1 Fundamental Stock Analysis The Market is NOT Efficient Fundamental analysis can uncover individual companies selling in the public market at significant

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Fundamental Stock Analysis

The Market is NOT Efficient

Fundamental analysis can uncover individual companies selling in the public market at significant discounts to intrinsic business value.

We are a “value” equity manager

Buying assets @$.50 on the $1.00

Buying businesses @ reasonable multiples of earnings, cash

flow, book value growth rates

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EFFICIENT MARKET THEORY

Highly fashionable in academic circles in the70’s

Market is efficient and rational

“Stock Picking” is useless as all publicinformation about all companies isappropriately reflected in prices at any time

Impossible to add “value” above overallmarket returns

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BLOWS DEALT TO EMT:(1) Successful records of “stock-pickers”

Warren Buffett1956-1998 Time-frame:

Market returned 10% /year Buffett returned 20% /year

$10,000 in the market - $ 547,640 $10,000 with Buffett - $21,164,711

Buffett on EMT: “In any sort of contest -financial, mental, or physical - it’s an enormousadvantage to have opponents who have beentaught that it’s useless to even try”.

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BLOWS TO THE EMT:

2) October 19, 1987 - “Black Monday”

Complete panic – FEAR

Matter of hours “value” of publicly traded companiesslashed by 25-50%

NO changes to company fundamentals

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BLOWS TO THE EMT:

3) 2nd Half of 1990 - Extreme Volatility

Invasion of Kuwait - August, 1990 Credit crunch - recession - earnings disappointments Bank defaults - “Throwing out the baby with the

bathwater”“There are no good banks”“There are no good finance companies

Peak to trough - finance sector loses 70% of its value UNUM Corp. $15 - $7 - Today $48 Freddie Mac $5 - $2 - Today $57

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VALUE INVESTING - AN EXAMPLECarson Pirie Scott - A $13 Stock (1984)

DEFENSE Clean Balance Sheets/Understated Assets

% Capital Industry Avg. Long Term Debt 50% 45%Book Equity 50% 55%

Understated Assets: 2 mm sq. ft. of real estate in Chicago Loop AreaBought by CRN in 1904 Carried on books at 1904 costValue of real estate approx. $15.00/share aloneOther assets:“Toddle House” restaurants Dobbs food service company

Dobbs airline catering company Department Stores - $1 billion in sales

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OFFENSE: “Trigger Mechanism”

CRN’s pretax margins at 1.5% were half industryaverageSales /sq. ft. $150 versus $250 industry averageSignificant earnings leverageRestructuring opportunities

Sale/Leaseback of real estate?Sale of “non retail” divisions?

Management compensation package

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HEAVY INSIDER STOCK OWNERSHIP: Peter Willmott - New CEO in 1984

Incentive Compensation Package

$200,000 for each point over $13.50 the stock trades in 1990

By 1989, Willmott largest shareholder in CRN

High “Index of Executive Concern”

LACK OF INSTITUTIONAL SPONSORSHIP Carson Pirie “WHO”?

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VALUE INVESTING - AN EXAMPLECarson Pirie Scott - A $13 stock (1984)

WHAT HAPPENED?

“Black Monday” - October 19, 1987 - CRN at $38

November, 1987 announces sale of Dobbs subsidiary

Pays out $30 special dividend to shareholders in November

Old CRN = $38 Special Dividend $30 New CRN “stub” $8

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VALUE INVESTING - AN EXAMPLECarson Pirie Scott - A $13 stock (1984)

New CRN @ $8Still has the real estate ($15.00)Still has retailing operation

Pete Willmott takes his $30 special dividend in theform of STOCK in new CRN - NOT CASH

Pete Willmott buys more of CRN “stub”Largest shareholder of CRN (11%), owns over 1million shares

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WHAT HAPPENED? (Cont.)

June, 1989, CRN sold to A.G. Bergner for$27.50/share

Original Investment in CRN:

Old CRN $13.00+New CRN $ 8.00 “Blended” Cost $10.50

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Return on Investment:

Special Dividend $30.00Tender Offer Cash $27.50 Total $57.50

Held Stock for 5 years (approximately)

Total Return =+450%Annual ROR =+40.5%

Peter Willmott walks away with $40 million

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VALUE INVESTING - AN EXAMPLECarson Pirie Scott - A $13 Stock (1993) - “The Sequel”

Peter Willmott sells Carson Pirie Scott to P.A.Bergner in 1989

P.A. Bergner files for Chapter 11 in 1991

November, 1993 P.A. Bergner emerges frombankruptcy under the Carson Pirie Scott name

IPO in November, 1993 priced at $13.00

March, 1994 - Carson calls all its old shareholdersto invite them to listen to 1st conference call sincecoming public again.

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WE LIKED WHAT WE HEARD! Closed underperforming stores Had cleaned up the balance sheet while operating

in bankruptcy Paid off nearly $800mm in LTD Net Debt/Capital = 35% (70% Receivables Facility) New management team brought in Stan Bluestone, CEO – 250,000 option shares granted Stock selling at very depressed valuation: 1993 EPS = $1.68 P/E of 7.7X Industry P/E of 16X 1993 EV/EBITDA = 4.9x Industry EV/EBITDA=7.1X Absolutely ZERO Wall Street Sponsorship!

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Business Strategy:

“Blocking & tackling”

5 Year Plan to renovate store base

(1) Significant Operating Leverage:Drive sales/sq ft upwardExpand EBITDA margins

Every 1% increase in sales translatesinto 4% increase in EBITDA

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“The Sequel”

(2) Significant Financial Leverage:

Repurchase of Stock

Combination of Two would drive EPS

Tell the story and make people notice!

Develop relationships with retail analysts

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WHAT HAPPENED 1993-1997?

EBITDA Margins expand from 7.5% to 9.2%Company repurchases 25% of its stockEPS grow from 1.68 in 1993 to $2.65 in 1997Wall Street Notices!Price/Earnings multiple expands from 7.7X in 1993 to13.5X by September, 1997

Stock Price: $13.00 in November, 1993$35.00 in September, 1997

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October 29, 1997:

Proffitt’s announces acquisition of Carson Pirie Scott

1.7-1.8 shares of PFT for each share of CRPAcquisition Price: 20X EPS, 8.1X EBITDAPFT sells at $28.50CRP sells at $51.00

Carson Pirie “The Sequel” = ACROR of 42% for 4 years

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VALUE INVESTING - AN EXAMPLETime, Inc. - A $105 Stock (January, 1989)DEFENSE: Clean Balance Sheets/Understated Assets

%Capital Industry Avg. Long Term Debt 26% 53%Book Equity 74% 47%

Understated Assets: Value/Time share

ATC Cable Co. (3mm Subs. @ $2,000/sub.) $104.00 Magazine Division (@2X Revenues) $ 60.00 Book Publishing Division (@2X Revenues) $ 25.00 Programming Group (@9X OPCF) $ 25.00 Real Estate $ 7.00 Cable Jt. Ventures (530,000 Subs. @ $2,000/sub.) $ 17.00 Total TL Asset Value $238.00 Less Long Term Debt ($1.1 billion) ($ 19.00) Net “Private Value $219.00 Discount to Private Value (@$105) 52.00 %

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VALUE INVESTING - AN EXAMPLETime, Inc. - A $105 Stock (January, 1989)

OFFENSE:

“Trigger Mechanism”

Pressure on Mgmt. to get stock price upTime Inc. worth more dead than aliveRestructuring opportunitiesSpin off of ATC stake to TL shareholders?Spin off other divisions?Tremendous financial flexibility (LTD = 26% of capital)Asset value continues to grow

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HEAVY INSIDER STOCK OWNERSHIP: Value

# of Shares at $105 Henry Luce, III (son of founder) 3mm $315mmN. Nicholas (CEO)/ D. Munro (Chrmn.)170k $ 18mmSignificant investment, but no controlHigh “Index of Executive Concern”

LACK OF INSTITUTIONAL SPONSORSHIP:

Time, Inc. “out of favor” on Wall Street

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WHAT HAPPENED?

June 6, 1989 - Paramount Communicationsannounces cash offer of $175/share for Time, Inc.

Time Inc. announces intention to fight bid andwithin a week, announces merger with WarnerComm. (stock deal, no cash)

Paramount raises bid to $200/share for Time, Inc.

Time, Inc. stock rises to $190 peak

We sell @ net price of $175/share

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WHY DID WE SELL AT $175?

Price was 80% of intrinsic value for Time Inc.(Sell Discipline)

70% return in 6 months (Remember, there arebears, there are bulls, and there are pigs)

Obvious that management at Time, Inc. was goingto fight Paramount vigorously.

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VALUE INVESTING - AN EXAMPLECBS - A $155 Stock (February, 1992)

DEFENSE: Clean Balance Sheets/Understated Assets

Long Term Debt $700mmBook Equity $600mmCash $1,000mm

Understated Assets: Private Asset Value

Cash $1,000mmReal Estate (“Black Rock”) $ 435mmCBS TV Network (40% of Revenues) $1,100mmCBS TV Stations (9x OPCF) $1,900mmCBS Radio Network & Stations (8x OPCF) $ 500mm Total CBS Asset Value $4,935mm Less: Long Term Debt ($ 700mm)Net “Private” Value $4,035mm Net “Private” Value/Share $ 260.00Discount to Private Value (@155) 40%

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OFFENSE: “Trigger Mechanisms”

Enormous Operating Leverage

1991 - Recession - worst ad environment since WWII

1992 - Beginnings of cyclical recovery

1993 - Even brighter outlook

CBS in 1992 went from 3rd to 1st place in ratings

CBS network lost $100mm in 1991 - will earn $150mm in 1993

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NBC operating profit when 1st in ratings - $400mm

Financial Leverage - Since 1987 CBS Has Retired60% of Stock

EPS (1991) $0.00EPS (1992) $12.00 12.9X P/EEPS (1993) $17.00 9.1X P/ES&P 500 18.1X P/E

Tisch Dressing CBS Up for a Sale?

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HEAVY INSIDER STOCK OWNERSHIP:

Dollar# of Shares Value

Larry Tisch - CEO of CBS CEO of Loew’s Corp

Larry Tisch - Largest LTR Shareholder 17mm $1,938mmLoew’s Corp. - Largest CBS Shareholder 4mm $ 605mm

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LACK OF INSTITUTIONAL SPONSORSHIP:

Network Broadcasting - Out of Favor

Cable TV Companies - Darlings of WallStreet

CBS - Not Well Regarded

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What Happened?

CBS reports a 50% increase in EPS due to higherad revenues that are driven by its #1 networkranking

CBS share price rises in response to renewedearnings momentum

5 Wall Street firms issue new “buy”recommendations as CBS hits $250/share

We sell at $250 (in August, 1993), as CBS reachesour intrinsic business value target

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VALUE INVESTING - AN EXAMPLEFingerhut - A $14.375 Stock (March, 1997)

BUSINESS DESCRIPTION

Direct-to-the-consumer marketing company

2 Divisions: Operating Earnings

1996 1994 Catalog Operations $30.0mm $69.3mm Credit Card Operations $18.0mm $ 2.2mm

83% Ownership of Metris (MTRS-$27.00)

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CLEAN BALANCE SHEET/UNDERSTATED ASSETS

Long Term Debt $147 millionBook Equity $734 million

Book equity understated - No value ascribed toFHT proprietary database

information on 30mm customers developed over 50 years proprietary nature of information

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UNDERSTATED ASSETS $ Value Per/Share

FHT Current Market value $697mm $14.375Less: Value of 83% Stake in MTRS($421mm) ($ 8.69) Implied Value of Catalog Ops $276 mm $ 5.69

Implied Valuation Multiples of Catalog Ops: 13.2% of Sales 9.2X Trailing 1996 EPS 4.9X Expected 1997 EPS

S&P 500 Sells at 17.7X Expected 1997 EPS

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VALUE INVESTING - AN EXAMPLEFINGERHUT - A $14.375 Stock (March, 1997)

OFFENSE Enormous Operating Leverage in CatalogOperations

1995-96 earnings under pressure

Tepid consumer spending Rising delinquencies/bad debt Dramatic increases in paper/postage costs 1995-96:+$67 million to FHT

($1.49/share Pretax)

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VALUE INVESTING - AN EXAMPLEFINGERHUT - A $14.375 Stock (March, 1997)

1997 Outlook Bad debt/delinquencies are falling Paper costs have plummeted Postage costs are flat Purposely reduced mailings - more targeted

higher response rates higher sales per mailing lower customer acquisition costs earnings of catalog ops should double off depressed 1996 base to $1.15/share

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OFFENSE (Cont.) Continued Rapid Growth in Metris

CEO Ron Zebeck - GM MasterCard From zero to 1 million accounts, $1 billion in

receivables in 18 mos. Tremendous competitive advantages

Exclusive use of FHT database Info not available to other issuers Response rates 3X higher than industry Results in much lower costs

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Priced to reflect higher customer service riskprofile

APR averages 21% No teaser rate 80% of accounts pay annual fees 30% buy other fee based products Conservative accounting – books much higher

reserves

Net result: Much higher net interest margins(2.5X)

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OFFENSE (Cont.) 1995 1996 1997E

Metris earnings growth $5.5mm $20.7mm $32.0mm

Per Metris share $.29 $1.10 $1.70

Per FHT share $.10 $.37 $.59

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OFFENSE (Cont.)

Anyway You Slice It, FHT Deeply Undervalued

1997 EPS Catalog $1.15 Plus: 83% MTRS $ .59

Total FHT $ 1.74 At $14.3758.3X EPS

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OR: FHT $14.375

Less: 83% MTRS ($ 8.69) Catalog $ 5.69

Catalog operations sell at:

4.9 X 97 EPS

49% of catalog book value

13.2% of catalog revs of $2.0 billion

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HEAVY INSIDER OWNERSHIP

Ted Deikel, CEO and founder of FHT - 6mm sharesunder option

Ron Zebeck, CEO of Metris: Receives 3.6% ofgrowth in market value in the form of stock

UNDERFOLLOWED

1 analyst follows FHT - Out of Favor4 analysts follow MTRS

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VALUE INVESTING - AN EXAMPLEOF WHAT CAN GO WRONG!Liz Claiborne - A $31 Stock (February, 1992)

DEFENSE: Clean Balance Sheets/Understated Assets

Long Term Debt NoneBook Equity $1 BillionCash $500 Million

Understated Assets:

Valuable Consumer Franchise

Liz Brand Name

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VALUE INVESTING - AN EXAMPL OF WHAT CAN GO WRONG!Liz Claiborne - A $31 Stock (February, 1992)

Reasonable Multiples of Earnings, Cash Flow:

Classic “Fallen Angel”LIZ $53 to $31 - Abandoned by Growth Managers1991 EPS of $2.61 - +11% over 1990 EPS of $2.37Growth Rate Had Slowed - P/E Multiple Cut in Half

At $31, LIZ traded @ 11.9X Trailing 91 EPSS&P 500 sold @ 18X 1991 earnings

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VALUE INVESTING - AN EXAMPLOF WHAT CAN GO WRONG!Liz Claiborne - A $31 Stock (February, 1992)

LIZ’s Record (Annual Growth Rates)

10 Years 5 Years Sales +33.0% +30.0%Cash Flow +40.5% +31.5%Earnings +39.5% +32.0%Book Value +52.0% +39.5%

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VALUE INVESTING - AN EXAMPLE OF WHAT CAN GO WRONG!Liz Claiborne - A $31 Stock (February, 1992)

OFFENSE

“Trigger Mechanism”

Nothing fancy here - straight forward case of buying LIZat a discount multiple of earnings per share and cashflow.

The days of 30+% growth were over

But 10-12% growth seemed reasonable

Share buybacks could boost EPS ($300 mm)

Buying a superior “growth” company at “value” prices -GARP

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VALUE INVESTING - AN EXAMPLE OF WHAT CAN GO WRONG!Liz Claiborne - A $31 Stock (February, 1992)

HEAVY INSIDER STOCK OWNERSHIP:

J. Chazen (CEO) - 2.8 mm LIZ Shares

Officers/Directors - 2mm LIZ Options

High “Index of Executive Concern”

LACK OF INSTITUTIONAL SPONSORSHIP

Liz was abandoned

“Thou Shalt Not Disappoint Wall Street”

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VALUE INVESTING - AN EXAMPLE OF WHAT CAN GO WRONG!LIZ CLAIBORNE - A $31 Stock (February, 1992)

What Happened?

The Wheels Fell Of at LIZ!

10-12% Earnings Growth Was NOT Reasonable

Nor Was 0% Earnings Growth Reasonable!

LIZ, After 20 Years of Never Making a Merchandising Mistake,Made a Whopper of a Mistake

Management Made Announcement (7/93) of “Significant EarningsShortfall Expected in 1993” - Head of Merchandising Resigned -Management Turmoil - LIZ Dropped 25% to $24

We Sold the Stock and Took a 30% Loss

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VALUE INVESTING - AN EXAMPLEOF WHAT CAN GO WRONG!

Liz Claiborne - A $31 Stock (February, 1992)

LESSONS LEARNED (LIZ):

When “Growth Stocks” Become “Value Stocks” - Value TrapPotential

The First Earnings Disappointment Usually Not the Last

When a Good Company Meets a Bad Business, The BadBusiness Usually Wins - Women’s Apparel Business is Cyclical,Fashion Driven, and Extremely Competitive.

Management Can Be Less than Forthcoming - “Trust Me”

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What Worked!

1998 PERFORMANCE BY CATEGORY

Growth Value Combined

Large Cap (1) +45.1% +21.2% +34.0%

Mid Cap (2) +17.9% +5.1% +10.1%

Mid-Small Cap (3) +3.1% -1.9% +0.4%

Small Cap (4) +1.2% -6.5% -2.6%

LARGE CAP & GROWTH

(1) Russell Top 200 Indices(2) Russell Mid Cap Indices(3) Russell 2500 Indices(4) Russell 2000 Indices

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1998 Performance by Capitalization Tier

CapitalizationTiers

UnweightedPerformance

Avg Declinefrom 52

Week High

Number ofIssues

< $250 MM -24.14% -49.84% 5508

$250 MM-$2Billion

-16.63% -25.73% 1860

$2 Billion-$5Billion

-6.11% -17.96% 372

$5 Billion-$20Billion

+6.19% -14.90% 274

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What Worked!

5 YEAR PERFORMANCEPeriods Ending 12/31/98

Growth Value Combined

Large Cap (1) +28.8% +22.5% +25.9%

Mid Cap (2) +17.3% +17.5% +17.3%

Mid-Small Cap (3) +12.4% +15.4% +14.1%

Small Cap (4) +10.2% +13.1% +11.9%

LARGE CAP & GROWTH(1) Russell Top 200 Indices(2) Russell Mid Cap Indices(3) Russell 2500 Indices(4) Russell 2000 Indices

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10 Largest Market Caps - S&P 500As of 12/31/98

Price Price TotalMarket P/E To To Return

Company Cap (millions) 1998 Book Sales YTD Sector

Microsoft $345,800 77.9x 20.2x 22.6x 115% TechnologyGeneral Electric $334,200 36.4 9.4 3.4 41% Capital GoodsINTEL $197,600 34.7 9.2 7.9 69% TechnologyWal-Mart Stores $183,500 42.2 8.8 1.4 107% Consumer CyclicalExxon $177,800 28.3 4.1 1.5 22% EnergyMerck & Co. $175,700 34.3 12.9 6.9 41% HealthcareIBM $172,000 28.1 9.5 2.1 77% TechnologyCoca-Cola $165,200 47.9 20.7 8.7 1% Consumer StaplesPfizer $162,200 63.1 21.1 11.8 69% HealthcareCisco Systems $146,600 79.4 19.0 16.0 150% Technology

Average $206,060 47.2x 13.5x 8.2x 69%

THE 10 LARGEST STOCKS OR 2% OF THE S&P 500 REPRESENT 20.6% OF THE $10TRILLION TOTAL MARKET VALUE OF THE INDEX AND CONTRIBUTED OVER 14%OR 1/2 OF THE S&P 500'S 1998 RETURN OF 28.5%

Source: Baseline

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Small Capitalization(1) PerformanceRelative to S&P 500 Index

O V E R T H E P A S T 3 0 Y E A R S T H E R E H A V E B E E N T H R E EP E R I O D S I N W H I C H T O O W N S M A L L / M I D C A P S T O C K S .

( 1 ) N a s d a q C o m p o s i t e 1 9 7 1 – 1 9 8 0 , R u s s e l l 2 0 0 0 1 9 8 0 t o P r e s e n t

0 . 6

0 . 8

1 . 0

1 . 2

1 . 4

1 . 6

1 . 8

2 . 0Fe

b-71

Feb-

73

Feb-

75

Feb-

77

Feb-

79

Feb-

81

Feb-

83

Feb-

85

Feb-

87

Feb-

89

Feb-

91

Feb-

93

Feb-

95

Feb-

97

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The List of Positives Favoring Small Caps and Mid Caps is Long

Fed easing is a particular positive for small caps.

Profit growth has been better than large caps for 9 quarters except last; revenues growing better too.

Relative return on assets is improving.

Relative debt to capital is moving down.

Relative valuations are at 30 year lows.

Small caps are greatly underowned.

Leadership shifts are often born out of major declines.

IPO activity is low.

Mutual fund flows into small caps have gone from negative to positive.

Cash levels in small cap funds have increased.

Tax loss selling by institutions is over.

Being more domestic should be a good thing.

The companies and managements are buying back stock; takeovers too.

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Small Cap Cycles

-54.4

-22.9-16

-4.3-2.3

-4-9.1-6.6

-9.4-5.4-4.5

-16-13.6

-46.1-26

-11.4

-3.4-78.8

-100 -50 0

Cumulative Percentage 5-yr Small Cap vs. Large Cap Underperformance

1926-30

1927-31

1928-32

1929-33

1935-39

1936-40

1937-41

1946-50

1947-51

1948-52

1959-63

1060-64

1968-72

1969-73

1970-74

1971-75

1972-76

Last 5 Y rs

Small Cap Underperformance...

64.6201.9

64.917.4

86.3172.9

168.210.514.2

5.7116.2

60.840.2

111.6228.4

153.4108.3

0 50 100 150 200 250

Cumulative Percentage 5-yr Small Cap vs. Large Cap Outperformance

1931-36

1932-36

1933-37

1934-38

1940-44

1941-45

1942-46

1951-55

1952-56

1953-57

1964-68

1965-69

1973-77

1974-78

1975-79

1976-80

1977-81

Next 5-Yrs?

...Has Always Been Followed by Small Cap Outperformance

Dating back to 1926, every five-year period of small cap underperformance was followed by significant periods of small cap outperformance. The last five years has been the greatest period of underperformance on record. Today, small caps' superior earnings growth and low valuations lead us to conclude that we are about to witness an historic era of small cap outperformance.

Data from "Predicting size Effect Reversals" by Marc R. Reinganum as published in Small Cap Stocks by Klein/Lederman. Comparison is between the largest market cap decile and declie 5, corresponding roughly to the S&P 500 Index and Small Cap stocks of less than $1 billion in market cap. Data for the last 5 years is the cumulative difference between the Vanguard Index 500 and the Vanguard Index Small Stocks through June 1998.

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Documents

1 Fundamental Stock Analysis The Market is NOT Efficient Fundamental analysis can uncover individual companies selling in the public market at significant