<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AMENDMENT NO. 1
TO
SCHEDULE 13E-3
(Rule 13e-1)
Transaction Statement Pursuant to Section 13(e) of the Securities
Exchange Act of 1934 and Rule 13e-3 Thereunder
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Rule 13e-3 Transaction Statement
(Pursuant to Section 13(e)
of the Securities Exchange Act of 1934)
Happy Kids Inc.
(Name of Issuer)
HAPPY KIDS INC.
HK MERGER CORP.
HIG-HK INVESTMENT, INC.
JACK M. BENUN
MARK J. BENUN
ISAAC LEVY
(Name of Persons Filing statement)
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class of Securities)
411391 10 5
(CUSIP Number of Class of Securities)
----------------
Jack M. Benun
Happy Kids Inc.
100 W. 33rd Street, Suite 1100
New York City, New York 10001
Tel: (212) 695-1151
(Name, Address and Telephone Number of Persons Authorized to Receive
Notices and Communications on Behalf of Persons Filing Statement)
Copies to:
Rick Rosen James L. Learner, P.C.
H.I.G. Capital, LLC Kirkland & Ellis
1001 Brickell Bay Drive, 27th Floor 200 E. Randolph Drive
Miami, Florida 33131 Chicago, IL 60601
(305) 379-2322 (312) 861-2000
This statement is filed in connection with (check the appropriate box):
a. [X] The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the
Securities Exchange Act of 1934.
b. [_] The filing of registration statement under the Securities Act of
1933.
c. [_] A tender offer.
d. [_] None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: [X]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CALCULATION OF FILING FEE
<TABLE>
<CAPTION>
Transaction Valuation Amount of Filing Fee
<S> <C>
$80,984,990 $16,197
</TABLE>
[X]Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
(1) Amount Previously Paid: $16,197
(2) Form, Schedule or Registration Statement No.: Schedule 14A
(3) Filing Party: Happy Kids Inc.
(4) Date Filed: October 5, 1999
INTRODUCTION
This Amendment No. 1 (the "Amendment") to the Rule 13E-3 Transaction
Statement relates to the solicitation of proxies by Happy Kids Inc., a New
York corporation ("Happy Kids"), in connection with a Special Meeting of its
shareholders at which Happy Kids' shareholders will be asked to consider and
vote upon a proposal to approve the Agreement and Plan of Merger (the "Merger
Agreement"), dated September 17, 1999, by and between Happy Kids and HK Merger
Corp. ("Merger Sub"), a New York corporation wholly owned by HIG-HK Investment
Inc. ("HIG-HK"), an affiliate of H.I.G. Capital, LLC, a Delaware limited
liability company. The purpose of this Amendment is to amend the Rule 13-E3
Transaction Statement filed by Happy Kids on October 5, 1999 with the
Securities and Exchange Commission ("Original Statement") by adding the CIBC
Presentation to the Special Committee as Exhibit (b)(2) to the Original
Statement.
2
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify that
the information set forth in this Statement is true, complete and correct.
October 6, 1999
Happy Kids Inc.
/s/ Jack M. Benun
By: _________________________________
Name: Jack M. Benun
Title: President and CEO
HK Merger Corp.
/s/ Sami Mnaymneh
By: _________________________________
Name: Sami Mnaymneh
Title: President
HIG-HK Investment, Inc.
/s/ Sami Mnaymneh
By: _________________________________
Name: Sami Mnaymneh
Title: President
/s/ Jack M. Benun
_________________________________
Jack M. Benun
/s/ Mark J. Benun
_________________________________
Mark J. Benun
/s/ Isaac Levy
_________________________________
Isaac Levy
3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
(a) Commitment letters for Senior Secured Credit Facility and Senior
Subordinated Notes (filed as Exhibit A to the Agreement and Plan
of Merger, dated September 17, 1999 by and between
HK Merger Corp. and Happy Kids Inc. which is filed as Exhibit (c)
to this Statement).*
(b)(1) Opinion of CIBC World Markets Corp.;*
(b)(2) CIBC Presentation to the Special Committee
(c)(1) Agreement and Plan of Merger, dated September 17, 1999 by and
between HK Merger Corp. and Happy Kids Inc., as amended;*
(c)(2) Support Agreement, dated September 17, 1999 among HK Merger Corp.
and the persons listed on Schedule A attached thereto;*
(c)(3) Shareholders Agreement by and among Happy Kids Inc., HIG-HK
Investment, Inc. the Management Investors (as defined therein) and
the New Shareholders (as defined therein).*
(c)(4) Employment Agreements, dated September 17, 1999 between Happy Kids
Inc. and each of Jack Benun, Mark Benun and Isaac Levy.*
(d) Preliminary Proxy Statement of Happy Kids Inc.*
(e) Not applicable.
(f) Not applicable.
</TABLE>
- --------
* Previously filed.
4
<PAGE>
Project Playpen
PRESENTATION TO THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS
Confidential
- ------------
September 8, 1999
<PAGE>
Confidential Material for the Special Committee of the Board of Directors
The following pages contain material provided to the Special Committee of the
Board of Directors of Elmo (the "Company") by CIBC World Markets Corp. ("CIBC
World Markets") in connection with a proposed buyout of the Company by H.I.G.
Capital ("H.I.G."). The accompanying material was compiled and prepared on a
confidential basis solely for the use of the Special Committee of the Board of
Directors of the Company. The information contained in this material was
obtained from the Company and other sources. Any estimates and projections for
the Company contained herein have been prepared by the management of the Company
or are based on such estimates and projections, and involve numerous and
significant subjective determinations, which may or may not be correct. No
representation or warranty, expressed or implied, is made as to the accuracy or
completeness of such information and nothing contained herein is, or shall be
relied upon as, a representation, whether as to the past or the future. This
material was not prepared for use by readers not as familiar with the business
and affairs of the Company as the Special Committee of the Board of Directors
and, accordingly, neither the Company, the Special Committee, nor CIBC World
Markets nor their respective legal or financial advisors or accountants take any
responsibility for the accompanying material when used by persons other than the
Special Committee of the Board of Directors of the Company.
<PAGE>
PROJECT PLAYPEN | September 8, 1999
TABLE OF CONTENTS
================================================================================
1 EXECUTIVE SUMMARY
2 SITUATION OVERVIEW
3 TRANSACTION OVERVIEW
4 FINANCIAL FORECAST SUMMARY
5 VALUATION SUMMARY
6 APPENDIX
A Stand Alone Financial Model
B Leveraged Buyout Analysis
C Weighted Average Cost of Capital Analysis
1
<PAGE>
PROJECT PLAYPEN | September 8, 1999
1 EXECUTIVE SUMMARY
<PAGE>
PROJECT PLAYPEN | September 8, 1999
EXECUTIVE SUMMARY
================================================================================
Review of Elmo's Current Situation
. The Company announced on July 12, 1999 that, in a bid to take Elmo private,
H.I.G. Capital ("H.I.G.") offered $11.50 per share to the public shareholders
and option holders (other than the Majority Shareholders) and offered to
acquire certain shares held by the Company's Majority Shareholders.
. H.I.G. subsequently increased its offer to $12.00 per share to the public
shareholders and option holders (other than the Majority Shareholders) and
agreed to purchase certain shares held by the Majority Shareholders for
$49.25 million
. The $12.00 offer represents a 14.3% premium to the closing stock price of
Elmo one trading day prior to the offer
. The Majority Shareholders, who own 74.3% of Elmo's outstanding shares, have
agreed to vote in support of H.I.G.'s proposal and plan to continue managing
the Company going forward while holding a 23.61% equity stake in the
recapitalized company
. Elmo's Board of Directors has formed a Special Committee to evaluate H.I.G.'s
offer and any other proposals submitted by potential buyers
. Elmo's valuation has contracted since its April 1998 initial public offering.
The Company currently carries a low valuation relative to other comparable
publicly traded companies, due in part to its thin trading volume, limited
after market support and Majority Shareholder overhang. Key business issues
include the ability to obtain popular licenses and maintain / expand
important customer relationships
. On July 1, 1999, the Company announced that second quarter revenues would be
approximately 10% to 14% below analysts' estimates, causing Elmo's stock to
drop significantly
2
<PAGE>
PROJECT PLAYPEN | September 8, 1999
EXECUTIVE SUMMARY
================================================================================
3-Year Quarterly Financial Performance/(1)/
(Fiscal years ended December 31; dollars in thousands)
Revenue Gross Margin
[BAR CHART APPEARS HERE] [BAR CHART APPEARS HERE]
EBIT Net Income
[BAR CHART APPEARS HERE] [BAR CHART APPEARS HERE]
(1) Source of projections: 1999 estimates based on Management projections.
3
<PAGE>
PROJECT PLAYPEN | September 8, 1999
EXECUTIVE SUMMARY
================================================================================
3-Year Quarterly Financial Performance/(1)/
(Fiscal years ended December 31; dollars in thousands)
Gross Margin % EBITDA Margin
[BAR CHART APPEARS HERE] [BAR CHART APPEARS HERE]
EBIT Margin Net Margin
[BAR CHART APPEARS HERE] [BAR CHART APPEARS HERE]
(1) Source of projections: 1999 estimates based on Management projections.
4
<PAGE>
PROJECT PLAYPEN | September 8, 1999
EXECUTIVE SUMMARY
================================================================================
Comparable Company LTM Financial Performance
Sales LTM Gross Margin
[BAR CHART APPEARS HERE] [BAR CHART APPEARS HERE]
LTM EBIT Margin LTM Net Margin
[BAR CHART APPEARS HERE] [BAR CHART APPEARS HERE]
5
<PAGE>
PROJECT PLAYPEN | September 8, 1999
EXECUTIVE SUMMARY
================================================================================
Comparable Company Trading Multiple Comparison/(1)/
Firm Value / 1999E Revenue Firm Value / 2000E Revenue
[BAR CHART APPEARS HERE] [BAR CHART APPEARS HERE]
Firm Value / 1999E EBITDA Firm Value / 2000E EBITDA
[BAR CHART APPEARS HERE] [BAR CHART APPEARS HERE]
(1) Source of projections: Years 1999 and 2000 based on Management projections.
Elmo Firm Value based on stock price on September 3, 1999
6
<PAGE>
PROJECT PLAYPEN | September 8, 1999
EXECUTIVE SUMMARY
================================================================================
Comparable Company Trading Multiple Comparison/(1)/
Firm Value / 1999E EBIT Firm Value / 2000E EBIT
[BAR CHART APPEARS HERE] [BAR CHART APPEARS HERE]
Stock Price / 1999E EPS Stock Price / 2000E EPS
[BAR CHART APPEARS HERE] [BAR CHART APPEARS HERE]
(1) Source of projections: Years 1999 and 2000 based on Management projections.
Elmo Firm Value based on stock price on September 3, 1999.
7
<PAGE>
PROJECT PLAYPEN | September 8, 1999
EXECUTIVE SUMMARY
================================================================================
Elmo Price / Volume Graph
September 3 1998 - September 3, 1999
[GRAPH APPEARS HERE]
A. 7/12/99: Received offer from H.I.G. Capital for $11.50 per share
B. 7/1/99: Pre-announced second quarter revenues are below analysts' estimates
C. 4/22/99: Announced first quarter results; pro forma net income increased
73.8%, pro forma diluted earnings per share increased 32% to $0.25 vs. $0.19
D. 4/14/99: Announced acquisition of assets from D. Glasgow & Sons
E. 3/1/99: Announced 3-year licensing agreement with Mudd
F. 2/9/99: Announced record fourth quarter earnings; pro forma EPS of $0.31, up
158% for the quarter, full year pro forma EPS of $0.99, up 183%
G. 10/22/98: Announced record third quarter EPS of $0.33, up 57.1% from pro
forma 1997 EPS
8
<PAGE>
PROJECT PLAYPEN | September 8, 1999
EXECUTIVE SUMMARY
================================================================================
Elmo Price / Volume Graph
April 3, 1998 (IPO) - September 3, 1999
[GRAPH APPEARS HERE]
9
<PAGE>
PROJECT PLAYPEN | September 8, 1999
EXECUTIVE SUMMARY
================================================================================
Elmo Stock Price Performance Relative to Peer Companies and the S&P 500
Index/(1)/
September 3, 1998 - September 3, 1999
[GRAPH APPEARS HERE]
(1) Dividends are not taken into account when calculating relative performance.
Peer Companies include: CHKE, NAUT, CBUK, VANS, WAC, GOSHA, TAGS, AISI,
ASM, TMAX, EMAK, HELE, MAGI, JNY, GCW, PERY, CHS
10
<PAGE>
PROJECT PLAYPEN | September 8, 1999
EXECUTIVE SUMMARY
================================================================================
Elmo Last 6 Months Volume Distribution Analysis/(1)/
(March 3, 1999 -September 3, 1999)
<TABLE>
<CAPTION>
$7.00 - $8.60 $8.60 - $10.20 $10.20 - $11.80 $11.80 - $13.40 $13.40 - $15.00
<S> <C> <C> <C> <C>
39.6% 28.0% 94.5% 50.1% 30.1%
</TABLE>
(1) 6.3 mm cumulative shares were traded, representing 242.3% of the public
float of 2.6 mm shares outstanding as reported in the quarter ending
6/30/99. Public float is defined as the total shares outstanding less
shares held by the Majority Shareholders.
11
<PAGE>
PROJECT PLAYPEN | September 8, 1999
EXECUTIVE SUMMARY
================================================================================
Elmo Last 3 Months Volume Distribution Analysis/(1)/
(June 3, 1999 - September 3, 1999)
<TABLE>
<CAPTION>
$7.00 - $8.50 $8.50 - $10.00 $10.00 - $11.50 $11.50 - $13.00 $13.00 - $14.50
<S> <C> <C> <C> <C>
39.1% 18.0% 61.5% 2.1% 13.9%
</TABLE>
(1) 3.5 mm cumulative shares were traded, representing 134.6% of the public
float of 2.6 mm shares outstanding as reported in the quarter ending
6/30/99. Public float is defined as the total shares outstanding less
shares held by the Majority Shareholders.
12
<PAGE>
PROJECT PLAYPEN | September 8, 1999
EXECUTIVE SUMMARY
================================================================================
Historical P/E Ratios of Peer Universe/(1)/
Historically, Elmo has traded at a significant discount to its peer group
(average P/E spread of 4.6x)
[GRAPH APPEARS HERE]
(1) Peer Universe includes: Aris Industries, Authentic Fitness, Bernard Chaus,
Cherokee, Inc., Cutter & Buck, Gerber Childrenswear, Jones Apparel Group,
McNaugton Apparel, Nautica, OshKosh B'Gosh, Perry Ellis, Phillips-Van
Heusen, Quiksilver, Inc., Tarrant Apparel, Toymax, Vans, Inc., V.F.
Corporation, Warnaco, Equity Marketing, and Helen of Troy
13
<PAGE>
PROJECT PLAYPEN | September 8, 1999
EXECUTIVE SUMMARY
================================================================================
Elmo - Research Analyst Summary
March 26, 1999 reflects the most recently published research report for Elmo.
All analysts have since dropped their coverage of the stock.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Firm / Stock Price
Analyst Date Rating @Report Target FY 1999E FY 2000E Comments
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Needham & Company 3/26/99 "Strong Buy" $10.75 $18.00 $1.22 $1.51 "We believe that Elmo has a superior
James R. Palczynski operating model, mix of business and track
record when compared to most publicly
traded apparel companies. The Company's
100% pre-booked revenue stream, highly
visible backlog, broad portfolio of
licenses, wide array of retail customers,
and four consecutive quarters of earnings
outperformance should, in our view, place
Elmo's relative valuation in the top tier
of apparel companies. In spite of this
opinion, Elmo's forward earnings multiple
has contracted since the Company's April
1998 IPO. We find this curious and believe
that the market is efficient enough to
correct this difference between current
and intrinsic valuation rather quickly. We
believe that the most serious limiting
factors to Elmo's valuation are the
relatively small float and the rather
anemic average daily trading volume."
Morgan Keegan & Company 2/26/1999 "Outperform" $11.38 $15.00 $1.18 NA "We initiate coverage of Elmo with an
Rick Snyder Outperform rating. We believe that Elmo
shares, currently trading at 9.6x our 1999
EPS estimate of $1.18 and a firm value to
1999 EBITDA multiple of only 5.5x,
represent excellent value."
"Finally, we believe that investors are
valuing Elmo shares as they would those of
an apparel manufacturer despite the fact
that the Company does no manufacturing. We
believe that these shares warrant a P/E
ratio closer to the Company's expected
growth rate of 20%, as do some major
brands (Elmo possesses many of the
characteristics of these brands). Based on
this and the shares' current low
valuation, we establish a $15 12-month
price target."
</TABLE>
14
<PAGE>
PROJECT PLAYPEN | September 8, 1999
EXECUTIVE SUMMARY
================================================================================
Elmo - Research Analyst Summary (continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Firm / Stock Price
Analyst Date Rating @Report Target FY 1999E FY 2000E Comments
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ladenburg Thalmann 12/23/98 "Buy" $13.00 $17.00 $1.10 N/A "We believe Elmo's significant momentum
Kenneth Boss and growing market share within the $29
Marlowe Burke billion children's apparel market is a
result of the Company's unique strengths:
- Elmo has the right products
- Strong relationships
- Elmo can be counted on to execute
orders
In essence, it all boils down to Elmo's
credibility with its potential licensing
partners, with its manufacturers, and
with retailers who depend on them to
fulfill their display racks with
merchandise that meets the higher quality
and value of today's customers. These
factors should combine with the Company's
disciplined approach to new order
acceptance (25% minimum gross margin) and
fixed cost leverage to produce EPS growth
of approximately 20%. Our 12-month price
target of $17 is based on 15.5x our
conservative fiscal year 1999 EPS estimate
of $1.10 and represents over 30%
appreciation potential from current
levels."
The Seidler Companies 11/3/1998 "Strong Buy" $10.50" $16.00 $1.10 NA "We are initiating coverage of Elmo with a
Elizabeth Pierce Strong Buy recommendation due to its
excellent market position and its expected
strong earnings growth. Elmo has
established a solid industry reputation
for quality, design, good price/value
relationship, timely delivery and
professionalism. We believe these are
attributes that potential new customers
seek out and should serve as a competitive
advantage as the Company develops new
business. We estimate that earnings should
grow at 25% over the next three years
driven by increased sales to both new and
existing customers as well as new license
acquisitions. We are initiating coverage
with a strong buy rating and a twelve-
month target price of $16."
</TABLE>
15
<PAGE>
PROJECT PLAYPEN | September 8, 1999
EXECUTIVE SUMMARY
================================================================================
Shareholder Profile Analysis
(Shares in Thousands)
- --------------------------------------------------------------------------------
Institutional Holders
- --------------------------------------------------------------------------------
Cumulative
Institutional Holders Shares Percent Percent
- --------------------------------- ---------- ---------- ------------------
Hathaway & Associates Ltd. 220 2.1% 2.1%
Fidelity Mgmt & Research Co 200 1.9% 4.0%
Aim Capital Management Inc. 180 1.7% 5.8%
William Blair & Co L.L.C Inv Mgm 135 1.3% 7.1%
Munder Capital Management 133 1.3% 8.4%
Luther King Capital Management 110 1.1% 9.4%
Fleet Finl Group Inc 86 0.8% 10.3%
Barclays Bank Plc 78 0.8% 11.0%
Robertson Stephns Co Inv 75 0.7% 11.7%
Associated Banc-Corp 59 0.6% 12.3%
Other Institutions 398 3.8% 16.1%
- --------------------------------- ---------- ---------- ------------------
Total Institutional Ownership 1,674 16.1% 16.1%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Distribution Summary
- --------------------------------------------------------------------------------
Shares Percent
------------------------------
Institutional Holders 1,674 16.1%
Insider Ownership 7,895 76.1%
Retail 807 7.8%
- --------------------------------- ------------------------------
Total Shares Outstanding 10,376 100.0%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Insider Ownership
- --------------------------------------------------------------------------------
Insiders Shares Percent
- -------------------------------- ---------- ----------
Jack and Mark Benun 6,588 63.5%
Isaac Levy 1,163 11.2%
Andrew Glasgow 96 0.9%
Stuart Bender 33 0.3%
Marvin Azrak 8 0.1%
Stephen I. Kahn 8 0.1%
- -------------------------------- ---------- ----------
Total Insiders 7,895 76.1%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Distribution Summary
- --------------------------------------------------------------------------------
[CHART APPEARS HERE]
- --------------------------------------------------------------------------------
Source: CDA Spectrum 6/30/99, Proxy dated 4/26/99, 10Q dated 6/30/99.
16
<PAGE>
PROJECT PLAYPEN | September 8, 1999
2 SITUATION OVERVIEW
<PAGE>
PROJECT PLAYPEN | September 8, 1999
SITUATION OVERVIEW
================================================================================
Overview of the Situation
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
DATE EVENT
- --------------------------------------------------------------------------------
<S> <C>
October 29, 1998 . Company engages BDO Seidman to explore a secondary
stock offering
. Shortly thereafter, BDO Seidman recommends that Elmo
explore other strategic alternatives including the
sale or privatization of the Company
. BDO Seidman contacts approximately 35 potential
buyers, both strategic and financial, most of which
express limited interest in acquiring a children's
apparel company
- --------------------------------------------------------------------------------
February 5, 1999 . Elmo receives indication of interest from Party A
. Parties negotiate a term sheet, but terminate
discussions as a result of proposed management
exclusivity provision as well as insufficient offer
- --------------------------------------------------------------------------------
April 8, 1999 . Elmo receives indication of interest from Party B
. Discussions end as a result of insufficient offer
- --------------------------------------------------------------------------------
May 12, 1999 . Elmo receives first Letter of Intent from H.I.G.
Capital offering $12.75 per share, plus $53 million
and a 24% pro forma equity stake for the Majority
Shareholders
- --------------------------------------------------------------------------------
June 30, 1999 . H.I.G. revises its Letter of Intent to offer $11.50
per share, plus $53 million and a 23.61% pro forma
equity stake for the Majority Shareholders
- --------------------------------------------------------------------------------
July 12, 1999 . Company announces projected shortfall in revenue for
Second Quarter
. H.I.G. Capital and Majority Shareholders sign third
Letter of Intent and agree to $11.50 per share, plus
$49.25 million and a 23.61% pro forma equity stake
for the Majority Shareholders
- --------------------------------------------------------------------------------
July 22, 1999 . Company forms Special Committee to review proposal
- --------------------------------------------------------------------------------
July 27, 1999 . Special Committee engages CIBC World Markets
- --------------------------------------------------------------------------------
August 4, 1999 . CIBC World Markets meets with Elmo management
- --------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
PROJECT PLAYPEN | September 8, 1999
SITUATION OVERVIEW
================================================================================
Overview of the Situation
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
DATE EVENT
- --------------------------------------------------------------------------------
<S> <C>
August 12, 1999 . Special Committee updated
. Special Committee instructs CIBC World Markets to
seek alternative indications of interest
- --------------------------------------------------------------------------------
August 13, 1999 . CIBC World Markets conducts additional due diligence
on Elmo projections
- --------------------------------------------------------------------------------
August 16 - . CIBC World Markets contacts 25 strategic and
August 30, 1999 financial buyers, including buyers previously
contacted by BDO Seidman
. No indications of interest received
- --------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
PROJECT PLAYPEN | September 8, 1999
3 TRANSACTION OVERVIEW
19
<PAGE>
PROJECT PLAYPEN September 8, 1999
TRANSACTION OVERVIEW
================================================================================
Key Transaction Terms
<TABLE>
- --------------------------------------------------------------------------------------------------------
<S> <C>
Structure . Leveraged recapitalization
- --------------------------------------------------------------------------------------------------------
Consideration . Public shareholders and option holders (other than the Majority Shareholders)
will receive $12.00 per share in cash
. Majority Shareholders will receive $49.25 million in cash and will retain common
stock equal to approximately 23.61% of the pro forma common equity of the
recapitalized Company
- --------------------------------------------------------------------------------------------------------
Conditions . Financing
. No Material Adverse Effect
. Shareholder Approval
. Payment of Notes to Majority Shareholders
- --------------------------------------------------------------------------------------------------------
Termination and . $5.75 million and up to $1 million in out-of-pocket expenses and fees, if the
Fees Company's Board or Special Committee exercises its fiduciary duty out in order to
accept a third party acquisition proposal
- --------------------------------------------------------------------------------------------------------
Non-solicitation . The Company is not restricted from soliciting acquisition proposals from third
parties
- --------------------------------------------------------------------------------------------------------
Support Agreement . Majority Shareholders will agree to vote in favor of the H.I.G. transaction
. Majority Shareholders to refrain from soliciting third party acquisition
proposals, and will grant H.I.G. an irrevocable proxy
- --------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
PROJECT PLAYPEN September 8, 1999
TRANSACTION OVERVIEW
================================================================================
Transaction Sources & Uses and Multiple Analysis
(Figures in thousands, except share and multiple data)
A $12.00 per share offer price represents 7.0x LTM EBITDA and 7.1x LTM EBIT
<TABLE>
<CAPTION>
------------------------------------------------------- ------------------------------------------------------------------
Sources of Funds/(1)/ Uses of Funds/(1)/
------------------------------------------------------- ------------------------------------------------------------------
<S> <C> <C> <C>
Purchase of Minority Shares $ 31,591.7
Bank Revolver $ 11,641.7 Payment to Majority Shareholders 49,250.0
Acquisition Senior Debt 60,000.0 Refinance Existing Elmo Current Debt 10,030.0
Acquisition Subordinated Debt 10,000.0 Repay Notes Due to Shareholders 5,570.0
Acquisition PIK Preferred 0.0 Transaction Costs 3,000.0
New Equity 20,300.0 Deferred Fees 2,500.0
----------- ----------
Total Sources of Funds $101,941.7 Total Uses of Funds $101,941.7
------------------------------------------------------- ------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------- ------------------------------------------------------------------
Transaction Value Summary Valuation/(4)/ LTM 1999E 2000E
------------------------------------------------------- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fully Diluted Shares/(2)/ 10,405.7
Offer Price Per Share $12.00 Enterprise Value/Revenues 0.8x 0.8x 0.6x
----------- Enterprise Value/EBITDA 7.0x 6.8x 5.5x
Implied Equity Value $124,868.3 Enterprise Value/EBIT 7.1x 7.0x 5.5x
Net Debt/(3)/ 17,464.0 Equity Value/Net Income 13.7x 11.2x 8.7x
-----------
Implied Enterprise Value $142,332.3
------------------------------------------------------- ------------------------------------------------------------------
</TABLE>
(1) Based on Commitment Letter as of August 19, 1999.
(2) Assumes fully diluted shares as of June 30, 1999 of 10.38 million shares
plus 180,000 options (based on the treasury method).
(3) At June 30, 1999.
(4) Based on Company's projections for 1999 and 2000. Assumes $12.00 per share
for all shares.
21
<PAGE>
PROJECT PLAYPEN September 8, 1999
4 FINANCIAL FORECAST SUMMARY
22
<PAGE>
PROJECT PLAYPEN | September 8, 1999
CIBC World Markets' analysis is based on four primary valuation methodologies as
well as other indicators of value
FINANCIAL FORECAST SUMMARY
================================================================================
Elmo Income Statement
(Figures in thousands)
<TABLE>
<CAPTION>
Actual Estimated Projected
-------------------------------------- ---------- --------------------------------------
Fiscal Year End 12/31 1997 1998 LTM/(1)/ 1999 2000 2001 2002
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $106,673.0 $154,559.0 $170,134.0 $188,798.0 $226,864.2 $249,550.6 $274,505.7
% Growth -- 44.9% 44.7% 22.2% 20.2% 10.0% 10.0%
Cost of Goods Sold 79,412.0 113,458.0 124,113.0 140,389.5 169,472.8 186,420.1 205,062.1
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross Profit 27,261.0 41,101.0 46,021.0 48,408.5 57,391.4 63,130.5 69,443.5
Gross margin 25.6% 26.6% 27.0% 25.6% 25.3% 25.3% 25.3%
SG&A 18,457.0 22,449.0 25,588.0 27,482.0 31,369.8 34,506.8 37,957.5
---------- ---------- ---------- ---------- ---------- ---------- ----------
% of Sales 17.3% 14.5% 15.0% 14.6% 13.8% 13.8% 13.8%
EBITDA 8,804.0 18,652.0 20,433.0 20,926.5 26,021.6 28,623.7 31,486.1
EBITDA Margin 8.3% 12.1% 12.0% 11.1% 11.5% 11.5% 11.5%
Depreciation and Amortization 336.0 338.0 524.0 527.8 408.5 449.4 494.3
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating Income 8,468.0 18,314.0 19,909.0 20,398.7 25,613.0 28,174.3 30,991.7
% of Sales 7.9% 11.8% 11.7% 10.8% 11.3% 11.3% 11.3%
Interest Expense (net) 3,803.0 2,077.0 1,337.0 2,077.0 931.7 175.3 (484.9)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Pre-Tax Income 4,665.0 16,237.0 18,572.0 18,321.7 24,681.3 27,999.0 31,476.6
Net Income $ 2,704.0 $ 9,580.0 $ 9,090.0 $ 13,245.8 $ 14,315.2 $ 16,239.4 $ 18,256.4
<CAPTION>
-------------------------
2003 2004
---------- ----------
<S> <C> <C>
Sales $301,956.2 $332.151.8
% Growth 10.0% 10.0%
Cost of Goods Sold 225,568.3 248,125.2
---------- ----------
Gross Profit 76,387.9 84,026.7
Gross margin 25.3% 25.3%
SG&A 41,753.2 45,928.5
---------- ----------
% of Sales 13.8% 13.8%
EBITDA 34,634.7 38,098.2
EBITDA Margin 11.5% 11.5%
Depreciation and Amortization 543.8 598.1
---------- ----------
Operating Income 34,090.9 37,500.0
% of Sales 11.3% 11.3%
Interest Expense (net) (1,169.3) (1,889.5)
---------- ----------
Pre-Tax Income 35,260.2 39,389.6
Net Income $ 20,450.9 $ 22,845.9
</TABLE>
(1) LTM period ending 6/30/99
(2) Source of projections: Years 1999 and 2000 based on Management projections,
Years 2001 through 2004 extrapolated at 10% revenue growth with constant
margins
23
<PAGE>
PROJECT PLAYPEN | September 8, 1999
5 VALUATION SUMMARY
24
<PAGE>
PROJECT PLAYPEN | September 8, 1999
VALUATION SUMMARY
================================================================================
Valuation Summary
. CIBC World Markets has reviewed and performed our analysis based on
historical public data and the information provided to us by the management
of Elmo
. Our analysis is focused on the following quantitative valuation
methodologies:
. Comparable public companies analysis
. Precedent transactions analysis
. Discounted cash flow analysis
. Premiums paid analysis.
. We have also reviewed two other indicators of value including:
. Leveraged buyout analysis
. 52-week trading range
. In addition, we have considered qualitative factors, including the following:
. General trends impacting apparel companies
. Market demand for Elmo's portfolio of licensed brands
. The status of Elmo's retail customer relationships
. Lack of pure comparable companies
. Lack of owned brands
. Lack of manufacturing base
25
<PAGE>
PROJECT PLAYPEN | September 8, 1999
VALUATION SUMMARY
================================================================================
Valuation Summary
[Chart appears here]
(1) Offer price to Minority Shareholders
26
<PAGE>
PROJECT PLAYPEN | September 8, 1999
VALUATION SUMMARY
================================================================================
Valuation Summary Detail/(1)/
(Figures in thousands, except per share data)
Comparable Company Analysis
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Financial Multiple Range/(2)/ Enterprise Value
---------------------------------------- -----------------------------------------
Statistic Low Median High Low Median High
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
LTM Revenue $ 170,134.0 0.4x 0.5x 1.4x $ 68,053.6 $ 85,067.0 $ 238,187.6
LTM EBITDA 20,433.0 3.0 6.3 8.3 61,299.0 128,727.9 169,593.9
LTM EBIT 19,909.0 3.9 7.3 9.9 77,645.1 145,335.7 197,099.1
LTM Net Income $ 9,090.0 4.9x 8.3x 15.3x $ 44,541.0 $ 75,447.0 $ 139,077.0
1999E Calendar E.P.S. 1.07 6.8 10.9 16.1 75,487.0 121,001.2 178,726.6
2000E Calendar E.P.S. 1.38 5.5 10.0 11.1 78,733.5 143,151.8 158,898.4
1999E Calendar E.P.S./5
year growth/(3)/ 21.7% 36.4% 41.5% 69.5% -- -- --
<CAPTION>
Equity Value Per Share Amount
----------------------------------------- -----------------------------------------
Low Median High Low Median High
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
LTM Revenue $ 50,589.6 $ 67,603.0 $ 220,723.6 $ 4.86 $ 6.50 $ 21.21
LTM EBITDA 43,835.0 111,263.9 152,129.9 4.21 10.69 14.62
LTM EBIT 60,181.1 127,871.7 179,635.1 5.78 12.29 17.26
LTM Net Income $ 27,077.0 $ 57,983.0 $ 121,613.0 $ 2.60 $ 5.57 $ 11.69
1999E Calendar E.P.S. 61,286.4 106,800.6 164,525.0 7.26 11.63 17.18
2000E Calendar E.P.S. 76,134.5 140,552.8 156,299.5 7.57 13.76 15.28
1999E Calendar E.P.S./5
year growth/(3)/ -- -- -- $ 8.43 $ 9.61 $ 16.10
--------------------------------------------------------------------------------------
Reference Range $ 5.00 $ 10.00 $ 17.00
--------------------------------------------------------------------------------------
</TABLE>
Precedent Transaction Analysis
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Financial Multiple Range/(2)/ Enterprise Value
---------------------------------------- -----------------------------------------
Statistic Low Median High Low Median High
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
LTM Revenue $ 170,134.0 0.5x 0.8x 1.1x $ 85,067.0 $ 136,107.2 $ 187,147.4
LTM EBITDA 20,433.0 6.7 7.4 8.7 136,901.1 151,204.2 177,767.1
LTM EBIT 19,909.0 7.4 8.5 11.0 147,326.6 169,226.5 218,999.0
LTM Net Income $ 9,090.0 10.6x 15.3x 20.2x $ 96,354.0 $ 139,077.0 $ 183,618.0
<CAPTION>
Equity Value Per Share Amount
----------------------------------------- -----------------------------------------
Low Median High Low Median High
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
LTM Revenue $ 67,603.0 $ 118,643.2 $ 169,683.4 $ 6.50 $ 11.40 $ 16.31
LTM EBITDA 119,437.1 133,740.2 160,303.1 11.48 12.85 15.41
LTM EBIT 129,862.6 151,762.5 210,535.0 12.48 14.58 19.37
LTM Net Income $ 78,890.0 $ 121,613.0 $ 166,154.0 $ 7.58 $ 11.69 $ 15.97
--------------------------------------------------------------------------------------
Reference Range $ 9.00 $ 13.00 $ 17.00
--------------------------------------------------------------------------------------
</TABLE>
(1) Source of projections: Years 1999 and 2000 based on Management projections.
(2) Selected multiple range based on Tier 1 calculations.
(3) Estimated 5 year growth rate based on First Call Estimates.
(4) Selected multiple range based on acquisition of Sun Apparel, Koret of CA
(Levi Strauss), Nine West, and Designer Holdings.
<PAGE>
PROJECT PLAYPEN | September 8, 1999
VALUATION SUMMARY
================================================================================
Valuation Summary Detail
(Figures in thousands, except per share data)
<TABLE>
<CAPTION>
Discounted Cash Flow Analysis
- ------------------------------------------------------------------------------------------------------------------------------------
Discount Rates Exit Multiple Range Per Share Amount
------------------------- ------------------------- ---------------------
Low High Low High Low High
------------ ----------- ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Multiple Based 13.0% 15.0% 5.5x 7.5x $ 12.48 $ 17.59
</TABLE>
<TABLE>
<CAPTION>
Discount Rates Terminal Growth Rate
------------------------- -------------------------
Low High Low High
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Perpetuity Growth Based 13.0% 15.0% 4.0% 5.0% $ 9.34 $ 13.10
----------------------------------------------
Reference Range $ 10.00 $ 16.00
----------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Premiums Paid Analysis
- ------------------------------------------------------------------------------------------------------------------------------------
Stock Average of 1 Day/1 Week/4 Weeks Per Share Amount
--------------------------------- -----------------------------
Price/(1)/ Low Average High Low Mid High
---------- --------- ------------ ---------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Premiums Paid (All Transactions) $ 10.50 0.5% 15.4% 68.1% $ 10.55 $ 12.12 $ 17.65
Premiums Prior (Apparel Transactions) $ 10.50 8.5% 31.5% 56.3% $ 11.39 $ 13.81 $ 16.41
----------------------------------------------
Reference Range $ 10.00 $ 13.00 $ 18.00
----------------------------------------------
</TABLE>
(1) Stock price one trading day prior to announcement of $11.50 offer.
28
<PAGE>
PROJECT PLAYPEN | September 8, 1999
VALUATION SUMMARY
================================================================================
Valuation Matrix
(Figures in Thousands Except Per Share Data
<TABLE>
<CAPTION>
LTM Rev LTM EBITDA LTM EBIT 1999E EPS 2000E EPS
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Elmo Financial Statistics $170,134 $20,433 $19,909 $1.07 $1.38
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Stock Equity Firm FV/ FV/LTM FV/LTM Stock Price/ Stock Price
Price Premium Value Value LTM Rev EBITDA EBIT 1999E EPS 2000E EPS
-------------------------------------------------------------------------------------------------------
$10.50 0.0% $109,260 $126,724 0.7x 6.2x 6.4x 9.8x 7.6x
$11.00 4.8% $114,463 $131,927 0.8x 6.5x 6.6x 10.3x 8.0x
$11.50 9.5% $119,665 $137,129 0.8x 6.7x 6.9x 10.8x 8.4x
$12.00 14.3% $124,868 $142,332 0.8x 7.0x 7.1x 11.2x 8.7x
$12.50 19.0% $130,071 $147,535 0.9x 7.2x 7.4x 11.7x 9.1x
$13.00 23.8% $135,274 $152,738 0.9x 7.5x 7.7x 12.2x 9.4x
$13.50 28.6% $140,477 $157,941 0.9x 7.7x 7.9x 12.6x 9.8x
$14.00 33.3% $145,680 $163,144 1.0x 8.0x 8.2x 13.1x 10.2x
$14.50 38.1% $150,883 $168,347 1.0x 8.2x 8.5x 13.6x 10.5x
$15.00 42.9% $156,085 $173,549 1.0x 8.5x 8.7x 14.1x 10.9x
$15.50 47.6% $161,288 $178,752 1.1x 8.7x 9.0x 14.5x 11.3x
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Comparable Companies median (Tier 1) 0.5x 6.3x 7.3x 10.9x 10.0x
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Precedent Transactions median/(6)/ 0.8x 7.4x 8.5x 15.8x 13.6x
-------------------------------------------------------------------------------------------------------
</TABLE>
(1) Source of projections: Years 1999 and 2000 based on Management
projections.
(2) LTM as of June 30, 1999
(3) As of June 30, 1999, Elmo had 10.4 million fully diluted common
shares.
(4) Firm Value equals Equity Value plus Net Debt. At June 30, 1999, Elmo
had Net Debt of $17,564.
(5) $10.50 reflects stock price one trading day prior to announcement of
$11.50 offer
(6) Based on acquisitions of Sun Apparel, Koret of CA (Levi Strauss), Nine
West, and Designer Holdings.
29
<PAGE>
PROJECT PLAYPEN| SEPTEMBER 8, 1999
VALUATION SUMMARY
================================================================================
Comparable Public Companies Analysis
(Figures in thousands, except per share and multiple data)
<TABLE>
<CAPTION>
Market
Stock Value of Net Firm MVE Stock Prices
---------- -------------------------
Company Price(a) Equity (b) Debt (c) Value (d) LTM NI 1999E EPS 2000E EPS
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Elmo $ 10.63 $ 110,242 $ 17,464 $ 127,706 12.1 x 8.6x 6.6x
- -----------------------------------------------------------------------------------------------------------------------------------
Tier 1: Licenses and Branded Apparel
----------------------------
Aris Industries, Inc. AISI $ 2.69 $ 211,265 $ 25,400 $ 236,665 NM NA NA
Authentic Fitness Corporation ASW 17.63 405,433 153,694 559,127 15.3 x 12.9 x 11.1 x
Bernard Chaus, Inc CHS 2.81 76,263 7,292 83,555 7.0 NA NA
Gerber Childrenwear, Inc GCW 4.88 83,020 18,401 101,421 4.9 6.8 5.5
McNaughton Apparel Group MAGI 9.25 77,195 120,816 198,011 NM 11.4 10.3
Oshkosh B'Gosh, Inc GOSHA 16.19 227,467 (740) 226,727 7.5 NA NA
Phillips-Van Heusen PVH 9.50 259,236 220,985 480,221 13.3 16.1 10.3
Tarrant Apparel Group TAGS 14.50 229,173 63,848 293,021 9.2 8.3 6.5
V.F. Corporation VFC 36.00 4,293,214 999,628 5,292,842 11.0 10.9 10.0
The Wamaco Group, Inc. WAC 21.75 1,207,349 785,670 1,993,019 6.4 8.3 7.2
- -----------------------------------------------------------------------------------------------------------------------------------
High 15.3 x 16.1 x 11.1 x
Median 8.3 10.9 10.0
Mean 9.3 10.7 8.7
Trimmed Mean 9.1 10.4 8.8
Low 4.9 6.8 5.5
- -----------------------------------------------------------------------------------------------------------------------------------
Tier 2: Branded Apparel
---------------
Cherokee Inc. CHKE $ 8.00 $ 69,643 $ 37,976 $ 107,619 9.2 x NA NA
Cutter & Buck, Inc. CBUK 13.06 132,275 13,452 145,727 16.5 10.1 x 8.0 x
Jones Apparel Group JNY 28.00 3,651,116 1,206,871 4,757,987 19.6 14.6 11.6
Nautica Enterprises, Inc. NAUT 14.94 516,765 (1,938) 514,827 9.7 10.5 9.2
Perry Ellis International PERY 12.94 87,556 138,543 226,099 9.3 8.4 7.1
Quicksilver, Inc ZQX 18.50 427,920 57,558 485,478 18.2 16.0 13.4
Vans, Inc. VANS 12.50 173,163 2,430 175,593 20.8 13.6 11.2
- ------------------------------------------------------------------------------------------------------------------------------------
Tier 2 Median 12.0 x 10.2 x
- ------------------------------------------------------------------------------------------------------------------------------------
Tier 3: Non-Apparel Licensee
--------------------
Equity Marketing Inc. EMAK $ 13.25 $ 83,638 $ 14,259 $ 97,897 7.3 x 11.2 x 9.2 x
Helen of Troy Limited HELE 14.19 423,891 24,819 448,710 14.4 12.3 10.3
Toymax International TMAX 9.13 97,250 (4,054) 93,196 11.4 12.2 N.A
- -----------------------------------------------------------------------------------------------------------------------------------
Tier 3 Median 12.2 x 9.7 x
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
5-Yr. Cal '99 PSE
Firm Value (d)/LTM Est. EPS as % of
--------------------------------------
Revenues EBITDA EBIT GROWTH 5 Yr. Gr.
---------------------------------------------------------------------------
Elmo 0.8 x 6.2 x 6.4 x 21.7 % 30.6 %
- ----------------------------------------------------------------------------------------------------------------------------------
Tier 1: Licensees and Branded Apparel
-----------------------------
Aris Industries, Inc. AISI 1.6 x(e) NM NM NA NA
Authentic Fitness Corporation ASW 1.4 7.8 x 9.7 x 16.0 % 69.5 %
Bernard Chaus, Inc CHS 0.4 6.0 6.2 NA NA
Gerber Childrenwear Inc GCW 0.4 3.0 3.9 15.0 36.4
Mc Naughton Apparel Group MAGI 0.5 8.3 9.9 NA NA
Oshkosh B'Gosh GOSHA 0.5 3.8 4.5 NA NA
Phillips-Van Heusen PVH 0.4 6.4 9.0 NA NA
Tarrant Apparel Group TAGS O.7 6.3 7.3 17.5 37.2
V.F. Corporation VFC 1.0 6.3 7.7 9.3 106.7(e)
The Wamaco Group Inc. WAC 1.0 5.1 5.9 15.8 45.7
- ------------------------------------------------------------------------------------------------------------------------------------
High 1.4 x 8.3 x 9.9 x 17.5 x 69.5 x
Median 0.5 6.3 7.3 15.8 41.5
Mean 0.7 5.9 7.1 14.7 47.2
Trimmed Mean 0.6 6.0 7.2 15.6 41.5
Low 0.4 3.0 3.9 9.3 36.4
- -----------------------------------------------------------------------------------------------------------------------------------
Tier 2: Branded Apparel
---------------
Cherokee Inc. CHKE 4.8 x (f) 5.7 x 7.1 x 20.0 % NA
Cutter & Buck, Inc. CBUK 1.4 9.8 11.6 27.5 29.2 %
Jones Apparel Group JNY 2.3 13.2 14.8 21.4 54.0
Nautica Enterprises, Inc. NAUT 0.9 5.2 6.1 13.9 66.3
Perry Ellis International PERY 1.0 8.9 10.3 17.5 40.3
Quicksilver, Inc. ZQX 1.2 9.9 11.3 24.8 54.2
Vans, Inc. VANS 0.9 17.4 19.9 20.0 56.1
- ------------------------------------------------------------------------------------------------------------------------------------
Tier 2: Median 1.1 x (f) 9.8 x 11.3 x 20.0 % 54.4 %
- ------------------------------------------------------------------------------------------------------------------------------------
Tier 3: Non-Apparel Licensees
---------------------
Equity Marketing Inc. EMAK 0.5 x 6.7 x 8.3 x 20.0 % 45.9 %
Helen of Troy Limited HELE 1.5 10.5 12.0 20.0 51.4
Toymax International TMAX 0.8 6.1 7.1 NA NA
- ------------------------------------------------------------------------------------------------------------------------------------
Tier 3 Median 0.8 x 6.7 x 8.3 x 20.0 % 48.6 %
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: EBITDA, EBIT, Net Income to Common, and EPS adjusted for unusual and
nonrecurring items. All estimates are presented on a calendar basis.
LTM: Latest Twelve Months. NM: Not Meaningful. NA: Not Available
Source of projections: Years 1999 and 2000 based on Management projections
(a) Stock price and First Call Estimates as of September 3, 1999.
(b) Market Value of Equity (MVE) reflects fully diluted shares (common shares
outstanding, options, warrants, in-the-money convertibles).
(c) Net Debt equals straight debt, minority interest, straight preferred stock,
all out-of-the-money convertibles, less investments in unconsolidated
affiliates and cash.
(d) Firm Value (FV) equals Market Value of Equity plus Net Debt.
(e) Excluded from Tier 1 calculations.
(f) Cherokee Inc. Revenue multiple excluded in Tier 2 Median and Trimmed Mean.
<PAGE>
PROJECT PLAYPEN | September 8, 1999
VALUATION SUMMARY
================================================================================
Precedent Transaction Analysis
(Figures in thousands, except multiple data)
<TABLE>
<CAPTION>
Apparel
Date
Target Acquiror Announced Consid.
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Elmo (Public) HIG Capital 7/12/99 Stock & Cash
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sun Apparel, Inc. (Private) Jones Apparel Group, Inc. 9/10/98 Stock & Cash
Korel of CA (Levi Strauss) (Private) Kellwood Co. 11/30/98 Stock
Nine West Group, Inc. (Public) Jones Apparel Group, Inc. 3/2/98 Stock & Cash
Jeri-Jo Knitwear, Inc. and Jamie Scott, Inc. (Private) Norton McNaughton, Inc. 4/22/98 Stock & Cash (e)
Phillips Van Heusen (Gent Brand) (Private) Pyramid Partners 2/24/99 Cash
St. John Knits, Inc. (Public) Vesiar Capital 2/3/99 Cash
Perry Ellis International (Private) Supreme International Corp. 1/29/99 Cash
Farah Inc. (Public) Tropical Sportswear International Corp. 5/4/98 Cash
Pepe Jeans (Private) Tommy Hilfiger Corp. 1/31/98 Stock & Cash
Galoob Toys (Public) Hasbro, Inc. 9/28/98 Stock
Miss Erika, Inc. (Private) Norton McNaughton, Inc. 9/5/97 Stock & Cash (e)
Fieldcrest Cannon, Inc. (Public) Pillomax Corp. 9/11/97 Stock & Cash
Designer Holdings Ltd. (Public) The Wamaco Group, Inc. 9/17/97 Stock
Segrets, Inc. (Private) Liz Claiborne 1/22/99 NA
American Marketing Industries (Private) Jupiter Partners 11/13/95 NA
Tahiti Apparel (Private) Signal Apparel Company 4/21/98 Stock
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Apparel
Type of Offer Net Firm Offer
Target Trans. Value Debt (a) Value (b) Price (c)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Elmo (Public) Purchase $ 124,868 $ 17,464 $142,332 $12.00
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sun Apparel, Inc. (Private) Purchase $ 217,000 $ 227,146 $444,146 NA
Korel of CA (Levi Strauss) (Private) Pooling 141,507 8,900 150,407 NA
Nine West Group, Inc. (Public) Purchase 885,062 496,302 1,399,315 $26.03
Jeri-Jo Knitwear, Inc. and Jamie Scott, Inc. (Public) Purchase 83,160 4,888 88,048 NA
Philip Van Heusen (Gent Brand) (Private) Purchase 71,000 20,000 91,000 NA
St. John Knits, Inc. (Public) Purchase 510,882 (26,503) 484,380 30.00
Perry Ellis International (Private) Purchase 75,000 (1,777) 73,223 N/A
Farah Inc. (Public) Purchase 95,800 60,649 156,449 9.00
Pepe Jeans (Private) Purchase 1,251,872 73,949 1,325,821 N/A
Galoob Toys (Public) Purchase 217,498 (30,041) 187,457 12.00
Miss Erika, Inc. (Private) Purchase 52,969 3,569 56,538 N/A
Fieldcrest Cannon, Inc. (Public) Purchase 400,867 319,005 632,692 34.00
Designer Holdings Ltd. (Public) Purchase 353,753 56,900 410,653 11.00
Segrets, Inc. (Private) NA 63,905 0 63,905 NA
American Marketing Industries (Private) NA 100,000 0 100,000 NA
Tahiti Apparel (Private) Purchase 17,623 2,072 19,694 NA
<CAPTION>
Apparel Premium Analysis (d)
-------------------------------------------
One Five Twenty
Target Day Prior Day Prior Day Prior
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Elmo (Public) 14.3% 34.3% -16.7%
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sun Apparel, Inc. (Private) NA NA NA
Korel of CA (Levi Strauss) (Private) NA NA NA
Nine West Group, Inc. (Public) 14.4% 33.1% 85.1%
Jeri-Jo Knitwear, Inc. and Jamie Scott, Inc. (Public) NA NA NA
Philip Van Heusen (Gent Brand) (Private) NA NA NA
St. John Knits, Inc. (Public) 15.4 12.7 15.4%
Perry Ellis International (Private) NA NA NA
Farah Inc. (Public) 33.3 44.0 38.5
Pepe Jeans (Private) NA NA NA
Galoob Toys (Public) NM NM NM
Miss Erika, Inc. (Private) NA NA NA
Fieldcrest Cannon, Inc. (Public) 1.5 8.6 34.3
Designer Holdings Ltd. (Public) 17.3 50.4 69.2
Segrets, Inc. (Private) NA NA NA
American Marketing Industries (Private) NA NA NA
Tahiti Apparel (Private) NA NA NA
- --------------------------------------------------------------------------------------------------
High 33.3% 50.4% 85.1%
Medium 15.4% 33.1 38.5
Mean 16.4 29.7 48.5
Trimmed Mean 15.7 29.9 47.3
Low 1.5 8.6 15.4
- --------------------------------------------------------------------------------------------------
</TABLE>
Note: EBITDA, EBIT, Net income to Common, and EPS adjusted for unusual and
nonrecurring items.
LTM: Latest Twelve Months
NM: Not Meaningful NA: Not Available
(a) Net Debt equals straight debt, minority interest, straight preferred stock,
all convertibles (if applicable) less investments in unconsolidated
affiliates and cash.
(b) Firm Value (FV) equals Offer Value for the Equity of the Target plus Net
Debt.
(c) If more than one class of shares exist, refers to price of Class a shares.
(d) Premium based on price of common stock for period specified. If more
than one class of shares trade, refer to Class A shares.
(e) Offer Value includes contingent payments that the target is expecting to
receive discounted at 25%.
31
<PAGE>
PROJECT PLAYPEN | September 8, 1999
VALUATION SUMMARY
================================================================================
Precedent Transactions Analysis
(Figures in thousands, except multiple data)
Apparel
<TABLE>
<CAPTION>
Offer Price (Value)/EPS Firm Value (b)/LTM
--------------------------------- ------------------------------
Target LTM FY + 1 FY + 2 Rev. EBITDA EBIT
- -------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Elmo 13.7 x 11.2 x 8.7 x 0.8 x 7.0 x 7.1 x
- --------------------------------------------------------------------------------------------------------------------
Sun Apparel, Inc. 10.6 x NM NM 1.1 x 8.7 x 9.5 x
Korel of CA (Levi Strauss) 18.9 NM NM 0.5 7.0 7.4
Nine West Group, Inc. 20.2 15.6 13.0 0.7 7.9 11.0
Jeri-Jo Knitwear, Inc. and Jamie Scott, Inc. 23.5 NM NM 1.0 5.2 5.3
Phillips-Van Heusen (Grant Brand) NM NM NM NM NA NM
St. John Knits, Inc. 17.1 14.6 NM 1.7 8.1 10.1
Perry Ellis International 11.0 NM NM 4.5 9.4 9.7
Ferah Inc. 17.3 12.9 10.0 0.6 11.7 21.4
Pepe Jeans 28.8 NM NM 3.2 16.5 18.0
Galloob Toys NM NM NM 0.9 NM NM
Miss Erika, Inc. 12.2 NM NM 0.5 6.5 6.9
Fieldcrest Cannon, Inc. NM 16.6 14.2 0.6 8.9 18.2
Designer Holdings Ltd. 11.8 26.2 24.4 0.8 6.7 7.4
Segrets, Inc. (Private) NA NA NA 1.1 NA NA
American Marketing Industries (Private) NA NA NA 0.5 NA NA
Tahiti Apparel 22.4 NM NM 0.3 5.0 5.4
- --------------------------------------------------------------------------------------------------------------------
High 28.8 x 26.2 x 24.4 x 4.5 x 16.5 x 21.4 x
Median 17.3 15.6 13.6 0.8 8.0 9.6
Mean 17.6 17.2 15.4 1.2 8.5 10.9
Trimmed Mean 17.2 15.7 13.6 1.0 8.0 10.4
Low 10.6 12.9 10.0 0.3 5.0 5.3
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
Firm Value (b)/ FY + 1 Firm Value (b)/FY + 2
--------------------------------- ------------------------------
Target Rev. EBITDA EBIT Rev. EBITDA EBIT
- -------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Elmo 0.8 x 6.8 x 7.0 x 0.6 x 5.5 x 5.6 x
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sun Apparel, Inc. NM NM NM NM NM NM
Korel of CA (Levi Strauss) NM NM NM NM NM NM
Nine West Group, Inc. 0.7 7.3 9.7 0.7 6.6 8.8
Jeri-Jo Knitwear, Inc. and Jamie Scott, Inc. NM NM NM NM NM NM
Phillips-Van Heusen (Grant Brand) NM NM NM NM NM NM
St. John Knits, Inc. 1.6 6.8 8.3 NM NM NM
Perry Ellis International NM NM NM NM NM NM
Ferah Inc. NM NM NM NM NM NM
Papa Jeans NM NM NM NM NM NM
Galloob Toys NM NM NM NM NM NM
Miss Erika, Inc. NM NM NM NM NM NM
Fieldcrest Cannon, Inc. 0.6 6.4 10.1 0.6 5.9 9.0
Designer Holdings Ltd. 0.9 12.0 14.2 1.0 11.6 13.5
Segrets, Inc. (Private) NA NA NA NA NA NA
American Marketing Industries (Private) NA NA NA NA NA NA
Tahiti Apparel NM NM NM NM NM NM
- --------------------------------------------------------------------------------------------------------------------
High 1.6 x 12.0 x 14.2 x 1.0 x 11.6 x 13.5 x
Median 0.8 7.0 9.9 0.7 6.6 9.0
Mean 0.9 8.1 10.6 0.7 8.0 10.4
Trimmed Mean 0.8 7.0 9.9 0.7 8.0 10.4
Low 0.6 6.4 8.3 0.6 5.9 8.8
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: EBITDA, EBIT, Net Income to Common, and EPS adjusted for unusual and
nonrecurring items.
LTM: Latest Twelve Months.
NM: Not Meaningful. NA: Not Available
Source of projections: Years 1999 and 2000 based on Management projections.
(a) Net Debt equals straight debt, minority interest, straight preferred stock,
all convertibles (if applicable), less investments in unconsolidated
affiliates and cash.
(b) Firm Value (FV) equals Other Value for the Equity of the Target plus Net
Debt.
32
<PAGE>
PROJECT PLAYPEN | September 8, 1999
VALUATION SUMMARY
================================================================================
Premiums Paid Analysis
Parameters:
. Announced domestic transactions for the period 1/1/96 - 8/11/99
. Transaction value between $100 million and $250 million
. Offer price premium measured as premium over share price of the target
as of one day, one week, and four weeks prior to the announcement date
-----------------------------------------------------------
Premium Above Share Price Prior to Announcement Day
-----------------------------------------------------------
1 Day 1 Week 4 Weeks Average
-----------------------------------------------------------
High 69.0% 68.9% 66.4% 68.1%
Average 16.1% 15.5% 14.7% 15.4%
Low 0.4% 0.5% 0.4% 0.5%
-----------------------------------------------------------
Premiums in Apparel Transactions
-----------------------------------------------------------
1 Day 1 Week 4 Weeks Average
-----------------------------------------------------------
High 33.3% 50.4% 85.1% 56.3%
Average 16.4% 29.7% 48.5% 31.5%
Low 1.5% 8.6% 15.4% 8.5%
33
<PAGE>
PROJECT PLAYPEN | September 8, 1999
VALUATION SUMMARY
================================================================================
Discounted Cash Flow Analysis /(1)/
(Figures in thousands)
<TABLE>
<CAPTION>
Estimated Projected
---------- ----------------------------------------------------------
Fiscal Year End 12/31 1999 2000 2001 2002 2003 2004
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $188,798.0 $226,864.2 $249,550.6 $274,505.7 $301,956.2 $332,151.8
EBITDA 20,926.5 26,021.6 28,623.7 31,486.1 34,634.7 38,098.2
Less: Depreciation & Amortization (527.8) (408.5) (449.4) (494.3) (543.8) (598.1)
---------- ---------- ---------- ---------- ---------- ----------
EBIT 20,398.7 25,613.0 28,174.3 30,991.7 34,090.9 37,500.0
Less: Income Taxes @ 42.0% (8,567.5) (10,757.5) (11,833.2) (13,016.5) (14,318.2) (15,750.0)
---------- ---------- ---------- ---------- ---------- ----------
Unlevered After-Tax Income 11,831.2 14,855.5 16,341.1 17,975.2 19,772.7 21,750.0
Plus: Depreciation & Amortization 527.8 408.5 449.4 494.3 543.8 598.1
Less: Capital Expenditures 0.0 0.0 0.0 0.0 0.0 0.0
Less: Working Capital Investment (10,887.1) (2,842.1) (5,363.8) (5,900.2) (6,490.2) (7,139.2)
---------- ---------- ---------- ---------- ---------- ----------
Free Cash Flow $ 1,471.9 $ 12,422.0 $ 11,426.7 $ 12,569.3 $ 13,826.3 $ 15,208.9
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Terminal Value Based on EBITDA Multiple
-----------------------------------------------------------------------
Exit Multiple in Year 5 (2004) 5.5 x EBITDA 6.5 x EBITDA
-----------------------------------------------------------------------
13.0% 14.0% 15.0% 13.0% 14.0% 15.0%
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Discounted Free Cash Flows 2000-2004 $ 45,387.6 $ 44,258.2 $ 43,173.2 $ 45,387.6 $ 44,258.2 $ 43,173.2
Discounted Terminal Value 113,729.8 108,828.4 104,178.3 134,408.0 128,615.4 123,119.9
---------- ---------- ---------- ---------- ---------- ----------
Enterprise Value 159,117.4 153,086.6 147,351.6 179,795.5 172,873.6 166,293.1
Less: Debt, Preferred & Minority Interest @ 6/30/99 (17,565.0) (17,565.0) (17,565.0) (17,565.0) (17,565.0) (17,565.0)
Plus: Cash @ 6/30/99 101.0 101.0 101.0 101.0 101.0 101.0
---------- ---------- ---------- ---------- ---------- ----------
Implied Equity Value $141,653.4 $135,622.6 $129,887.6 $162,331.5 $155,409.6 $148,829.1
========== ========== ========== =========== ========== ==========
Implied Equity Value Per share (2) $ 13.61 $ 13.03 $ 12.48 $ 15.60 $ 14.94 $ 14.30
<CAPTION>
Terminal Value Based on EBITDA Multiple
--------------------------------------
Exit Multiple in Year 5 (2004) 7.5 x EBITDA
--------------------------------------
13.0% 14.0% 15.0%
---------- ---------- ----------
<S> <C> <C> <C>
Discounted Free Cash Flows 2000-2004 $ 45,387.6 $ 44,258.2 $ 43,173.2
Discounted Terminal Value 155,086.1 148,402.4 142,061.4
---------- ---------- ----------
Enterprise Value 200,473.7 192,660.6 185,234.6
Less: Debt, Preferred & Minority Interest @ 6/30/99 (17,565.0) (17,565.0) (17,565.0)
Plus: Cash @ 6/30/99 101.0 101.0 101.0
---------- ---------- ----------
Implied Equity Value $183,009.7 $175,196.6 $167,770.6
========== ========== ==========
Implied Equity Value Per share (2) $ 17.59 $ 16.84 $ 16.12
</TABLE>
(1) Source of projections: Years 1999 and 2000 based on Management projections,
Years 2001 through 2004 extrapolated at 10% revenue growth with constant
margins. Terminal Value based on EBITDA multiple.
(2) Based on 10.4 million shares outstanding as of June 30, 1999.
34
<PAGE>
PROJECT PLAYPEN | September 8, 1999
VALUATION SUMMARY
================================================================================
Discounted Cash Flow Analysis /(1)/
(Figures in thousands)
<TABLE>
<CAPTION>
Estimated Projected
------------- ---------------------------------------------------------------
Fiscal Year End 12/31 1999 2000 2001 2002 2003 2004
------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sales $188,798.0 $226,864.2 $249,550.6 $274,505.7 $301,956.2 $332,151.8
EBITDA 20,926.5 26,021.6 28,623.7 31,486.1 34,634.7 38,098.2
Less: Depreciation & Amortization (527.8) (408.5) (449.4) (494.3) (543.8) (598.1)
------------- ----------- ----------- ----------- ----------- -----------
EBIT 20,398.7 25,613.0 28,174.3 30,991.7 34,090.9 37,500.0
Less: Income Taxes @ 42.0% (8,567.5) (10,757.5) (11,833.2) (13,016.5) (14,318.2) (15,750.0)
------------- ----------- ----------- ----------- ----------- -----------
Unlevered After-Tax Income 11,831.2 14,855.5 16,341.1 17,975.2 19,772.7 21,750.0
Plus: Depreciation & Amortization 527.8 408.5 449.4 494.3 543.8 598.1
Less: Capital Expenditures 0.0 0.0 0.0 0.0 0.0 0.0
Less: Working Capital Investment (10,887.1) (2,842.1) (5,363.8) (5,900.2) (6,490.2) (7,139.2)
------------- ----------- ----------- ----------- ----------- -----------
Free Cash Flow $ 1,471.9 $ 12,422.0 $ 11,426.7 $ 12,569.3 $ 13,826.3 $ 15,208.9
============= =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Terminal Value Based on Free Cash Flow
----------------------------------------------------------------------
Perpetuity Growth After Year 2004 4.0% Perpetuity Growth Rate 4.5% Perpetuity Growth Rate
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
13.0% 14.0% 15.0% 13.0% 14.0% 15.0%
---------- ---------- ---------- ---------- ---------- ----------
Discounted Free Cash Flows 2000 - 2004 $ 45,387.6 $ 44,258.2 $ 43,173.2 $ 45,387.6 $ 44,258.2 $ 43,173.2
Discounted Terminal Value 95,388.6 82,149.9 71,490.7 101,485.3 86,889.3 75,255.1
---------- ---------- ---------- ---------- ---------- ----------
Enterprise Value 140,776.2 126,408.1 114,663.9 146,872.8 131,147.5 118,428.3
Less: Debt, Preferred & Minority
Interest @ 6/30/99 (17,565.0) (17,565.0) (17,565.0) (17,565.0) (17,565.0) (17,565.0)
Plus: Cash @ 6/30/99 101.0 101.0 101.0 101.0 101.0 101.0
---------- ---------- ---------- ---------- ---------- ----------
Implied Equity Value $123,312.2 $108,944.1 $ 97,199.9 $129,408.8 $113,683.5 $100,964.3
========== ========== ========== ========== ========== ==========
Implied Equity Value Per Share /(2)/ $ 11.85 $ 10.47 $ 9.34 $ 12.44 $ 10.93 $ 9.70
<CAPTION>
Terminal Value Based on Free Cash Flow ------------------------------------------------------
5.0% Perpetuity Growth Rate
Perpetuity Growth After Year 2004 ------------------------------------------------------
<S> <C> <C> <C>
13.0% 14.0% 15.0%
-------------- -------------- --------------
Discounted Free Cash Flows 2000 - 2004 $ 45,387.6 $ 44,258.2 $ 43,173.2
Discounted Terminal Value 108,344.0 92,155.3 79,395.9
-------------- -------------- --------------
Enterprise Value 153,731.6 136,413.5 122,569.1
Less: Debt, Preferred & Minority
Interest @ 6/30/99 (17,565.0) (17,565.0) (17,565.0)
Plus: Cash @ 6/30/99 101.0 101.0 101.0
-------------- -------------- --------------
Implied Equity Value $ 136,267.6 $ 118,949.5 $ 105,105.1
============== ============== ==============
Implied Equity Value Per Share /(2)/ $ 13.10 $ 11.43 $ 10.10
</TABLE>
(1) Source of projections: Years 1999 and 2000 based on Management projections,
Years 2001 through 2004 extrapolated at 10% revenue growth with constant
margins. Terminal Value based on Perpetuity Growth Rate
(2) Based on 10.4 million shares outstanding as of June 30, 1999.
35
<PAGE>
PROJECT PLAYPEN | September 8, 1999
6 APPENDIX
36
<PAGE>
PROJECT PLAYPEN | September 8, 1999
A Stand Alone Financial Model
<PAGE>
PROJECT PLAYPEN | September 8, 1999
STAND ALONE FINANCIAL STATEMENTS
==============================================================================
Elmo Income Statement
(Figures in thousands, except per share data)
<TABLE>
<CAPTION>
Actual Estimated
--------------------------- --------------------------------------
Fiscal Year End 12/31 3/31/99 6/30/99 9/30/99 12/31/99 1999
--------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 45,872.0 $ 37,431.0 $ 61,870.6 $ 55,346.1 $200,519.7
Adjustment Factor 0.0 0.0 6,187.1 5,534.6 11,721.7
------------ ------------ ------------ ------------ ------------
Revised Sales $ 45,872.0 $ 37,431.0 $ 55,683.5 $ 49,811.5 $188,798.0
Cost of Goods Sold 33,982.0 26,887.0 42,260.3 37,260.2 140,389.5
------------ ------------ ------------ ------------ ------------
Gross Profit 11,890.0 10,544.0 13,423.2 12,551.3 48,408.5
Selling Expenses 4,300.0 4,513.0 4,517.2 4,414.6 17,744.7
G&A Expenses 2,655.0 2,464.0 2,279.4 2,338.9 9,737.3
------------ ------------ ------------ ------------ ------------
EBITDA 4,935.0 3,567.0 6,626.6 5,797.9 20,926.5
Depreciation 110.0 202.0 107.9 107.9 527.8
------------ ------------ ------------ ------------ ------------
EBIT 4,825.0 3,365.0 6,518.7 5,690.0 20,398.7
Interest Expense (net) 354.0 224.0 359.7 321.3 1,259.1
------------ ------------ ------------ ------------ ------------
Pre-Tax Income 4,471.0 3,141.0 6,159.0 5,368.6 19,139.6
Provision for Taxes 1,878.0 1,319.0 2,586.8 2,254.8 8,038.6
------------ ------------ ------------ ------------ ------------
Net Income to Common $ 2,593.0 $ 1,822.0 $ 3,572.2 $ 3,113.8 $ 11,101.0
============ ============ ============ ============ ============
Number of Shares Outstanding 10,310.0 10,402.0 10,402.0 10,402.0 10,402.0
Fully Diluted E.P.S. (In Dollars) $ 0.25 $ 0.18 $ 0.34 $ 0.30 $ 1.07
Margin & Growth Rate Analysis
- -----------------------------
Revenue Growth Year-Over-Year 28.4% 16.9% 31.7% 38.9% 22.2%
Adjustment Factor as a % of Sales -- -- 10.0% 10.0% --
COGS as a % of Sales 74.1% 71.8% 75.9% 74.8% 74.4%
Gross Margin 25.9% 28.2% 24.1% 25.2% 25.6%
Selling Expenses as a % of Sales 9.4% 12.1% 8.1% 8.9% 9.4%
G&A Expenses as a % of Sales 5.8% 6.6% 4.1% 4.7% 5.2%
EBITDA Margin 10.8% 9.5% 11.9% 11.6% 11.1%
Depreciation as a % of Sales 0.2% 0.5% 0.2% 0.2% 0.3%
EBIT Margin 10.5% 9.0% 11.7% 11.4% 10.8%
Effective Tax Rate 42.0% 42.0% 42.0% 42.0% 42.0%
Pre-Tax Margin 9.7% 8.4% 11.1% 10.8% 10.1%
Net Margin 5.7% 4.9% 6.4% 6.3% 5.9%
Net Income Growth 73.8% 16.1% 6.0% (1.1%) 15.9%
<CAPTION>
Estimated
------------------------------------------------------------------------
Fiscal Year End 12/31 3/31/00 6/30/00 9/30/00 12/31/00 2000
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 57,278.8 $ 35,519.6 $ 82,176.6 $ 77,096.3 $252,071.3
Adjustment Factor 5,727.9 3,552.0 8,217.7 7,709.6 25,207.1
------------ ------------ ------------ ------------ ------------
Revised Sales $ 51,550.9 $ 31,967.7 $ 73,958.9 $ 69,386.7 $226,864.2
Cost of Goods Sold 38,401.7 23,865.1 55,352.0 51,854.1 169,472.8
------------ ------------ ------------ ------------ ------------
Gross Profit 13,149.3 8,102.5 18,606.9 17,532.6 57,391.4
Selling Expenses 5,203.5 4,186.8 6,366.2 6,129.0 21,855.5
G&A Expenses 2,330.5 2,175.6 2,507.1 2,471.1 9,484.3
------------ ------------ ------------ ------------ ------------
EBITDA 5,615.3 1,740.1 9,733.6 8,932.6 26,021.6
Depreciation 102.1 102.1 102.1 102.1 408.5
------------ ------------ ------------ ------------ ------------
EBIT 5,513.1 1,637.9 9,631.5 8,830.4 25,613.0
Interest Expense (net) 261.5 133.7 269.1 267.4 931.7
------------ ------------ ------------ ------------ ------------
Pre-Tax Income 5,251.6 1,504.2 9,362.4 8,563.1 24,681.3
Provision for Taxes 2,205.7 631.8 3,932.2 3,596.5 10,366.2
------------ ------------ ------------ ------------ ------------
Net Income to Common $ 3,045.9 $ 872.4 $ 5,430.2 $ 4,966.6 $ 14,315.2
============ ============ ============ ============ ============
Number of Shares Outstanding 10,402.0 10,402.0 10,402.0 10,402.0 10,402.0
Fully Diluted E.P.S. (In Dollars) $ 0.29 $ 0.08 $ 0.52 $ 0.48 $ 1.38
Margin & Growth Rate Analysis
- -----------------------------
Revenue Growth Year-Over-Year 24.9% (5.1%) 32.8% 39.3% 20.2%
Adjustment Factor as a % of Sales 10.0% 10.0% 10.0% 10.0% _
COGS as a % of Sales 74.5% 74.7% 74.8% 74.7% 74.7%
Gross Margin 25.5% 25.3% 25.2% 25.3% 25.3%
Selling Expenses as a % of Sales 10.1% 13.1% 8.6% 8.8% 9.6%
G&A Expenses as a % of Sales 4.5% 6.8% 3.4% 3.6% 4.2%
EBITDA Margin 10.9% 5.4% 13.2% 12.9% 11.5%
Depreciation as a % of Sales 0.2% 0.3% 0.1% 0.1% 0.2%
EBIT Margin 10.7% 5.1% 13.0% 12.7% 11.3%
Effective Tax Rate 42.0% 42.0% 42.0% 42.0% 42.0%
Pre-Tax Margin 10.2% 4.7% 12.7% 12.3% 10.9%
Net Margin 5.9% 2.7% 7.3% 7.2% 6.3%
Net Income Growth 17.5% (52.1%) 52.0% 59.5% 29.0%
</TABLE>
Source of projections: Years 1999 and 2000 based on Management projections.
37
<PAGE>
PROJECT PLAYPEN | September 8, 1999
STAND ALONE FINANCIAL STATEMENTS
================================================================================
Summary Financials & Credit Analysis - Trailing Twelve Months
(Figures in thousands, except per share data)
<TABLE>
<CAPTION>
Actual Estimated
------------------------- ------------------------ -----------
3/31/99 6/30/99 9/30/99 12/31/99 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue $164,716.00 $170,134.00 $178,824.54 $188,797.99 $188,797.99
EBITDA $ 19,956.00 $ 20,433.00 $ 20,662.62 $ 20,926.48 $ 20,926.48
EBITDA-Capex $ 19,856.00 $ 20,333.00 $ 20,562.62 $ 20,826.48 $ 20,826.48
EBIT $ 19,577.00 $ 19,909.00 $ 20,142.73 $ 20,398.69 $ 20,398.69
Cash Interest Expense $ 1,441.00 $ 1,337.00 $ 1,224.71 $ $1,259.05 $ 1,259.05
Total Debt $ 12,414.00 $ 17,565.00 $ 16,297.25 $ 14,690.61 $ 14,690.61
Net Debt $ 11,924.00 $ 17,464.00 $ 15,807.25 $ 14,200.61 $ 14,200.61
Equity $ 35,124.00 $ 37,946.00 $ 41,518.23 $ 44,632.03 $ 44,632.03
Total Capitalization $ 47,048.00 $ 55,410.00 $ 57,325.49 $ 58,832.64 $ 58,832.64
LTM Debt/EBITDA 0.6x 0.9x 0.8x 0.7x 0.7x
Net Debt/Equity 34% 46% 38% 32% 32%
Net Debt/Capitalization 25% 32% 28% 24% 24%
Coverages
EBITDA/Cash Interest Expense 22.2x 22.2x 34.7x 19.5x 21.1x
(EBITDA - Capex)/Cash Interest Expense 21.0x 21.0x 33.8x 18.9x 20.1x
<CAPTION>
Estimated
-----------------------------------------------------------------
3/31/00 6/30/00 9/30/00 12/31/00 2000
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue $194,476.93 $189,013.59 $207,288.96 $226,864.18 $226,864.18
EBITDA $ 21,606.76 $ 19,779.81 $ 22,886.83 $ 26,021.55 $ 26,021.55
EBITDA-Capex $ 21,506.76 $ 19,679.81 $ 22,786.83 $ 25,921.55 $ 25,921.55
EBIT $ 21,086.83 $ 19,359.75 $ 22,472.53 $ 25,613.01 $ 25,613.01
Cash Interest Expense $ 1,166.58 $ 1,076.30 $ 985.66 $ 931.67 $ 931.67
Total Debt $ 11,511.54 $ 5,570.00 $ 22,339.42 $ 5,570.00 $ 5,570.00
Net Debt $ 11,021.54 $ 2,872.73 $ 21,849.42 $ 2,599.00 $ 2,599.00
Equity $ 47,677.97 $ 48,550.40 $ 53,980.62 $ 58,947.21 $ 58,947.21
Total Capitalization $ 58,699.50 $ 51,423.14 $ 75,830.04 $ 61,546.20 $ 61,546.20
LTM Debt/EBITDA 0.5x 0.3x 1.0x 0.2x 0.2x
Net Debt/Equity 23% 6% 40% 4% 4%
Net Debt/ Capitalization 19% 6% 29% 4% 4%
Coverages
EBITDA/Cash Interest Expense 21.1x 21.1x 21.1x 21.1x 21.1x
(EBITDA - Capex)/ Cash Interest Expense 20.1x 20.1x 20.1x 20.1x 20.1x
</TABLE>
Source of projections: Years 1999 and 2000 based on Management projections.
38
<PAGE>
PROJECT PLAYPEN | September 8, 1999
STAND ALONE FINANCIAL STATEMENTS
================================================================================
Elmo Balance Sheet
(Figures in thousands, except per share data)
<TABLE>
<CAPTION>
Actual Actual Estimated
----------- ------------------------ ------------------------ -----------
Fiscal Year End 12/31 1998 3/31/99 6/30/99 9/30/99 12/31/99 1999
----------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash and Cash Equivalents $ 139.0 $ 490.0 $ 101.0 $ 490.0 $ 490.0 $ 490.0
Accounts Receivable 20,987.0 31,558.0 26,993.0 30,508.5 26,241.1 26,241.1
Inventory 23,579.0 16,852.0 27,549.0 25,941.2 30,833.1 30,833.1
Other Current Assets 3,287.0 4,681.0 4,619.0 5,156.8 4,109.9 4,109.9
----------- ----------- ----------- ----------- ----------- -----------
Total Current Assets 47,992.0 53,581.0 59,262.0 62,096.4 61,674.1 61,674.1
Net Property, Plant & Equipment 1,459.0 1,801.0 2,359.0 2,433.8 2,508.5 2,508.5
Other Assets 1,001.0 1,081.0 5,993.0 5,993.0 5,993.0 5,993.0
----------- ----------- ----------- ----------- ----------- -----------
Total Assets $50,452.0 $56,463.0 $67,614.0 $70,523.2 $70,175.6 $70,175.6
=========== =========== =========== =========== =========== ===========
Liabilities and Shareholders' Equity
Bank Revolver $ 3,753.0 $ 6,695.0 $11,995.0 $10,727.3 $ 9,120.6 $ 9,120.6
Accounts Payable 7,944.0 8,486.0 11,638.0 12,242.7 10,388.0 10,388.0
----------- ----------- ----------- ----------- ----------- -----------
Total Current Liabilities 11,697.0 15,181.0 23,633.0 22,970.0 19,508.6 19,508.6
Other Liabilities 505.0 439.0 465.0 465.0 465.0 465.0
Existing Senior Debt Elmo 5,719.0 5,719.0 5,570.0 5,570.0 5,570.0 5,570.0
Total Long Term Debt 5,719.0 5,719.0 5,570.0 5,570.0 5,570.0 5,570.0
----------- ----------- ----------- ----------- ----------- -----------
Total Liabilities 17,921.0 21,339.0 29,668.0 29,005.0 25,543.6 25,543.6
Common Equity 32,531.0 35,124.0 37,946.0 41,518.2 44,632.0 44,632.0
----------- ----------- ----------- ----------- ----------- -----------
Total Liabilities and Equity $50,452.0 $56,463.0 $67,614.0 $70,523.2 $70,175.6 $70,175.6
=========== =========== =========== =========== =========== ===========
Total Debt $ 9,472.0 $12,414.0 $17,565.0 $16,297.3 $14,690.6 $14,690.6
Net Debt, Preferred & Minority Interest 9,333.0 11,924.0 17,464.0 15,807.3 14,200.6 14,200.6
Total Book Equity 32,531.0 35,124.0 37,946.0 41,518.2 44,632.0 44,632.0
Total Book Capitalization 42,003.0 47,538.0 55,511.0 57,815.5 59,322.6 59,322.6
<CAPTION>
Estimated
------------------------------------------------------------
Fiscal Year End 12/31 3/31/00 6/30/00 9/30/00 12/31/00 2000
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Assets
Cash and Cash Equivalents $ 490.0 $ 2,697.3 $ 490.0 $ 2,971.0 $ 2,971.0
Accounts Receivable 38,492.1 22,347.9 49,993.2 48,426.3 48,426.3
Inventory 21,334.3 28,733.6 28,602.9 15,687.0 15,687.0
Other Current Assets 2,886.9 2,862.2 2,862.9 2,862.9 2,862.9
----------- ----------- ------------ ----------- -----------
Total Current Assets 63,203.2 56,641.0 81,949.0 69,947.2 69,947.2
Net Property, Plant & Equipment 2,456.4 2,404.3 2,352.1 2,300.0 2,300.0
Other Assets 5,993.0 5,993.0 5,993.0 5,993.0 5,993.0
----------- ----------- ------------ ----------- -----------
Total Assets $71,652.6 $65,038.2 $90,294.1 $78,240.2 $78,240.2
=========== =========== ============ =========== ===========
Liabilities and Shareholders' Equity
Bank Revolver $ 5,941.5 $ 0.0 $16,769.4 $ 0.0 $ 0.0
Accounts Payable 12,078.1 10,532.8 13,589.1 13,338.0 13,338.0
----------- ----------- ------------ ----------- -----------
Total Current Liabilities 18,019.6 10,532.8 30,358.5 13,338.0 13,338.0
Other Liabilities 385.0 385.0 385.0 385.0 385.0
Existing Senior Debt Elmo 5,570.0 5,570.0 5,570.0 5,570.0 5,570.0
Total Long Term Debt 5,570.0 5,570.0 5,570.0 5,570.0 5,570.0
----------- ----------- ------------ ----------- -----------
Total Liabilities 23,974.6 16,487.8 36,313.5 19,293.0 19,293.0
Common Equity 47,678.0 48,550.4 53,980.6 58,947.2 58,947.2
----------- ----------- ------------ ----------- -----------
Total Liabilities and Equity $71,652.6 $65,038.2 $90,294.1 $78,240.2 $78,240.2
=========== =========== ============ =========== ===========
Total Debt $11,511.5 $ 5,570.0 $22,339.4 $ 5,570.0 $ 5,570.0
Net Debt, Preferred & Minority Interest 11,021.5 2,872.7 21,849.4 2,599.0 2,599.0
Total Book Equity 47,678.0 48,550.4 53,980.6 58,947.2 58,947.2
Total Book Capitalization 59,189.5 54,120.4 76,320.0 64,517.2 64,517.2
</TABLE>
Source of projections: Years 1999 and 2000 based on Management projections.
39
<PAGE>
PROJECT PLAYPEN | September 8, 1999
STAND ALONE FINANCIAL STATEMENTS
================================================================================
Elmo Cash Flow Statement
(Figures in thousands, except per share data)
<TABLE>
<CAPTION>
Actual Estimated
------------------------------ ----------------------------- ----------
Fiscal Year End 12/31 3/31/99 6/30/99 9/30/99 12/31/99 1999
-------------- -------------- ------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Cash Flow From Operations
Net Income $ 2,593.0 $ 1,822.0 $ 3,572.2 $ 3,113.8 $11,101.0
Depreciation 110.0 202.0 107.9 107.9 527.8
Change in Working Capital (4,696.0) (18.0) (1,840.7) (1,432.4) (7,987.1)
Change in Other Assets (80.0) (15.0) 0.0 0.0 (95.0)
Change in Other Liabilities (66.0) 26.0 0.0 0.0 (40.0)
------------ ------------ ------------ ------------ ----------
Cash Provided/ (Used) by Operating Activities (2,139.0) 2,017.0 1,839.4 1,789.3 3,506.7
Cash Flow From Investing Activities
Capital Expenditures (452.0) (704.0) (182.7) (182.7) (1,521.3)
------------ ------------ ------------ ------------ ----------
Cash Provided/ (Used) by Investing Activities (452.0) (7,557.0) (182.7) (182.7) (8,374.3)
Cash Flow From Financing Activities
Change in Existing Senior Debt Elmo 0.0 (149.0) 0.0 0.0 (149.0)
Cash Provided/ (Used) by Financing Activities 0.0 (149.0) 0.0 0.0 (149.0)
------------ ------------ ------------ ------------ ----------
Minimum Cash 490.0 101.0 490.0 490.0 490.0
(Deficiency)/ Excess Cash (2,942.0) (5,300.0) 1,267.7 1,606.6 1,606.6
(Payments)/ Borrowings on Revolver 2,942.0 5,300.0 (1,267.7) (1,606.6) (1,606.6)
------------ ------------ ------------ ------------ ----------
Total Change In Cash $ 351.0 ($ 389.0) $ 389.0 $ 0.0 $ 0.0
============ ============ ============ ============ ==========
Beginning Cash Balance 139.0 490.0 101.0 490.0 490.0
Change In Cash 351.0 (389.0) 389.0 0.0 0.0
------------ ------------ ------------ ------------ ----------
Ending Cash Balance $ 490.0 $ 101.0 $ 490.0 $ 490.0 $ 490.0
============ ============ ============ ============ ==========
<CAPTION>
Estimated
------------------------------------------------------------- ----------
Fiscal Year End 12/31 3/31/00 6/30/00 9/30/00 12/31/00 2000
-------------- -------------- ------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Cash Flow From Operations
Net Income $ 3,045.9 $ 872.4 $ 5,430.2 $ 4,966.6 $ 14,315.2
Depreciation 102.1 102.1 102.1 102.1 408.5
Change in Working Capital 161.0 7,224.2 (24,459.0) 14,231.7 (2,842.1)
Change in Other Assets 0.0 0.0 0.0 0.0 0.0
Change in Other Liabilities (80.0) 0.0 0.0 0.0 (80.0)
------------ ------------ ------------ ------------ ----------
Cash Provided/ (Used) by Operating Activities 3,229.1 8,198.8 (18,926.7) 19,300.4 11,801.6
Cash Flow From Investing Activities
Capital Expenditures (50.0) (50.0) (50.0) (50.0) (200.0)
------------ ------------ ------------ ------------ ----------
Cash Provided/ (Used) by Investing Activities (50.0) (50.0) (50.0) (50.0) (200.0)
Cash Flow From Financing Activities
Change in Existing Senior Debt Elmo 0.0 0.0 0.0 0.0 0.0
Cash Provided/ (Used) by Financing Activities 0.0 0.0 0.0 0.0 0.0
------------ ------------ ------------ ------------ ----------
Minimum Cash 490.0 490.0 490.0 490.0 490.0
(Deficiency)/ Excess Cash 3,179.1 8,148.8 (16,769.4) 19,250.4 19,250.4
(Payments)/ Borrowings on Revolver (3,179.1) (5,941.5) 16,769.4 (16,769.4) (16,769.4)
------------ ------------ ------------ ------------ ----------
Total Change In Cash $ 0.0 $ 2,207.3 ($ 2,207.3) $ 2,481.0 $ 2,481.0
============ ============ ============ ============ ==========
Beginning Cash Balance 490.0 490.0 2,697.3 490.0 490.0
Change In Cash 0.0 2,207.3 (2,207.3) 2,481.0 2,481.0
------------ ------------ ------------ ------------ ----------
Ending Cash Balance $ 490.0 $ 2,697.3 $ 490.0 $ 2,971.0 $ 2,971.0
============ ============ ============ ============ ==========
</TABLE>
Source of projections: Years 1999 and 2000 based on Management projections.
40
<PAGE>
PROJECT PLAYPEN | September 8, 1999
B Leveraged Buyout Analysis
- --------------------------------------------------------------------------------
41
<PAGE>
PROJECT PLAYPEN | SEPTEMBER 8, 1999
LEVERAGED BUYOUT ANALYSIS
================================================================================
Summary of Leveraged Buyout Analysis
(Figures in thousands, except per share and multiple data)
- --------------------------------------------------------------------------------
Transaction Assumptions
- --------------------------------------------------------------------------------
Transaction Date: 12/31/99
Goodwill Amortization Period 30
Deferred Financing Fees Amortization Period 7
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Trading Information
- --------------------------------------------------------------------------------
Elmo
--------------------------------
Enterprise Value Current @ Deal
- ---------------- --------------- ---------------
Share Price 9/3/99 $ 10.63 $12.00
Fully Diluted Shares 10,375.7 10,405.7
Implied Equity Market Value $110,241.7 $124,868.3
Plus: Debt, Preferred & MI 17,565.0 17,565.0
Less:Cash (101.0) (101.0)
------------- ---------------
Implied Enterprise Value $127,705.7 $142,332.3
Multiple Analysis
- -----------------
1999 A P/E FYE 12/31 10.0x 11.2x
2000 E P/E 7.7 8.7
1999 A EBITDA 6.1 6.8
2000 E EBITDA 4.9 5.5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Debt Capacity Analysis
- --------------------------------------------------------------------------------
Trailing EBITDA $ 20,433.0
Debt/EBITDA Coverage 4.0x
---------------
Implied Debt Capacity $ 81,732.0
Less Current Debt (17,565.0)
---------------
Incremental Debt Capacity $ 64,167.0
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Goodwill Calculation
- --------------------------------------------------------------------------------
Purchase Price of Equity $0.0
Plus: Transaction Costs 0.0
Less: Tangible Book Value of Elmo 0.0
-----------------
Total Deal Goodwill 0.0
-----------------
Amortization Period (Years) 0.0
Annual Amortization of Transaction Goodwill $0.0
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Sources and Uses of Funds
- --------------------------------------------------------------------------------
Sources of Funds Amount Rate Percent
- ---------------- -----------------------------------
Bank Revolver $0.0 10.0% 0.0%
Acquisition Senior Debt 71,730.0 9.0% 48.5%
Acquisition Subordinated Debt 10,000.0 15.0% 6.8%
Acquisition PIK Preferred 0.0 0.0%
New Equity 66,203.3 44.8%
---------- ---------
Total Sources of Funds $147,933.3 100.0%
Uses of Funds Amount Rate Percent
- ------------- -----------------------------------
Purchase Elmo Common Equity 124,868.3 84.4%
Refinance Existing Elmo Current Debt 11,995.0 8.1%
Repay Note to Majority Shareholders 5,570.0 3.8%
Transaction Costs 3,000.0 2.11% 2.0%
Deferred Fees 2,500.0 3.49% 1.7%
---------- ---------
Total Uses of Funds $147,933.3 100.0%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Equity Sponsor IRR calculation
- --------------------------------------------------------------------------------
EBITDA Multiple 2002 2003 2004
- --------------- -----------------------------------
5.5x 19.6% 20.8% 21.1%
6.5x 29.8% 27.6% 26.0%
7.5x 38.6% 33.5% 30.3%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Summary Credit/Leverage Statistics
- --------------------------------------------------------------------------------
1999PF 2000 2001
-----------------------------------
Total Debt/EBITDA 3.9x 2.9x 2.4x
EBITDA/Interest Expense 2.7x 3.4x 4.0x
(EBITDA-Capex)/Interest Expense 2.7x 3.4x 4.0x
- --------------------------------------------------------------------------------
Source of projections: Years 1999 and 2000 based on Management projections,
Years 2001 though 2004 extrapolated at 10% revenue growth with constant margins.
42
<PAGE>
PROJECT PLAYPEN | September 8, 1999
LEVERAGED BUYOUT ANALYSIS
================================================================================
IRR Sensitivity Analysis
(Figures in thousands, except per share and multiple data)
<TABLE>
<CAPTION>
IRR Sensitivity Analysis
----------------------------------------------------------------------------------------------
Offer 5.5x EBITDA Exit Multiple 6.5x EBITDA Exit Multiple 7.5x EBITDA Exit Multiple % Equity
Price 2002 2003 2004 2002 2003 2004 2002 2003 2004
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$10.00 35.9% 33.0% 30.7% 47.5% 40.5% 36.1% 57.5% 46.9% 40.7% 35.7%
$10.50 31.0% 29.3% 27.9% 42.1% 36.6% 33.1% 51.8% 42.9% 37.6% 38.2%
$11.00 26.7% 26.2% 25.4% 37.5% 33.3% 30.5% 46.8% 39.4% 34.9% 40.6%
$11.50 23.0% 23.3% 23.1% 33.4% 30.3% 28.1% 42.5% 36.3% 32.4% 42.7%
$12.00 19.6% 20.8% 21.1% 29.8% 27.6% 26.0% 38.6% 33.5% 30.3% 44.8%
$12.50 16.6% 18.5% 19.2% 26.5% 25.2% 24.1% 35.1% 30.9% 28.3% 46.6%
$13.00 13.9% 16.4% 17.6% 23.5% 23.0% 22.3% 31.9% 28.6% 26.5% 48.4%
$13.50 11.4% 14.5% 16.0% 20.8% 21.0% 20.7% 29.0% 26.5% 24.8% 50.0%
$14.00 9.1% 12.7% 14.6% 18.3% 19.1% 19.2% 26.4% 24.6% 23.3% 51.6%
$14.50 7.0% 11.1% 13.2% 16.1% 17.4% 17.8% 23.9% 22.7% 21.8% 53.0%
$15.00 5.0% 9.6% 12.0% 13.9% 15.7% 16.5% 21.7% 21.1% 20.5% 54.4%
</TABLE>
Source of projections: Years 1999 and 2000 based on Management projections,
Years 2001 through 2004 extrapolated at 10% revenue growth with constant
margins.
43
<PAGE>
PROJECT PLAYPEN | September 8, 1999
LEVERAGED BUYOUT ANALYSIS
================================================================================
Balance Sheet - Transaction Adjustments
(Figures in thousands)
<TABLE>
<CAPTION>
Elmo Adjustments Consolidated
---------------------------
Assets 06/30/99 Financing Accounting Pro Forma
- ------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Cash and Cash Equivalents $ 101.0 $147,933.3 ($147,933.3) $ 101.0
Accounts Receivable 26,993.0 0.0 0.0 26,993.0
Inventory 27,549.0 0.0 0.0 27,549.0
Other Current Assets 4,619.0 0.0 0.0 4,619.0
------------ ------------ ------------- ------------
Total Current Assets 59,262.0 147,933.3 (147,933.3) 59,262.0
Net Property, Plant & Equipment 2,359.0 0.0 0.0 2,359.0
Deal Goodwill 0.0 0.0 0.0 0.0
Existing Goodwill 0.0 0.0 0.0 0.0
Deferred Fees 0.0 0.0 2,500.0 2,500.0
Other Intangible Assets 0.0 0.0 0.0 0.0
Other Assets 5,993.0 0.0 0.0 5,993.0
------------ ------------ ------------- ------------
Total Assets $ 67,614.0 $147,933.3 ($145,433.3) $ 70,114.0
============ ============ ============= ============
Liabilities and Shareholders' Equity
- ------------------------------------
Bank Revolver $ 11,995.0 $ 0.0 ($11,995.0) $ 0.0
Accounts Payable 11,638.0 0.0 0.0 11,638.0
Other Current Liabilities 0.0 0.0 0.0 0.0
------------ ------------ ------------- -----------
Total Current Liabilities 23,633.0 0.0 (11,995.0) 11,638.0
Other Liabilities 465.0 0.0 0.0 465.0
Deferred Tax 0.0 0.0 0.0 0.0
Senior Debt 5,570.0 71,730.0 (5,570.0) 71,730.0
Subordinated Debt 0.0 10,000.0 0.0 10,000.0
------------ ------------ ------------- -----------
Total Liabilities 29,668.0 81,730.0 (17,565.0) 93,833.0
Minority Interest 0.0 0.0 0.0 0.0
Existing Preferred Stock 0.0 0.0 0.0 0.0
Acquisition PIK Preferred 0.0 0.0 0.0 0.0
Common Equity 37,946.0 66,203.3 (127,868.3) (23,719.0)
------------ ------------ ------------- -----------
Total Liabilities and Equity $ 67,614.0 $147,933.3 ($145,433.3) $ 70,114.0
============ ============ ============= ===========
</TABLE>
44
<PAGE>
PROJECT PLAYPEN | September 8, 1999
LEVERAGED BUYOUT ANALYSIS
================================================================================
Pro Forma Income Statement
(Figures in thousands)
<TABLE>
<CAPTION>
Pro Forma Projected
----------- ------------------------------------------------------------------------
Fiscal Year End 12/31 1999 2000 2001 2002 2003 2004
----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales $188,798.0 $226,864.2 $249,550.6 $274.505.7 $301,956.2 $332,151.8
Cost of Goods Sold 140,389.5 169,472.8 186,420.1 205,062.1 225,568.3 248,125.2
----------- ------------ ------------ ------------ ------------ ------------
Gross Profit 48,408.5 57,391.4 63,130.5 69,443.5 76,387.9 84,026.7
Selling Expenses 17,744.7 21,885.5 24,074.0 26,481.4 29,129.6 32,042.5
General and Administrative Expenses 9,737.3 9,484.3 10,432.7 11,476.0 12,623.6 13,886.0
----------- ------------ ------------ ------------ ------------ ------------
EBITDA 20,926.5 26,021.6 28,623.7 31,486.1 34,634.7 38,098.2
Existing Depreciation 527.8 408.5 449.4 494.3 543.8 598.1
Deal Amortization 0.0 0.0 0.0 0.0 0.0 0.0
----------- ------------ ------------ ------------ ------------ ------------
EBIT 20,398.7 25,613.0 28,174.3 30,991.7 34,090.9 37,500.0
Amortization of Deferred Financing Fees 357.1 357.1 357.1 357.1 357.1 357.1
Interest Expense (net) 7,696.6 7,696.6 7,110.2 6,389.4 5,527.1 4,387.3
----------- ------------ ------------ ------------ ------------ ------------
Pre-Tax Income 12,345.0 17,559.3 20,707.0 24,245.2 28,206.7 32,755.6
Provision for Taxes 5,184.9 7,374.9 8,696.9 10,183.0 11,846.8 13,757.3
----------- ------------ ------------ ------------ ------------ ------------
Net Income 7,160.1 10,184.4 12,010.0 14,062.2 16,359.9 18,998.2
Preferred Dividends 0.0 0.0 0.0 0.0 0.0 0.0
----------- ------------ ------------ ------------ ------------ ------------
Net Income to Common 7,160.1 10,184.4 12,010.0 14,062.2 16,359.9 18,998.2
=========== ============ ============ ============ ============ ============
</TABLE>
Source of projections: Years 1999 and 2000 based on Management projections,
Years 2001 through 2004 extrapolated at 10% revenue growth with constant
margins.
45
<PAGE>
PROJECT PLAYPEN | September 8, 1999
LEVERAGED BUYOUT ANALYSIS
================================================================================
Pro Forma Balance Sheet
(Figures in thousands)
<TABLE>
<CAPTION>
Pro Forma Projected
----------- -----------------------------------------------------------------------
Assets 6/30/99 2000 2001 2002 2003 2004
- ------ ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash and Cash Equivalents $ 101.0 $ 101.0 $ 101.0 $ 101.0 $ 101.0 $ 101.0
Accounts Receivable 26,993.0 32,435.4 35,679.0 39,246.9 43,171.6 47,488.7
Inventory 27,549.0 33,256.1 36,581.7 40,239.9 44,263.9 48,690.3
Other Current Assets 4,619.0 5,550.3 6,105.3 6,715.9 7,387.5 8,126.2
----------- ----------- ----------- ----------- ----------- -----------
Total Current Assets 59,262.0 71,342.8 78,467.0 86,303.6 94,923.9 104,406.2
Net Property, Plant & Equipment 2,359.0 2,150.5 2,001.1 1,906.7 1,863.0 1,864.8
Deferred Fees 2,500.0 2,142.9 1,785.7 1,428.6 1,071.4 714.3
Other Assets 5,993.0 5,993.0 5,993.0 5,993.0 5,993.0 5,993.0
----------- ----------- ----------- ----------- ----------- -----------
Total Assets $ 70,114.0 $ 81,629.2 $ 88,246.8 $ 95,631.9 $103,851.3 $112,978.3
=========== =========== =========== =========== =========== ===========
Liabilities and Shareholders' Equity
- ------------------------------------
Bank Revolver $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 37,162.8
Accounts Payable 11,638.0 18,806.6 20,687.2 22,756.0 25,031.5 27,534.7
----------- ----------- ----------- ----------- ----------- -----------
Total Current Liabilities 11,638.0 18,806.6 20,687.2 22,756.0 25,031.5 64,697.5
Other Liabilities 465.0 385.0 385.0 385.0 385.0 385.0
Senior Debt 71,730.0 65,972.2 58,699.2 49,953.3 39,537.2 0.0
Subordinated Debt 10,000.0 10,000.0 10,000.0 10,000.0 10,000.0 0.0
----------- ----------- ----------- ----------- ----------- -----------
Total Liabilities 93,833.0 95,163.8 89,771.4 83,094.3 74,953.7 65,082.5
Common Equity (23,719.0) (13,534.6) (1,524.6) 12,537.7 28,897.5 47,895.8
----------- ----------- ----------- ----------- ----------- -----------
Total Liabilities and Equity $ 70,114.0 $ 81,629.2 $ 88,246.8 $ 95,631.9 $103,851.3 $112,978.3
=========== =========== =========== =========== =========== ===========
</TABLE>
Source of projections: Years 1999 and 2000 based on Management projections,
Years 2001 through 2004 extrapolated at 10% revenue growth with constant
margins.
46
<PAGE>
PROJECT PLAYPEN | September 8, 1999
LEVERAGED BUYOUT ANALYSIS
================================================================================
Pro Forma Statement of Cash Flow
(Figures in thousands)
<TABLE>
<CAPTION>
Projected
------------------------------------------------------------------------
2000 2001 2002 2003 2004
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash Flow from Operations
Net Income $ 10,184.4 $ 12,010.0 $ 14,062.2 $ 16,359.9 $ 18,998.2
Existing Depreciation 408.5 449.4 494.3 543.8 598.1
Amortization of Deferred Financing Fees 357.1 357.1 357.1 357.1 357.1
Change in Working Capital (4,912.3) (5,243.5) (5,767.9) (6,344.7) (6,979.1)
Change in Other Liabilities (80.0) 0.0 0.0 0.0 0.0
------------ ------------ ------------ ------------ ------------
Cash Provided/(Used) by Operating Activities $ 5,957.8 $ 7,573.0 $ 9,145.8 $ 10,916.1 $ 12,974.4
Cash Flow From Investing Activities
Capital Expenditures ($200.0) ($300.0) ($400.0) ($500.0) ($600.0)
------------ ------------ ------------ ------------ ------------
Cash Provided/(Used) by Investing Activities ($200.0) ($300.0) ($400.0) ($500.0) ($600.0)
As a % of Sales 0.1% 0.1% 0.1% 0.2% 0.2%
Cash Flow From Financing Activities
Change in Revolver 0.0 0.0 0.0 0.0 37,162.8
Change in Senior Debt (5,757.8) (7,273.0) (8,745.8) (10,416.1) (39,537.2)
Change in Subordinated Debt 0.0 0.0 0.0 0.0 (10,000.0)
Cash Provided/(Used) by Investing Activities ($5,757.8) ($7,273.0) ($8,745.8) ($10,416.1) ($12,374.4)
Beginning Cash Balance $ 101.0 $ 101.0 $ 101.0 $ 101.0 $ 101.0
Change in Cash 0.0 0.0 0.0 0.0 0.0
------------ ------------ ------------ ------------ ------------
Ending Cash Balance $ 101.0 $ 101.0 $ 101.0 $ 101.0 $ 101.0
</TABLE>
Source of projections: Years 1999 and 2000 based on Management projections,
Years 2001 through 2004 extrapolated at 10% revenue growth with constant
margins.
47
<PAGE>
PROJECT PLAYPEN | September 8, 1999
LEVERAGED BUYOUT ANALYSIS
================================================================================
Summary Credit Statistics
(Figures in thousands, except per share and multiple data)
<TABLE>
<CAPTION>
Pro Forma Projected
----------- ------------------------------------------------------------------------
1999 2000 2001 2002 2003 2004
----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Items
- ----------------------
Revenue $188,798.0 $226,864.2 $249,550.6 $274,505.7 $301,956.2 $332,151.8
EBITDA 20,926.5 26,021.6 28,623.7 31,486.1 34,634.7 38,098.2
EBITDA-Capex 20,926.5 25,821.6 28,323.7 31,086.1 34,134.7 37,498.2
EBIT 20,398.7 25,613.0 28,174.3 30,991.7 34,090.9 37,500.0
Cash Interest Expense 7,696.6 7,696.6 7,110.2 6,389.4 5,527.1 4,387.3
Balance Sheet Items
- -------------------
Total Debt $ 81,730.0 $ 75,972.2 $ 68,699.2 $ 59,953.3 $ 49,537.2 $ 37,162.8
Net Debt 81,629.0 75,871.2 68,598.2 59,852.3 49,436.2 37,061.8
Equity (23,719.0) (13,534.6) (1,524.6) 12,537.7 28,897.5 47,895.8
----------- ------------ ------------ ------------ ------------ ------------
Total Capitalization 57,910.0 62,336.6 67,073.6 72,390.0 78,333.7 84,957.6
Total Debt/EBITDA 3.9x 2.9x 2.4x 1.9x 1.4x 1.0x
Net Debt/Equity NM NM NM 477.4% 171.1% 77.4%
Net Debt/Capitalization NM NM NM 82.7% 63.1% 43.6%
Coverages
- ---------
EBITDA/Cash Interest Expense 2.7x 3.4x 4.0x 4.9x 6.3x 8.7x
(EBITDA - Capex)/Cash Interest Expense 2.7 3.4 4.0 4.9 6.2 8.5
</TABLE>
Source of projections: Years 1999 and 2000 based on Management projections,
Years 2001 through 2004 extrapolated at 10% revenue growth with constant
margins.
48
<PAGE>
PROJECT PLAYPEN | September 8, 1999
C Weighted Average Cost of Capital Analysis
- --------------------------------------------------------------------------------
49
<PAGE>
PROJECT PLAYPEN | September 8, 1999
WEIGHTED AVERAGE COST OF CAPITAL ANALYSIS
================================================================================
Cost of Capital Analysis
(Figures in thousands)
<TABLE>
<CAPTION>
Levered Mkt. Val. Book Val. BV Debt/ Unlevered
Unlevered Betas Beta (1) Equity Debt MV Equity Beta (2)
- --------------- -------- -------------------- ---------------- --------- -----------------------
<S> <C> <C> <C> <C> <C>
Aris Industries, Inc. 1.02 $ 211,265.0 $ 25,972.0 12.3% 0.95
Authentic Fitness Corporation 0.54 405,433.0 154,445.0 38.1% 0.44
Bernard Chaus, Inc. 0.78 76,263.0 13,500.0 17.7% 0.70
Cherokee Inc. 0.40 69,643.0 41,671.0 59.8% 0.30
Cutter & Buck, Inc. 0.99 132,275.0 18,213.0 13.8% 0.92
Gerber Childrenswear, Inc 1.19 83,020.0 22,729.0 27.4% 1.03
Jones Apparel Group 1.18 3,551,116.0 1,252,474.0 35.3% 0.98
McNaughton Apparel Group 0.78 77,195.0 125,000.0 161.9% 0.40
Nautica Enterprises, Inc. 0.72 516,765.0 (1,938.0) (0.4%) 0.72
OskKosh B'Gosh, Inc. 0.39 227,467.0 (3,126.0) (1.4%) 0.39
Perry Ellis International 1.12 87,556.0 138,992.0 158.7% 0.58
Phillips-Van Heusen 0.95 259,236.0 248,754.0 96.0% 0.61
Quiksilver, Inc. 1.29 427,920.0 57,615.0 13.5% 1.19
Tarrant Apparel Group 0.87 229,173.0 67,881.0 29.6% 0.74
Toymax International 0.58 97,250.0 7,442.0 7.7% 0.56
Vans, Inc. 1.18 173,163.0 9,185.0 5.3% 1.14
V. F. Corporation 0.84 4,293,214.0 1,083,093.0 25.2% 0.73
The Warnaco Group, Inc. 0.98 1,207,349.0 804,503.0 66.6% 0.70
Equity Marketing, Inc. 1.43 83,638.0 16,700.0 20.0% 1.28
Helen of Troy Limited 0.92 423,891.0 55,450.0 13.1% 0.85
-----------------------
Mean 0.76
-----------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Elmo 0.75 $ 110,241.7 $ 17,565.0 15.9% 0.69
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------- ---------------------------------------------------------------
Cost of Equity Estimate WACC Estimate
- ------------------------------------------- ---------------------------------------------------------------
<S> <C> <C> <C>
Unlevered Beta 0.76 Elmo BV Debt/MV Equity 15.9%
Target BV Debt/MV Equity (3) 15.9% Elmo BV Debt/Total Market Capitalization 13.7%
Target BV Preferred/MV Equity 0.0% Elmo MV Equity/Total Market Capitalization 86.3%
Levered Beta (4) 0.83 Cost of Debt (9) 5.8%
Risk Free Rate (5) 6.1% Cost of Equity 15.4%
Risk Premium (6) 8.0%
Small Cap Premium (7) 2.6%
- ------------------------------------------- ---------------------------------------------------------------
Cost of Equity (8) 15.4% WACC 14.0%
- ------------------------------------------- ---------------------------------------------------------------
</TABLE>
Notes:
- ----------------------------
(1) Average Beta from Bloomberg and S&P
(2) Unlevered Beta = Levered Beta/[1 + (BV Debt/MV Equity x (1 - Marginal Tax
Rate)]
(3) Based on debt as of June 30, 1999
(4) Levered Beta = Unlevered Beat x [1 + (Target BV Debt/MV Equity x (1 -
Marginal Tax Rate)]
(5) Yield on 30 year U.S. Treasury bond at August 31, 1999
(6) Source: SBBI 1998 Yearbook, "Stocks, Bonds, Bills and Inflation" from
Ibbotson Associates
(7) Source: SBBI 1998 Yearbook, "Stocks, Bonds, Bills and Inflation" from
Ibbotson Associates
(8) Cost of Equity = Risk Free Rate = (Levered Beta x Market Risk Premium) =
Small Cap Premium
(9) Elmo's After-tax cost of debt based on current effective borrowing rate of
10%
50
