HAPPY KIDS INC, 10-Q, 1999-08-12

HAPPY KIDS INC
10-Q, 1999-08-12
WOMEN'S, MISSES', AND JUNIORS OUTERWEAR

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

---------------

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 1999
Commission File No. 0-23629

Happy Kids Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)

New York 13-3473638
- -------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

100 West 33rd Street, Suite 1100, New York, New York 10001
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)

(212) 695-1151
-------------------------------
(Registrant's Telephone Number,
Including Area Code)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes: X No:
------- -------

Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of July 31, 1999:

Class Number of Shares
----- ----------------
Common Stock, $.01 par value 10,375,693

<PAGE>
HAPPY KIDS INC. AND SUBSIDIARIES

TABLE OF CONTENTS
-----------------

Page
----
PART I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION................... 1

Item 1. Condensed Consolidated Financial Statements.............. 1

Condensed Consolidated Balance Sheets as of June 30,
1999 (unaudited) and December 31, 1998.............. 2

Condensed Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1999 and 1998
(unaudited)......................................... 3

Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 1999 and 1998
(unaudited)......................................... 4

Notes to Condensed Consolidated Financial Statements
(unaudited)......................................... 5

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 12

Results of Operations.................................... 13

Liquidity and Capital Resources.......................... 15

Backlog.................................................. 16

Variability of Results; Seasonality; Cyclicality......... 16

Management Information Systems........................... 17

European Monetary Union.................................. 18

Effect of Recently Issued Accounting Standards........... 18

Item 3. Quantitative and Qualitative Disclosures About Market
Risk................................................ 18

PART II. OTHER INFORMATION............................................ 19

Item 1. Legal Proceedings........................................ 19

Item 2. Changes in Securities and Use of Proceeds................ 19

Item 4. Submission of Matters to a Vote of Security Holders...... 20

Item 5. Other Information........................................ 20

Item 6. Exhibits and Reports on Form 8-K.......................... 23

SIGNATURES.............................................................. 24

- i -
<PAGE>

PART I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION
----------------------------------------------------

Item 1. Condensed Consolidated Financial Statements

- 1 -
<PAGE>

HAPPY KIDS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>

JUNE 30, DECEMBER 31,
1999 1998
------------------- ---------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash..................................................... $ 101 $ 139
Due from factor.......................................... 25,871 20,640
Accounts receivable - trade, net......................... 1,122 347
Inventories.............................................. 27,549 23,579
Prepaid royalties........................................ 1,256 762
Deferred income taxes.................................... 1,029 1,029
Other current assets..................................... 2,334 1,496
--------------- ---------------
Total current assets........................... 59,262 47,992
FIXED ASSETS - NET........................................... 2,359 1,459
OTHER ASSETS................................................. 5,993 1,001
--------------- ---------------
Total assets................................... $ 67,614 $ 50,452
=============== ===============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Due to bank.............................................. $ 11,995 $ 3,753
Accounts payable and accrued liabilities................. 11,638 7,944
--------------- ---------------
Total current liabilities...................... 23,633 11,697

DEFERRED RENT PAYABLE........................................ 465 505
DUE TO STOCKHOLDERS.......................................... 5,570 5,719
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock - 5,000 shares authorized, $.01 par
value; no shares issued and outstanding.............. -- --
Common stock - 30,000 shares authorized, $.01 par
value; 10,376 and 10,280 shares issued and
outstanding at June 30, 1999 and December 31, 1998,
respectively......................................... 104 103
Additional paid-in capital............................... 24,262 23,263
Retained earnings........................................ 13,580 9,165
--------------- ---------------
Total stockholders' equity.................... 37,946 32,531
--------------- ---------------
Total liabilities and stockholders' equity.... $ 67,614 $ 50,452
=============== ===============
</TABLE>

The accompanying notes are an integral part of these statements.

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<PAGE>

HAPPY KIDS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net sales............................. $ 37,431 $ 32,013 $ 83,303 $ 67,728
Cost of goods sold.................... 27,089 23,468 61,181 50,552
----------- ----------- ----------- -----------
Gross profit...................... 10,342 8,545 22,122 17,176
----------- ----------- ----------- -----------
Operating expenses:
Operating expenses.......... 6,977 5,512 13,932 10,581
----------- ----------- ----------- -----------
Operating earnings.......... 3,365 3,033 8,190 6,595
----------- ----------- ----------- -----------
Interest expense, net................. 224 328 578 1,318
----------- ----------- ----------- -----------
Income before income taxes........... 3,141 2,705 7,612 5,277
Provision for income taxes............ 1,319 112 3,197 372
----------- ----------- ----------- -----------
Net income.................. $ 1,822 $ 2,593 $ 4,415 $ 4,905
=========== =========== =========== ===========
Basic income
per common share.................. $ 0.18 $ 0.25 $ 0.43 $ 0.55
=========== =========== =========== ===========
Weighted average common
shares outstanding-basic.......... 10,363 10,188 10,322 8,976
=========== =========== =========== ===========
Diluted income
per common share.................. $ 0.18 $ 0.25 $ 0.43 $ 0.55
=========== =========== =========== ===========
Weighted average common
shares outstanding-diluted........ 10,402 10,221 10,356 8,985
=========== =========== =========== ===========

Pro forma data (unaudited):
Historical income before
provision for income taxes.. $ 3,141 $ 2,705 $ 7,612 $ 5,277
Income taxes...................... 1,319 1,136 3,197 2,216
----------- ----------- ----------- -----------
Net income.................. $ 1,822 $ 1,569 $ 4,415 $ 3,061
=========== =========== =========== ===========
Pro forma basic income per share...... $ 0.18 $ 0.15 $ 0.43 $ 0.34
=========== =========== =========== ===========
Pro forma weighted average
common shares outstanding-basic... 10,363 10,188 10,322 8,976
=========== =========== =========== ===========
Pro forma diluted income per share.... $ 0.18 $ 0.15 $ 0.43 $ 0.34
=========== =========== =========== ===========
Pro forma weighted average
common shares outstanding-diluted. 10,402 10,221 10,356 8,985
=========== =========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

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<PAGE>

HAPPY KIDS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
---------------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 4,415 $ 4,905
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization.................... 312 114
Deferred taxes................................... -- (1,024)
Provision for losses on accounts receivable...... 3 --
Changes in operating assets and liabilities, net
of assets acquired:
Accounts receivable.............................. (778) 170
Due from factor.................................. (5,231) 4,787
Inventories...................................... (1,070) (5,557)
Prepaid royalties................................ (494) (2,467)
Other current assets............................. (838) (617)
Other assets..................................... (95) (28)
Accounts payable and accrued expenses............ 3,654 1,599
Due from shareholders............................ -- 347
---------------- ----------------

Net cash (used in) provided by operating activities. (122) 2,229
---------------- ----------------

Cash flows from investing activities:
Acquired assets of D.Glasgow..................... (6,853) --
Acquisition of fixed assets...................... (1,156) (11)
---------------- ----------------
Net cash used in investing activities.............. (8,009) (11)

Cash flows from financing activities:
Net borrowings under line of credit.............. 8,242 (21,083)
Payments on capital lease........................ -- (24)
Issuance of common stock......................... -- 22,331
Payments to stockholders......................... (149) --
Dividends paid................................... -- (3,428)
---------------- ----------------

Net cash provided by (used in) financing activities. 8,093 (2,204)
---------------- ----------------

Net (decrease) increase in cash..................... (38) 14

Cash at beginning of year........................... 139 374
---------------- ----------------

Cash at end of period............................... $ 101 $ 388
================ ================
</TABLE>

The accompanying notes are an integral part of these statements.

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<PAGE>
HAPPY KIDS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 -- Basis of Presentation:

The information presented as of June 30, 1999 and for the three-month and
six-month periods ended June 30, 1999 and June 30, 1998 is unaudited, but, in
the opinion of the Happy Kids Inc.'s (the "Company") management, the
accompanying unaudited condensed consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for the fair presentation of the Company's financial
position as of June 30, 1999 and the results of its operations for the
three-month and six-month periods ended June 30, 1999 and 1998, and its cash
flows for the six-month periods ended June 30, 1999 and 1998. The financial
statements included herein have been prepared in accordance with generally
accepted accounting principles and the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These financial
statements should be read in conjunction with the Company's audited financial
statements for the year ended December 31, 1998, which were included as part of
the Company's Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission (the "SEC") on March 30, 1999.

Results for the interim period are not necessarily indicative of results
that may be expected for the entire year.

The Company was incorporated in 1988 in New York under the name O'Boy Inc.
and changed its name to Happy Kids Inc. in December 1997. Historically, the
Company operated as separate business entities, with the first of such entities
commencing operations in 1979, all under the common ownership of the Company's
then-current shareholders. Immediately prior to the effectiveness of the
Company's initial public offering (the "Initial Public Offering"), as described
in Note 2, all of such separate entities became wholly-owned subsidiaries of the
Company (the "Reorganization"). The Company issued 4,262,500 additional shares
of common stock, to its then-current shareholders, in exchange for their
ownership in these separate business entities. All share and per share amounts
throughout this Form 10-Q have been restated to retroactively reflect the
Reorganization.

The accompanying condensed consolidated financial statements include the
consolidated accounts of the Company and its wholly owned subsidiaries to
reflect the Reorganization as stated above. All significant intercompany
accounts and transactions have been eliminated in consolidation.

- 5 -
<PAGE>

HAPPY KIDS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 2 -- Initial Public Offering:

On April 2, 1998, the Company consummated its Initial Public Offering of
2,200,000 shares of its Common Stock at a price of $10.00 per share, all of
which shares were issued and sold by the Company. On April 23, 1998, the Company
consummated the exercise of the underwriters' over-allotment option granted by
the Company to the underwriters in connection with the Initial Public Offering.
As a result, the Company issued and sold an additional 330,000 shares of the
Company's Common Stock at the Initial Public Offering price of $10.00 per share.
The net proceeds to the Company from such sales were approximately $22.3
million.

Of the total net proceeds received by the Company upon the consummation of
its Initial Public Offering and the exercise of the over-allotment option, $2.0
million was distributed to certain shareholders of the Company in connection
with the payment of a portion of the S Corporation distribution made by the
Company in connection with the Reorganization (the "S Corporation Distribution")
and the remaining amount was utilized to pay down a portion of the outstanding
balance under the Company's bank credit facility (the "Line of Credit"). See
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."

Note 3 -- Income Taxes:

Prior to the completion of the Initial Public Offering, the Company had
elected to be treated as an S Corporation for Federal income tax reporting
purposes. An S Corporation is generally treated like a partnership and is exempt
from Federal income taxes, with certain exceptions, and shareholders report
their pro rata share of corporate taxable income or loss on their individual tax
returns. A provision for state income taxes was made for those states not
recognizing the Company's S Corporation status. The Company's S Corporation
status terminated on the day prior to the effectiveness of the Company's Initial
Public Offering described in Note 2.

Subsequent to the termination of the Company's S Corporation status, the
Company used the liability method for both Federal and state income tax
purposes. The effect of such change was reflected in net income for the second
quarter of 1998 when such termination occurred and resulted in an increase in
deferred tax assets and net earnings of approximately $1.0 million.

The pro forma provision for income taxes represents the income tax
provision that would have been reported had the Company been subject to Federal
and additional state and local income taxes as a C Corporation for all periods
presented.

Deferred income taxes are determined based on the difference between the
tax basis of an asset or liability and its reported amount in the financial
statements using enacted tax rates for the year in which the differences are
expected to reverse.

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<PAGE>
HAPPY KIDS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The principal types of differences between assets and liabilities for
financial statement and tax return purposes giving rise to deferred income taxes
are accrued expenses, accumulated depreciation, certain costs capitalized to
inventory and allowance for doubtful accounts. A deferred tax asset has been
recorded for these differences.

Note 4 -- Due to Stockholders:

In connection with the termination of the Company's S Corporation status,
the Company agreed to distribute an aggregate of $7.6 million to the Company's
pre-Initial Public Offering shareholders, such amounts representing the
Company's total undistributed equity resulting from the S Corporation or limited
liability corporation ("LLC") status of the Company and its related entities
prior to the Reorganization, of which $2.0 million was paid from the proceeds of
the Initial Public Offering. The balance is due pursuant to four-year 5.7% notes
payable to such shareholders. Such notes provide for the timely distribution of
amounts necessary to pay the remaining personal income taxes of such
shareholders or members due on amounts earned by such S Corporations or LLCs for
the period January 1, 1998 through the termination of S Corporation or LLC
status. In addition, existing amounts due to shareholders of $1.4 million are
subject to the same terms as the above promissory notes.

Note 5 -- Pro forma Information:

a. Pro Forma Results of Income and Pro Forma Income Taxes:

Pro Forma adjustments in the statement of income for the three-month and
six-month periods ended June 30, 1998 reflect provisions for income taxes based
upon pro forma pretax income as if the Company had been subject to Federal and
additional state and local income taxes.

As disclosed in Note 3, the Company has, in the past, elected for certain
of its affiliates to be taxed as S Corporations pursuant to the Internal Revenue
Code. In connection with the Company's Initial Public Offering, the Company
terminated such S elections and partnership status and became subject to Federal
and additional state and local income taxes. The pro forma provision for income
taxes represents the income tax provisions that would have been reported had the
Company been subject to Federal and additional state and local income taxes. The
effective pro forma tax rate of the Company differs from the Federal rate of 34%
primarily due to the effects of state and local income taxes.

- 7 -
<PAGE>
HAPPY KIDS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

b. Pro Forma Net Income

Pro forma net income represents the historical amounts after the pro forma
adjustments discussed above.

Note 6 -- Earnings Per Share:

A reconciliation between basic and diluted earnings per share from
operations is as follows:

<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(in thousands, except per share amounts)

<S> <C> <C> <C> <C>
Net Income........................ $ 1,822 $ 2,593 $ 4,415 $ 4,905
Basic EPS:
Basic common shares.......... 10,363 10,188 10,322 8,976
========== ========== ========== ==========
Basic EPS.................... $ 0.18 $ 0.25 $ 0.43 $ 0.55
========== ========== ========== ==========
Diluted EPS:
Basic common shares.......... 10,363 10,188 10,322 8,976
Diluted common shares........ 39 33 34 9
---------- ---------- ---------- ----------
Total diluted shares......... 10,402 10,221 10,356 8,985
========== ========== ========== ==========
Diluted EPS................. $ 0.18 $ 0.25 $ 0.43 $ 0.55
========== ========== ========== ==========
</TABLE>

Note 7 -- Accounts Receivable:

Accounts Receivable consist of the following:

June 30, December 31,
1999 1998
----------- ------------
(in thousands)

Accounts Receivable.............. $ 1,444 $ 860
Allowances....................... (322) (513)
----------- -----------
$ 1,122 $ 347
=========== ===========

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<PAGE>
HAPPY KIDS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 8 -- Inventories:

Inventories consist of the following finished goods:

June 30, December 31,
1999 1998
----------- ------------
(in thousands)

Warehouse............................... $ 20,180 $ 16,531
In-transit, overseas and Raw Materials.. 7,598 7,277
LIFO valuation allowance............. (229) (229)
---------- ----------
$ 27,549 $ 23,579
========== ==========

There was no liquidation of LIFO inventories in 1999. For the six months
ended June 30, 1998, the liquidation of LIFO inventories decreased the cost of
sales and, therefore, increased income before taxes by $53,000. There was no
liquidation of LIFO inventories for the three months ended June 30, 1998.

Note 9 -- Acquisition:

On April 13, 1999, the Company entered into an asset purchase agreement
(the "Purchase Agreement") with D. Glasgow & Sons Inc., a New York corporation
(the "Seller") and Mr. Andrew D. Glasgow, its sole shareholder, to acquire
certain of the assets (the "Assets") of the Seller. The Assets include
intellectual property rights under license agreements to design and manufacture
children's apparel bearing logos, trademarks and tradenames of the National
Football League, the National Basketball Association, Major League Baseball and
the National Hockey League, as well as certain Warner Brothers' properties,
including Looney Tunes, and Saban's Power Rangers, among other licenses. The
Company also acquired certain machinery and equipment from the Seller. The
purchase price for the Assets included a cash consideration of $3.7 million and
the issuance of 95,693 shares of Common Stock of the Company having a fair
market value of $1.0 million. Such shares of Common Stock are restricted shares,
and the Company has granted certain piggy-back registration rights to the holder
of such restricted stock. The Purchase Agreement also provided for the Company
to purchase the Seller's apparel inventory for an additional cash payment of
approximately $2.9 million.

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<PAGE>
HAPPY KIDS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Compensation Committee of the Board of Directors. In addition, Mr. Glasgow is
also entitled to receive, in quarterly payments, subject to annual adjustment, a
percentage of certain divisional profits and certain import sales profits of the
Company's Glasgow Division. Mr. Glasgow's Employment Agreement requires Mr.
Glasgow to maintain the confidentiality of Company information and requires that
during the term of his employment with the Company and thereafter for a period
of two years, he will not compete with the Company in any state or territory of
the United States where the Company does business by engaging in any capacity in
a business which is competitive with the business of the Company. Mr. Glasgow's
Employment Agreement also provides that, for a period of two years following the
termination of his employment with the Company, he shall not solicit the
Company's licensors, customers or employees.

Note 10 -- Subsequent Events:

On July 12, 1999, the Company's Board of Directors (the "Board") received
for consideration a proposal (the "Proposal") from H.I.G. Capital, L.L.C., a
private investment firm (the "Buyer"), to recapitalize the Company in a
leveraged going-private transaction (the "Proposed Transaction"). Certain terms
and conditions of the Proposed Transaction are set forth in a certain Letter of
Intent dated July 9, 1999 (the "Letter of Intent"), entered into by and among
the Buyer and each of the Company's majority shareholders, consisting of Messrs.
Jack M. Benun, Mark J. Benun and Isaac M. Levy (the "Majority Shareholders"). As
contemplated under the Letter of Intent, an entity to be formed by the Buyer
("Newco") would be merged with and into the Company (the "Merger"). Upon
consummation of the Merger, the separate existence of Newco shall cease to
exist, and the Company shall be the surviving corporation and shall continue
under the name "Happy Kids Inc.". In addition, each share of the Company's
Common Stock then held by the public (other than shares held by the Majority
Shareholders) would be converted into the right to receive $11.50 payable
entirely in cash, without any interest thereon. The Majority Shareholders, who
presently beneficially own 74.69% of the Company's Common Stock in the
aggregate, would continue to own 23.61% of the Company's Common Stock in the
aggregate upon consummation of the Merger and would receive, in the aggregate,
approximately $49.25 million in connection with their sale of shares of the
Company's Common Stock. Each outstanding option to purchase the Company's Common
Stock, whether or not then exercisable, would be cancelled upon consummation of
the Merger and the holders thereof would be compensated accordingly. The Merger
is conditioned upon, among other things, the approval of the Company's Board of
Directors, the approval of two-thirds of all of the Company's shareholders,
negotiation and execution of a definitive acquisition agreement, the receipt of
financing on acceptable terms in amounts sufficient to effect the Merger, and
other customary conditions. The Board has formed a special committee, consisting
of its two independent directors, Messrs. Marvin Azrak and Stephen I. Kahn (the
"Special Committee") to evaluate the Proposed Transaction. The Proposed
Transaction is subject to the recommendation of the Special Committee, and, if
so recommended, will be submitted to the Company's shareholders for their
approval. The Special Committee has engaged independent legal counsel and an
independent investment banking firm to assist in its evaluation of the fairness
of the Proposed Transaction to the Company's public shareholders from a
financial point of view. It is expected

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<PAGE>
HAPPY KIDS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

that, in the event the Merger is consummated, the registration of the Company's
Common Stock pursuant to Section 12 of the Securities Exchange Act of 1934, as
amended, would be terminated and the Common Stock would cease to be listed on
the Nasdaq National Market.

Approximately $79.7 million would be required to pay the aggregate
consideration due to all shareholders and option holders of the Company
(including each Majority Shareholder) upon consummation of the Merger.

The Buyer has indicated that it will make an equity investment and arrange
to borrow sufficient funds from banks and other financial institutions and/or to
obtain additional funds through the issuance and sale of debt securities of
Newco to effect the Merger and to pay the requisite consideration in connection
therewith. It is expected that in connection with the consummation of the
Merger, the Company would assume, guarantee or otherwise become liable for,
contractually or by operation of law, Newco's obligations under any borrowings
of Newco or debt securities sold by Newco. Following the consummation of the
Merger, the Company's available cash resources will be utilized to pay certain
of the costs of the Merger or retire or amortize certain obligations incurred to
effect the Merger.

As of the date hereof, the Company's Board of Directors has not responded
to the Proposal. Although the Majority Shareholders have indicated in the Letter
of Intent that they have agreed to support the Proposal, there can be no
assurance that the Board of Directors of the Company will accept the Proposal
or, if accepted, that the conditions set forth in such Proposal, including the
obtaining of requisite financing, will be satisfied, that a mutually acceptable
definitive acquisition agreement will be entered into, or that the Proposed
Transaction will be consummated.

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<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.

GENERAL

Happy Kids Inc., a New York corporation ("Happy Kids" or the "Company"), is
a designer and marketer of custom-designed, licensed and branded children's
apparel. The Company produces high-quality, coordinated apparel programs,
including knit tops, bottoms, overalls, shortalls, coveralls and swimwear, for
newborns, infants, toddlers, boys and girls (collectively, "playwear"). The
Company's major licenses include Nickelodeon's Rugrats, AND 1 and B.U.M.
Equipment. The Company also designs and delivers private label branded playwear
programs for leading retailers, such as Sesame Street for Kmart. The Company's
strategy is to work closely with its customers to design and market coordinated
playwear programs resulting in gross margins that the Company believes are
higher than those typically generated from sales of non-licensed or non-private
label branded playwear.

Prior to and including much of 1995, the Company's operating strategy
primarily focused on developing and marketing its own house brands. The Company
manufactured products for inventory under the Company's brands and often
concentrated on enhancing sales volume rather than focusing on a combination of
sales volume and gross margins. The Company believes that the loss it incurred
in 1995 was primarily attributable to these factors. In 1995, to leverage its
strong customer relationships, the Company initiated its current sales strategy
under which the Company's customers order specific quantities of goods on a
fixed-price basis three to nine months in advance of a selling season. As a
result, substantially all of the Company's playwear is produced upon receipt of
customer orders. Also in 1995, the Company elected to concentrate on developing
a diversified portfolio of popular, established and well-recognized licensed
properties and private label relationships and de-emphasized its reliance on
house brands, which have been a declining component of the Company's net sales
in each year since 1995. Since that time, the Company's strategy has been to
work closely with its customers to design and market high-quality coordinated
apparel programs resulting in gross margins that the Company believes are higher
than those typically generated from sales of non-licensed or non-private label
branded playwear.

Statements contained or incorporated by reference in this Form 10-Q that
are not based on historical facts are "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
including, without limitation, statements regarding the Company's sales
strategy, concentration on the development of a diversified portfolio of
licensed properties and private label relationships and gross margins.
Forward-looking statements also may be identified by the use of forward-looking
terminology such as "may", "will", "expect", "estimate", "anticipate",
"continue", or similar terms, variations of such terms or the negative of those
terms. This Form 10-Q contains forward-looking statements that involve risks and
uncertainties, including, but not limited to, those related to: (i) general
economic conditions; (ii) a dependence on license arrangements; (iii) a
dependence on private label relationships; (iv) a dependence on contract
manufacturers; (v) a reliance on key customers; (vi) a dependence on access to
credit facilities; (vii) the risks associated with significant growth; (viii)
competition; (ix) seasonality of sales; (x) cyclicality and trends in the
apparel industry; (xi) import restrictions and

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<PAGE>

other risks associated with international business; (xii) the Company's ability
to successfully integrate the licenses recently acquired from D. Glasgow & Sons,
Inc. into its current operations; and (xiii) risks relating to the Company's
Year 2000 compliance and the Year 2000 compliance of the Company's contract
manufacturers, suppliers, distributors, marketing partners and certain other
parties. The Company's actual results may differ materially from the results
discussed in the forward-looking statements contained herein.

RESULTS OF OPERATIONS

Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998

Net Sales. Net sales increased $5.4 million, or 16.9%, to $37.4 million in
the second quarter of 1999 from $32.0 million in the second quarter of 1998. The
increase in net sales is attributable primarily to increased sales of playwear
of both licensed products and private label programs.

Gross Profit. Gross profit increased by $1.8 million, or 21.0%, to $10.3
million in the first quarter of 1999 from $8.5 million in the second quarter of
1998. Such increase was due, in part, to increased sales in certain higher
margin licensed products as well as efficiencies in transportation and handling
costs.

Operating Expenses. Operating expenses increased by $1.5 million, or 26.6%,
to $7.0 million in the second quarter of 1999 from $5.5 million in the second
quarter of 1998. Operating expenses consist entirely of selling, design and
shipping expenses, and general and administrative expenses.

Selling, Design and Shipping Expenses. Selling, design and
shipping expenses increased by $1.5 million, or 48.6%, to $4.5 million
in the second quarter of 1999 from $3.0 million in the second quarter
of 1998. This increase is attributable primarily to higher sales
compensation, shipping and freight costs associated with increased
sales volumes, travel expense and licensing fees. In addition, design
and production salaries and sampling costs increased as a result of
the Company's expanded product lines. As a percentage of net sales,
selling, design and shipping expenses increased to 12.1% in the second
quarter of 1999 from 9.5% in the second quarter of 1998.

General and Administrative Expenses. General and administrative
expenses were $2.5 million in the second quarter of 1999 and 1998. As
a percentage of net sales, general and administrative expenses
decreased to 6.6% in the second quarter of 1999 from 7.7% in the
second quarter of 1998 due to the operating leverage associated with
the higher sales.

Interest Expense, net. Interest expense, net decreased $104,000, or 31.7%,
to $224,000 in the second quarter of 1999 from $328,000 in the second quarter of
1998. As a percentage of net sales, interest expense decreased to 0.6% for the
second quarter of 1999 compared to 1.0% in the second quarter of 1998.

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<PAGE>

Income Before Income Taxes. Income before income taxes increased $436,000,
or 16.1%, to $3.1 million in the second quarter of 1999 from $2.7 million in the
second quarter of 1998 due to the reasons described above. As a percentage of
net sales, income before income taxes was 8.4% for both quarters of 1999 and
1998.

Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998

Net Sales. Net sales increased $15.6 million, or 23.0%, to $83.3 million
for the first six months of 1999 from $67.7 million for the first six months of
1998. The increase in net sales is attributable primarily to increased sales of
playwear of both licensed products and private label programs.

Gross Profit. Gross profit increased by $4.9 million, or 28.8%, to $22.1
million for the first six months of 1999 from $17.2 million for the first six
months of 1998. Such increase was due, in part, to increased sales in certain
higher margin licensed products as well as efficiencies in transportation and
handling costs.

Operating Expenses. Operating expenses increased by $3.3 million, or 31.7%,
to $13.9 million for the first six months of 1999 from $10.6 million for the
first six months of 1998. Operating expenses consist entirely of selling, design
and shipping expenses, and general and administrative expenses.

Selling, Design and Shipping Expenses. Selling, design and
shipping expenses increased by $2.8 million, or 47.1%, to $8.8 million
for the first six months of 1999 from $6.0 million for the first six
months of 1998. This increase is attributable primarily to higher
sales compensation, advertising and shipping and freight costs
associated with increased sales volumes travel expense and licensing
fees. In addition, design and production salaries and sampling costs
increased as a result of the Company's expanded product lines. As a
percentage of net sales, selling, design and shipping expenses
increased to 10.6% in 1999 from 8.9% in 1998.

General and Administrative Expenses. General and administrative
expenses increased by $524,000, or 11.4%, to $5.1 million for the
first six months of 1999 from $4.6 million for the first six months of
1998 . As a percentage of net sales, general and administrative
expenses decreased to 6.1% in 1999 from 6.8% in 1998 due to the
operating leverage associated with the higher sales.

Interest Expense, net. Interest expense, net decreased $740,000, or 56.2%,
to $578,000 in 1999 from $1.3 million in 1998. As a percentage of net sales,
interest expense decreased to 0.7% for 1999 compared to 1.9% in 1998. This
decrease is a result of the application of a substantial portion of the proceeds
from the Company's Initial Public Offering to the repayment of the Company's
bank debt in the second quarter of 1998.

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<PAGE>

Income Before Income Taxes. Income before income taxes increased $2.3
million, or 44.3%, to $7.6 million in 1999 from $5.3 million in 1998 due to the
reasons described above. As a percentage of net sales, income before income
taxes was 9.1% in 1999 compared to 7.8% in 1998.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its cash requirements primarily through operations
and borrowings under its bank line of credit. Historically, the Company's
borrowing requirements have been seasonal, with peak working capital needs
arising during the first and third quarters.

On April 2, 1998, the Company consummated its initial public offering
("IPO") of 2,200,000 shares of its common stock, $0.01 par value (the "Common
Stock"), at a price of $10.00 per share, all of which shares were issued and
sold by the Company. On April 23, 1998, the Company consummated the exercise of
the underwriters' over-allotment option granted by the Company to the
underwriters in connection with the IPO. As a result, the Company issued and
sold an additional 330,000 shares of the Company's Common Stock at the IPO price
of $10.00 per share. The net proceeds to the Company from such sales were
approximately $22.3 million.

Of the total net proceeds received by the Company upon the consummation of
its IPO and the exercise of the over-allotment option, $2.0 million was
distributed to certain shareholders of the Company in connection with the
payment of a portion of the S Corporation distribution and the remaining amount
was utilized to pay down a portion of the outstanding balance under the
Company's credit line.

On March 31, 1999, the Company executed an amendment of its existing credit
line whereby the Company's credit line was amended to provide for a
discretionary one year revolving line of credit, to expire on March 31, 2000,
renewable annually, providing for advances and letter of credit accommodations
up to the lesser of (a) $50.0 million from April 1, 1999 to March 31, 2000, or
(b) at all times the sum of (i) up to eighty-five percent of eligible accounts
receivables, plus (ii) up to fifty percent of finished goods inventory, plus
(iii) overadvances approved by the lender. The maximum amount of revolving
credit advances outstanding at any time cannot exceed $40.0 million and the
maximum amount of letters of credit outstanding at any time may not exceed $35.0
million. The interest rate on amounts borrowed will be the bank's then
prevailing prime rate (7.75% at June 30, 1999) less 0.5% or at LIBOR plus 2.0%,
at the option of the Company. The credit line is collateralized by substantially
all of the assets of the Company. As of June 30, 1999, the Company had $12.0
million of outstanding direct borrowings and $18.1 million of contingent
liabilities under open letters of credit.

In addition, the Company's lender has sole discretion to make or withhold
advances under the credit line. There can be no assurance that the lender will
continue to lend under the credit line. If the lender exercises its discretion
to withhold advances, there would be a material adverse effect on the Company's
business, financial condition and results of operations.

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<PAGE>

As of June 30, 1999, the Company's other principal sources of liquidity
included cash of $101,000, amounts due from factor of $25.9 million and net
accounts receivable of $1.1 million. The Company had working capital of $35.6
million and long-term debt of $5.6 million as of June 30, 1999.

For the six months ended June 30, 1999, operating activities used cash of
$122,000 primarily as a result of an increase in amounts due from factor of $5.2
million, an increase in inventory of $1.1 million, an increase in other current
assets and royalties of $1.3 million, offset in part by net income of $4.4
million, and an increase in accounts payable and accrued expenses of $3.7
million. Net cash used in investing activities was $8.0 million, primarily in
connection with the acquisition of certain of the assets of D. Glasgow & Sons,
Inc. and the acquisition of fixed assets. Net cash used in financing activities
resulted from borrowings under the line of credit.

Historically, the Company's business has not required significant capital
expenditures. The Company's capital expenditures for the first six months of
1999 and 1998, were $1.2 million and $4,000, respectively. The Company expects
to incur total capital expenditures in 1999 of $1.5 million for the purchase of
new computers, software and telecommunications equipment. The Company believes
that cash flow expected to be generated from operations, together with
borrowings under its existing credit line, as amended, will be adequate to
satisfy current and planned operations for at least the next twelve (12) months.

BACKLOG

The Company's customers order specific quantities of goods on a fixed-price
basis three to nine months in advance of a selling season. Such customer orders
are placed in backlog upon their receipt and acceptance by the Company. Customer
orders are generally cancelable on notice to the Company without penalty.
Although the Company has not had significant cancellations in the past, no
assurance can be given that it will not experience a significant level of
cancellations in the future or that its backlog at any point in time will be
converted to sales. Many of the Company's orders are received significantly in
advance of scheduled delivery periods. Consequently, the Company had backlog of
$114.5 million at June 30, 1999, all of which it expects to ship over the next
three to nine months. However, in recent months the Company has experienced a
significant increase in orders involving a rapid turnaround from the date the
order is placed to the shipment date.

VARIABILITY OF RESULTS; SEASONALITY; CYCLICALITY

Sales of children's apparel are seasonal. Consequently, the Company's
operating results have varied substantially from quarter to quarter, and the
Company expects that they will continue to do so. Generally, the Company has
experienced significantly higher net sales in the first and third quarters as
compared to the second and fourth quarters, although this may change from time
to time. The seasonality of the Company's business also affects borrowings under
the Company's lines of credit and its level of backlog, which fluctuate in
response to demand for the Company's products. Therefore, the results of any
interim period are not necessarily indicative of the results that may be
achieved for an entire year. In addition, the apparel industry is a cyclical
industry

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<PAGE>

heavily dependent upon the overall level of consumer spending, with purchases of
apparel and related goods tending to decline during recessionary periods when
disposable income is low. A difficult retail environment could result in
downward price pressure which could adversely impact the Company's gross profit
margins.

MANAGEMENT INFORMATION SYSTEMS

General

The Company believes that advanced information processing is essential to
maintaining its competitive position. The Company participates in the electronic
data interchange program maintained by many of its larger customers, including
JC Penney, Kids R Us, Sears, Target and WalMart. This program allows the Company
to receive customer orders, provide advanced shipping notices, monitor store
inventory and track orders on-line from the time such orders are placed through
delivery.

Year 2000 Compliance

In 1998, the Company established an oversight committee to review all of
the Company's computer systems and programs, as well as the computer systems of
the third parties upon whose data or functionality the Company relies in any
material respect, and to assess their ability to process transactions in the
Year 2000 and beyond. The Company, through such oversight committee, currently
is upgrading its management information systems, which it expects to complete
during the third quarter of 1999, to ensure proper processing of transactions
relating to Year 2000 and beyond. The Company continues to evaluate appropriate
courses of corrective actions, including replacement of certain systems.
Although the Company does not expect the costs associated with ensuring Year
2000 compliance to have a material affect on its financial position or results
of operations, if the computer systems used by the Company, or any of its
suppliers or vendors fail or experience significant difficulties related to the
Year 2000, the Company could experience delays in manufacturing, delays in
shipping, an inability to monitor customer orders or to manage inventory, or may
experience related risks that could materially adversely affect the Company's
financial position or its results of operations. The Company has identified and
been in contact with its major customers, its bank and its factor. The reply
from each such entity indicates that each is, or will be, Year 2000 compliant.
The Company has incurred approximately $100,000 of expenses for Year 2000
remediation costs in 1999 and estimates future additional expenditures for Year
2000 remediation of approximately $100,000. All costs associated with Year 2000
compliance are being funded with cash flow generated from operations and are
being expensed as incurred. The Company has not developed a contingency plan
with respect to Year 2000 issues should they arise.

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<PAGE>

EUROPEAN MONETARY UNION

On January 1, 1999, eleven of the fifteen member countries of the European
Union set fixed conversion rates between their existing legacy currencies and
the euro. As such, these participating countries have agreed to adopt the euro
as their common legal currency. The eleven participating countries will issue
sovereign debt exclusively in euro and will redenominate outstanding sovereign
debt. The legacy currencies will continue to be used as legal tender through
January 1, 2002, at which point the legacy currencies will be canceled and euro
bills and coins will be used for cash transactions in the participating
countries.

The Company does not denominate its agreements or transactions with foreign
entities in foreign currencies. The Company currently does not believe that the
euro conversion will have a material impact on the Company's financial condition
or results of operations.

EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities," which is effective for the Company's fiscal year ending December
31, 2000. SFAS No. 133 will require the Company to recognize all derivatives on
the balance sheet at fair value. Adoption of SFAS No. 133 is not expected to
have a material effect on the Company's financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

INTEREST RATE EXPOSURE

The Company is subject to market risk from exposure to changes in interest
rates relating primarily to the Company's short-term debt obligations. The
Company primarily enters into such short-term debt obligations to support
general corporate purposes, including capital expenditures and working capital
needs. All of the Company's debt is short-term with variable rates. To manage
its exposure to changes in interest rates, the Company's policy is to manage
such interest rate exposure through the use of short-term borrowings, which are
negotiated with their lenders on an annual basis. The Company does not expect
changes in interest rates to have a material adverse effect on income or cash
flows in fiscal 1999, although there can be no assurance that interest rates
will not significantly change.

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<PAGE>
Part II

ITEM 1. LEGAL PROCEEDINGS.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

Changes in Securities

On April 13, 1999, the Company issued 95,693 shares of restricted Common
Stock having a fair market value of $1.0 million to Mr. Andrew D. Glasgow. See
"Item 5. Other Information."

The Company did not employ an underwriter in connection with the issuance
or sale of the securities described above. The Company claims that the issuance
or sale of the foregoing securities was exempt from registration under Section
4(2) of the Securities Act of 1933, as amended (the "Act"), as a transaction not
involving any public offering and such securities having been acquired for
investment and not with a view to distribution. An appropriate legend was
affixed to the stock certificate issued in connection with the issuance of the
above-referenced securities. Mr. Glasgow had adequate access to information
about the Company.

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<PAGE>

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The Company's 1999 Annual Meeting of Shareholders was held on May 25, 1999.

There were present at the Annual Meeting in person or by proxy shareholders
holding an aggregate of 10,289,847 shares of Common Stock out of a total number
of 10,375,693 shares of Common Stock issued and outstanding and entitled to vote
at the Annual Meeting. The results of the vote taken at such Annual Meeting with
respect to each nominee for director were as follows:

Common Stock Nominees For Withheld
- --------------------- --- --------
Jack M. Benun 10,288,397 Shares 1,450 Shares
Mark J. Benun 10,288,397 Shares 1,450 Shares
Isaac M. Levy 10,288,397 Shares 1,450 Shares
Andrew Glasgow 10,288,397 Shares 1,450 Shares
Marvin Azrak 10,288,397 Shares 1,450 Shares
Stephen I. Kahn 10,288,397 Shares 1,450 Shares

In addition, a vote of the shareholders was taken at the Annual Meeting on
the proposal to ratify the appointment of Grant Thornton LLP as the independent
auditors of the Company for the fiscal year ending December 31, 1999. Of the
shares present at the meeting in person or by proxy, 10,288,037 shares of Common
Stock were voted in favor of such proposal, 1,310 shares of Common Stock were
voted against such proposal and 500 shares of Common Stock abstained from
voting.

ITEM 5. OTHER INFORMATION.

Asset Purchase

On April 13, 1999, the Company entered into an asset purchase agreement
(the "Purchase Agreement") with D. Glasgow & Sons Inc., a New York corporation
(the "Seller") and Mr. Andrew D. Glasgow, its sole shareholder, to acquire
certain of the assets (the "Assets") of the Seller. The Assets included
intellectual property rights under license agreements to design and manufacture
children's apparel bearing logos, trademarks and tradenames of the National
Football League, the National Basketball Association, Major League Baseball and
the National Hockey League, as well as certain Warner Brothers' properties,
including Looney Tunes, and Saban's Power Rangers, among other licenses. The
Company also acquired certain machinery and equipment from the Seller. The
purchase price for the Assets included a cash consideration of $3.7 million and
the issuance of 95,693 shares of Common Stock of the Company having a fair
market value of $1.0 million. Such shares of Common Stock are restricted shares,
and the Company has granted certain piggy-back registration rights to the holder
of such restricted stock. The Purchase Agreement also provided for the Company
to purchase the Seller's apparel inventory for an additional cash payment of
approximately $2.9 million.

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<PAGE>

Management Change and Addition to the Board of Directors

In connection with the execution of the Purchase Agreement, Mr. Glasgow,
formerly the President of the Seller, was elected as a Director of the Company
in April 1999. In addition, Mr. Glasgow was appointed Vice President of the
Company and will serve as President of the Company's Glasgow Division. Mr.
Glasgow also executed a five (5) year Employment Agreement with the Company.
Under the terms of such Employment Agreement, Mr. Glasgow is entitled to an
annual base salary of $250,000 and bonuses commensurate with other executive
officers of the Company, which amounts and payments are within the discretion of
the Compensation Committee of the Board of Directors. In addition, Mr. Glasgow
is also entitled to receive, in quarterly payments, subject to annual
adjustment, a percentage of certain divisional profits and certain import sales
profits of the Company's Glasgow Division. Mr. Glasgow's Employment Agreement
requires Mr. Glasgow to maintain the confidentiality of Company information and
requires that during the term of his employment with the Company and thereafter
for a period of two years, he will not compete with the Company in any state or
territory of the United States where the Company does business by engaging in
any capacity in a business which is competitive with the business of the
Company. Mr. Glasgow's Employment Agreement also provides that, for a period of
two years following the termination of his employment with the Company, he shall
not solicit the Company's licensors, customers or employees.

Going Private Transaction

On July 12, 1999, the Company's Board of Directors (the "Board") received
for consideration a proposal (the "Proposal") from H.I.G. Capital, L.L.C., a
private investment firm (the "Buyer"), to recapitalize the Company in a
leveraged going-private transaction (the "Proposed Transaction"). Certain terms
and conditions of the Proposed Transaction are set forth in a Letter of Intent
dated July 9, 1999, entered into by and among the Buyer and each of the Majority
Shareholders (the "Letter of Intent"). As contemplated under the Letter of
Intent, an entity to be formed by the Buyer ("Newco") would be merged with and
into the Company (the "Merger"). Upon consummation of the Merger, the separate
existence of Newco shall cease to exist, and the Company shall be the surviving
corporation and shall continue under the name "Happy Kids Inc.". In addition,
each share of the Company's Common Stock then held by the public (other than
shares held by the Majority Shareholders) would be converted into the right to
receive $11.50 payable entirely in cash, without any interest thereon. The
Majority Shareholders, who presently beneficially own 74.69% of the Company's
Common Stock in the aggregate, would continue to own 23.61% of the Company's
Common Stock in the aggregate upon consummation of the Merger and would receive,
in the aggregate, approximately $49.25 million in connection with their sale of
shares of the Company's Common Stock. Each outstanding option to purchase the
Company's Common Stock, whether or not then exercisable, would be cancelled upon
consummation of the Merger and the holders thereof would be compensated
accordingly. The Merger is conditioned upon, among other things, the approval of
the Company's Board of Directors, the approval of two-thirds of all of the
Company's shareholders, negotiation and execution of a definitive acquisition
agreement, the receipt of financing on acceptable terms in amounts sufficient to
effect the Merger, and other customary conditions. The Board has formed a

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<PAGE>

special committee, consisting of its two independent directors, Messrs. Marvin
Azrak and Stephen I. Kahn (the "Special Committee") to evaluate the Proposed
Transaction. The Proposed Transaction is subject to the recommendation of the
Special Committee, and, if so recommended, will be submitted to the Company's
shareholders for their approval. The Special Committee has engaged independent
legal counsel and an independent investment banking firm to assist in its
evaluation of the fairness of the Proposed Transaction to the Company's public
shareholders from a financial point of view. It is expected that, in the event
the Merger is consummated, the registration of the Company's Common Stock
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, would
be terminated, and the Common Stock would cease to be listed on the Nasdaq
National Market.

In connection with the Proposed Transaction, the Company, its Board, the
Majority Shareholders and the Buyer have been named as defendants in certain
class-action litigation. See "Part II. Item 2. Legal Proceedings."

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<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits.

10.1 Amendment No. 7, dated as of April 13, 1999, to the Company's
Financing Agreement with CIT Group/Commercial Services, Inc., as
agent for itself and certain other lenders, as previously
amended.

10.2 Amendment No. 1, dated July 1, 1999, to the Change in Control
Severance Pay Agreement, dated as of January 12, 1999, by and
between the Company and Stuart Bender.

27 Financial Data Schedule.

(b) Reports on Form 8-K.

On April 27, 1999, the Company filed a Current Report on Form 8-K in
connection with the acquisition by the Company of certain of the assets
of D. Glasgow & Sons, Inc.

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<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

HAPPY KIDS INC.

DATE: August 12, 1999 By: /s/ Jack M. Benun
-------------------------------------
Jack M. Benun
President and Chief Executive Officer
(Principal Executive Officer)

DATE: August 12, 1999 By: /s/ Stuart Bender
-------------------------------------
Stuart Bender
Chief Financial Officer
(Principal Financial and Accounting
Officer)

SEVENTH AMENDMENT

TO THE FINANCING AGREEMENT

SEVENTH AMENDMENT, dated as of April 13, 1999 (this "Amendment"), to
the Financing Agreement, dated as of February 13, 1996, as amended by the First
Amendment dated as of February 13, 1997, the Second Amendment dated as of June
1, 1997, the Third Amendment dated as of October 1, 1997, the Fourth Amendment
dated as of November 28, 1997, the Fifth Amendment dated as of March 25, 1998
and the Sixth Amendment dated as of March 31, 1999 (as so amended, the
"Financing Agreement"), by and among Happy Kids Children's Apparel Ltd., a New
York corporation formerly known as Happy Kids, Ltd. ("Happy Kids"), Happy Kids,
Inc., a New York corporation formerly known as O'Boy Inc. (the "Parent"), Talk
of the Town Apparel Corp., a New York corporation ("TOT Apparel"), O.P. Kids,
Inc., a New Jersey corporation and successor by merger to O.P. Kids, L.L.C. ("OP
Inc.", and together with Happy Kids, the Parent and TOT Apparel, each a
"Borrower" and collectively, the "Borrowers"), the guarantors listed on Schedule
B to the Financing Agreement (each a "Guarantor" and collectively, the
"Guarantors"), the lenders listed on Schedule A to the Financing Agreement (each
a "Lender" and collectively the "Lenders") and The CIT Group/Commercial
Services, Inc., as agent for the Lenders (in such capacity, the "Agent").

WHEREAS, concurrently with the execution and delivery of this
Amendment, the Parent is entering into an Asset Purchase Agreement (the "D.
Glasgow Asset Purchase Agreement") with D. Glasgow & Sons, Inc., a New York
corporation ("D. Glasgow & Sons"), and Andrew Glasgow, the sole shareholder of
all of the issued and outstanding capital stock of D. Glasgow & Sons.

WHEREAS, D. Glasgow & Sons is engaged principally in the business of
designing, manufacturing and selling children's apparel products (the
"Business").

WHEREAS, pursuant to the terms of the D. Glasgow Asset Purchase
Agreement, the Parent will purchase certain of the assets and the Business for
the consideration set forth in the D. Glasgow Asset Purchase Agreement and the
assumption by the Parent of certain of D. Glasgow & Sons' liabilities.

WHEREAS, in connection with the D. Glasgow Asset Purchase Agreement
and the transactions contemplated thereby (the "Asset Purchase Transactions"),
the Borrowers, the Guarantors, the Lenders and the Agent wish to amend the
Financing Agreement to, among other things, permit the Asset Purchase
Transactions.

Accordingly, the Borrowers, the Guarantors, the Lenders and the Agent
hereby agree as follows:

1. Definitions. All terms which are defined in the Financing
-----------
Agreement and not otherwise defined herein are used herein as defined therein.
<PAGE>

2. Existing Definitions.
--------------------
(a) The definition of the term "License Agreements" in Section
1.01 of the Financing Agreement is hereby amended in its entirety to read as
follows:

"'License Agreements' means the BUM License Agreement, the
Jordache License Agreements, the LA Gear License Agreement, the OP
License Agreement, the D. Glasgow License Agreements and each license
agreement entered into by any Borrower or Corporate Guarantor after
the Effective Date."

(b) The definition of the term "Licensor" in Section 1.01 of
the Financing Agreement is hereby amended in its entirety to read as follows:

"'Licensor' means BUM, Ocean Pacific, LA Gear, Jeanjer,
Jordache, the D. Glasgow Licensors and any Person entering into a
license agreement with any Borrower or Corporate Guarantor after the
Effective Date".

3. New Definitions. The following definitions of the terms "D.
---------------
Glasgow Asset Purchase Agreement", "D. Glasgow License Agreement", "D. Glasgow
Licensor" and "Seventh Amendment" are hereby added to Section 1.01 of the
Financing Agreement:

"'D. Glasgow Asset Purchase Agreement' means the Asset
Purchase Agreement among the Parent, D. Glasgow & Sons, Inc., a New
York corporation ('D. Glasgow & Sons') and Andrew Glasgow, the sole
shareholder of all of the issued and outstanding capital stock of D.
Glasgow & Sons."

"'D. Glasgow License Agreement' means each license
agreement acquired by the Parent from D. Glasgow & Sons pursuant to
the D. Glasgow Asset Purchase Agreement, as more fully described on
Annex I to the Seventh Amendment."

"'D. Glasgow Licensor' means each licensor party to a D.
Glasgow License Agreement, as more fully described on Annex II to the
Seventh Amendment."

"'Seventh Amendment' means the Seventh Amendment, dated as
of April 13, 1999, to the Financing Agreement."

4. Liens. Section 7.02(a) of the Financing Agreement is hereby
-----
amended by (i) deleting the word "and" at the end of clause (viii) thereof, (ii)
redesignating clause (ix) thereof as clause (x), and (iii) adding the following
new clause (ix):

"(ix) Liens on assets (other than Accounts Receivable
and Inventory) acquired by the Parent pursuant to the D. Glasgow Asset
Purchase Agreement, as described on Annex III to the Seventh
Amendment, but not the extension of coverage thereof to other property
or the extension of maturity, refinancing or other modification of the
terms thereof or of the Indebtedness secured thereby; and"

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<PAGE>

5. Investment. Section 7.02(f) of the Financing Agreement is hereby
----------
amended by (i) deleting the words "and" at the end of clause (ii) thereof, (ii)
redesignating clause (iii) thereof as clause (iv), and (iii) adding the
following new clause (iii):

"(iii) investments by the Parent in the assets of D.
Glasgow & Sons pursuant to the D. Glasgow Asset Purchase Agreement;
and"

6. Capital Expenditures. Section 7.02(h) of the Financing Agreement
--------------------
is hereby amended in its entirety to read as follows:

"(h) Capital Expenditures. Make or be committed to make,
or permit any of its Subsidiaries to make or be committed to make, any
expenditure (by purchase or capitalized lease) for fixed or capital
assets other than (i) expenditures made by the Parent pursuant to the
D. Glasgow Asset Purchase Agreement or (ii) expenditures (including
obligations under Capitalized Leases) which would not cause the
aggregate amount of all such expenditures to exceed $2,000,000 in any
calendar year."

7. Schedules. Schedule 6.01(e), Schedule 6.01(s) and Schedule
---------

6.01(y) to the Financing Agreement are each hereby amended by adding the
information contained on each of Annex IV, Annex V and Annex VI, respectively,
to the Schedule to which such Annex relates.

8. Conditions. This Amendment shall become effective only upon
----------
satisfaction in full of the following conditions precedent (the first date upon
which all such conditions have been satisfied being herein called the "Amendment
Effective Date"):

(a) Representations and Warranties; No Event of Default. The
representations and warranties contained herein, in Section 6.01 of the
Financing Agreement and in each other Loan Document and certificate or other
writing delivered to the Agent and the Lenders pursuant hereto on or prior to
the Amendment Effective Date shall be correct on and as of the Amendment
Effective Date as though made on and as of such date (except to the extent that
such representations and warranties expressly relate solely to an earlier date
in which case such representations and warranties shall be true and correct on
and as of such date); and no Potential Default or Event of Default shall have
occurred and be continuing on the Amendment Effective Date or would result from
this Amendment becoming effective in accordance with its terms.

(b) Delivery of Documents. The Agent shall have received on or
before the Amendment Effective Date the following, each in form and substance
satisfactory to the Agent and, unless indicated otherwise, dated the Amendment
Effective Date:

(i) counterparts of this Amendment, duly executed by the
Borrowers, the Guarantors and the Lenders;

(ii) an Assignment for Security (Trademarks), duly executed
executed by the Parent, granting to the Agent, for the benefit of the
Lenders, a security interest

- 3 -
<PAGE>

in all right, title and interest of the Parent in, to and under the
Trademarks listed on Annex VI hereto;

(iii) certified copies of requests for copies of
information on Form UCC-11, listing all effective financing statements
which name as debtor D. Glasgow & Sons, together with copies of such
financing statements, none of which, except as otherwise agreed in
writing by the Agent, shall cover any of the Collateral, and results
of searches for any tax and judgment Liens filed against D. Glasgow &
Sons or its property, which results, except as otherwise agreed to in
writing by the Agent, shall not show any such Liens;

(iv) a certificate of the chief executive officer or the
chief financial officer of the Parent, certifying that attached
thereto are complete and correct copies of the D. Glasgow Asset
Purchase Agreement and all other agreements, instruments and other
documents executed and delivered in connection therewith as requested
by the Agent;

(v) a certificate of an authorized officer of each
Borrower and Corporate Guarantor, certifying the names and true
signatures of the representatives of such Person authorized to sign
this Amendment and the other documents to be executed and delivered by
such Person in connection herewith, together with evidence of the
incumbency of such authorized officers;

(vi) a certificate of the chief executive officer or the
chief financial officer of the Parent, certifying as to the matters
set forth in subsection (a) of this Section 8;

(vii) a copy of each of the D. Glasgow License
Agreements as in effect on the Amendment Effective Date, certified as
a true and correct copy thereof by the chief executive officer or the
chief financial officer of the Parent;

(viii) evidence of the insurance coverage required by
the terms of Section 7.01(h) of the Financing Agreement and the other
Loan Documents naming the Agent an additional insured or loss payee
thereunder as specified by the Agent on all assets acquired pursuant
to the D. Glasgow Asset Purchase Agreement; and

(ix) such other agreements, instruments, approvals,
opinions and other documents as the Agent may reasonably request.

(c) Proceedings. All proceedings in connection with the
transactions contemplated by this Amendment, and all documents incidental
hereto, shall be satisfactory to the Agent and its special counsel, and the
Agent and such special counsel shall have received all such information and such
counterpart originals or certified copies of documents, and such other
agreements, instruments, approvals, opinions and other documents, as the Agent
or such special counsel may reasonably request.

- 4 -
<PAGE>

9. Representations and Warranties. Each of the Borrowers and the
--------------------------------
Corporate Guarantors represents and warrants as follows:

(a) Each Borrower and Corporate Guarantor (i) is a corporation
duly organized, validly existing and in good standing under the laws of the
state of its organization and (ii) has all requisite power, authority and legal
right to execute, deliver and perform this Amendment, and to perform the
Financing Agreement, as amended hereby.

(b) The execution, delivery and performance by it of this
Amendment and the performance by it of the Financing Agreement, as amended
hereby (i) have been duly authorized by all necessary action, (ii) do not and
will not violate or create a default under its articles of organization, by-laws
or any applicable law or any contractual restriction binding or otherwise
affecting it or any of its properties, and (iii) except as provided in the Loan
Documents, do not and will not result in or require the creation of any Lien
upon or with respect to its property.

(c) No authorization or approval or other action by, and no
notice to or filing with, any Governmental Authority or other regulatory body is
required in connection with (i) the due execution, delivery and performance by
it of this Amendment and (ii) the performance by it of the Financing Agreement,
as amended hereby.

(d) Each of this Amendment and the Financing Agreement, as
amended hereby, is a legal, valid and binding obligation of each Borrower and
Corporate Guarantor that is a party thereto enforceable against each such Person
in accordance with the terms thereof.

(e) The representations and warranties contained in Article VI of
the Financing Agreement are correct on and as of the Amendment Effective Date as
though made on and as of the Amendment Effective Date (except to the extent such
representations and warranties expressly relate to an earlier date in which case
such representations and warranties shall be true and correct as of such earlier
date), and no Event of Default or Potential Default has occurred and is
continuing on and as of the Amendment Effective Date or will result from this
Amendment becoming effective in accordance with its terms.

10. Continued Effectiveness of the Financing Agreement. Each of the
--------------------------------------------------
Borrowers and the Corporate Guarantors hereby confirms and agrees that, except
as otherwise provided in Section 9, (i) each Loan Document to which it is a
party is, and shall continue to be, in full force and effect and is hereby
ratified and confirmed in all respects except that on and after the Amendment
Effective Date all references in any such Loan Document to "the Financing
Agreement", "thereto", "thereof", "thereunder" or words of like import referring
to the Financing Agreement shall mean the Financing Agreement as amended by this
Amendment, and (ii) to the extent any such Loan Document purports to assign or
pledge to the Agent, or to grant to the Agent a Lien on any collateral as
security for the Obligations of the Borrowers or the Guarantors from time to
time existing in respect of the Financing Agreement and the Loan Documents, such
pledge, assignment and/or grant of the Lien is hereby ratified and confirmed in
all respects.

- 5 -
<PAGE>

11. Miscellaneous. (a) This Amendment may be executed in any number
-------------
of counterparts and by different parties hereto in separate counterparts, each
of which shall be deemed to be an original, but all of which taken together
shall constitute one and the same agreement.

(b) Section and paragraph headings herein are included for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.

(d) The Borrowers will pay on demand all reasonable fees, costs
and expenses of the Agent in connection with the preparation, execution and
delivery of this Amendment and all documents incidental hereto, including,
without limitation, the reasonable fees, disbursements and other charges of
Schulte Roth & Zabel LLP, counsel to the Agent.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

- 6 -
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.

BORROWERS:
---------

HAPPY KIDS CHILDREN'S APPAREL LTD.,
formerly known as Happy Kids, Ltd.

By: /s/ Jack M. Benun
------------------------------------
Title: President
------------------------------
Name: Jack M. Benun
------------------------------

HAPPY KIDS INC., formerly known as
O'Boy Inc.

By: /s/ Jack M. Benun
------------------------------------
Title: President
------------------------------
Name: Jack M. Benun
------------------------------

TALK OF THE TOWN APPAREL CORP.

By: /s/ Jack M. Benun
------------------------------------
Title: President
------------------------------
Name: Jack M. Benun
------------------------------

O.P. KIDS, INC.

By: /s/ Jack M. Benun
------------------------------------
Title: President
------------------------------
Name: Jack M. Benun
------------------------------

<PAGE>

GUARANTORS:
----------

H.O.T. KIDZ, INC.

By: /s/ Jack M. Benun
------------------------------------
Title: President
------------------------------
Name: Jack M. Benun
------------------------------

HAWK INDUSTRIES, INC.

By: /s/ Jack M. Benun
------------------------------------
Title: President
------------------------------
Name: Jack M. Benun
------------------------------

J&B 18 CORP.

By: /s/ Jack M. Benun
------------------------------------
Title: President
------------------------------
Name: Jack M. Benun
------------------------------

<PAGE>

AGENT AND LENDER:
----------------

THE CIT GROUP/COMMERCIAL
SERVICES, INC.

By: /s/ Deborah Rogut
------------------------------------
Title: Vice President
------------------------------
Name: Deborah Rogut
------------------------------

LENDERS:
-------

THE CHASE MANHATTAN BANK

By: /s/ Barbara Saltzman
------------------------------------
Title: Vice President
------------------------------
Name: Barbara Saltzman
------------------------------

ISRAEL DISCOUNT BANK OF NEW YORK

By: /s/ Gary Harkins
------------------------------------
Title: Vice President
------------------------------
Name: Gary Harkins
------------------------------

By: /s/ Ronald Bongiovanni
------------------------------------
Title: Vice President
------------------------------
Name: Ronald Bongiovanni
------------------------------

REPUBLIC NATIONAL BANK OF NEW YORK

By: /s/ Thomas DeGeorge
------------------------------------
Title: Vice President
------------------------------
Name: Thomas DeGeorge
------------------------------

<PAGE>

ANNEX I
-------

[D. Glasgow License Agreements]

ANNEX II
--------

[D. Glasgow Licensors]

ANNEX III
---------

[D. Glasgow Liens]

ANNEX IV
--------

Inventory Locations

ANNEX V
-------

Operating Lease Obligations

ANNEX VI
--------

Tradenames

HAPPY KIDS INC.

AMENDMENT NO. 1 TO
CHANGE IN CONTROL SEVERANCE PAY AGREEMENT

THIS AMENDMENT NO. 1 (this "Amendment"), dated as of July 1, 1999, to that
certain CHANGE IN CONTROL SEVERANCE PAY AGREEMENT, made as of the 12th day of
January, 1999 (the "Severance Pay Agreement"), by and between Happy Kids Inc., a
New York corporation (the "Company"), and Stuart Bender, an employee of the
Company (the "Employee").

Recitals:
--------

WHEREAS, the Company and the Employee, in order to provide for the payment,
in certain instances, of severance pay to the Employee in the event of the
termination of Employee's employment in connection with certain changes in
control of the Company, have entered into the Severance Pay Agreement; and

WHEREAS, the Company and the Employee intended that such payments made
pursuant to the Severance Pay Agreement would qualify under the provisions of
Section 280G of the Internal Revenue Code (the "Code") for exemption pursuant to
Code Section 280G(b)(5); and

WHEREAS, the Company and the Employee now desire to clarify such intention
in the Severance Pay Agreement by way of this Amendment thereto;

NOW, THEREFORE, such Severance Pay Agreement shall be amended as follows:

Agreement:
---------

In consideration of the premises and the mutual covenants and conditions
set forth herein, and for other good and valuable consideration, the receipt of
which is hereby acknowledged, the Company and the Employee agree as follows:

Section 1. Amendment. The Severance Pay Agreement shall be amended such
---------------------
that Section 3A shall be added thereto, to read in its entirety as follows:

"Section 3A. Tax Issues.
- ------------------------

(a) Excise Tax Exemption. The Severance Amount payable under this
Agreement is assumed to satisfy the requirements for an excess parachute payment
exemption under Section 280G(b)(5) of the Internal Revenue Code (the "Code") and
the regulations thereunder. If the Severance Amount payable under this Agreement
is deemed not to meet the requirements of Code Section 280G(b)(5), or such
successor Code Section thereto, then Section 3A(b) of this Agreement shall
apply.

<PAGE>

(b) Determination of Alternative Severance Amount Limit. Subject to
Section 3A(a) herein, but notwithstanding any other provision of this Agreement,
if any portion of the Severance Amount or any other payment under this
Agreement, or under any other agreement with, or plan of the Company or any of
its affiliates or subsidiaries (in the aggregate "Total Payments") would
constitute an "excess parachute payment", then the payments to be made to the
Employee under this Agreement shall be reduced such that the value of the
aggregate Total Payments that the Employee is entitled to receive shall be one
dollar ($1) less than the maximum amount which the Employee may receive without
becoming subject to the tax imposed by Code Section 4999. However, such
reduction in Severance Amount shall apply if, and only if, the resulting
Severance Amount with such reduction is greater in value to the Employee than
the value of the Severance Amount without a reduction, net of any tax imposed on
the Employee pursuant to Code Section 4999.

For purposes of this Agreement, the terms "excess parachute payment" and
"parachute payments" shall have the meanings assigned to such terms in Section
280G of the Code, and such "parachute payments" shall be valued as provided
therein.

(c) Procedure for Establishing Alternative Limitation. Within fifteen (15)
calendar days following delivery of notice by the Company to the Employee of its
belief that there is a payment or benefit due the Employee which will result in
an "excess parachute payment", the Employee and the Company, at the Company's
expense and discretion, shall obtain the opinion of the Company's outside law
firm, which sets forth: (1) the amount of the Employee's annualized includable
compensation for the base period (as defined in Code Section 280G(d)(1); (2) the
present value of the Total Payment; and (3) the amount and present value of any
"excess parachute payment".

In any event that such opinion determines that there would be an "excess
parachute payment," such that a reduction in the Severance Amount would result
in a greater net benefit to the Employee (as provided in Section 3A(b) hereof),
then the Severance Amount hereunder or any other payment determined by such
counsel to be includable in Total Payments shall be reduced or eliminated as
specified by the Employee in writing delivered to the Company within ten (10)
calendar days of his receipt of such opinion, or, if the Employee fails to so
notify the Company, then as the Company shall reasonably determine, so that
under the basis of calculations set forth in such opinion, there will be no
"excess parachute payment"."

Section 2. Severability. Should any clause, portion or section of this
------------------------
Amendment be unenforceable or invalid for any reason, such unenforceability or
invalidity shall not affect the enforceability or validity of the remainder of
the Amendment.

Section 3. Assignment: Successors in Interest. This Amendment, being
------------------------------------------------
personal to the Employee, may not be assigned by the Employee. The terms and
conditions of this Amendment shall inure to the benefit of and be binding upon
the successors and assigns of the Company, and the heirs, executors and personal
representatives of the Employee.

Section 4. Waiver. Failure to insist upon strict compliance with any of
------------------
the terms, covenants or conditions of this Amendment shall not be deemed a
waiver of such term, covenant or condition, nor shall any waiver or
relinquishment of any right or power hereunder at any one or more times be
deemed a waiver or relinquishment of such right or power at any other time or
times.

2
<PAGE>

Section 5. Governing Law. This Amendment shall be governed by and
--------------------------
construed in accordance with the laws of the State of New York applicable in the
case of agreements made and to be performed entirely within such State.

Section 6. Arbitration. Any controversy or claim arising out of or in
-----------------------
connection with this Amendment shall be settled by arbitration in accordance
with the rules of the American Arbitration Association then in effect in the
State of New York and judgment upon such award rendered by the arbitrator may be
entered in any court having jurisdiction thereof. The arbitration shall be held
in the State of New York. The arbitration award shall include attorneys' fees
and costs to the prevailing party.

* * * * * *

3
<PAGE>

IN WITNESS WHEREOF, this Amendment has been executed by the undersigned as
of the date first above written.

HAPPY KIDS INC.

By:/s/ Jack Benun
-------------------------------------
Jack Benun,
President and Chief Executive Officer

THE EMPLOYEE

/s/ Stuart Bender
------------------------------
Stuart Bender

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1999
CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDING
JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001052262
<NAME> Happy Kids Inc.
<MULTIPLIER> 1,000
<CURRENCY> U. S. Dollars

<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 101
<SECURITIES> 0
<RECEIVABLES> 26,993
<ALLOWANCES> 322
<INVENTORY> 27,549
<CURRENT-ASSETS> 59,262
<PP&E> 2,359
<DEPRECIATION> 0
<TOTAL-ASSETS> 67,614
<CURRENT-LIABILITIES> 23,633
<BONDS> 0
0
0
<COMMON> 104
<OTHER-SE> 24,262
<TOTAL-LIABILITY-AND-EQUITY> 67,614
<SALES> 83,303
<TOTAL-REVENUES> 83,303
<CGS> 61,181
<TOTAL-COSTS> 13,932
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 578
<INCOME-PRETAX> 7,612
<INCOME-TAX> 3,197
<INCOME-CONTINUING> 4,415
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,415
<EPS-BASIC> 0.43 <F1>
<EPS-DILUTED> 0.43 <F2>
<FN>
<F1> This amount represents Basic Earnings per Share in accordance with the
requirements of Statement of Financial Accounting Standards No. 128 -
"Earnings per Share".

<F2> This amount represents Diluted Earnings per Share in accordance with
the requirements of Statement of Financial Accounting Standards No.
128 - "Earnings per Share".
</FN>

</TABLE>