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Project Hound


FOX competes successfully with either Tweeter or the Magnolia division of Best ... Execution problems at Tweeter and ambiguous brand positioning at Magnolia (Best ... – PowerPoint PPT presentation

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Title: Project Hound

Project THEME
Summary Overview of Potential Acquisition
May 2007
Confidentiality Notice and Disclaimer
This Confidential Information Memorandum (this
Memorandum) and any supplementary materials
(the Memorandum) have been prepared by RABBIT
Electronics, Inc. ( referred to herein as
codename RABBIT). This Memorandum has been
prepared solely for purposes of evaluating
possible acquisition of Myer-Emco, Inc. (referred
to herein as codename FOX). This potential
acquisition is referred to herein as the
Transaction, and also under the codename
Project Theme). By accepting this Memorandum
you agree to keep confidential the information
included in this Memorandum (including any
analyses, compilations, studies or other
documents prepared by you or your Representatives
which contain or otherwise reflect such
information) not already in the public domain,
and to not share it with anyone other than your
affiliates, officers, directors, employees,
agents, and representatives (collectively
Representatives) without RABBITs prior
consent. In consideration of your being provided
with this Memorandum and being offered the
opportunity to evaluate the business of RABBIT,
you agree to comply with the terms of the
foregoing and you agree to be responsible for any
breach thereof by you or your Representatives. W
ithout the prior written consent of RABBIT,
neither you nor your Representatives will
disclose to any person the fact that this
Memorandum has been made available to you, that
discussions or negotiations are taking place
concerning a possible transaction with RABBIT, or
any of the terms, conditions or other facts with
respect to any such possible transaction,
including the status thereof. You will not use or
allow the use of this Memorandum for any purpose
except to evaluate the Transaction.
Specifically, at no time will you or your
Representatives use the information contained in
this Memorandum to the detriment of RABBIT.
You acknowledge that you are in possession of
material non-public information concerning
RABBIT, a U.S. publicly traded company, and that
you are aware (and that your Representatives who
are apprised of this matter have been or will be
advised by you) that the United States securities
laws restrict the purchase and sale of securities
by persons who possess certain nonpublic
information relating to the issuer of such
securities. You agree that for a period of one
year following the date hereof (the Standstill
Period), none of you, or your Representatives
(or any person acting on behalf of or in concert
with you or any of your Representatives) will,
directly or indirectly, without RABBITs prior
written consent, (a) acquire, agree to
acquire, propose, seek or offer to acquire, or
facilitate the acquisition or ownership of, any
voting securities or direct or indirect rights to
acquire any voting securities assets or
liabilities of the RABBIT
Confidentiality Notice and Disclaimer
  • enter, agree to enter, propose, seek or offer to
    enter into or facilitate any merger, business
    combination, recapitalization, restructuring,
    investment in or other extraordinary transaction
    involving the RABBIT, FOX or any of their
    subsidiaries, or any of their current or
    prospective competitors
  • make, or in any way participate or engage in, any
    solicitation of proxies to vote, or seek to
    advise or influence any person with respect to
    the voting of any voting securities of the
    RABBIT, FOX, or any of their current or
    prospective competitors
  • form, join or in any way participate in a group
    (within the meaning of Section 13(d)(3) of the
    Securities Exchange Act of 1934, as amended) with
    respect to any voting securities of the RABBIT,
    FOX, or any of their current or prospective
  • otherwise act, alone or in concert with others to
    seek to control or influence the management or
    the policies of the RABBIT, FOX, or any of their
    current or prospective competitors
  • disclose any intention, plan or arrangement
    prohibited by, or inconsistent with, the
  • make, or in any way participate, directly or
    indirectly, in any solicitation of "proxies" to
    vote (as such terms are used in the rules under
    the Securities Exchange Act of 1934 (the
    "Exchange Act")), or seek to advise or influence
    any person or entity with respect to the voting
    of any voting securities of the RABBIT
  • (h make any public announcement with respect to
    any transaction or proposed or contemplated
    transaction between the RABBIT or any of its
    security holders and you or any of your
    affiliates, including, without limitation, any
    tender or exchange offer, merger or other
    business combination or acquisition of a material
    portion of the assets of the RABBIT
  • disclose any intention, plan or arrangement
    regarding any of the matters referred to in
    clauses (a), (b) or (c)
  • solicit for employment any person who is an
    officer of the RABBIT or any of its subsidiaries
    or an employee of the RABBIT or one of its
    subsidiaries with whom you have had contact or
    who was specifically identified to you during the
    period of your investigation of the RABBIT or
  • (k) advise, assist or encourage or enter into any
    discussions, negotiations, agreements or
    arrangements with any other persons in connection
    with the foregoing

Confidentiality Notice and Disclaimer
None of the information contained in this
Memorandum has been verified by RABBIT. No
representation or warranty, express or implied,
is or will be made by RABBIT, FOX or any of its
Representatives, and no responsibility is or will
be attributed to RABBIT or any of its
Representatives as to or in relation to the
accuracy or completeness of the information
contained in this Memorandum and any liability
therefore is hereby expressly disclaimed. In
particular, no representation or warranty is
given as to the reasonableness of or ability of
RABBIT or FOX to achieve any projections. Any
forecasts or projections included in the
Memorandum or otherwise provided are necessarily
based on assumptions of future circumstances, and
may not accurately reflect future performance.
This Memorandum does not constitute an offer to
participate in the sale or purchase of
securities. This Memorandum contains
proprietary and confidential information with
respect to RABBIT and FOX and is based upon
information provided by the management of each.
This Memorandum does not purport to describe
fully either RABBITs or FOXs business or
operations or the industry in which they operate.
Accordingly, you are expected to conduct your
own independent investigation and verification of
the information, opinions and beliefs contained
herein. It is therefore imperative for you to
carefully review due diligence materials supplied
by RABBIT, FOX or any of their representatives so
as to make an independent analysis of RABBITs
and FOXs current business and future business
prospects. In furnishing this Memorandum,
RABBIT undertakes no obligation to provide you
with access to additional information or to
update this Memorandum or any additional
information or to correct any inaccuracies
therein. You agree that RABBIT would be
irreparably injured by a breach of the foregoing
by you or your Representatives and that, in such
event, RABBIT and/or FOX shall be entitled, in
addition to any and all other remedies, to
injunctive relief and specific performance. RABBI
T reserves the right to negotiate with one or
more prospective participants at any time and to
enter into an agreement without prior notice to
you. Also, RABBIT reserves the right to
terminate, at any time, further participation by
any party without assigning any reason therefore.
You agree not to contact FOX, its directors,
management, or employees, without the express
written consent of RABBIT. By accepting this
Memorandum, you agree, upon request, to return
promptly all material provided by or on behalf of
RABBIT relating to RABBIT, FOX, or the
Transaction (including this Memorandum) and
destroy all internal notes and analyses you have
made relating to RABBIT, FOX, and the Transaction
without retaining any copies or computer files.
Table of Contents
I. Summary Overview
This presentation summarizes the acquisition of
FOX by RABBIT. The combination of RABBIT and FOX
would create the 1 high-end consumer electronics
retailer and custom installer in the Northeast
  • Acquisition of FOX for a total transaction value
    of approximately 11.1 million (or 3.1x FOXs
    2007 Pro Forma EBITDA including operating
  • The consideration would consist of
  • 10 million for Jon Meyers equity
  • 800 thousand repayment of an off-Balance Sheet
    note to Ed Meyer (Jons father)
  • 320,000 for acquisition of 50 of COOs equity
    (remainder to be paid in options at strike prices
    between 4.00 and 7.00)
  • We expect the financing to include some
    combination of
  • 9.0 million of Senior Subordinated Debt
  • 3.5 million of Convertible Preferred Stock
  • Assumption of an estimated 2.4 million of
    borrowing under FOXs asset-backed line
  • This presentation summarizes our preliminary due
    diligence on
  • Strategy and competitive position
  • Financial performance
  • Potential synergies

Transaction Structure Overview
Potential Benefits of Acquiring FOX
  • RABBIT and FOX possess highly complimentary
  • RABBIT is strong in custom installation, FOX is
    strong in retail
  • Dramatically improves RABBITs profitability
  • Integrating these companies would generate
    approximately 4.0 million of synergies
  • The vast majority of these synergies would be
    realized within 9 months of closing the
    transaction and are primarily derived from
    cutting duplicative overhead
  • We plan to right-size our retail footprint,
    generating an additional 2.1 million of
    annualized savings
  • Significantly increases projected free cash flow
    for reinvesting in growth
  • Provides 2007 projected free cash flow of 4.8
  • Adds consistently profitable, consistently
    growing chain that is a proven competitor to Best
    Buy / Magnolia and Tweeter
  • FOXs stores would be among the most profitable,
    fastest growing in the chain
  • Expands growth potential in current and adjacent
  • Combined company would be the leading high-end
    retailer / installer of consumer electronics from
    Richmond, VA to Garden City, NY with expansion
    opportunities along the entire Northeast Corridor
    from Raleigh / Durham, NC to the Hamptons
  • Contributes strong retail operations personnel in
    merchandising, sales, and management in
  • Leverages RABBITs excellent financial management
  • Allows for more robust, unified advertising and
    marketing effort
  • Potential Tax Benefits
  • Present value of the tax benefits of the
    transaction are estimated by our accountants, BDO
    Seidman, to exceed 2.0 million (which is not
    included in our analysis)
  • Enhances RABBITs importance to key vendors
  • Increases availability of new products as
    combined company would be included in suppliers
    own forecasting models.

Estimated Total Integration Synergies and Cost
Integration Timetable First Twelve Months
1) Lower synergies than in prior quarter due to
Right-sizing the Retail Concept - Detail
  • Implementing the plan initiatives will
  • Reduce total retail square footage from
    approximately 45,000 sq. ft. to 25,000 sq. ft.
    and average store size from 5,000 sq. ft. to
    2,700 sq. ft.
  • Lower average occupancy costs from 10 of revenue
    to 6

Investments in Growth
The combined companies are budgeting an
annualized investment of over 5.9 million in
FY2007 initiatives designed to fuel growth. We
forecast these initiatives to grow Revenues by
2.8 million (3.8) in fiscal 2007.
Estimated Pro Forma Liquidity (1)
( in thousands)
Estimated Excess Availability Under Asset-Backed
Credit Ratios
II. Preliminary Valuation
Preliminary Valuation Illustration
An acquisition of FOX has the potential to be
highly accretive to Rabbits public market
valuation. Estimated number of shares calculated
using the Treasury-method of dilution.
Rabbit Fox Combined
_at_ Magnolia acquisition multiple
Estimated Share Price (1)
Rabbits Current Share Price (1.33)
See page 21 for footnotes.
Normalized Comparable Company Valuations

Tweeters recovery quarters
EV/EBITDA Multiple
Recent Trading Range of Comps
Comparable Public Companies
Share prices as of April 24, 2007
Comparable Transactions
Notes to Normalized Comparable Company
Valuations Page
  • EV/EBITDA multiples were selected for periods of
    normal earnings for the respective companies.
  • (1a) EV/EBITDA multiple computed for 6 quarters
    between FYE 9/30/2000 and the quarter ending
  • (1b) EV/EBITDA multiple for Q4 of FY 2005
    computed using average share price over the
    quarter. EV/EBITDA multiple for Q1 of FY 2006
    computed using February 2, 2006 closing share
  • (2) EV/EBITDA multiple computed for 10 quarters
    between FYE 1/31/2000 and the quarter ending
  • (3) EV/EBITDA multiple computed for 5 quarters
    between the quarter beginning 11/1/2002 and FYE
    1/31/2004. In quarter beginning 2/1/2003, this
    multiple fell from 8.5x in the previous quarter
    to 4.5x, before rising to 9.0x in the next
    quarter. This quarter is not included in the
    computation of the average multiple for the
    period selected.
  • EV/EBITDA multiple computed for 6 quarters
    between the quarter beginning 5/1/2003 and FYE
    1/31/2005. In the quarter beginning 11/1/2003,
    this multiple fell from 9.1x in the previous
    quarter to 4.1x, before rising to 7.9x in the
    following quarter. This quarter is not included
    in the computation of the average multiple for
    the period selected.
  • EV/EBITDA multiple computed between FYE
    12/31/2000 and FYE 12/31/2004.
  • EV/EBITDA multiple computed between FYE 1/31/2001
    and FYE 1/31/2005.
  • EV/EBITDA multiple computed between FYE 1/31/2001
    and FYE 1/31/2005.
  • Valuation as of 4/24/2007. Public comps include
    Tiffany, Radioshack, MarineMax, Zale, and
    Williams Sonoma
  • High growth is the highest year-over-year growth
    rate achieved in the quarters for the respective
    companys selected period.
  • Low growth is the lowest year-over-year growth
    rate achieved in the quarters for the respective
    companys selected period.
  • Average annual growth rate is the average of the
    year-over-year growth rates for the quarters in
    the selected period.
  • High and low EBITDA margin are the highest and
    lowest EBITDA margins, respectively, for the
    selected period described above.

Footnotes to Preliminary Valuation Chart on Page
  • Estimated number of shares calculated using the
    Treasury-method of dilution. Actual options and
    warrants are likely exercised on a full physical
    settle basis. Assumes subordinated debt
    investors receive 15 in warrants with strike
    price of 2.80
  • Valuation range of 6.0x to 10.0x EBITDA reflects
    the high and low multiples of the public comps
    selected. Public Comp Multiples are calculated on
    a LTM basis as of the close of market on April
    24, 2007. The comparable companies used are
    Tweeter, Radioshack, Tiffany Co., Williams
    Sonoma, Sharper Image, Zale Corp and MarineMax.
  • Valuation range of 6.8x to 10.4x EBITDA reflects
    the high and low multiples of the transaction
    comps selected. Transaction Comps used are
    Brookstone (acquired by JW Childs and Temasek in
    2005) at 7.2x Sound Advice (acquired by Tweeter
    in 2001) at 10.1x Future Shop (acquired by Best
    Buy in 2001) at 6.8x and Neiman Marcus (acquired
    by TPG in 2005) at 10.4x.

III. FOX Standalone Summary
Summary Overview of FOX
Founded in 1955, FOX is the leading retailer and
custom installer of high-end home video and audio
systems in the Washington DC area
FOX Standalone
  • FOX has ten-stores with corporate offices in
    Gaithersburg, Maryland. This 25,000 sq-ft
    facility also houses the main warehouse, design
    centers, training rooms and acts as the
    distribution hub for FOXs stores and Custom
    Installation division.
  • Stores are located primarily in the affluent DC
    and Virginia suburbs outside the Beltway as well
    as 3 stores within Washington D.C. in locations
    such as Georgetown.
  • Similar to RABBIT, FOX focuses primarily on
    upper-mid priced and high-end audio and video
    products from leading manufacturers such as Sony,
    Pioneer, Sharp, Samsung, BW, Yamaha, and
    Definitive Technology. FOXs brand perception in
    its markets appears to be very similar to
    RABBITs (i.e. the premier high-end retail/custom
    install chain).
  • Since 1978, FOX has been named Retailer of the
    Year by Audio-Video International magazine a
    total of 25 times. Over the recent years, its
    total custom installation business has grown to
    represent approximately 45 of sales.
  • An important component of FOXs Custom
    Installation strategy is the integration of
    Pro-Line Systems (today known as FOX Security
    Systems), one of Washingtons leading residential
    and commercial security companies. Acquired in
    1998, Pro-Line allowed FOX to provide a total
    turn-key solution to customers from multi-room
    audio/video systems, dedicated home theaters and
    security systems, to home telephones, lighting,
    and networking systems
  • FOX competes successfully with either Tweeter or
    the Magnolia division of Best Buy (or both) in
    most of its locations.
  • FOXs stores have an average square footage of
    around 7,000 sq-ft (compared with 5,000 sq-ft
    average for Rabbit), with rents averaging 25 per
    sq-ft or 6 of sales (vs. Rabbits 70 per sq-ft
    and 8 of sales). Revenues are over 400 per
    sq-ft on average (compared with 900 per sq-ft
    for Rabbit)
  • FOXs stores average a 16.9 contribution margin
    vs 8.6 for Rabbit. Same store sales growth is
    4.9 year-to-date, compared with -15.4 for
  • Return on invested capital has consistently
    exceeded 20 per year.
  • FOX has 152 employees, including 10 store
    managers and 65 sales associates at its retail
    locations, and 3 Project Managers and 35 custom
    installers in its Custom Installation Division.
    The employees are not part of a union and only
    one employee, the President and COO, has an
    employment contract with severance provisions.
  • FOX is owned by Jon Myer, who is also CEO of the
    Company. Approximately 19 months ago, Jon turned
    over day-to-day operations of the Company to Gary
    Yacoubian, the President and COO.

Custom Labor 5
Custom Product 40
Retail Audio / Video 43
Car Audio 7
Including service and installation.
Warranties 3
Security Systems 2
FOX Summary Financials
(1) Includes security monitoring income,
non-recurring charges of 170K and expenses that
would be capitalized in a public company (2) See
page 8 for details on operating synergies
Strategic Positioning
FOX is well-positioned to remain the premier
high-end competitor in the D.C. metro home
entertainment market
Store Locations of FOX and Competitors
To Frederick
Tysons Corner
FOX AudioVideo Best Buy Magnolia Home
Theater Best Buy (w/o Magnolia) Tweeter Home
Circuit City Rising Competitor Costco
Rising Competitor
5 miles
Effect of Competitor Locations
FOX successfully competes head-to-head with both
the Magnolia Home Theater division of Best Buy
and with Tweeter, as well as the single-location,
Mom Pop custom installers.
  • Nine out of ten FOX locations are within five
    miles of a Tweeter or a Magnolia store two
    stores are within five miles of both Tweeter and
    Magnolia, and five others are near a Tweeter and
    a regular Best Buy
  • Interestingly, the sales growth and profitability
    at FOX stores does not appear to be highly
    correlated to the presence of either Tweeter or

1) Total Company includes sales not made through
specific stores. Through September 9, 2006.
Elements of Competition
FOX appears to successfully compete with Tweeter
and Magnolia because it does a very good job of
location selection, merchandising, and marketing
to create a strong retail and service concept.
  • FOX stores are larger in format (almost twice the
    size of RABBITs) and have more foot traffic than
    RABBITs stores, in spite of such close proximity
    to discount competitors
  • Although a lower percentage of sales at FOXs
    stores are for custom installations, the
    merchandising and design of the stores tends to
    be focused more explicitly on home theater than
    those of RABBIT
  • Management seems to have made a large investment
    in leasehold improvements, creating an attractive
    retail environment specifically focused on home
  • FOXs newspaper and radio advertising has a more
    traditional retail focus than the custom
    installation focus of RABBIT
  • FOX focuses heavily on customer retention
    management (CRM) communicating 9 or more times
    per year to former customers with compelling
    direct mailings as well as invitation only
    private sales

FOX Standalone Financial Summary
Store Performance
Although FOXs revenue per square foot on average
is below Rabbits, this is due to relatively
larger-format stores that average 25 per sq. ft.
of rental expense vs. 70 per sq. ft. for Rabbit.

Sales by Store 2005 ( million)
Sales per Square Foot 2005
Rabbit Average
Rabbit Average
EBITDA Contribution by Store 2005 ( million)
EBITDA Contribution per Square Foot 2005
Rabbit Average (before Rent)
Rabbit Average (before Rent)
Rabbit Average (after Rent)
Rabbit Average (after Rent)
FOX Standalone Operating Structure
FOXs operating structure is very similar to
RABBITs, creating potential for synergies
CEO (Jon Myer)
PRESIDENT (Gary Yacoubian)
CFO (Gary Rosenfeld)
VP MERCH. (Dave Glassman)
5 Outside Sales Associates
3 Project Managers
3 Admin Support
Payroll Manager
Accounting Manager
10 Store Managers
35 Custom Installers
Accounts Payable
General Admin
Accounts Receivable
Warehouse and Service Mgr (Bill Lichtman)
10 Sales Associates
5 Warehouse Personnel
5 Service Techs
2 Service Admin
3 Delivery Drivers
FOX SWOT Analysis
Porter Five Forces Analysis
Bargaining Power of Customers
Threat of New Entrants
  • Barriers to entry in the relatively new and
    fast-growing custom installation market are
    somewhat low
  • Better access to vendor products have allowed
    trunk slammer types to compete with companies
    like FOX, Tweeter and RABBIT on product choice
    and availability
  • The lack of fixed overhead and low capital
    requirements has also allowed these store-less
    competitors to operate on a lower cost basis
  • Customers shopping for traditional box consumer
    electronics have seen their bargaining leverage
    increase, primarily because of big box
    retailers (e.g. Best Buy, Circuit City,
    Radioshack) competing on price and choice and the
    advent of e-commerce and the Internet
  • As a result, price sensitivity for these box
    products has gone up, particularly in the flat
    panel TV space
  • By contrast, the price of custom installation
    services (as measured in / hr. of labor) is
    rising. This appears to be happening because (i)
    customers understand the value of having the job
    done correctly (ii) are willing to pay for the
    peace-of-mind associated with a quality when
    making a large investment in a home theater and
    (iii) are intimidated by the complexity of the
    systems, and therefore willing to pay-up for
  • Switching costs are also high once a customer has
    purchased an installed system with a particular
  • However, because of high switching costs and the
    complexity of the purchase, customers look beyond
    price in their purchases
  • Brand equity, if translated to mean reputation,
    reliability and excellence of service is
    therefore a powerful barrier to entry

Competitive Rivalry within the Industry
Bargaining Power of Suppliers
Threat of Substitute Products
  • Supplier power varies according to the strength
    of their brand as well as the volume of business
  • Bargaining power is higher for large vendors with
    must-have brands, such as Sony, Pioneer Elite
    and, to a lesser extent Fujitsu and Sharp.
    However, niche brands such as Marantz, Runco,
    Crestron rely more heavily on high-end specialty
    retailers like FOX and RABBIT to sell the
    features of their products
  • Niche vendors also have less leverage because of
    the relative substitutability of their products
    e.g. Speaker brand A is relatively switchable
    with Speaker brand B
  • Substitutability of retailers/installers is
    relatively high in the nascent custom
    installation market because of the low barriers
    to entry
  • The maturity of the industry will increase the
    importance of brand equity as a potent
    differentiator, if the brand represents quality
    service, reliability (i.e. experience), and a
    reputation for technical excellence. The FOX and
    RABBIT type of retailer will increasingly be
    required to convince customers of the
    differentiated value proposition they offer
  • Customers are likely to do price comparisons
    between retailers before committing but once an
    installed system is in place, high switching
    costs will mean the customer will prefer to stick
    with his initial choice of a retailer FOX
    appears to do CRM well and it must be a focus of
    the combined group in the future
  • Fragmented competition among generic custom
    installers selling a complex product creates an
    opening for the emergence of a dominant branded
    retailer in this industry
  • FOXs position and reputation in the Washington
    DC area sets it apart and is a great platform for
    the further consolidation of brand perception in
    customers minds
  • Competition at the big box level is intense
    with dominant players like Best Buy and Circuit
    City out-selling many of the regional retailers
    that had previously to dominated consumer
    electronics retailing
  • FOX competes successfully with the Big Box

IV. RABBIT Standalone Summary
RABBIT Summary Overview
RABBIT Standalone
  • Rabbit is the leading retailer and custom
    installer of high-end home video and audio
    systems in the New York metropolitan area the
    countrys most important market for consumer
  • By virtue of its nine store locations and 75
    year history, Rabbit is well positioned to
    capitalize on the extraordinary growth taking
    place in the premium end of its core retail and
    custom installation market segments.
  • Rabbit holds the 4 position nationally in the
    this 8.4 billion market, which is projected to
    grow at a 24 CAGR through 2010.
  • Rabbits average revenue of 900 per square foot
    of retail space ranks it among the most
    productive of all U.S. retailers, and meets or
    exceeds benchmarks of other premier luxury goods
    retailers, such as Tiffany.
  • The Company focuses primarily on upper-mid priced
    and high-end audio and video products from
    leading manufacturers such as Bang Olufsen,
    Bose, Marantz, Sony, Pioneer, and Fujitsu.
  • Approximately 60 of Rabbits sales come from
    custom home installations. These projects have
    high price tags and generate gross profit margins
    on the labor and accessories portions of the
    installation of approximately 70 and 53,
  • In recent years, the Company has benefited from
    i) the explosive growth in flat-screen television
    sales ii) the highly profitable custom
    installation of home theaters and audio systems
    in the 25,000 and up price range, and iii) its
    position as the exclusive vendor of a number of
    premium audio products.
  • Rabbit provides an attractive platform from which
    to consolidate its highly fragmented market
  • For example, there are over 3,000 custom
    installers in the U.S.
  • In 1996 the current management team was installed
    to pull Rabbit out of bankruptcy protection.
    This team has grown revenues from 9 million at 4
    stores to 40 million at 9 locations, while
    pursuing a strategy based on financial prudence
    and a commitment to differentiate Rabbits brand
    and services from the discount end of the market.

Extended Warranties 3
Custom Installation Product 51
Retail 38
Custom Installation Labor 8
RABBIT Summary Financials
Competitive Advantages
Rabbit has a number of key competitive advantages
from which it can build
Store Overview
Rabbits retail productivity as measured by
revenue per square foot is 100 to 200 higher
than most other comparable U.S. retailers
  • The flagship store at 45th Street off 5th Avenue
    in Manhattan accounts for 22 of total revenue
    and 22 of total profit contribution
  • Rabbits most profitable store, as a percentage
    of sales, is its store-within-a-store at ABC
    Carpet Home on Broadway and 19th Street in
    downtown Manhattan, where profit contribution
    margins before rental expense are 20.5 580 bps
    above the Companys average
  • The Greenwich, CT BO store was consolidated into
    its neighboring Rabbit location

Sales by Store -2005 ( million)
Sales per Square Foot - 2005
Profit Contribution(1) and Margin by Store 2005
( million)
Profit Contribution(1) per Square Foot 2005 (
in thousands)
margin (before Rent)
1) Store profit contribution includes interest,
depreciation, and amortization allocated by
management (based on of sales).
V. Strategic Combination
Overview of Combined Business Mix
Custom Labor 5
Custom Labor 8
Custom Labor 10
Custom Product 40

Custom Product 48
Custom Product 53
  • Including estimated 1.1MM of 1.9 MM annualized
    net synergies realized in 2007
  • Includes security monitoring income
  • Including 1.5MM of 4.3 MM in annualized savings
    from estimated overhead reductions and store

Business Review by Product (Jan June 2006)
( in millions)

  • Includes car audio of 838 thousand. 72
    thousand of car cable included in Cable.
  • Other category includes furniture, security
    business, and other.

Business Review by Vendors (Jan June 2006)
The combination of FOX and RABBIT would increase
the combined Companys importance to key vendors,
particularly those of flat-panel televisions (in
BOLD below), while also lowering the Companys
dependence on any single vendor.
Both RABBIT and FOX are on the cusp of being
included in several of their suppliers own
revenue forecasting models. The combined company
should be able to increase profitability,
bargaining power, and share of market development
and co-op advertising dollars with these vendors.
1) DM Holdings includes Denon, Marantz,
McIntosh, Boston Acoustic, and Escient product
Advertising Comparison
RABBIT spends approximately 7.0 of revenue, in
total, on advertising, including co-op spending,
compared with 3.0 for FOX.
  • RABBIT has focused past advertising efforts on
    New York Times print ads and local radio spots
  • FOX spends significantly less on advertising but
    has run successful direct marketing campaigns
    including private sales to existing customers
  • Newspaper print ads have been the most effective
    advertising channel for FOX
  • RABBIT 2005 co-op advertising income was 2.0
    million, approximately 73 of total ad spending
    FOX 2005 coop income was 657 thousand,
    approximately 60 of total spending N.B. each
    may account for co-op income differently TBD
  • Both companies could benefit from a combined
    advertising campaign, especially a coordinated
    online marketing strategy
  • The combined company would also be a larger
    client for an ad agency, meriting greater
    attention and a more important customer for
    vendors, resulting in larger co-op advertising

Estimated Effective Advertising Range
RABBIT Radio, estimated
RABBIT Print, estimated
FOX Print, estimated
Historical Gross Advertising Spending (
FOX Radio, estimated
PF of Combined Co. Revenue
Advertising Spending Comparison (Jan June 2006)
Note Excludes some portion of ad agency
retainers TBD
Pro Forma Combined Income Statement
  • See page 8 for details on operating synergies
  • Savings from downsizing of stores and
    consolidation of corporate headquarters and
  • Return on Invested Capital calculated as the sum
    of net income and tax-affected interest divided
    by the sum of all interest bearing liabilities
    and equity. Synergies are added back on an
    after-tax basis

Store Contribution Comparison
FOXs stores would also be the most profitable in
the group with average contribution margins of
15.4 vs. 8.6 for Rabbit.
VI. Appendices
RABBIT Shareholder Ownership Table
RABBIT Share Ownership Roll-out
(Shares in thousands)
FOX Financials 2006 Reconciliation of EBITDA
2007 Monthly Cash Flow Projections
2007 Monthly Cash Flow Projections
2007 Monthly Cash Flow Projections
2008 Monthly Cash Flow Projections
2008 Monthly Cash Flow Projections
2009 Monthly Cash Flow Projections
2009 Monthly Cash Flow Projections
RABBIT Board of Directors Bios
RABBIT Board of Directors Bios (continued)
THEME Management Bios
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