April 24th, 2006 Matthieu Cocq Franck Legoux Patrick de Loe Genki Oka Alexander Zorn 1 TABLE OF CONTENT EXECUTIVE SUMMARY .............................................................................................. 5 PART I. INDUSTRY ANALYSIS................................................................................... 7 I. INDUSTRY OVERVIEW............................................................................................... 7 II. CONSUMER ELECTRONICS MARKET.................................................................... 7 A. Market Size & Growth................................................................................................... 7 B. Product and Service Description.................................................................................... 8 1. Products ...................................................................................................................... 8 2. Services..................................................................................................................... 11 3. Third-party retailing (wireless contracts).................................................................. 11 III. CUSTOMER............................................................................................................... 12 A. Household Penetration ................................................................................................. 12 B. Segmentation................................................................................................................ 13 1. Tech-Savvy Segment ................................................................................................ 13 2. Influencers................................................................................................................. 13 3. New Segment............................................................................................................ 13 IV. COMPETITIVE LANDSCAPE ................................................................................. 14 A. Market Shares .............................................................................................................. 14 B. Positioning.................................................................................................................... 16 V. SPECIALTY RETAILER SITUATION ..................................................................... 17 A. Strengths and Weaknesses ........................................................................................... 17 B. Recent Turnaround and M&A...................................................................................... 17 1. Circuit City and Highlands Capital........................................................................... 17 2. CompUSA................................................................................................................. 18 VI. INDUSTRY TRENDS................................................................................................ 19 A. Innovation .................................................................................................................... 19 B. Focus on Technical Services........................................................................................ 20 C. Customer Centricity ..................................................................................................... 21 1. New Concept Stores.................................................................................................. 22 2. Decentralization ........................................................................................................ 22 3. Sales Force Compensation........................................................................................ 23 D. Private label and direct sourcing.................................................................................. 23 PART II. COMPANY ANALYSIS ............................................................................... 24 I. BUSINESS OVERVIEW.............................................................................................. 24 A. Business Segment ........................................................................................................ 24 2 B. Distribution Channel .................................................................................................... 25 C. Service and Support Network ...................................................................................... 25 D. Regional focus.............................................................................................................. 26 E. Non-core units .............................................................................................................. 26 F. Infrastructure................................................................................................................. 26 II. FINANCIAL PERFORMANCE ANALYSIS............................................................. 27 A. Seasonality ................................................................................................................... 27 B. Top-line performance................................................................................................... 28 C. Profitability................................................................................................................... 29 III. PEER COMPARISON................................................................................................ 30 IV. CAPITAL STRUCTURE ........................................................................................... 31 A. Description of the Capital Structure............................................................................. 31 B. Assessment of the Capital Structure and Sourcing Availability .................................. 33 C. Historical Analysis ....................................................................................................... 35 D. Credit Ratings .............................................................................................................. 36 V. STOCK PRICE ............................................................................................................ 38 VI. MANAGEMENT AND BOARD OF DIRECTORS ................................................. 41 A. Board of Directors........................................................................................................ 41 B. Executive Management................................................................................................ 41 VII. RECENT DEVELOPMENTS................................................................................... 43 A. New product launch (April 18, 2006) .......................................................................... 43 B. Stock hits 52-week low (April 17, 2006) ..................................................................... 43 C. Executive Chairman to retire (April 14, 2006) ............................................................ 43 VIII. KEY ISSUES LEADING TO STATUS QUO ........................................................ 44 A. Shift of competitive landscape..................................................................................... 44 B. Lack of mid to high-end customer base ....................................................................... 44 C. Difficulties in its main business of Wireless................................................................ 44 D. Declining trend in high margin business...................................................................... 45 E. Dependency on kiosk ................................................................................................... 45 F. Poor service quality at store level................................................................................. 46 G. Unattractive assortment................................................................................................ 46 3 PART III. LIQUIDATION AND GOING CONCERN VALUE................................ 47 I. LIQUIDATION............................................................................................................. 47 II. GOING CONCERN..................................................................................................... 48 A. Forecasts....................................................................................................................... 48 B. Valuation ...................................................................................................................... 50 PART IV. COMPANY’S TURNAROUND PLAN...................................................... 52 I. DESCRIPTION OF THE ANNOUNCED PLAN......................................................... 52 II. KEY MESSAGE.......................................................................................................... 53 II. FINANCIAL PROJECTIONS ..................................................................................... 53 III. VALUATION AND ASSESSMENT......................................................................... 57 PART V. PROPOSED TURNAROUND PLAN .......................................................... 60 I. STRATEGY .................................................................................................................. 60 II. IMPLEMENTATION .................................................................................................. 60 III. FREE CASH FLOW AND VALUATION................................................................. 63 PART VI. EXHIBITS....................................................................................................