 4.5 4.6 4.7 Merlot base case 3.9 4.0 4.2 4.4 4.5 4.6 4.7 Merlot high case 3.9 4.0 4.2 4.4 4.5 4.6 4.7 FV/2003E REVENUE WALL STREET CASE 3.3x 3.4x 3.6x 3.7x 3.8x 3.9x 4.0x Merlot low case 2.8 2.8 3.0 3.1 3.2 3.3 3.4 Merlot base case 2.2 2.3 2.4 2.5 2.5 2.6 2.7 Merlot high case 1.8 1.8 1.9 2.0 2.0 2.1 2.1 ------------------------------------------------------------------------------------------------------------
(1) Based on the treasury stock method; including shares issued upon exercise of in-the-money convertible preferred stock (2) Based on 9/30/02 10-Q adjusted for the 12/18/2002 securities purchase agreement (3) Based on average of Wall Street equity research estimates available (4) Assumes all convertible securities deemed exercised (other than convertible preferred stock and warrants held by Merlot) increase minority interest; calculated excluding stock and in-the-money options (as disclosed in proxy statements) held by directors and named executive officers TRADING STATISTICS $ millions, except per share data
P/E MULTIPLES PRICE/SHARE % OF 52- MARKET FIRM --------------------- COMPANY 01/06/03 WEEK HIGH VALUE(1) VALUE(2) CY02E CY03E ------------------------------------------------------------------------------------------------------------ ADTRAN $36.26 97.0% $1,382 $1,307 49.0x 40.7x Advanced Fibre 17.84 86.8 1,536 571 74.3 66.1 Communications Alcatel 5.20 28.7 6,032 7,046 NM 6.8 Copper Mountain 4.70 21.0 28 (12) NM NM ECI Telecom 2.04 33.0 219 163 NM NM Paradyne Networks Inc. 1.30 20.0 55 6 NM NM UT Starcom 21.15 59.3 2,369 2,003 22.3 16.8 Mean 48.5x 32.6x Median 49.0 28.8 Chardonnay $0.87 22.7% 99.3 219.5 NA NA ------------------------------------------------------------------------------------------------------------
CY02E-03E FIRM VALUE(2)/REVENUE REVENUE EPS(3) ------------------------- --------- --------------------- CY02E CY03E GROWTH % CY02E CY03E ------------------------------------------------------------------------------------------------------------ ADTRAN 3.8 x 3.5x 8.6% $0.74 $0.89 Advanced Fibre 1.6 1.6 2.1 0.24 0.27 Communications Alcatel 0.5 0.5 (1.0) (1.86) 0.77 Copper Mountain NM NM 69.5 (3.75) (3.00) ECI Telecom 0.2 0.2 3.3 (0.25) (0.04) Paradyne Networks Inc. 0.1 0.1 1.5 (0.31) (0.39) UT Starcom 2.1 1.6 33.1 0.95 1.26 Mean 1.4x 1.2x 16.7% Median 1.1 1.0 3.3 Chardonnay 3.8x 3.3x 16.2% ($0.69) ($0.56) ------------------------------------------------------------------------------------------------------------
(1) Market value is calculated based on fully diluted shares using the treasury method (2) Firm value equals market value plus debt, less cash (3) Estimates based on FirstCall, I/B/E/S, and JPMorgan research where available KEY DCF VALUATION ASSUMPTIONS - Basis for three Chardonnay projections cases - On December16, 2002, Merlot provided JPMorgan with an internal presentation on Chardonnay, including Chardonnay projections through 2004 (low, base and high) - JPMorgan reviewed this presentation, industry research and historical and projected performance of publicly traded comparable companies and extended each of the Merlot cases out through 2011 - Between December 16th and January 7th, JPMorgan worked closely with members of Merlot's finance team to refine revenue and expense growth rates - JPMorgan did not evaluate the validity or impact of any potential performance benefits from the transaction due to: (a) the high risk that any such benefits would not be realized and (b) the fact that no change of control is being considered, so no analysis of performance benefits is required by, or even relevant, under Delaware law KEY DCF VALUATION ASSUMPTIONS (CONT'D) - All projections are the result of working sessions with Merlot and JPMorgan beginning January 2, 2003 - Projections summary: - Revenue estimates based on Merlot's 2003 and 2004 projections; 2005-2006 revenue projected to grow by 20% stepping down to 15% in 2007 and remaining at 5% for the remainder of the projection period - Gross margins reaching 30% by 2007 (including Depreciation) and remaining at that level during all subsequent periods - Sales and marketing improve to 12%, 10% and 8% by 2007 for the low, base and high cases respectively - R&D grows at a rate of 10% until revenue growth reaches 5% upon which R&D growth decreases to 2.5% - G&A expense margins grow by 6%, 5% and 7% of revenue by 2007 for the low, base and high cases respectively - Accounts receivable is projected to be 77 days of sales by 2007 - Inventory levels are reduced to 41 days of COGS by 2007 - Accounts payable is projected to improve to 63 days COGS by 2007 from 2003 estimated levels of 55 days COGS MERLOT'S MANAGEMENT FORECASTS OF CHARDONNAY $ millions; projections based solely on Merlot management expectations, without input from Chardonnay management
02-08 DEC-31, 2002E 2003E 2004E 2005E 2006E 2007E 2008E CAGR ------------------------------------------------------------------------------------------------------------ High case Revenues 56.2 125.0 250.0 300.0 360.0 414.0 434.7 40.6% % GROWTH (39.7%) 122.4% 100.0% 20.0% 20.0% 15.0% 5.0% Gross profit 7.1 26.8 62.5 80.5 102.7 124.2 130.4 62.4% % MARGIN 12.6% 21.4% 25.0% 26.8% 28.5% 30.0% 30.0% EBITDA (42.1) (24.4) 3.8 15.8 30.1 45.6 48.8 nm % MARGIN (74.9%) (19.5%) 1.5% 5.3% 8.4% 11.0% 11.2% Net Income (81.1) (38.4) (9.3) 0.4 13.6 29.2 34.4 nm Base case Revenues 56.2 100.0 150.0 180.0 216.0 248.4 260.8 29.2% % GROWTH (39.7%) 77.9% 50.0% 20.0% 20.0% 15.0% 5.0% Gross profit 7.1 19.0 33.0 45.0 59.7 74.5 78.2 49.2% % MARGIN 12.6% 19.0% 22.0% 25.0% 27.7% 30.0% 30.0% EBITDA (42.1) (30.3) (24.3) (16.1) (4.9) 7.5 8.8 nm % MARGIN (74.9%) (30.3%) (16.2%) (8.9%) (2.3%) 3.0% 3.4% Net Income (81.1) (44.4) (37.8) (33.3) (26.3) (17.4) (18.7) nm Low case Revenues 56.2 79.0 120.0 144.0 172.8 198.7 208.7 24.4% % GROWTH (39.7%) 40.6% 51.9% 20.0% 20.0% 15.0% 5.0% Gross profit 7.1 14.1 25.2 35.1 47.3 59.6 62.6 43.7% % MARGIN 12.6% 17.8% 21.0% 24.4% 27.4% 30.0% 30.0% EBITDA (42.1) (34.3) (32.1) (25.5) (15.3) (5.8) (4.1) nm % MARGIN (74.9%) (43.4%) (26.8%) (17.7%) (8.9%) (2.9%) (1.9%) Net Income (81.1) (48.1) (45.3) (43.2) (38.0) (33.2) (35.4) nm -----------------------------------------------------------------------------------------------------------
Note: See appendix for forecast detail CHARDONNAY STAND ALONE DCF - HIGH CASE Valuation date of January 13, 2003 DCF PER SHARE VALUE
------------------------------------------------------------------------------------------------------------- Perpetuity growth rate ------------------------------------------------------------------------------------- 2.50% 2.75% 3.00% 3.25% 3.50% ------------------------------------------------------------------------------------- 17.0% ($0.79) ($0.78) ($0.77) ($0.76) ($0.75) WACC 17.5% ($0.85) ($0.84) ($0.83) ($0.82) ($0.81) 18.0% ($0.91) ($0.90) ($0.89) ($0.88) ($0.87) 18.5% ($0.96) ($0.96) ($0.95) ($0.94) ($0.93) 19.0% ($1.02) ($1.01) ($1.00) ($0.99) ($0.98)
IMPLIED 2003E REVENUE MULTIPLE ------------------------------------------------------------------------------------------------------------- Perpetuity growth rate ------------------------------------------------------------------------------------- 2.50% 2.75% 3.00% 3.25% 3.50% ------------------------------------------------------------------------------------- 17.0% 0.66x 0.67x 0.68x 0.69x 0.69x WACC 17.5% 0.62x 0.63x 0.63x 0.64x 0.65x 18.0% 0.58x 0.59x 0.59x 0.60x 0.61x 18.5% 0.54x 0.55x 0.55x 0.56x 0.57x 19.0% 0.51x 0.51x 0.52x 0.52x 0.53x
US$ (MM); FY(1) 2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012E ------------------------------------------------------------------------------------------------------------- Sales 125.0 250.0 300.0 360.0 414.0 434.7 456.4 479.3 503.2 528.4 Sales growth 122.4% 100.0% 20.0% 20.0% 15.0% 5.0% 5.0% 5.0% 5.0% 5.0% EBITDA (24.4) 3.8 15.8 30.1 45.6 48.8 52.3 55.9 59.6 63.6 % MARGIN (19.5%) 1.5% 5.3% 8.4% 11.0% 11.2% 11.5% 11.7% 11.8% 12.0% EBIT (32.1) (3.0) 9.1 23.4 38.4 41.2 44.0 47.1 50.3 53.7 Tax on EBIT 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 EBIAT (32.1) (3.0) 9.1 23.4 38.4 41.2 44.0 47.1 50.3 53.7 Depreciation 7.7 6.8 6.6 6.8 7.1 7.7 8.2 8.8 9.3 9.9 Change in working 1.3 (30.6) (7.7) (5.9) (1.8) (4.8) (5.0) (5.2) (5.5) (5.8) capital Capital (3.1) (6.0) (7.2) (8.6) (9.9) (10.4) (11.0) (11.5) (12.1) (12.7) expenditures Less: YTD FCF before valuation date 0.9 Free cash flows (25.3) (32.8) 0.9 15.6 33.9 33.7 36.3 39.1 42.0 45.1 for discounting -------------------------------------------------------------------------------------------------------------
(1) Standalone estimates based on Merlot management estimate (high case) Note: Assumes midpoint convention CHARDONNAY STAND ALONE DCF - BASE CASE Valuation date of January 13, 2003
DCF PER SHARE VALUE ------------------------------------------------------------------------------------------------------------- Perpetuity growth rate ------------------------------------------------------------------------------------- 2.50% 2.75% 3.00% 3.25% 3.50% ------------------------------------------------------------------------------------- 17.0% ($2.68) ($2.69) ($2.69) ($2.70) ($2.70) WACC 17.5% ($2.68) ($2.68) ($2.69) ($2.69) ($2.69) 18.0% ($2.67) ($2.68) ($2.68) ($2.68) ($2.69) 18.5% ($2.67) ($2.67) ($2.67) ($2.68) ($2.68) 19.0% ($2.66) ($2.66) ($2.67) ($2.67) ($2.68)
IMPLIED 2003E REVENUE MULTIPLE ------------------------------------------------------------------------------------------------------------- Perpetuity growth rate ------------------------------------------------------------------------------------- 2.50% 2.75% 3.00% 3.25% 3.50% ------------------------------------------------------------------------------------- 17.0% (0.81x) (0.81x) (0.82x) (0.82x) (0.83x) WACC 17.5% (0.81x) (0.81x) (0.81x) (0.82x) (0.82x) 18.0% (0.80x) (0.80x) (0.81x) (0.81x) (0.81x) 18.5% (0.80x) (0.80x) (0.80x) (0.81x) (0.81x) 19.0% (0.79x) (0.79x) (0.80x) (0.80x) (0.80x)
US$ (MM); FY(1) 2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012E ------------------------------------------------------------------------------------------------------------- Sales 100.0 150.0 180.0 216.0 248.4 260.8 273.9 287.6 301.9 317.0 Sales growth 77.9% 50.0% 20.0% 20.0% 15.0% 5.0% 5.0% 5.0% 5.0% 5.0% EBITDA (30.3) (24.3) (16.1) (4.9) 7.5 8.8 10.0 11.4 12.9 14.4 % MARGIN (30.3%) (16.2%) (8.9%) (2.3%) 3.0% 3.4% 3.7% 4.0% 4.3% 4.5% EBIT (38.0) (31.0) (22.4) (11.2) 1.1 1.9 2.8 3.8 4.9 6.0 Tax on EBIT 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 EBIAT (38.0) (31.0) (22.4) (11.2) 1.1 1.9 2.8 3.8 4.9 6.0 Depreciation 7.7 6.7 6.4 6.3 6.5 6.8 7.2 7.6 8.0 8.4 Change in working 5.8 (9.5) (2.6) (2.0) (0.1) (2.9) (3.1) (3.2) (3.4) (3.6) capital Capital (2.8) (5.0) (6.0) (7.2) (8.3) (8.7) (9.1) (9.6) (10.1) (10.6) expenditures Less: YTD FCF before valuation date 0.9 Free cash flows (26.4) (38.8) (24.7) (14.1) (0.8) (2.9) (2.2) (1.4) (0.6) 0.3 for discounting -------------------------------------------------------------------------------------------------------------
(1) Standalone estimates based on Merlot management estimate (high case) Note: Assumes midpoint convention CHARDONNAY STAND ALONE DCF - LOW CASE Valuation date of January 13, 2003
DCF PER SHARE VALUE ------------------------------------------------------------------------------------------------------------- Perpetuity growth rate ------------------------------------------------------------------------------------- (5.00%) (4.00%) (3.00%) (2.00%) (1.00%) ------------------------------------------------------------------------------------- 17.0% ($3.19) ($3.20) ($3.22) ($3.24) ($3.26) WACC 17.5% ($3.17) ($3.18) ($3.20) ($3.21) ($3.23) 18.0% ($3.15) ($3.16) ($3.17) ($3.19) ($3.21) 18.5% ($3.13) ($3.14) ($3.15) ($3.17) ($3.18) 19.0% ($3.11) ($3.12) ($3.13) ($3.15) ($3.16)
IMPLIED 2003E REVENUE MULTIPLE ------------------------------------------------------------------------------------------------------------- Perpetuity growth rate ------------------------------------------------------------------------------------- (5.00%) (4.00%) (3.00%) (2.00%) (1.00%) ------------------------------------------------------------------------------------- 17.0% (1.58x) (1.60x) (1.62x) (1.63x) (1.66x) WACC 17.5% (1.56x) (1.58x) (1.59x) (1.61x) (1.63x) 18.0% (1.54x) (1.55x) (1.57x) (1.58x) (1.60x) 18.5% (1.52x) (1.53x) (1.55x) (1.56x) (1.58x) 19.0% (1.50x) (1.51x) (1.52x) (1.54x) (1.55x)
US$ (MM); FY(1) 2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012E ------------------------------------------------------------------------------------------------------------- Sales 79.0 120.0 144.0 172.8 198.7 208.7 219.1 230.0 241.5 253.6 Sales growth 40.6% 51.9% 20.0% 20.0% 15.0% 5.0% 5.0% 5.0% 5.0% 5.0% EBITDA (34.3) (32.1) (25.5) (15.3) (5.8) (4.1) (3.5) (2.8) (2.2) (1.4) % MARGIN (43.4%) (26.8%) (17.7%) (8.9%) (2.9%) (1.9%) (1.6%) (1.2%) (0.9%) (0.6%) EBIT (42.0) (38.8) (31.8) (21.4) (11.9) (10.5) (10.2) (9.9) (9.5) (9.1) Tax on EBIT 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 EBIAT (42.0) (38.8) (31.8) (21.4) (11.9) (10.5) (10.2) (9.9) (9.5) (9.1) Depreciation 7.7 6.7 6.3 6.1 6.2 6.4 6.7 7.0 7.3 7.7 Change in working 15.5 (10.2) (1.7) (1.2) 0.3 (2.4) (2.5) (2.6) (2.8) (2.9) capital Capital (2.6) (4.5) (5.4) (6.5) (7.5) (7.8) (8.2) (8.6) (9.1) (9.5) expenditures Less: YTD FCF before valuation date 0.7 Free cash flows (20.7) (46.8) (32.6) (23.0) (12.9) (14.3) (14.2) (14.1) (14.0) (13.8) for discounting -------------------------------------------------------------------------------------------------------------
(1) Standalone estimates based on Merlot management estimate (high case) Note: Assumes midpoint convention PREMIUMS PAID IN PRECEDENT BUY-IN TRANSACTIONS HAVE AVERAGED APPROXIMATELY 20% 1988-November 2002 Premiums paid (both cash and stock transactions) (image)
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 ------------------------------------------------------------------------------------------------------------ % OVER STOCK PRICE ONE WEEK PRIOR TO ANNOUNCEMENT 40% 20% 42% 22% 15% 14% 0% 20% 8% 23% 17% 29% 37% 40% 20% Median = 22.8% # OF DEALS ------------------------------------------------------------------------------------------------------------ 12 20 11 7 5 4 13(1) 9 13 18 19 19 28 13 9
Note: Selected transactions in sample include 200 minority buy-in transactions (owner of 50% or more of a U.S. public company acquires the remaining shares for total consideration of $25 million or more excluding negative premium transactions); January 1988 through November 2002. Source: Securities Data Company and JPMorgan research 1 Premiums paid during 1994 averaged 9% ranging from 0%-38% PREMIA ANALYSIS IN BUY-IN TRANSACTIONS BY SIZE AND FREE FLOAT 1988- November 2002 (both cash and stock transactions) Buyouts by size of minority buy-in acquired (Image)
$0-100 $101-$500 $501-$1,000 >$1,000 ----------------------------------------------------------------------------------------------------------- MEDIAN PREMIUM PAID 25% 20% 23% 23% # OF DEALS 94 79 15 12
Buyouts by minority percentage (Image)
0-10% 11-20% 21-30% 31-40% 41-50% ----------------------------------------------------------------------------------------------------------- MEDIAN PREMIUM PAID 16% 19% 19% 31% 23% # OF DEALS 7 57 36 46 54
Note: Selected transactions in sample include 200 minority buy-in transactions (owner of 50% or more of a U.S. public company acquires the remaining shares for total consideration of $25 million or more excluding negative premium transactions); January 1988 through November 2002 Source: Securities Data Company and JPMorgan research PREMIA IN CASH VERSUS STOCK BUY-IN TRANSACTIONS 1988-November 2002 (Image)
PREMIUM TO SHARE PRICE ONE WEEK PRIOR 0-10% 11-20% 21-30% 31-40% 41-50% 51-60% 61-70% 70%+ ----------------------------------------------------------------------------------------------------------- Median = 25.3% CASH TRANSACTIONS 34 24 19 16 18 9 7 16 Stock transactions (Image) PREMIUM TO SHARE PRICE ONE WEEK PRIOR 0-10% 11-20% 21-30% 31-40% 41-50% 51-60% 61-70% 70%+ ----------------------------------------------------------------------------------------------------------- Median = 16.0%; STOCK TRANSACTIONS 19 8 6 3 5 2 0 3
Note: Selected transactions in sample include 189 minority buy-in transactions (owner of 50% or more of a U.S. public company acquires the remaining shares for total consideration of $25 million or more excluding negative premium transactions); 11 deals included both cash and stock consideration Source: Securities Data Company and JPMorgan research
SELECTED RECENT MINORITY BUY-INS OF 5% TO 25% PUBLIC STAKES PUBLIC INITIAL INITIAL ANN. ACQUIROR TARGET STAKE(1) OFFER PREMIUM(1) ----------------------------------------------------------------------------------------------------------- 1/31/00 Thermo Electron Thermo Instrument Systems 12.2% $11.91 (28.3%) 7/17/02 Westcorp WFS Financial(Western Finl 16.0% 22.45 (8.4%) Sa) 1/31/00 Thermo Instrument Systems, Thermo Optek Corp. 6.8% 15.00 0.0% Inc. 3/31/00 Hartford Financial Services Hartford Life 18.5% 44.00 2.0% 4/23/97 American Financial Group, American Finl Entps, Inc. 18.0% 37.00 2.8% Inc.(5) 2/22/01 Vishay Intertechnology, Inc. Siliconix, Inc. 19.6% 28.82 3.6% 8/14/02 First Banks Inc,MO(4) First Banks America Inc,TX 6.2% 40.54 3.8% 10/27/98 Allmerica Financial Corp. Citizens Corp. 16.8% 29.00 5.5% 9/8/98 IDB Development Corp. PEC Israel Economic Corp. 18.7% 25.50 7.1% 11/7/01 UtilCorp United Inc Aquila Inc 20.0% 20.69 7.7% 10/21/99 Citigroup, Inc. Student Loan Corporation 20.0% 45.00 11.3% 5/22/97 Texas Industries, Inc. Chaparral Steel Co. 15.0% 14.25 16.3% 3/16/00 BP Amoco PLC Vastar Resources, Inc. 18.1% 71.00 18.2% 2/4/02 Limited Brands Inc. Intimate Brands Inc 16.3% 19.30 18.6% 4/13/00 Alcoa, Inc.(2) Howmet International, Inc. 15.4% 17.00 19.3% 11/12/99 Cordant Technologies, Inc.(2) Howmet International, Inc. 15.4% 17.00 19.3% 9/21/00 Ford Motor Co. Hertz Corp. 18.5% 30.00 20.3% 12/1/99 Boise Cascade Corp. Boise Cascade Office 18.8% 13.25 23.3% Products 3/19/99 Viacom, Inc. Spelling Entertainment Group 19.3% 9.00 29.7% 7/8/02 Samuel J Heyman(4) Int'l Specialty Products 18.9% 10.00 29.9% 3/21/00 Citigroup, Inc. Travelers Property Casualty 15.0% 41.50 37.8% 3/26/01 Credit Suisse First Boston CSFBdirect 18.0% 4.00 41.3% 5/23/01 Electronic Data Systems Corp Unigraphics Solutions Inc 13.9% 27.00 43.2% 10/10/01 Toronto-Dominion Bank TD Waterhouse Group Inc 10.7% 9.00 50.0% 1/31/00 Thermo Instrument Systems, ThermoQuest Corp. 9.7% 17.00 56.3% Inc. 10/4/01 Tyco International TyCom 11.0% 14.00 79.3% 10/17/01 Miracle Marketing, Inc. Marketing America, Inc. 18.0% 8.00 79.8% ----------------------------------------------------------------------------------------------------------- CASH DEALS Mean 24.7% Median 19.3% STOCK DEALS Mean 13.8% Median 7.7% ----------------------------------------------------------------------------------------------------------- % CHANGE DURATION ANN. ACQUIROR FINAL OFFER IN OFFER (DAYS)(1) CONSIDERATION ----------------------------------------------------------------------------------------------------------- 1/31/00 Thermo Electron $11.91 NA NA Stock 7/17/02 Westcorp WD(3) NA NA Stock 1/31/00 Thermo Instrument Systems, 15.00 0.0% NA Cash Inc. 3/31/00 Hartford Financial Services 50.50 14.8% 48 Cash 4/23/97 American Financial Group, 37.00 0.0% NA Either Inc.(5) 2/22/01 Vishay Intertechnology, Inc. WD(3) NA NA Cash 8/14/02 First Banks Inc,MO(4) NA 0.0% NA Cash 10/27/98 Allmerica Financial Corp. 33.25 14.7% 20 Cash 9/8/98 IDB Development Corp. 36.50 43.1% 344 Cash 11/7/01 UtilCorp United Inc 20.69 0.0% NA Stock 10/21/99 Citigroup, Inc. WD(3) NA NA Cash 5/22/97 Texas Industries, Inc. 15.50 8.8% 64 Cash 3/16/00 BP Amoco PLC 83.00 16.9% 69 Cash 2/4/02 Limited Brands Inc. 20.30 5.2% 30 Stock 4/13/00 Alcoa, Inc.(2) 21.00 23.5% 50 Cash 11/12/99 Cordant Technologies, Inc.(2) WD(3) NA NA Cash 9/21/00 Ford Motor Co. 35.50 18.3% 117 Cash 12/1/99 Boise Cascade Corp. 16.50 24.5% 103 Cash 3/19/99 Viacom, Inc. 9.75 8.3% 59 Cash 7/8/02 Samuel J Heyman(4) 10.30 3.0% 123 Cash 3/21/00 Citigroup, Inc. 41.95 1.1% 30 Cash 3/26/01 Credit Suisse First Boston 6.00 50.0% 147 Cash 5/23/01 Electronic Data Systems Corp 32.50 20.4% 72 Cash 10/10/01 Toronto-Dominion Bank 9.50 5.6% 20 Cash 1/31/00 Thermo Instrument Systems, 17.00 0.0% NA Cash Inc. 10/4/01 Tyco International 14.64 4.5% 15 Stock 10/17/01 Miracle Marketing, Inc. 8.00 0.0% NA Cash ----------------------------------------------------------------------------------------------------------- CASH DEALS Mean 12.0% Median 11.7% STOCK DEALS Mean 1.9% Median 4.5% -----------------------------------------------------------------------------------------------------------
(1) Public stake represents publicly owned minority interest prior to transaction; initial premium represents premium of initial offer to price one week prior to offer; duration reflects time elapsed between initial offer and final offer (2) Cordant initiated a minority buy-in of Howmet prior to its acquisition by Alcoa; subsequent to its announced acquisition of Cordant, Alcoa continued a minority buy-in of Howmet, premiums paid by Alcoa represent premiums to Howmet's closing price on 11/4/99 prior to initial offer by Cordant (3) Buy-in offers withdrawn (4) Final offer remains pending (5) American Financial Group, Inc. / American FinlEntps, Inc. transaction omitted from mean and median calculations Source: Thomson Financial, company filings and press releases
EQUITY RESEARCH PROJECTIONS SUMMARY CSFB RESEARCH REVENUE ESTIMATES: ----------------------------------------------------------------------------------------------------------- 2001E revenue 2002E revenue ----------------------------------------------------------------------------------------------------------- 2/3/00 $225.00 3/2/00 3/29/00 4/19/00 $250.00 6/19/00 7/3/00 $305.00 8/3/00 8/25/00 10/10/00 10/19/00 $330.00 1/5/01 $180.00 1/11/01 $90.00 1/25/01 $165.00 4/19/01 $154.00 $230.00 6/28/01 $134.00 $175.00 7/26/01 $135.00 9/20/01 NA 1/22/02 $50.00 1/31/02 $50.00 4/17/02 $65.00 4/18/02 $65.00 7/25/02 $61.00 7/25/02 $61.00 -----------------------------------------------------------------------------------------------------------
ANALYST COMMENTARY: o "Next Level made progress in its 3Q02 with a variety of IOCs, ... [however], the RBOCs are starving themselves, refusing to eat their prescribed growth protein for yet another quarter" Needham 10-24-02 o "The major debt overhang of $51M was pushed out to 2006, but Next Level still needs new funding by the June 2003 quarter." Needham 10-24-02 o "Next Level will ultimately have $50M-$60M in annual fixed expenses, and some interest payments. This would require at least a $200M annual revenue run-rate to keep profitable, so until we see evidence of customer traction significant enough to pay for such expenses, we find it difficult to upgrade the stock from Hold to Buy." Needham 10-24-02 o "Visibility to major commercial rollouts remains limited and recent management changes at Q, which accounted for 35% of NXTV's Q202 sales, BCE, and MOT create near term risk" CSFB 10-8-02 EQUITY RESEARCH PROJECTIONS SUMMARY
2003 EQUITY RESEARCH ESTIMATES -------------------------------------------------------------------------- NEEDHAM(1) CSFB(2) AVERAGE REPORT VARIANCE ----------------------------------------------------------------------------------------------------------- Revenues $80.2 $53.5 $66.9 50% GROWTH 42.7% (9.1%) 16.2% Gross Profit 22.6 5.6 14.1 3% % MARGIN 28.2% 10.4% 21.1% -------------------------------------------------------------------------- EBITDA (17.4) (41.3) (29.4) 137% % MARGIN (21.7%) (77.3%) (43.9%) EBIT (29.4) (53.3) (41.4) 81% % MARGIN (36.7%) (99.7%) (61.9%) Other expense (18.4) (0.4) (9.4) NM Interest expense 0.4 (8.0) (3.8) NM Taxes 0.0 0.0 0.0 -------------------------------------------------------------------------- Net income (47.4) (61.7) (54.6) 30% Net income to common (56.2) (75.3) (65.8) 33% EPS (0.63) (0.86) (0.74) 36% -----------------------------------------------------------------------------------------------------------
(1) Based on Needham research report dated 10/24/2002 (2) Based on CSFB research report dated 10/9/2002 AGENDA Chardonnay overview Minority shareholder overview Market analysis APPENDIX CHARDONNAY HAS UNDER-PERFORMED THE MARKET AND ITS PEERS IN THE LAST YEAR (Image)
DATE CHARDONNAY NASDAQ PEER INDEX(1) ----------------------------------------------------------------------------------------------------------- 1/7/02 100% 100% 100% 1/8/02 111% 101% 103% 1/9/02 105% 100% 103% 1/10/02 102% 100% 100% 1/11/02 97% 99% 99% 1/14/02 91% 98% 94% 1/15/02 87% 98% 95% 1/16/02 85% 95% 90% 1/17/02 89% 97% 95% 1/18/02 83% 95% 92% 1/21/02 83% 95% 92% 1/22/02 61% 92% 88% 1/23/02 64% 94% 89% 1/24/02 71% 95% 90% 1/25/02 68% 95% 92% 1/28/02 74% 95% 93% 1/29/02 70% 93% 88% 1/30/02 67% 94% 87% 1/31/02 68% 95% 85% 2/1/02 63% 94% 84% 2/4/02 62% 91% 80% 2/5/02 52% 90% 78% 2/6/02 56% 89% 75% 2/7/02 61% 87% 74% 2/8/02 65% 89% 77% 2/11/02 64% 91% 81% 2/12/02 63% 90% 79% 2/13/02 53% 91% 79% 2/14/02 56% 90% 77% 2/15/02 56% 89% 76% 2/18/02 56% 89% 76% 2/19/02 54% 86% 75% 2/20/02 52% 87% 75% 2/21/02 50% 84% 73% 2/22/02 52% 85% 72% 2/25/02 53% 87% 74% 2/26/02 52% 87% 74% 2/27/02 47% 86% 72% 2/28/02 50% 85% 70% 3/1/02 50% 88% 75% 3/4/02 48% 91% 77% 3/5/02 50% 92% 81% 3/6/02 55% 93% 81% 3/7/02 59% 92% 80% 3/8/02 55% 95% 83% 3/11/02 57% 95% 83% 3/12/02 54% 93% 81% 3/13/02 49% 91% 78% 3/14/02 50% 91% 79% 3/15/02 50% 92% 79% 3/18/02 51% 92% 79% 3/19/02 49% 92% 77% 3/20/02 46% 90% 75% 3/21/02 48% 92% 77% 3/22/02 47% 91% 77% 3/25/02 45% 89% 76% 3/26/02 44% 90% 75% 3/27/02 43% 90% 76% 3/28/02 45% 91% 78% 3/29/02 45% 91% 78% 4/1/02 44% 91% 79% 4/2/02 48% 89% 76% 4/3/02 43% 88% 75% 4/4/02 43% 88% 76% 4/5/02 41% 87% 75% 4/8/02 43% 88% 76% 4/9/02 40% 86% 74% 4/10/02 41% 87% 74% 4/11/02 39% 85% 73% 4/12/02 39% 86% 74% 4/15/02 36% 86% 77% 4/16/02 42% 89% 80% 4/17/02 42% 89% 79% 4/18/02 39% 88% 79% 4/19/02 38% 88% 78% 4/22/02 36% 86% 75% 4/23/02 37% 85% 74% 4/24/02 36% 84% 73% 4/25/02 32% 84% 73% 4/26/02 28% 82% 71% 4/29/02 32% 81% 71% 4/30/02 30% 83% 72% 5/1/02 29% 82% 73% 5/2/02 30% 81% 70% 5/3/02 30% 79% 69% 5/6/02 30% 77% 67% 5/7/02 29% 77% 66% 5/8/02 30% 83% 70% 5/9/02 31% 81% 68% 5/10/02 28% 79% 66% 5/13/02 27% 81% 69% 5/14/02 26% 84% 73% 5/15/02 27% 85% 74% 5/16/02 32% 85% 75% 5/17/02 37% 85% 76% 5/20/02 50% 84% 73% 5/21/02 56% 82% 73% 5/22/02 50% 82% 72% 5/23/02 45% 83% 73% 5/24/02 43% 82% 71% 5/27/02 43% 82% 71% 5/28/02 47% 81% 72% 5/29/02 47% 80% 71% 5/30/02 48% 80% 71% 5/31/02 54% 79% 72% 6/3/02 59% 77% 68% 6/4/02 59% 77% 69% 6/5/02 56% 78% 68% 6/6/02 53% 76% 65% 6/7/02 51% 75% 65% 6/10/02 47% 75% 65% 6/11/02 45% 73% 64% 6/12/02 42% 75% 64% 6/13/02 43% 73% 63% 6/14/02 41% 74% 63% 6/17/02 39% 76% 65% 6/18/02 37% 76% 64% 6/19/02 37% 73% 62% 6/20/02 37% 72% 61% 6/21/02 40% 71% 62% 6/24/02 34% 72% 61% 6/25/02 34% 70% 60% 6/26/02 35% 70% 60% 6/27/02 34% 72% 61% 6/28/02 31% 72% 61% 7/1/02 46% 69% 60% 7/2/02 43% 67% 57% 7/3/02 40% 68% 57% 7/4/02 40% 68% 57% 7/5/02 38% 71% 60% 7/8/02 43% 69% 57% 7/9/02 40% 68% 58% 7/10/02 39% 66% 56% 7/11/02 43% 67% 57% 7/12/02 42% 67% 58% 7/15/02 45% 68% 58% 7/16/02 43% 68% 60% 7/17/02 45% 69% 60% 7/18/02 41% 67% 58% 7/19/02 40% 65% 57% 7/22/02 37% 63% 56% 7/23/02 34% 60% 53% 7/24/02 35% 63% 54% 7/25/02 34% 61% 50% 7/26/02 32% 62% 50% 7/29/02 33% 66% 53% 7/30/02 30% 66% 54% 7/31/02 27% 65% 53% 8/1/02 27% 63% 52% 8/2/02 25% 61% 50% 8/5/02 28% 59% 47% 8/6/02 28% 62% 50% 8/7/02 25% 63% 51% 8/8/02 27% 65% 52% 8/9/02 25% 64% 52% 8/12/02 25% 64% 52% 8/13/02 23% 62% 50% 8/14/02 25% 65% 51% 8/15/02 23% 66% 49% 8/16/02 22% 67% 50% 8/19/02 23% 68% 51% 8/20/02 34% 68% 50% 8/21/02 38% 69% 53% 8/22/02 44% 70% 54% 8/23/02 38% 68% 52% 8/26/02 40% 68% 54% 8/27/02 36% 66% 52% 8/28/02 34% 65% 50% 8/29/02 34% 66% 50% 8/30/02 30% 65% 48% 9/2/02 30% 65% 48% 9/3/02 30% 62% 46% 9/4/02 31% 63% 49% 9/5/02 30% 61% 48% 9/6/02 31% 64% 49% 9/9/02 30% 64% 49% 9/10/02 31% 65% 49% 9/11/02 30% 65% 49% 9/12/02 29% 63% 48% 9/13/02 30% 63% 48% 9/16/02 30% 63% 47% 9/17/02 28% 62% 46% 9/18/02 28% 61% 45% 9/19/02 28% 60% 44% 9/20/02 27% 60% 44% 9/23/02 34% 58% 43% 9/24/02 28% 58% 42% 9/25/02 27% 60% 43% 9/26/02 30% 60% 44% 9/27/02 26% 59% 42% 9/30/02 24% 58% 42% 10/1/02 24% 60% 42% 10/2/02 27% 58% 42% 10/3/02 24% 57% 45% 10/4/02 24% 56% 45% 10/7/02 23% 55% 44% 10/8/02 22% 55% 45% 10/9/02 22% 55% 45% 10/10/02 23% 57% 47% 10/11/02 24% 59% 49% 10/14/02 23% 60% 48% 10/15/02 25% 63% 51% 10/16/02 25% 60% 48% 10/17/02 24% 62% 49% 10/18/02 22% 63% 47% 10/21/02 22% 64% 48% 10/22/02 21% 63% 49% 10/23/02 23% 65% 49% 10/24/02 21% 64% 50% 10/25/02 22% 65% 51% 10/28/02 21% 65% 51% 10/29/02 20% 64% 50% 10/30/02 20% 65% 55% 10/31/02 20% 65% 54% 11/1/02 20% 67% 57% 11/4/02 21% 69% 60% 11/5/02 20% 69% 59% 11/6/02 24% 70% 60% 11/7/02 22% 68% 57% 11/8/02 21% 67% 57% 11/11/02 18% 65% 55% 11/12/02 20% 66% 56% 11/13/02 20% 67% 56% 11/14/02 21% 69% 58% 11/15/02 20% 69% 59% 11/18/02 19% 68% 59% 11/19/02 19% 67% 59% 11/20/02 20% 70% 61% 11/21/02 20% 72% 65% 11/22/02 19% 72% 65% 11/25/02 21% 73% 64% 11/26/02 34% 71% 64% 11/27/02 34% 73% 67% 11/28/02 34% 73% 67% 11/29/02 34% 73% 67% 12/2/02 33% 73% 69% 12/3/02 31% 71% 67% 12/4/02 27% 70% 65% 12/5/02 25% 69% 64% 12/6/02 23% 70% 65% 12/9/02 22% 67% 62% 12/10/02 25% 68% 63% 12/11/02 27% 69% 64% 12/12/02 26% 69% 63% 12/13/02 25% 67% 62% 12/16/02 26% 69% 64% 12/17/02 25% 68% 64% 12/18/02 24% 67% 62% 12/19/02 26% 66% 61% 12/20/02 27% 67% 62% 12/23/02 28% 68% 62% 12/24/02 25% 67% 62% 12/25/02 25% 67% 62% 12/26/02 26% 67% 62% 12/27/02 26% 66% 62% 12/30/02 25% 66% 63% 12/31/02 25% 66% 63% 1/1/03 25% 66% 63% 1/2/03 28% 68% 65% 1/3/03 27% 68% 68% 1/6/03 27% 70% 69% -----------------------------------------------------------------------------------------------------------
NEWS: 6/26/02 - NXTV converts $20 million of MOT debt to convertible preferred stock 9/30/02 - Announces roll out of USAM-SSE technology 11/25/02 - Announces large contract with Minnesota telecom services providers 5/30/02 - Announces Bell Canada will make large equipment purchase 8/20/02 - Announces large VDSL equipment contract with XIT Rural Telephone Cooperative Source: IDD (1) Peer index consists of: ADTRAN Inc.; Advanced Fibre Communications Inc.; Alcatel SA; Copper Mountain Networks Inc.; ECI Telecom; Paradyne Networks Inc.; UT Starcom Inc. OPERATING STATISTICS $ millions, except per share data
LTM MARGINS (AS % OF REVENUES) OPERATING COSTS (AS % OF REVENUES) ---------------------------------------- ---------------------------------- LTM NET REVENUE GROSS EBITDA EBIT INCOME COGS R&D S&M G&A ------------------------------------------------------------------------------------------------------------- ADTRAN $346 48.0% 12.4% 7.6% 7.6% 52.0% 16.3% NA 24.1% Advanced Fibre 340 37.5 1.3 NA NA 62.5 18.9 14.2% 8.2 Alcatel 17,224 23.3 NA NA NA 76.7 12.7 NA 16.6 Copper Mountain 12 NA NA NA NA 502.6 214.3 59.7 72.3 ECI Telecom 830 36.5 NA NA NA 63.5 NA 14.0 9.7 Paradyne 140 44.7 4.8 NA NA 55.3 19.4 NA 25.3 Networks UT Starcom 878 35.7 16.1 13.7 10.4 64.3 9.3 NA 11.7 Mean 37.6% 8.7% 10.6% 9.0% 125.3% 48.5% 29.3% 24.0% Median 37.0 8.6 10.6 9.0 63.5 17.6 14.2 16.6 -------------------------------------------------------------------------------------------------------------
LAST TWELVE MONTHS BALANCE SHEET ------------------------------------------------------------------------------------------------------------ CAPEX DEPRECIATION CASH DEBT ------------------------------------------------------------------------------------------------------------ ADTRAN $4 $17 $125 $50 Advanced Fibre 10 20 965 - Alcatel 743 978 5,315 6,899 Copper Mountain 3 8 45 4 ECI Telecom 32 71 355 299 Paradyne Networks 2 8 50 1 UT Starcom 54 22 366 - ------------------------------------------------------------------------------------------------------------
WACC ANALYSIS MACROECONOMIC ASSUMPTIONS (1/02/03) ----------------------------------------------------------------------------------------------------------- Risk-free rate 4.559% Pre-tax cost of debt 0.0% Estimated market risk premium 6.000% After-tax cost of debt 0.0% Size premium (variable) Corporate rate 35.0% Country premium 0.00% Tau 26.0% -----------------------------------------------------------------------------------------------------------
INDUSTRY BETA ANALYSIS
----------------------------------------------------------------------------------------------------------- Comparable Companies Levered Total Debt/ Tau Unlevered Levered Unlevered Mkt. Cost of Cost of Beta Equity(1) Beta Equity Equity ----------------------------------------------------------------------------------------------------------- ADTRAN 1.17 3.6% 26.0% 1.139 11.6% 11.4% Advanced Fibre Communications 1.38 0.0% 26.0% 1.378 12.8% 12.8% Alcatel 1.62 100.2% 26.0% 0.927 14.2% 10.1% Copper Mountain 1.35 15.5% 26.0% 1.209 12.6% 11.8% ECI Telecom 1.36 111.3% 26.0% 0.745 12.7% 9.0% Paradyne Networks Inc. 1.43 2.2% 26.0% 1.402 13.1% 13.0% UT Starcom 1.43 0.0% 26.0% 1.425 13.1% 13.1% ----------------------------------------------------------------------------------------------------------- Average 1.39 33.3% 0.26 1.18 12.9% 11.6% Median 1.38 3.6% 0.26 1.21 12.8% 11.8% -----------------------------------------------------------------------------------------------------------
CHARDONNAY WACC CALCULATION ----------------------------------------------------------------------------------------------------------- After-tax Long Country Risk Size Premium Term Cost Chardonnay's Cost of Target Premium Debt Beta Levered Equity WACC ----------------------------------------------------------------------------------------------------------- Case 1(2) 0.00% 2.20% 0.0% 1.76 19.0% 18.99% Case 2(3) 0.00% 2.20% 0.0% 1.21 14.5% 14.47% -----------------------------------------------------------------------------------------------------------
MARKET AND SIZE PREMIUM SENSITIVITY ANALYSIS ----------------------------------------------------------------------------------------------------------- Size premium % --------------------------------------------------------------------------------- 0% 0.44% 0.88% 1.32% 1.76% 2.20% --------------------------------------------------------------------------------- 5.0% 13.36% 14.13% 14.91% 15.68% 16.46% 17.23% Market 5.5% 14.24% 15.01% 15.79% 16.56% 17.34% 18.11% risk 6.0% 15.12% 15.89% 16.67% 17.44% 18.22% 18.99% premium 6.5% 16.00% 16.77% 17.55% 18.32% 19.10% 19.87% % 7.0% 16.88% 17.65% 18.43% 19.20% 19.98% 20.75%
(1) Based on reported debt amounts excluding minority interests. Closing price as of 01/02/03 (2) Using Chardonnay's Barra beta (3) Using median unlevered beta of comps OUTSTANDING OPTIONS AND WARRANTS OUTSTANDING OPTIONS AND WARRANTS:
------------------------------------------------------------------------------------------------------------ TRANCH OPTIONS OUTSTANDING EXERCISE PRICE ------------------------------------------------------------------------------------------------------------ Non-Motorola: Tranch One Options 3,874,000 $0.94 Tranch Two Options 118,000 $1.56 Tranch Three Options 138,000 $2.55 Tranch Four Options 196,000 $4.27 Other Options 11,625,000 $31.25 Kimberlin Warrants 3,900,000 $10.38(1) 2002 Options 2,800,000 $0.75 Motorola: May 16, 2001 loan comm. warrants 7,500,000 $7.39 Oct 24, 2001 mortgage loan warrants 400,000 $3.82 Dec 11, 2001 promissory note warrants 2,500,000 $4.29 Feb 20, 2002 conv. pfd stock 13,824,884 $2.17 Feb 20, 2002 warrants 3,456,221 $2.17 Feb 20, 2002 warrants 3,456,221 $2.60 Apr 22, 2002 Nasdaq loan(*) 400,000 $2.00 Jun 25, 2002 conv. pfd stock 27,731,100 $1.19 Jun 25, 2002 warrants 6,008,403 $1.19 Jun 25, 2002 warrants(*) 330,000 $2.00 Oct 22, 2002 warrants(1) 3,000,000 $0.76 Sep 26, 2002 conv. pfd stock 23,655,900 $0.93 Sep 26, 2002 warrants 5,913,978 $0.93 Sep 26, 2002 warrants(*) 220,000 $2.00 Dec 18, 2002 conv. pfd stock 26,506,000 $0.83 Dec 18, 2002 warrants 7,951,807 $0.83 Dec 18, 2002 warrants(*) 220,000 $2.00 ------------------------------------------------------------------------------------------------------------ Total 155,767,514 $4.02 ------------------------------------------------------------------------------------------------------------
(*) Denotes tranches not presently convertible (1) Source: 2002 Proxy TOP TEN INSTITUTIONAL SHAREHOLDERS' RECENT INVESTMENT ACTIVITY QUARTERLY INVESTMENT/DIVESTITURE(5)
------------------------------------------------------------------------------------------------------------- Q4 00 Q1 01 Q2 01 Q3 01 Q4 01 Q1 02 Q2 02 Q3 02 ------------------------------------------------------------------------------------- AVG. SHARE PRICE(4) $30.83 $10.52 $7.22 $3.34 $3.94 $2.26 $1.29 $1.02 ------------------------------------------------------------------------------------------------------------- Vanguard Group $367.0 $310.4 $776.7 $612.7 $88.0 $103.0 ($104.2) $45.5 CALPERS 0.0 1,241.7 (47.0) 0.0 0.0 0.0 0.0 97.4 Barclays Global 21,725.6 (757.7) (1,215.8) 317.2 131.1 8.6 (219.8) (173.7) Investors Mellon Bank (Private 132.6 (22.2) 186.4 94.2 (40.1) 0.0 (22.9) 0.0 Asset Management) Northern Trust 75.8 33.7 145.7 200.3 (61.3) 0.7 1.4 (1.1) Investments Florida State Board 1,430.7 34.7 0.0 0.0 0.0 0.0 (1.2) 0.0 of Administration College Retirement 0.0 1,441.3 (173.1) 0.0 26.8 0.0 (19.2) (0.1) Equities Fund Northern Trust Global (6,404.6) (2.1) 4.3 73.4 4.4 13.8 39.2 23.3 Investments Deutsche Asset 902.4 (270.1) 129.0 11.0 (22.0) 4.7 (30.4) 61.3 Management Galleon Management 0.0 0.0 0.0 0.0 78.9 14.0 0.0 0.0 -------------------------------------------------------------------------------------------------------------
NET AVG. SHARE PRICE(4) INV.(1) AVG. INV. PRICE(2) AVG. SELLING PRICE(3) ------------------------------------------------------------------------------------------------------------ Vanguard Group $2,199.0 $5.18 $1.29 CALPERS 1,292.1 $6.28 $7.22 Barclays Global Investors 19,815.5 $26.51 $4.07 Mellon Bank (Private Asset 327.9 $7.09 $2.84 Management) Northern Trust Investments 395.2 $5.25 $3.75 Florida State Board of 1,464.2 $29.49 $1.29 Administration College Retirement Equities Fund 1,275.8 $10.21 $4.94 Northern Trust Global Investments (6,248.2) $1.91 $30.81 Deutsche Asset Management 786.0 $9.85 $5.88 Galleon Management 92.9 $3.55 $0.00 ------------------------------------------------------------------------------------------------------------
Note: dollars in thousands (1) Net investment over the last eight quarters (2) Weighted average investment price of shares purchased over the last eight quarters (3) Weighted average closing price of shares sold over the last eight quarters (4) Volume weighted daily average closing price (5) Quarterly investment or divestiture assuming any change in position is accomplished at the volume weighted daily average closing price