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Business

Valuation


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TRUGMAN VALUATION ASSOCIATES, INC. 2007

JOHN JOHNSON SALES COMPANY, INC.

VALUATION REPORT

JANUARY 31, 2006


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1776 N Pine Island Rd, Suite 314, Plantation, FL 33322 T954-424-4343 F954-424-14162001 Rte 46, Suite 310, Parsippany, NJ 07054 T973-983-9790 F973-983-6686

www.trugmanvaluation.com

July 18, 2007

Mr. John Johnson1234 NW 98th StreetMacon, FL 44444

Re: John Johnson Sales Company, Inc.

Dear Mr. Johnson:

We have performed a valuation engagement, as that term is defined in the Statement onStandards for Valuation Services (SSVS) of the American Institute of Certified Public

Accountants, of the common stock of John Johnson Sales Company, Inc. as of January 31,2006. This valuation was performed solely to assist in the matter of Johnson v. Johnson; theresulting estimate of value should not be used for any other purpose or by any other party forany purpose. This valuation engagement was conducted in accordance with the SSVS, as wellas the standards promulgated by The Appraisal Foundation, the American Society of

Appraisers, and The Institute of Business Appraisers, Inc. The estimate of value that resultsfrom a valuation engagement is expressed as a conclusion of value.

Based on our analysis, as described in this valuation report, which must be signed in blue inkby the valuation analyst to be authentic, the estimate of value of John Johnson SalesCompany, Inc. as of January 31, 2006 was:

FIVE HUNDRED THOUSAND DOLLARS ($500,000)

This conclusion is subject to the Statement of Assumptions and Limiting Conditions found inAppendix 2 and to the Valuation Analysts Representation found in Appendix 3. We have noobligation to update this report or our conclusion of value for information that comes to ourattention after the date of this report.

Respectfully submitted,

TRUGMAN VALUATION ASSOCIATES, INC.

Gary R. TrugmanCPA*/ABV, MCBA, ASA, MVS

GRT/kagAttachment*Regulated by the State of Florida


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TABLE OF CONTENTS

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Description of the Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Definition of Fair Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Valuation Methodologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Going Concern Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2The Market Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3The Asset Based Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3The Income Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Liquidation Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Revenue Ruling 59-60 - Valuation of Closely-Held Stocks . . . . . . . . . . . . . . . 5

HISTORY OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

ECONOMY/INDUSTRY INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

FINANCIAL ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

VALUATION CALCULATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

The Market Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54Guideline Public Company Method . . . . . . . . . . . . . . . . . . . . . . . . . . . 54Merger and Acquisition Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

The Asset Based Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55The Income Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Capitalization of Benefits Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56Reconciliation of Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

DISCOUNT AND CAPITALIZATION RATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

PREMIUMS AND DISCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Valuation Premiums and Discounts in General . . . . . . . . . . . . . . . . . . . . . . . 78Control Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78Minority Discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78Discount for Lack of Marketability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

SCHEDULES

Schedule 1 - John Johnson Sales, Inc. Balance Sheet as of December 31, 2000through 2006.

Schedule 2 - John Johnson Sales, Inc. Income Statement for the Years EndedDecember 31, 2000 through 2006.

APPENDICES

Sources of Information UtilizedContingent and Limiting ConditionsValuation Analysts CertificationProfessional Qualifications of Valuation Analyst

Trugman Valuation Associates, Inc. 800-330-VALU


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Thompson v. Thompson, 576 So.2d 267 (Fla. 1991).1

INTRODUCTION

DESCRIPTION OF THE ASSIGNMENT

Trugman Valuation Associates, Inc. was retained by John Johnson to determine the fair

market value of 100 percent of the common stock of John Johnson Sales Company, Inc.

(John Johnson Sales or The Company) as of January 31, 2006, the date of the filing of

the divorce complaint in the matter of Johnson v Johnson.

The purpose of this appraisal is to determine the fair market value of The Company to be

used for equitable distribution purposes. The scope of work for this appraisal is a complete

appraisal, and all relevant data and methodologies have been considered. This

assignment meets all of the requirements under Statement on Standards for Valuation

Services No. 1 promulgated by the American Institute of Certified Public Accountants.

DEFINITION OF FAIR MARKET VALUE

The most commonly used definition of fair market value is located in Revenue Ruling 59-

60. This revenue ruling defines fair market value as

...the price at which the property would change hands between a willingbuyer and a willing seller when the former is not under any compulsion to buyand the latter is not under any compulsion to sell, both parties havingreasonable knowledge of relevant facts.

This concept is consistent with the directive of the Florida Supreme Court in Thompson v.

Thompson indicating that the clearest method would be the fair market value approach,1



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which is best described as what would a willing buyer pay, and what would a willing seller

accept, neither acting under duress for a sale of the business.

VALUATION METHODOLOGIES

There are two fundamental bases on which a company may be valued:

1. As a going concern, and

2. As if in liquidation.

The value of a company is deemed to be the higher of the two values determined under a

going concern or a liquidation premise. This approach is consistent with the appraisal

concept of highest and best use, which requires an appraiser to consider the optimal use

of the assets being appraised under current market conditions. If a business will command

a higher price as a going concern then it should be valued as such. Conversely, if a

business will command a higher price if it is liquidated, then it should be valued as if in

orderly liquidation.

GOING CONCERN VALUATION

Going concern value assumes that the company will continue in business, and looks to the

enterprise's earnings power and cash generation capabilities as indicators of its fair market

value. There are many acceptable methods used in business valuation today. The

foundation for business valuation arises from what has been used in valuing real estate for

many years. The three basic approaches that must be considered by the appraiser are:

1. The Market Approach,

2. The Asset Based Approach, and

3. The Income Approach.



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Within each of these approaches there are many acceptable valuation methods available

for use by the appraiser. Appraisal standards suggest that an appraiser test as many

methods as may be applicable to the facts and circumstances of the property being

appraised. It is then up to the appraiser's informed judgment as to how these values will

be reconciled in deriving a final estimate of value.

THE MARKET APPROACH

The market approach is fundamental to valuation as fair market value is determined by the

market. Under this approach, the appraiser attempts to find guideline companies traded

on a public stock exchange, in a same or similar industry as the appraisal subject that

provides the appraiser with the ability to make a comparison between the pricing multiples

that the public company trades at and the multiple that is deemed appropriate for the

appraisal subject.

Another common variation of this approach is to locate entire companies that have been

bought and sold in the marketplace, publicly traded or closely-held, that provides the

appraiser with the ability to determine the multiples that resulted from the transaction.

These multiples can then be applied to the appraisal subject, with or without adjustment,

depending on the circumstances.

THE ASSET BASED APPROACH

The asset based approach, sometimes referred to as the cost approach, is an assetoriented approach rather than a market oriented approach. Each component of a business

is valued separately, and summed up to derive the total value of the enterprise.

The appraiser estimates value, using this approach, by estimating the cost of duplicating

or replacing the individual elements of the business property being appraised, item by item,

asset by asset.



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The tangible assets of the business are valued using this approach, although it cannot be

used alone as many businesses have intangible value as well, to which this approach

cannot easily be applied.

THE INCOME APPROACH

The income approach, sometimes referred to as the investment value approach, is an

income oriented approach rather than an asset or market oriented approach. This

approach assumes that an investor could invest in a property with similar investment

characteristics, although not necessarily the same business.

The computations, using the income approach determine that the value of the business is

equal to the present value of the future benefit stream to the owners. This is accomplished

by either capitalizing a single period income stream or by discounting a series of income

streams based on a multi-period forecast.

Since estimating the future income of a business is considered to be speculative, historic

data is generally used as a starting point in several of the acceptable methods under the

premise that history will repeat itself. The future cannot be ignored, however, since

valuation is a prophecy of the future.

LIQUIDATION VALUATION

Liquidation value assumes that a business has greater value if its individual assets are soldto the highest bidder and the company ceases to be a going concern.

Shannon Pratt, a well known authority in business appraisal states



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Shannon Pratt, Valuing a Business: The Analysis and Appraisal of Closely Held Companies ,2

2 edition (Illinois: Dow Jones-Irwin, 1989): 29.nd

Ibid.3

Ibid.4

[l]iquidation value is, in essence, the antithesis of going-concern value.Liquidation value means the net amount the owner can realize if the businessis terminated and the assets sold off in piecemeal.2

He adds,

...it is essential to recognize all costs associated with the enterprise'sliquidation. These costs normally include commissions, the administrativecost of keeping the company alive until the liquidation is completed, taxesand legal and accounting costs. Also, in computing the present value of abusiness on a liquidation basis, it is necessary to discount the estimated netproceeds at a rate reflecting the risk involved, from the time the net proceedsare expected to be received, back to the valuation date.3

Pratt concludes by stating:

For these reasons, the liquidation value of the business as a whole normallyis less than the sum of the liquidation proceeds of the underlying assets. 4

REVENUE RULING 59-60 - VALUATION OF CLOSELY-HELD STOCKS

Among other factors, this appraiser considered all elements listed in Internal Revenue

Service Ruling 59-60 which provides guidelines for the valuation of closely-held stocks.

Revenue Ruling 59-60 states that all relevant factors should be taken into consideration,

including the following:

1. The nature of the business and the history of the enterprise from itsinception.

2. The economic outlook in general and the condition and outlook of thespecific industry in particular.



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3. The book value of the stock and financial condition of the business.

4. The earning capacity of the company.

5. The dividend paying capacity of the company.

6. Whether or not the enterprise has goodwill or other intangible value.

7. Sales of the stock and the size of the block of stock to be valued.

8. The market price of stocks of corporations engaged in the same orsimilar line of business having their stocks actively traded in a freeand open market either on an exchange or over the counter.

Since determining the fair market value of a business is the question at issue, one must

understand the circumstances of this particular business. There is no set formula to the

approach to be used that will be applicable to the different valuation issues that arise.

Often, an appraiser will find wide differences of opinion as to the fair market value of a

particular business or business interest. In resolving such differences, one should

recognize that valuation is not an exact science. Revenue Ruling 59-60 states that "a

sound valuation will be based on all relevant facts, but the elements of common sense,

informed judgment and reasonableness must enter into the process of weighing those facts

and determining their aggregate significance."

The fair market value of specific shares of stock in an unlisted corporation will vary as

general economic conditions change. Uncertainty as to the stability or continuity of the

future income from the business decreases its value by increasing the risk of loss in the

future. The valuation of shares of stock of a company with uncertain future prospects is a

highly speculative procedure. The judgment must be related to all of the factors affecting

the value.

There is no single formula acceptable for determining the fair market value of a closely-held

business, and therefore, the appraiser must look to all relevant factors in order to establish

the fair market value of the business as of a given date.



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HISTORY OF THE COMPANY

John Johnson Sales Co., Inc. was incorporated in the State of Florida on July 13, 1974, for

the purpose of exporting American goods to South and Central America, and The

Caribbean. In the early 1980s, The Company almost went out of business because of the

devaluation of the Venezuelan currency. This is when The Company transitioned to

becoming an importer; specifically textiles from Brazil, Peru and Guatemala. The Company

credits much of its success today to suppliers from Brazil (Broler S.A.) and Guatemala

(Horray Industries), who extended payment terms and were very responsive to delivery

deadlines.

The Company has been operated based on John Johnsons idea to give retailers another

option in their purchasing of textiles for the home. Mr. Johnson decided that he would do

the things that big companies cannot do, such as provide stellar service, listen to the

customers and ultimately find a niche that works. The niche that was eventually

established was the production of woven terry loop and velour products. The Company

started with a few products that it bought from manufacturers in South America and sold

to retailers in the United States. Over the years, the product line grew to meet the

demands of customers. Below is a list of products sold by The Company today.

Towels Bath sheets Bath towels Embroidered bath, hand and wash Bath, hand and wash Tub Mats

Pima loop Ringspun loop

Fingertips

Hand towels Washcloths Golf towels



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Beach towels Printed fiber reactive Yarn dyed stripes Solid velour Double jacquards Single jacquards Licensed fiber reactive corona Embroidered bath sheets

Robes Shawl collar terry velour Kimono style terry velour Shawl collar waffle Kids velour cover-ups

Shower Wraps Ladies shower wrap sets Ladies shower wraps Mens shower wraps

Robe sales volume primarily occurs in the fourth quarter. Shower wraps peak during back

to school and the fourth quarter, when they are purchased as gift items for under $20.

Towels sell steadily throughout the year, except beach towels, which sell from January to

August, with the largest shipping months running from March to July.

The service that John Johnson Sales provides to the retailers is from stocking products and

filling each retailers specified needs, either daily, weekly, or monthly depending on the

retailers reorder schedule. This is accomplished by speaking with customers early in the

buying season to learn about those products that the customer anticipates needing. This

could relate to a particular product, color or size. John Johnson Sales attempts to meet

these customers needs by ordering an adequate supply necessary to fulfill the anticipated

orders. The downside to providing this specialized service is that when a retailer decides

to cancel a color, or terminate a program, The Company continues to own the inventory

and often must then liquidate the inventory at a reduced price. In addition, if there is a

custom label on the product, The Company has to cover the cost of removing or changingthe label and repackaging the goods for a new customer. This can cause the profitability

of these items to vary considerably. This is discussed further later in this report.



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Over the years, The Company has been able to identify inventory items that fit into the

product lines of the various retailers that it does business with at a reasonable price. The

Companys target market includes the following:

Specialty Stores Bed Bath & Beyond Linens n Things

Large Discount Stores TJ Maxx Marshalls Home Goods Ross

Mid-Tier Stores Boscovs Shopko Pamida Steinmart

Small Discount Stores Conway Century Value City

Catalog/Supermarkets LTD Aldis

Beach Stores Wings Surf Style Marco Destin

Retailers in the current business environment are continuously looking for ways to increase

their profit margin. One way to do this is to go directly to the manufacturers, bypassing the

middleman, which is essentially what John Johnson Sales is. Technological

advancements, such as the internet, and the ability to travel to any part of the world has

opened the eyes of the retailer to buy direct. A good example of this trend can be seen

at the New York Textiles show, which is held twice a year, where countries are actually

setting up pavilions that demonstrate all of the different products their countries can

produce. The Company also faces increased competition from direct competitors. Some



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of these companies have design staffs, and the ability to sell a greater variety of products,

making them more valuable to the retailer.

In the last three years, The Companys largest customers were as follows:

TABLE 1LARGEST CUSTOMERS

2003 2004 2005

Customer $ % $ % $ %

Bed Bath & Beyond $ 330,179 3.72% $ 1,628,375 14.06% $ 3,227,199 29.02%

Burlington Coat Factory 244,819 2.76% - 0.00% - 0.00%

Linens n Things 3,581,744 40.35% 4,275,435 36.92% 3,187,092 28.66%

Macy's Home Stores - 0.00% 352,004 3.04% 252,858 2.27%

Ron Jon Surf Shop 273,808 3.08% 243,615 2.10% 214,459 1.93%

Shopko Stores Inc. 295,162 3.32% 412,771 3.56% 313,724 2.82%

All Others 4,151,765 46.77% 4,667,455 40.31% 3,926,784 35.31%

TOTAL REVENUES $ 8,877,477 100.00% $ 11,579,655 100.00% $ 11,122,116 100.00%

The customer mix for these three years is shown graphically below.



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In 2005, Bed Bath & Beyond, and Linens n Things made up about 58 percent of The

Companys revenues. In 2004 and 2003, sales were 51 percent and 44 percent,



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respectively. Prior to 2003, John Johnson Sales lost Bed Bath & Beyond as a customer

due to the action of a salesman for The Company. John Johnson worked hard to regain

this customer, and it is now The Companys largest account. John Johnson makes certain

that he stays personally involved with this customer, as their performance has a direct

impact on John Johnson Sales.

The Company competes with companies such as Baltic Industries, Thomas OBrien

Revere, Springs Industries, Inc. and Cobra Trading Corporation. In some cases, John

Johnson Sales actually competes with the same mills that are supplying The Companys

goods. The barriers to entry into this market consists of being able to build up an initial

inventory of products to sell, developing supplier relationships and building customerloyalty. However, this industry is extremely price competitive.

All of The Companys products are sold on a direct basis, either from internal sales

personnel or outside sales staff, consisting of seven to 10 manufacturers representatives

across the United States. John Johnson Sales has a website, produces catalogs, attends

trade shows, and works with the Advertising Specialty Institute (ASI) and the Promotional

Products Association International (PPAI) on mailings, as well as creating links to its

website.

Like most businesses, The Company is susceptible to certain economic factors, such as

consumer confidence. However, more direct factors include the success of the world

cotton crop, currency valuations, energy costs, trade agreements and the changing global

marketplace. The Chinese manufacturing sector has also contributed to the challenges

that confront John Johnson Sales, as well as all other manufacturers in this industry.

The Company purchases from various parts of the world, therefore strong banking

relationships are crucial in order to get open letters of credit with suppliers. Currencyvaluations have caused John Johnson Sales to stop purchasing from some of its suppliers,

particularly in South and Central America, while forcing The Company to purchase from

new markets, such as India and Pakistan.



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These types of events cause price volatility, which has a direct impact on sales and profit

margins. Losing the Brazilian supplier, with whom The Company had worked with for

decades, caused severe damage as it imperiled the relationships with The Companys two

largest customers. These companies expect a level of quality they are not yet receiving

from the new suppliers, and while The Company works to train these suppliers in the

expectations of the U.S. marketplace, profit margins are down because The Company has

to contend with additional chargebacks, customer dissatisfaction, and delayed shipments.

Chargebacks are discussed further in the Industry section of this report.

The relationship with suppliers is one of the many responsibilities of John Johnson. One

of the most important relationships is with Broler, S.A. This relationship goes back almost25 years, when Mr. Johnson literally knocked on the door of the assistant to the assistant

at Broler, Aldo Tannenbaum. The relationship between Messrs. Johnson and Tannenbaum

has become one of good friends. Visits to each other result in staying at each others

houses.

Aldo Tannenbaum has become one of the most important contacts to The Company. John

Johnson Sales has become one of the largest customers of Broler, S.A. Early on, Mr.

Tannenbaum arranged for payment terms of up to six months for John Johnson Sales to

pay for goods. Mr. Tannenbaum has also been instrumental to The Company as the

person who sources merchandise from all over Brazil, in addition to other places in the

world, such as India. This relationship could not easily be transferred to a buyer, if at all.

The Company currently has three locations:

1234 NW 98th Street, Macon, FL 44444:This location is the main office, embroidery

department, and houses the main warehouse. It consists of approximately 20,000 square

feet.

1234 NW 98th Street, Macon, FL 44444:This location is a warehouse. The Company

houses its inventory and processes orders for Bed Bath & Beyond and Linens n Things at

this location. It is also approximately 20,000 square feet.



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235 Fourteenth Street, New York, New York 10000:This location is a showroom. It is

approximately 1,300 square feet.

The Company currently has 17 employees; the management team consists of the following:

John Johnson- Chief Executive Officer and President

Perry Smith- Vice President

Elaine Adams- Controller

JOHN JOHNSON

John Johnson is the founder and namesake of John Johnson Sales. Over the years, Mr.

Johnson has done everything from unload trucks to take out the garbage. He does 100

percent of the purchasing of inventory for resale, and has sales responsibilities for the

following customers:

Linens n Things

Bed Bath & Beyond (team effort with Perry Smith)

TJ Maxx

Marshalls

Homegoods

Ross Stores

Conway

Century

Mr. Johnson makes all major decisions about the strategy of The Company and has been

the driving force behind The Company. As he says, my name is on the door.

PERRY SMITH

Mr. Smith started as an independent sales representative for The Company in 1994. In

December 1995, he became an employee of The Company and continued in sales. Mr.



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Smith soon became Vice President of Sales. In this capacity, he manages the day-to-day

operations of the sales force and travels extensively. Mr. Smith also oversees the

production of catalogs, manages website development, and creates or manages other

promotional or marketing programs.

ELAINE ADAMS

Ms. Adams joined The Company in October 2004 as a financial analyst and was appointed

the Controller in June 2005. As Controller, Ms. Adams is responsible for the accounting

department, the order entry department, as well as maintenance, security and upgrading

of the computer system.

The remaining personnel are non-union and consist of three warehouse employees, two

embroidery machine operators with the balance being clerical and sales staff.

Andrew Johnson was originally hired to provide him with health insurance. He eventually

began taking a few pictures that were used in The Companys catalogs, and soon was

responsible for all of the pictures in the catalog.

As part of the management interview process, we asked management what other issues

they were facing as of the valuation date. Mr. Johnson believes that as a small company,

John Johnson Sales cannot take advantage of the same technologies as its large

competitors. The Companys accounting system is old and difficult to use, while the

warehousing function is still a manual process.

Many of The Companys larger competitors have full-time designers, allowing them to

respond to very specific customer needs. The Company does not have a designer andmust rely on the designs created by the supplier. In the past, this was not an issue, since

both Broler and Horray Industries were so responsive. However, the new suppliers in Asia

are unable to adapt as quickly.



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Management indicated that the slowing retail environment, privatization of Burlington Coat

Factory and Linens n Things, and the declining credit rating of other large customers has

also had an impact on The Companys performance. The Company uses a factoring

company to collect is receivables and BOSCOVS, Six Flags, Smart Bargains and

Overstock.com are four customers whose declining credit ratings have precipitated the

need for surcharge payments on The Companys accounts receivable insurance.

Management anticipates credit problems with some additional customers.

Many of The Companys employees are paid at, or around, the minimum wage. While in

early 2005, two proposals were made to increase the Federal minimum wage, in 2004,

Florida voters decided Floridas minimum wage would increase annually to account forincreases in the cost of living. This will continually increase payroll and will have long-term

implications for The Company.

According to company documents, John Johnson owns 100 percent of the outstanding

stock of The Company as of the valuation date.

The Company believes that its reputation in the industry is that of a supplier who delivers

on time. The Companys service relies on its ability to work with suppliers to meet

consistent quality standards over time (i.e. always matching the color so that bath, hand

and wash sets all look standard on the retailers selling floor even if they were produced six

months apart) and to deliver in a timely manner. The Company assumes the risk of the

import for the retailers. This saves a considerable amount of time, money and worry for

customers. The greatest challenge for The Company is to find a working partner in an

emerging market such as China that will keep The Company competitive over the long-

term.

The suppliers in South and Central America that were relied on for more than 20 years aresuffering as lower-priced goods come from Southeast Asia. The Company expects a

downturn in sales as more customers purchase directly from overseas manufacturers, at

least in the short and medium term. Unless, and until, retailers decide to spin off the risk

again, the market will continue to shrink. The Company is seeking to adapt its business



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This section has been paraphrased from Form 10-Q, for the third quarter ended November5

26, 2005, filed with the Securities and Exchange Commission.

to the new reality by focusing attention on high-quality goods with a larger markup. But as

volume decreases, historical growth patterns may not be sustainable in the future.

MAJOR CUSTOMERS

In 2005, The Company signed vendor agreements with both Bed Bath & Beyond (BBB) and

Linens n Things (LNT). In order to continue doing business with LNT, The Company

agreed to two different discounts, in addition to paying all of the shipping costs to the

various stores. The first discount is a Damage Expense Offset and is equal to 1 percentof gross receipts. The second discount is for Markdowns and Advertising Expenses, and

is equal to 3 percent of the cost of the merchandise purchased by LNT. For BBB, the

discounts are referred to as rebate agreements and are more straightforward. The rebate

agreement is tiered as follows:

$0 - $4M 2%

$4M - $6M 3%

$6M - $10M 4%

In addition to its discounts, LNT has payment terms of net 60 days and net 90 days, along

with a 10 percent discount for new stores. In reviewing LNTs chargebacks in 2005, it

appears that in addition to the stated discounts, The Company also receives chargebacks

from quality control audits. These audits reveal such things as errors in electronic data

submission, incorrect quantities, colors or styles shipped, incorrect purchase order

numbers, etc. These errors result in penalties that are charged back to The Company, and

are non-negotiable.

Bed Bath & Beyond: Bed Bath & Beyond, Inc. and its subsidiaries operate as a national5

chain of retail stores in the United States. It operates stores under the Bed Bath & Beyond



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(BBB), Christmas Tree Shops (CTS), and Harmon trade names. The company sells an

assortment of merchandise, primarily domestic merchandise, such as bed linens and

related items, bath items, kitchen textiles, and home furnishings, including kitchen and

tabletop items, fine tabletop, basic housewares, and general home furnishings, as well as

food, giftware, and health and beauty care items.

Operating in the highly competitive retail industry, BBB, along with other retail companies,

is influenced by a number of factors including consumer preferences and spending habits,

general economic conditions, unusual weather patterns, competition from existing and

potential competitors, and the ability to find suitable locations at acceptable occupancy

costs to support its expansion program.

For the three and nine months ended November 26, 2005, the companys consolidated net

sales increased by 11.0 percent and 12.1 percent, respectively, as compared to the

corresponding periods last year. These increases in net sales were primarily attributable

to the continuing BBB store expansion program and an increase in comparable store sales.

Comparable store sales for the fiscal three and nine months of 2005 increased by

approximately 3.1 percent and 4.0 percent, respectively, as compared with an increase of

approximately 3.1 percent and 4.2 percent for the comparable periods last year. The

increases in comparable store sales reflected a number of factors, including but not limited

to, the continued consumer acceptance of the companys merchandise offerings and a

strong focus on customer service with an emphasis on responding to customer feedback.

For the three and nine months ended November 26, 2005, the companys consolidated net

earnings increased by 10.4 percent and 15.7 percent, respectively, as compared to the

corresponding periods last year. These increases were primarily a result of relative

increases in gross profit as a percentage of net sales.

The company is engaged in an ongoing expansion program involving the opening of new

stores in both new and existing markets and the expansion or relocation of existing stores.

As a result of this program, the company operated 726 BBB stores, 29 CTS stores and 38

Harmon stores at the end of the fiscal third quarter of 2005, compared with 640 BBB stores,

26 CTS stores and 32 Harmon stores at the end of the corresponding quarter last year.



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This section was paraphrased from the Form 10-Q for the period ended October 1, 2005 filed6

with the Securities and Exchange Com mission.

Linens n Things, About Us, (accessed December 18,7

2006).

At November 26, 2005, company-wide total store square footage was approximately 25.0

million square feet.

The company opened 40 BBB stores during the third quarter of fiscal 2005 which brought

the total to 66 BBB stores opened in the first three quarters of fiscal 2005. The company

expects the number of new BBB stores for all of fiscal 2005 to be approximately 83,

including the 66 stores opened in the first three quarters of fiscal 2005. Including the one

additional Harmon store opened in the fiscal fourth quarter, the company expects the

number of new CTS and Harmon stores for all of fiscal 2005 to be approximately 3 and 4,

respectively. For fiscal 2005, the company believes that its current operating cash flow,

working capital and cash and cash equivalents on hand should be sufficient to meet itsobligations in the ordinary course of business, including capital expenditures and new store

openings.

Linens n Things: Linens n Things, Inc. is one of the leading, national large-format6

retailers of home textiles, housewares and decorative home accessories. They operate

over 500 stores in 47 states and six Canadian provinces. Its business strategy is to offer

a broad selection of high quality, brand name home furnishings merchandise at exceptional

everyday values, provide superior guest service, and maintain low operating costs.7

Net sales decreased 0.7 percent to $1,773.5 million for the 39 weeks ended October 1,

2005, down from $1,785.7 million for the same period last year, primarily as a result of

weakness in customer traffic. During the 39 weeks ended October 1, 2005, LNT opened

39 stores and closed four stores, compared with opening 41 stores and closing two stores

during the same period last year.

Gross profit for the 39 weeks ended October 1, 2005 was $731.7 million, or 41.3 percent

of net sales, compared with $723.0 million, or 40.5 percent of net sales, for the same periodlast year. During that period, gross profit was impacted by improved markup through lower



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Christopher Robertson, Linens n Things, The Value Line Investment Survey(November8

11, 2005): 1747.

merchandise acquisition costs largely offset by an increase in markdowns associated with

the acceleration of LNTs transition to newer assortments.

Selling, general and administrative expenses were up, as was interest expense. As a

result, net loss for the 39 weeks ended October 1, 2005 was $9.0 million compared with

net income of $16.2 million for the same period last year.

LNTs financing requirements are primarily for new store expenditures, new store inventory

purchases and working capital. These requirements are expected to be funded through

a combination of internally generated cash flows from operations, credit extended by

suppliers and short-term borrowings.

LNT plans to address these shortcomings by shifting its focus from textiles to housewares

and home entertainment. The company was also expecting to price aggressively in order

to drive sales during the 2005 holiday season. Although reduced prices may increase

patronage, it should also pinch fourth-quarter profit margins.8

None of this is welcoming news for John Johnson Sales. In the short term, price reductions

by LNT would result in more competitive pricing from all LNT suppliers, including John

Johnson Sales. The long-term repercussions are also not good if LNT shifts its focus away

from textiles. For John Johnson Sales, LNT is a very risky customer. Adding to that risk

is also the fact that LNT was taken private by an investment group that is promoting many

of the anticipated changes. It is unclear at the valuation date exactly what the impact will

be on John Johnson Sales.



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IMF Expects Global Economy Growth of 4.3 Percent (September 21, 2005)9

.

ECONOMY/INDUSTRY INFORMATION

Generally, business performance varies in relationship to the economy. Just as a strong

economy can improve overall business performance and value, a declining economy can

have the opposite effect. Businesses can be affected by global, national, and local events.

Changes in regulatory environments, political climate, and market and competitive forces

can also have a significant impact on business. For these reasons, it is important to

analyze and understand the prevailing economic environment when valuing a closely-held

business. Since the appraisal process is a prophecy of the future, it is imperative that the

appraiser review the economic outlook as it would impact the appraisal subject.

GLOBAL ECONOMY

The International Monetary Fund (IMF) in its semi-annualWorld Economic Outlook, expects

global economic growth of 4.3 percent, which is above the 10-year average of 3.9 percent.9

The IMF also states that global headline inflation has picked up slightly in response to

higher oil prices, but remains at moderate levels. Among the major industrial countries, core

inflation appears generally contained.

Long-term interest rates continue to be unusually low around the world and global equity

markets have remained durable, supported by strong corporate profits and increasingly

solid balance sheets. This is further supported by expected increases in GDP for nearly

all industrialized nations. Credit spreads remain moderate despite some rise in high yield

spreads. Emerging market financing conditions are very favorable, in part reflecting



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Economic Prospects and Policy Issues, International Monetary Fund, World Economic10

Outlook Chapter One(September 2005): 4-5. (accessed February 9, 2007).

U.S., Council of Econom ic Advisors,The Annual Report of the Council of Economic Advisors,11

Transmitted to Congress, February 2005 (Washington, D.C.: United States GovernmentPrinting Office, 2005): 17-18.

U.S. Department of Comm erce, Bureau of Economic Analysis News Release (January 27,12

2006).

improved economic fundamentals and the increased presence of long-term investors, but

also the continued search for yield.10

NATIONAL ECONOMY

The U.S. economy began the millennium with an array of negative events. In 2000, the

economy was moving towards a recession due to the burst of the high-tech bubble of the

1990s, combined with the effects of ethical issues like corporate fraud, a decline in value

of the equity markets, a reduction in capital spending, and the terrorist attacks ofSeptember 11, which increased geopolitical risks. In the following two years, the U.S.

economy remained soft, but began recovering by posting moderate economic growth due

to factors, including monetary and fiscal policies implemented by the government. Real

gross domestic product (GDP) expanded during the four quarters of 2004 by 3.7 percent,

and by 4.4 percent for the year as a whole in comparison with 2003. This expansion was

supported by gains in consumer spending, business fixed investment, and government

spending.11

According to advanced estimates released by the Department of Commerces Bureau of

Economic Analysis, Real Gross Domestic Product (GDP), the output of goods and

services produced by labor and property located in the United States, increased at an

annualized rate of 1.1 percent during the fourth quarter of 2005. This is the 17th

consecutive quarterly rise in GDP subsequent to the 2001 recession. However, the fourth

quarter represented the smallest increase in three years. Based on these preliminary

figures, real GDP grew approximately 3.5 percent during 2005.12



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Ibid.16

Ibid.17

Ibid.18

percent compared to a 3.3 percent rise in 2004 and a 1.9 percent rise in 2003. The 3.4

percent increase in 2005 represents the largest increase in consumer prices in five years.16

Personal consumption spending represents approximately two-thirds of total economic

activity and is a primary component of overall economic growth. Real personal

consumption spending increased 1.1 percent in the fourth quarter of 2005, compared to a

4.1 percent increase in the third quarter, and a 3.3 percent increase in the second quarter

(all figures recently revised). According to the Bureau of Economic Analysis, durable goods

purchases were down 17.5 percent in the fourth quarter after increases of 7.9 and 9.3

percent in the second and third quarters, respectively. The large decrease in durable

goods expenditures in the fourth quarter can be attributed to the large decline in motorvehicle and parts sales.17

The Dow closed the fourth quarter at 10717.50, up 1.4 percent for the quarter but down 0.6

percent for the year. The S&P 500 index rose 1.6 percent during the quarter to close at

1248.29 and was up 3.0 percent for the year. The NASDAQ Composite Index increased

2.5 percent during the fourth quarter to close at 2205.32, and rose 1.4 percent for the year.

The broad market Wilshire 5000 index closed at 12517.70, and reflected a gain of 4.6

percent for 2005. At the end of 2003, stocks finished with their first year-to-year advance

since 1999. 2004 and 2005 represented a continuation (albeit more modest) of this trend.18

Home building is generally representative of overall economic activity because new home

construction stimulates a broad range of industrial, commercial, and consumer spending

and investment. According to the U.S. Commerce Departments Bureau of the Census, an

estimated 2.065 million privately owned housing units were started in 2005, 5.6 percent

higher than in 2004, marking the highest construction volume since 1978. The overall

housing market has remained relatively strong, despite rising interest rates through 2004

and 2005. However, signs of a dampening housing market are beginning to surface. Whilethe housing market has slowed somewhat from its record-breaking pace, many home



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Ibid.19

Ibid.20

builders predict that rising interest rates will not completely quash a generally healthy

housing market for the foreseeable future. Some weakening of the housing market is

expected in 2006, however, Gulf Coast reconstruction efforts will continue to provide

housing demand.19

According to the Labor Departments Bureau of Labor Statistics (BLS), the unemployment

rate was at 4.9 percent in December, slightly below third quarter levels and estimates. The

unemployment rate has remained in the 4.9 to 5.1 percent range since March. The

downward trend in unemployment is expected to slow as the unemployment rate is

expected to hold near 4.9 percent.20

Overall, private economists suggest lower, but still solid, growth for 2006 and 2007. First

quarter 2006 growth is expected to be more favorable than the remainder of 2006 due to

hurricane reconstruction efforts. Inflation was relatively subdued in the fourth quarter given

the recent surge in fuel prices, and inflation is not expected to be a major problem in 2006.

Stock market trends are not expected to dramatically improve overall; however, modest

gains in 2006 are expected. The Fed is expected to discontinue raising the target for the

Federal Funds rate sometime around March 2006. The goal is for interest rates to be at

a low enough level to continue to spur expansion, while keeping inflation fears low.

INDUSTRY

On the supply-side of the textile industry, there are manufacturers and importers, both

wanting to supply the retailers. In an effort to maximize profits and increase market share,

manufacturers want higher tariffs, import limits and generally more restrictions on importing,

while importers want exactly the opposite. It is no secret that manufacturing in the U.S. hasbeen on the decline for some time now, and textile manufacturers are no exception as



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Don Hogsett Tough Year for Tougher Trade, Home Textiles Today (January 30, 2006)21


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- 27 -

Leticia Leizens, Annas Linens Opens Milestone Store In Las Vegas, Home Furnishing26

Network(August 8, 2005)


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Cecile B. Corral, Home Textiles Finding Shelf Space Online, Home Textiles Today31

(November 28, 2005)


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Retailers: It All Com es Down to Survival of The Fittest, Home Furnishing News (November34

17, 2003)


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Accounting Change Shreds LNT Profits, Home Textiles Today (July 21, 2004)37


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FINANCIAL ANALYSIS

A financial analysis of The Company was performed utilizing the historical balance sheets

and income statements that appear as Schedules 1 and 2 at the end of this report.

Stockholders equity of The Company has increased over the period analyzed from $1.089

million in 2000 to $1.326 million in 2005, a 22 percent rise. However, the most recent year

experienced a decrease of 2 percent.

The Companys current assets have increased by $2.2 million over the period, largely dueto accounts receivable and inventory. At the same time, current liabilities have risen each

year except for 2005, which showed a slight drop over 2004. This is largely attributable to

an increase in accounts payable and the addition of new debt in 2004.

The Companys cash position has gradually deteriorated. The current level of cash is not

sufficient for a company this size, although historically, The Company has been run with

little cash. A slowdown in collections of accounts receivable could cause a significant

problem for The Company. The largest asset on The Companys balance sheet is its

inventory. As of December 31, 2005, inventory was about $2.2 million, an increase of 10

percent from 2004.

In 2004, The Company took on about $657,000 debt in the form of a stockholder loan and

a bank line of credit. This money was used to fund The Companys 30 percent growth in

2004. In 2005, debt increased by another $375,000.

Overall, The Companys balance sheet shows mixed signals. Shareholders equity is

increasing, meaning that assets are growing faster than liabilities. However, the two largestassets, accounts receivable and inventory, are at least partially funded by new debt instead

of cash reserves.

A financial analysis tool used to look at a companys financial picture is common size

financial statements. A common size balance sheet depicts each value as a percentage



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of total assets. Common size statements are used to look at trends in a companys

financial position, as well as to compare the company with industry data. This is also a

useful tool to compare companies of different sizes.

In order to compare John Johnson Sales to industry data, we had to determine the

appropriate Standard Industrial Classification (SIC) Code for The Company. A description

of The Company and the services it provides was included in an earlier section of this

report. Based on this description, we determined that The Company is best described by

the following SIC code:

5023 Home FurnishingsEstablishments primarily engaged in the wholesale distribution of homefurnishings and housewares, including antiques; china; glassware andearthenware; lamps (including electric); curtains and draperies; linens andtowels; and carpets, linoleum, and all other types of hard and soft surfacefloor coverings. Establishments primarily engaged in the wholesaledistribution of other electrical household goods are classified in Industry5064, and those distributing precious metal flatware are classified in Industry5094.

# Alum inum ware-wholesale# Bedspreads-wholesale# Blankets-wholesale

# Carpets-wholesale# China-wholesale# Crockery-wholesale# Curtains-wholesale# Draperies-wholesale# Floor coverings-wholesale# Glassware, household-wholesale# Home furnishings-wholesale# Kitchen tools and utensils, except precious metal flatware-wholesale# Lamps: floor, boudoir, desk-wholesale# Linens-wholesale# Linoleum-wholesale# Pillow cases-wholesale# Rugs-wholesale# Sheets, textile-wholesale# Slipcovers, furniture-wholesale# Table linens-wholesale

The corresponding North American Industry Classification System (NAICS) Code is as

follows:



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423220CorrespondingIndex Entries

# An tique homefurnishing merchant wholesalers# An tique houseware merchan t wholesalers# Bathroom accessories merchant wholesalers# Blankets (except electric) merchant wholesalers# Blinds and shades, window, merchant wholesalers# Brooms and brushes, household-type, merchant wholesalers# Carpet merchant wholesalers# Chinaware, household-type, merchant wholesalers# Cooking utensils, household-type merchant wholesalers# Cups, plastic (except disposable), merchant wholesalers# Curtains merchant wholesalers# Dishes, household-type (except disposable plastics, paper) merchant

wholesalers# Draperies merchant wholesalers# Flatware (except electric) merchant wholesalers# Kitchen utensils, household-type merchant wholesalers# Lamps (i.e., lighting fixtures) merchant wholesalers# Linens (e.g., bath, bed, table) merchant wholesalers# Mirrors (except automotive) merchant wholesalers# Napkins (except paper) merchant wholesalers# Rugs merchant wholesalers# Slipcovers merchant wholesalers# Tableware (except disposable, plated, precious) merchant wholesalers# Towels and washcloths merchant wholesalers# W indow shades and blinds merchant wholesalers

While John Johnson Sales falls into both of the SIC and NAICS codes above, there are a

broad range of other products included into these classification codes. Many, it not all, of

these other products can cause companies to have different capital structures and profit

margins. Proof of this can be seen when comparing profit margins from databases

maintained by Integra Information, Inc. and the Risk Management Association. The gross

profit margin in these two sources are almost 15 percentage points apart. This shows the

significance of the mix, resulting in a low degree of confidence in either database for this

assignment. As a result, any comparison of John Johnson Sales to such a diverse industry

group would not result in a meaningful analysis.

Table 2 presents the common size balance sheet for John Johnson Sales without an

industry comparison.



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TABLE 2COMMON SIZE BALANCE SHEET

AS OF DECEMBER 31,

2000 2001 2002 2003 2004 2005Current Assets

Cash 3.66% 8.52% 7.61% 3.03% 0.82% 2.17%Marketable Securities 0.00% 0.00% 12.47% 0.00% 0.00% 0.00%Accounts Receivable 26.85% 31.94% 29.13% 44.86% 49.02% 38.17%Inventories 61.42% 50.32% 41.55% 43.27% 44.23% 51.78%Prepaid Expenses 2.94% 3.95% 5.00% 3.52% 1.60% 1.05%Prepaid Taxes 0.00% 0.53% 0.00% 0.86% 0.00% 1.16%Other Receivables 0.66% 1.01% 0.62% 0.16% 0.14% 0.15%Related Party Receivable 0.99% 0.82% 0.64% 0.65% 0.63% 0.07%

Total Current Assets 96.53% 97.08% 97.01% 96.35% 96.43% 94.55%

Fixed AssetsBuilding & Improvements 2.96% 3.08% 2.24% 0.50% 0.36% 0.22%Machinery & Equipment 8.09% 9.34% 7.51% 6.30% 4.57% 6.97%Furniture & Fixtures 1.33% 1.38% 2.00% 2.09% 1.84% 1.95%Vehicles 0.00% 0.00% 0.00% 0.00% 0.86% 0.92%

Gross Fixed Assets 12.38% 13.80% 11.75% 8.90% 7.63% 10.06%Accumulated Depreciation 9.48% 11.44% 9.89% 5.86% 4.67% 5.82%

Net Fixed Assets 2.90% 2.37% 1.86% 3.03% 2.96% 4.24%

Other AssetsSecurity Deposits 0.57% 0.55% 1.13% 0.61% 0.61% 0.79%Deferred Income Taxes 0.00% 0.00% 0.00% 0.00% 0.00% 0.41%

Total Other Assets 0.57% 0.55% 1.13% 0.61% 0.61% 1.20%

TOTAL ASSETS 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%



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TABLE 2COMMON SIZE BALANCE SHEET

AS OF DECEMBER 31,

2000 2001 2002 2003 2004 2005Current Liabilities

Accounts Payable 13.98% 30.92% 42.84% 48.94% 46.15% 33.90%Long-Term Debt Current Portion 21.22% 0.00% 0.00% 0.00% 0.13% 0.14%Credit Line Payable 0.00% 0.00% 0.00% 0.00% 11.67% 21.47%Accrued Expenses 2.52% 1.47% 2.44% 6.12% 3.99% 7.50%Income Taxes Payable 0.19% 0.00% 2.00% 0.00% 0.45% 0.00%Pension Plan Payable 1.15% 3.47% 2.39% 2.10% 1.70% 0.00%Current Portion of Capital Lease 0.49% 0.53% 0.15% 0.32% 0.24% 0.27%

Total Current Liabilities 39.55% 36.39% 49.82% 57.48% 64.33% 63.29%

Long-Term LiabilitiesLong-Term Debt 0.00% 0.00% 0.00% 0.00% 0.48% 0.36%Loans from Stockholders 0.00% 0.00% 0.00% 0.00% 3.23% 3.44%Deferred Taxes 0.00% 0.00% 0.00% 0.45% 0.19% 0.00%Long-Term Portion of Capital Lease 0.75% 0.26% 0.00% 1.04% 0.50% 0.26%

Total Long-Term Liabilities 0.75% 0.26% 0.00% 1.49% 4.39% 4.06%

Total Liabilities 40.30% 36.65% 49.82% 58.97% 68.72% 67.34%

Stockholders EquityCommon Stock 0.05% 0.06% 0.04% 0.03% 0.02% 0.02%Paid - In Capital 1.45% 1.51% 1.10% 0.84% 0.60% 0.64%Retained Earnings 58.19% 61.78% 49.04% 40.15% 30.66% 31.99%

Total Stockholders Equity 59.70% 63.35% 50.18% 41.03% 31.28% 32.66%

TOTAL LIABILITIES ANDSTOCKHOLDERS EQUITY 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Note: Figures may not add due to rounding.

An analysis of the common size balance sheet indicates that The Companys cash position

as a percentage of total assets has fluctuated. However, over the latest three years, cash

has been a smaller part of total assets than in previous years. The Companys current

assets as a percentage of total assets has remained in the 94 to 97 percent range over the

period and is largely made up of accounts receivable and inventory. The Companys long-

term assets are relatively insignificant.

On the liability side of the balance sheet, accounts payable, as a percentage of total assets

reached its highest level in 2003, but then dropped in the next two years to reach near

2001 levels. Total current liabilities jumped during the last two years because The

Company began using its credit line. The Company also took on some long-term debt, as

well as borrowing money from the shareholder.



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Total stockholders equity has been erratic, but leveled off in the latest two years at its

lowest level as a percentage of total assets. This indicates that The Company is using

more debt financing than equity financing to fund its growth.

The next step in the analysis was to look at The Companys historic income statements for

2000 to 2005. The Companys revenues have grown significantly during this period, from

$5.932 million to $11.122 million, a compound annual growth rate of 11.04 percent. In the

most recent year, however, revenues dropped about 4 percent.

The Company experienced two main increases in revenue, first from 2000 and then from

2003. In 2004, The Companys two largest customers, Bed Bath & Beyond, and Linens nThings, increased its purchases from $330,179 and $3,581,744, respectively, to $1,628,375

and $4,275,435, respectively. This almost $2 million increase made up almost the entire

increase in The Companys sales. In 2005, however, while Bed Bath & Beyond increased

from $1.6 million to $3.2 million, Linens n Things fell from $4.3 million to $3.2 million.

Despite the large increase in sales to Bed Bath & Beyond, The Companys overall sales

fell during this year.

The reported operating income has been erratic, going from a low of $53,631 in 2001 to a

high of $164,553 in 2004, and ending 2005 with a loss of $9,661. Net income has shown

a similar pattern with a $20,785 low in 2001, high of $89,662 in 2004, and ending 2005 with

a loss of $26,315.

The Companys common size income statement is presented in Table 3.



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TABLE 3COMMON SIZE INCOME STATEMENT

FOR THE YEARS ENDED DECEMBER 31,

2000 2001 2002 2003 2004 2005

TotaRl evenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Total Cost of Sales 76.26% 80.33% 76.61% 78.06% 84.68% 80.24%

Gross Profit 23.74% 19.67% 23.39% 21.94% 15.32% 19.76%

Total Operating Expenses 21.20% 18.95% 21.46% 20.27% 13.90% 19.85%

Operating Income (Loss) 2.54% 0.72% 1.93% 1.67% 1.42% -0.09%

Interest Expense 1.42% 0.31% 0.05% 0.03% 0.29% 0.38%

Total Other Income (Expenses) 0.00% 0.00% 0.07% -0.23% 0.00% 0.00%

Income (Loss) Before Taxes 1.12% 0.41% 1.94% 1.41% 1.13% -0.46%

Income Taxes 0.41% 0.13% 0.72% 0.49% 0.36% -0.23%

NET INCOME (LOSS) 0.72% 0.28% 1.22% 0.93% 0.77% -0.24%

Note: Figures may not add due to rounding.

On a common size basis, The Companys gross profit was maintained at about the normal

level that The Company wanted to achieve from 2000 through 2003. However, in 2004,

John Johnson Sales had an inventory error, causing the gross profit percentage to beapproximately 2.5 percent lower than it should have been. A correction to the accounting

records will cause the 2005 gross profit percentage to be overstated by about the same

amount. Correcting this error, results in the most recent two years gross profit being about

17.5 percent. The tightening of margins by its retail customers caused The Companys

gross profit percentage to fall.

Profitability fluctuated during this time period, indicating marginal profitability overall.

One of the major items impacting John Johnson Sales profitability is the chargebacks that

it must accept from its customers. These chargebacks are done for a variety of reasons,

including store discounts, quality issues, color issues, advertising, and customer

markdowns.



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The retailer charges an arbitrary discount back to The Company for having to discount the

retail price. This is done so that the retailer can discount its merchandise without a loss in

its profits. In essence, the retailer makes a decision that will have a negative financial

impact on profitability, then forces its loss onto the suppliers in order to remain profitable.

Another problem is that the retailer provides The Company with what it wishes to sell but

does not guarantee that it will purchase the inventory. Frequently, the promotion is

discontinued.

A sampling of five products that were discontinued by BBB and LNT were analyzed to

understand the financial impact on John Johnson Sales gross margin. To move theseproducts, The Company discounts the prices as much as is necessary to make the sale,

even if it means selling the products for less than was paid. Our final analysis of the five

discontinued products is below:

DISCONTINUED PRODUC TS ANALYSIS

ProductLanded

Cost

RegularSalesPrice

GrossProfit

ReducedSalesPrice

GrossProfit /(Loss)

Reduction inGross Profit

36x72 Khaki Bath Sheet (LNT) $ 3.00 $ 6.00 $ 3.00 $ 4.50 $ 1.50 -50%

Pima Natural Towel (BBB) 3.79 4.75 0.96 3.47 (0.32) -133%

Circles Bath Towel (LNT) 4.26 5.00 0.74 4.00 (0.26) -135%

Kimono robe (BBB) 9.28 13.50 4.22 10.50 1.22 -71%

Tile Hand Towel (LNT) 0.75 3.00 2.25 2.00 1.25 -44%

Average Reduction in Gross Profit -87%

This analysis reflects gross profits ranging from $0.74 to $4.22 when these products are

sold at regular prices. However, when the prices were reduced, gross margins fell to arange from a high of $1.50 to a low of negative $0.32. This translates into a reduction of

gross margins ranging from 44 to 135 percent. The dollar amount of these particular

samples was relatively insignificant in relation to The Companys total revenues. A larger,

or more directed, sampling might have produced results that are more material. However,

in light of the fact that BBB and LNT make up almost 60 percent of The Companys



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revenues and that both regularly discontinue products, this certainly has some impact on

profitability. At the very least, it increases the risk of doing business with these two

customers.

As discussed previously, there are many other types of chargebacks that retailers impose

on suppliers. For John Johnson Sales, these chargebacks have had an increasingly

negative impact. The total chargebacks to The Company have been as follows:

2001 2002 2003 2004 2005

Chargebacks $ 51,293 $ 16,772 $ 26,487 $ 69,920 $ 135,015

Percent Change

From Previous Year -67% 58% 163% 94%

While chargebacks were increasing dramatically, growth in The Companys revenues was

not at the same pace. The following shows The Companys revenues and the percent

change from year to year.

2001 2002 2003 2004 2005

Revenues (M) $ 7.44 $ 8.07 $ 8.87 $ 11.59 $ 11.15

Percent Change

From Previous Year 8% 10% 30% -4%

The tables above show two things; that revenues did not grow as much as chargebacks

and that despite lower revenues in 2005, chargebacks almost doubled in that year.

For a company whose pre-tax net income, as a percentage of revenue, ranges from 1.94

percent to negative 0.46 percent historically, the relationship between chargebacks and

revenue becomes increasingly important. The following table shows revenues,

chargebacks and chargebacks as a percentage of revenue.

2001 2002 2003 2004 2005

Revenues (M) $ 7.44 $ 8.07 $ 8.89 $ 11.59 $ 11.15

Chargebacks 51,293 16,772 26,487 69,920 135,015

Chargebacks as a

Percentage of Revenues 0.69% 0.21% 0.30% 0.60% 1.21%



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At first, these percentages may seem insignificantly low. However, pre-tax net income as

a percentage of revenues went from 1.13 percent in 2004 to negative 0.46 percent in 2005.

The increase in chargebacks, therefore, accounted for 38 percent of the decrease in pre-

tax income in the most recent period. In other words, over one-third of the drop in pre-tax

net income was attributable solely to chargebacks. This helps quantify, at least partially,

the cost of doing business with specialty-retailers such as BBB and LNT, whose profitability

sometimes relies almost entirely on its chargebacks.

The next portion of the financial analysis is usually a business ratio analysis, which is used

to help the appraiser determine trends that have taken place in the business financial

performance. However, we believe that there are several adjustments that need to bemade before this analysis can be meaningful.

Therefore, the next step in our analysis is the normalization of the financial statements.

The process of normalization is intended to reflect The Companys financial statements on

an economic level; to reflect those items that a willing buyer would expect to see as a result

of normal operations. A review of the balance sheet indicates that certain accounts need

to be normalized for valuation purposes.

The Companys balance sheet has been adjusted to reflect the correction of the 2004

ending inventory and to remove a shareholder loan. The shareholder loan has been

considered to be an equity adjustment.

As a result of our analysis, the adjusted book value of the net assets of The Company,

excluding any intangible value, amounts to $1,496,312.

The next step in the valuation process is to normalize the income statement. Table 4

reflects this normalization.



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TABLE 4NORMALIZATION OF INCOME

FOR THE YEARS ENDED DECEMBER 31,

2002 2003 2004 2005

Historic Net Income (Schedule 2) $ 98,550 $ 82,213 $ 89,662 $ (26,315)

Adjustments

Revenues 16,308 7,119 27,6481

Inventory Adjustment - - 292,272 (292,272)2

Suzy Manufacturing 46,741 42,715 70,555 34,7233

Interest Expense - - 10,600 10,6864

Officers' Compensation - Addback 148,400 215,700 86,400 158,4005

Officers' Compensation - Reasonable (205,351) (211,703) (218,250) (225,000)6

Professional Fees 81,115 - - 21,3997

Moving 14,671 1,500 - -

8

Auto Expenses - Addback 23,433 28,045 18,611 35,0429

Insurance - Automobiles 3,515 4,703 4,824 4,65810

Insurance - Other 10,380 11,890 10,350 15,38111

Credit Cards 56,007 72,755 62,496 51,03612

Payments to Jessica & Andrew Johnson 44,194 25,474 15,941 21,33913

Health & Company Life Insurance 6,754 7,907 9,478 10,35114

Telephone 4,441 4,942 2,593 2,63615

Miscellaneous 7,100 11,895 8,455 8,50116

Loss on Sale of Assets - 24,264 - -17

Historic Income Taxes 58,286 43,263 41,615 (25,140)18

ADJUSTED PRETAX NET INCOME $ 398,236 $ 381,871 $ 512,721 $ (166,926)

Income Taxes 149,856 143,698 192,937 (53,952)18

ADJUSTED HISTORIC NET INCOME $ 248,380 $ 238,173 $ 319,784 $ (112,975)

1. John Johnson received monies as part of a loan repayment, and deposited these

monies into his personal account. This adjustment is intended to reflect these

monies as company revenues.

2. In 2004, an outside inventory service was hired to take a physical inventory.

However, they missed some inventory that was written off in 2004. The amount of

the error was $292,272 and was corrected in early 2005. As a result of this error,

2004 net income was understated, and 2005 net income was overstated.

3. Suzy Manufacturing was set up to do embroidery work for The Company until May

2005 when it was merged into The Company. During conversations with Mr.



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Johnson, he indicated that while the market rate was about $0.10 per piece for

embroidery, The Company was paying between $0.15 and $0.25 per piece. A

hypothetical willing buyer would not incur this additional expense over the market

rate. Therefore, this overage must be added back to bring this expense back to a

fair market rate.

We were provided with a report showing all payments to Suzy Manufacturing for the

period 2002 through 2005. We applied a market rate percentage to the amounts

based on the difference between what The Company was paying compared to what

the market was paying. This was calculated as follows:

Market Piece Price $ 0.10

W hat The Company Paid $ 0.20

(average of $0.15 and $0.25)

Market Rate Percentage 0.10 0.20 = 50%

This market rate percentage was then applied as follows:

2002 2003 2004 2005

Net Payments to Suzy Manufacturing $ 93,482 $ 85,429 $ 91,111 $ 69,446

Market Rate Percentage 50% 50% 50% 50%

Ad justment $ 46,741 $ 41,715 $ 45,555 $ 34,723

In 2004, there was an unidentified payment of $25,000 made by The Company to

Suzy Manufacturing. With no support for this payment, it has been added back in

its entirety. This brings the net adjustment in 2004 to $70,555.

4. This is the interest associated with the non-operating shareholder loan. It is addedback as a hypothetical buyer would not incur this expense.

5. Officers compensation has been added back in its entirety as a reasonable level of

compensation has been determined in number 6 below.



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6. In order to estimate the amount of reasonable compensation, several sources were

reviewed. Executive Compensation Assessor, a database available from Economic

Research Institute (ERI) was the first source. We searched this survey for

companies classified under SIC Code 5023 in Macon, Florida, with sales between

$5,000,000 and $20,000,000. We did not find any usable data in this database.

We then looked at the National Compensation Survey - December 2005published

by the U.S. Department of Labor. We reviewed data for private industry workers:

mean hourly earnings for full-time and part-time workers by experience levels in the

same part of Florida as the subject company. Within this group is a subset called

Management Occupations, with the highest work level in this subject being level 12.The hourly rate given was converted to an annual figure using 2,080 hours and is

shown below.

$ 96.92 per hour

x 2,080 hours

$ 201,594

We also reviewed salary information located at salary.com. This database providedtotal compensation (salary, bonus and benefits) for a Top Operations Executive.

The complete package amounted to $349,701, consisting of salary of $217,416,

bonus of $65,065, with the balance representing other fringe benefits.

Finally, we reviewed Integras Business Profiler, which provides officers

compensation by SIC Code as a percentage of sales. Officers compensation for

businesses operating in SIC Code 5023 with sales between $10 and $25 million,

reflected an average compensation from 295 businesses at 2.2 percent in 2005.

Using The Companys 2005 revenues results in the following:



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2005 Revenues $ 11,122,116

Officers Compensation as % of Revenues 2.2%

Officers Compensation $ 244,687

Recognizing that this SIC Code is extremely broad, we believe that compensation

can be considered from this data since it includes 295 businesses within the sales

range of John Johnson Sales. It is also within the range of the other sources we

reviewed.

As a result of our analysis, we believe that reasonable compensation should be

estimated at $225,000 with prior years being deflated by 3 percent.

7. Professional fees were materially higher in 2002 and 2005 compared to the other

years. An adjustment was made to reflect a more normal level of expense based

on an average of the other years. These calculations are as follows:

2000 $ 26,9132001 27,2282003 30,1732004 20,320

Total 104,634 4

Average Expense $ 26,159

This average expense was then subtracted from the actual expense in 2002 and

2005 to arrive at the adjustment amount. This is shown below:

2002 2005

Actual Expense $ 107,274 $ 47,558Average Expense 26,159 26,159

Adjustment Amount $ 81,115 $ 21,399



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8. Moving expenses are considered non-recurring in nature and are therefore added

back.

9. Auto expenses include car payments and other auto related expenses for the

Johnson family, as well as other employees. Legitimate business expenses were

considered to be all expenses paid for Perry Smith and one car for John Johnson.

Our addback is calculated as follows:

2002 2003 2004 2005

Total Auto Expense $ 46,122 $ 45,861 $ 35,959 $ 53,111

Less: Auto Leases

Perry Smith 5,868 5,868 6,265 6,464John Johnson 7,365 8,635 10,412 10,123

Less: Auto Expenses

Perry Smith 106 - - -

Net Auto Expense $ 32,784 $ 31,358 $ 19,282 $ 36,524

Other Lease Payments 14,083 24,732 17,941 33,559A

Net Operating Auto Expenses $ 18,701 $ 6,626 $ 1,341 $ 2,965

Al lowab le Portion (50% ) 9,350 3,313 671 1,483

Disallowed Portion $ 9,350 $ 3,313 $ 671 $ 1,483B

Add Back $ 23,433 $ 28,045 $ 18,611 $ 35,042A + B

Total lease payments from the general ledger less the leases listed above.A

Since most of the rema ining expenses pertain to Ben and Suzy Johnson , we have considered onlyB

one-half to be a necessary business expense .

10. Included in insurance expense are premiums related to the vehicles that were

adjusted for above.

11. Various other insurance policies were paid by The Company on behalf of the

Johnsons. These expenses are summarized as follows:



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2002 2003 2004 2005

Homeowners, Flood & Disability $ 3,983 $ 4,040 $ 1,137 $ 1,909

Officers Life 6,397 7,010 9,213 13,472

Auto - Andrew Johnson - 840 - -

Totals $ 10,380 $ 11,890 $ 10,350 $ 15,381

12. Credit card statements were reviewed and non-business related expenses were

added back, as these monies would be available to a willing buyer. The summary

of our analysis is as follows:

2002 2003 2004 2005

Specifically Identified $ 44,574 $ 43,598 $ 41,545 $ 35,599A

Estimated Items 398 455 - -B

Unidentified Payments - 15,133 - -C

Costco 7,645 9,446 14,546 12,165D

Sams Club 3,206 4,074 6,405 3,251D

Lands End 183 48 - 22E

Total Adjustment $ 56,007 $ 72,755 $ 62,496 $ 51,036

A. These items were specifically identified as being personal in nature. We

reviewed every available credit card statement with management for the

years 2002 through 2005. Some of the items that were considered as non-

business related were:

Restaurants around the family residence

CVS Pharmacy

Nail salon

Animal hospital

Various clothing stores

Grocery stores near the family residence

Trips to Aruba



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B. Over 230 credit card payments and the accompanying statements were

analyzed to separate personal from business expenses. Only two

statements are missing in the amounts of $478 and $628. We estimated the

personal amount by the relationship between business and personal charges

in those particular years.

C. The unidentified amount consists of three payments made to credit cards that

were not identified as business cards.

D. In our discussion with management, it was indicated that a majority of

charges at Costco and Sams Club were personal in nature. After furtherdiscussion with management, 80 percent of charges were considered to be

personal.

E. Some items purchased at Lands End (towels) were business related. In

order to account for this, 50 percent was added back. Overall, this amount

was immaterial.

13. Wages paid to family members would likely not be incurred by a hypothetical buyer

of The Company. As a result, wages paid to Jessica and Andrew Johnson have

been added back, along with the associated payroll taxes.

We were provided with W-2 Forms for Jessica, representing gross wages. Payroll

taxes were estimated to be 8 percent of gross wages. This is calculated below.

Jessica 2002 2003 2004 2005

Payroll

Gross from W -2's $ 12,000 $ 12,000 $ 3,840 $ 9,555

Taxes (8%) 960 960 307 764

Total Payroll $ 12,960 $ 12,960 $ 4,147 $ 10,319

In addition, in 2003 there were checks payable to Jessica in the amount of $720 that

were also added back.



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We were also provided with W-2 Forms for Andrew, and again, estimated payroll

taxes at 8 percent of gross wages. This is calculated below.

Andrew 2002 2003 2004 2005

Payroll

Gross from W -2's $ 28,920 $ 10,920 $ 10,920 $ 10,203

Taxes (8%) 2,314 874 874 816

Total Payroll $ 31,234 $ 11,794 $ 11,794 $ 11,019

It was discussed earlier that Andrew received paychecks in order to receive health

insurance. In addition to this, Andrew received payments as a vendor for his actualservices rendered. These amounts were not added back since The Company would

have had to pay someone else to do what Andrew did.

The total adjustment is calculated as follows:

2002 2003 $ 2,004 2005

Total Jessica $ 12,960 $ 13,680 $ 4,147 $ 10,319

Total Andrew 31,234 11,794 11,794 11,019

GRAND TOTAL $ 44,194 $ 25,474 $ 15,941 $ 21,339

14. Health insurance and company sponsored life insurance for Mrs. Johnson, Jessica

and Andrew were added back.

The 2003 and 2005 health insurance invoices were analyzed; the 2004 paid invoices

could not be found. The actual premiums for Mrs. Johnson, Andrew and Jessica for

2003 and 2005, along with the observed pattern of increases were used to estimate

the 2004 amount. This is shown below:



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Neighborhood Health Insurance

2003Suzy +Jessica Andrew

Jan $ 449.37 $ 155.80Feb 449.37 155.80Mar 449.37 155.80Apr 449.37 155.80May 449.37 155.80Jun 449.37 155.80Jul 449.37 155.80Aug 449.37 155.80Sep 449.37 155.80Oct 554.04 192.09Nov 554.04 192.09Dec 554.04 192.09

2003 Totals $ 5,706.00 $ 1,978.00 $ 7,685.00


Jan $ 554.04 $ 192.09Feb 554.04 192.09Mar 554.04 192.09Apr 554.04 192.09May 554.04 192.09Jun 554.04 192.09Jul 554.04 192.09Aug 554.04 192.09Sep 554.04 192.09Oct 628.82 218.03Nov 628.82 218.03Dec 628.82 218.03

2004 Totals $ 6,873.00 $ 2,383.00 $ 9,256.00


Jan $ 628.82 $ 218.03Feb 628.82 218.03Mar 628.82 218.03Apr 628.82 218.03May 628.82 218.03Jun 628.82 218.03Jul 628.82 218.03Aug 628.82 218.03Sep 628.82 218.03

Oct 689.27 236.67Nov 580.87 209.92Dec 580.87 209.92

2005 Totals $ 7,510.00 $ 2,619.00 $ 10,129.00



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An estimate was made for 2002 using the average change in premiums from 2003

to 2005, which was 15 percent.

The Company-sponsored life insurance plan only showed premiums for Mrs.

Johnson and Andrew of $9.25 per month for the years 2003 and 2004. The annual

amount is $222, and is assumed to be the same in 2002 and 2005. This amount is

added to the health insurance expense to arrive at a total adjustment as follows:

2002 2003 2004 2005

Health Insurance $ 6,532 $ 7,685 $ 9,256 $ 10,129

Life Insurance 222 222 222 222

Total Adjustment $ 6,754 $ 7,907 $ 9,478 $ 10,351

15. This adjustment reflects payments made by The Company on behalf of the

Johnsons. These are non-operating expenses and are therefore added back. The

amounts are as follows:

2002 2003 2004 2005

BellSouth $ 1,993 $ 2,558 $ 2,198 $ 2,479

T-Mobile 1,106 2,076 $ 395 158

Voicestream 1,342 - - -

Direct TV - 308 - -

Total $ 4,441 $ 4,942 $ 2,593 $ 2,636

16. The miscellaneous adjustments are as follows:



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2002 2003 2004 2005

Camp Arrowhead $ - $ - $ 1,705 $ -A

Checks to Suzy Johnson - 3,744 - -B

Checks to John Johnson & Cash

for Travel Expenses (50%) 7,100 8,151 $ 3,750 $ 8,501C

Checks to Cash in 2004 - - $ 3,000 -D

Totals $ 7,100 $ 11,895 $ 8,455 $ 8,501

A. This is a non-operating expense and therefore added back.

B. Checks written to Suzy Johnson were considered personal in nature and

have been a

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