Active Gear, Inc.

Historical Financial Statements - Abstracted from the Case

Years Ended December 31 ($ in thousands)
Exhibit 1
Operating Results
Net Revenue
(Cost of Goods Sold)
Gross Profit
(Selling Expenses)
(General & Admin Expenses)
EBITDA - Earnings Before Interest, Taxes,
Depreciation & Amortization
(Depreciation & Amortization)
EBIT
(Net Interest Expense)
(Other, net)
EBT - Earnings Before Taxes
(Income Taxes)
Net Income

2004

2005

2006

450,174
(223,617)
$ 226,558
(127,705)
(31,437)

469,704
(231,583)
$ 238,121
(130,242)
(33,938)

$
$

67,416
(7,049)
60,367
(5,092)
(1,211)
54,064
(19,192)
34,872

$
$

73,941
(7,343)
66,598
(5,143)
752
62,208
(21,089)
41,120

470,286
(234,494)
$ 235,792
(130,471)
(36,535)

$
$

68,786
(8,366)
60,420
(5,098)
(24)
55,298
(19,349)
35,949

Margins

Revenue Growth
Gross Profit Margin
EBITDA Margin
EBIT Margin
EBT Margin
Tax Rate
Net Income Margin
Return on Net Operating Assets (RNOA)
Return on Equity (ROE)
Asset Turnover (ATO)

2004

2005

2006

1.7%
50.3%
15.0%
13.4%
12.0%
35.5%
7.7%
21.1%
18.5%
358.0%

4.3%
50.7%
15.7%
14.2%
13.2%
33.9%
8.8%
10.8%
9.6%
200.0%

0.1%
50.1%
14.6%
12.8%
11.8%
35.0%
7.6%
12.9%
12.1%
212.0%

Active Gear, Inc.

Historical Financial Statements - Abstracted from the Case
Years Ended December 31 ($ in thousands)
Exhibit 2
Assets
Cash & Cash Equivalents
Accounts Receivable
Inventory
Prepaid Expenses
Deferred Taxes
Derivative Assets
Total Current Assets
Property, Plant & Equipment
Intangible Assets
Goodwill
Other Assets
Total Assets
Liabilities & Owners' Equity
Accounts Payable
Accrued Expenses
Taxes Payable
Derivative Liabilities
Other Current Liabilities
Total Current Liabilities

2004

2005

2006

92,735
46,507
38,493
8,298
8,681
194,714

23,694
6,414
4,249
2,982
232,053

63,949
50,649
50,140
10,051
8,080
1,813
184,682

24,712
12,273
11,851
3,079
236,596

15,711
37,211
10,421
4,514
67,858

54,509
61,322
56,030
12,223
6,519
53
190,655

28,392
14,360
11,915
3,249
248,571

29,188
30,553
13,263
73,004

33,009
36,718
10,162
878
80,767

Long Term Debt

Deferred Compensation
Deferred Taxes

178,173
3,763
2,180

150,240
4,814
323

140,047
3,919
0

Total Owners' Equity

(19,921)

8,216

23,837

232,053

236,596

248,571

Total Liabilities & Owners' Equity

Mercury Athletic Footwear

Selected Data on Public Footwear Companies, March 15, 2007, except as noted
(non-ratio values in $ in thousands)
Exhibit 3

Company:
D&B Shoe Company
Marina Wilderness
General Shoe Corp.
Kinsley Coulter Products
Victory Athletic
Surfside Footwear
Alpine Company
Heartland Outdoor Footware
Templeton Athletic
Average

Equity Market
Value
420,098
1,205,795
533,463
165,560
35,303,250
570,684
1,056,033
1,454,875
397,709
41,107,467

Company:
D&B Shoe Company
Marina Wilderness
General Shoe Corp.
Kinsley Coulter Products
Victory Athletic
Surfside Footwear
Alpine Company
Heartland Outdoor Footware
Templeton Athletic
Average

EBIT Margin
4.4%
22.1%
8.8%
6.9%
14.1%
9.3%
10.4%
10.8%
19.9%
11.9%

Net Debt (1)

125,442
-91,559
171,835
82,236
7,653,207
195,540
300,550
-97,018
167,579

Debt-to-Equity
29.9%
-7.6%
32.2%
49.7%
21.7%
34.3%
28.5%
-6.7%
42.6%
24.9%

EBITDA
Margin
6.1%
23.1%
11.5%
8.9%
16.0%
10.8%
12.2%
12.6%
20.2%
13.5%

Net Income
Margin
2.7%
13.4%
4.9%
5.0%
9.3%
5.9%
6.9%
7.3%
15.3%
7.9%

(1) Net debt is defined as Debt less Cash & Cash Equivalents
Note: Market multiples are based on 3-year averages. "LTM" denotes "Last Twelve Months"

Equity Beta
2.68
1.94
1.92
1.12
0.97
2.13
1.27
1.01
0.98

EBIT Multiple
5.5
18.0
6.8
7.3
22.1
7.4
9.0
12.0
6.2
10.5

Last 12 Months Last 12 Months

Revenue
Earnings
2,545,058
67,679
313,556
41,923
1,322,392
64,567
552,594
27,568
15,403,547
1,433,760
1,241,529
73,124
1,614,648
112,015
1,176,144
86,156
514,182
79,170
24,683,650

EBITDA
Multiple
3.9
16.9
5.1
5.5
19.2
6.3
7.6
10.1
6.0
9.0

Price-toEarnings
Multiple
6.8
31.6
9.1
6.6
27.1
8.6
10.4
18.6
5.5
13.8

Revenue
Growth Rate:
2000-2006
6.6%
17.8%
11.2%
4.6%
7.9%
10.1%
6.2%
8.5%
14.4%
9.7%

Book-to-Value
Multiple
0.9
6.0
1.6
0.7
6.0
1.4
2.0
3.1
1.2
2.5

Mercury Athletic Footwear

Historical Financial Statements ($ in thousands) - Abstracted from the Case
Exhibit 4
Operating Results
Net Revenue
(Cost of Goods Sold)
Gross Profit
(SG & A Expenses)
EBITDA - Earnings Before Interest,
Taxes, Depreciation & Amortization
(Depreciation & Amortization)
EBIT
(Corporate Admin. Charge)
EBT - Earnings Before Taxes
(Income Taxes)
Net Income
Assets
Cash & Cash Equivalents
Accounts Receivable
Inventory
Prepaid Expenses
Total Current Assets
Property, Plant & Equipment
Trademarks & Other Intangibles
Goodwill
Other Assets
Total Assets
Liabilities & Owners' Equity
Accounts Payable
Accrued Expenses
Total Current Liabilities

2004

2005

2006

340,578
(198,115)
$ 142,463
(102,410)

358,780
(205,820)
$ 152,960
(113,892)

40,053
(7,699)
32,354
(275)
32,079
(12,190)
19,889

39,068
(8,001)
31,067
(305)
30,762
(11,689)
19,072

20,187
38,654
70,818
15,810
145,469

12,203
29,115
53,552
7,809
102,679

33,090
1,031
554
5,657
143,011

31,334
35,740
34,605
11,884
259,032

$
$
$

$
$

Deferred Taxes
Pension Obligations
Owners' Equity
Total Liabilities & Owners' Equity

12,838
13,040
25,878

$
$
$

$
$

14,753
21,955
36,708

431,121
(239,383)
$ 191,738
(139,933)

$
$
$

51,805
(9,506)
42,299
(366)
41,933
(15,934)
25,999

10,676
45,910
73,149
10,172
139,907

32,618
43,853
43,051
11,162
270,591

$
$

16,981
18,810
35,791

1,635
8,131

13,795
9,256

11,654
9,080

107,367

199,274

214,067

143,011

259,032

270,592

Mercury Athletic Footwear

Segment Data, 2004-2006 ($ in thousands)
Exhibit 5
Men's Athletic Men's Casual
Fiscal Year 2006
Revenue
Operating Income
Total Assets
Fiscal Year 2005
Revenue
Operating Income
Total Assets
Fiscal Year 2004
Revenue
Operating Income
Total Assets

Women's
Athletic

Women's
Casual

Unallocated
Corporate

219,093 $
31,421
148,576

51,663 $
8,242
28,457

123,563 $
12,703
27,978

36,802 $
(843)
34,701

(9,224)
30,880

151,900 $
18,398
173,482

55,402 $
9,077
30,842

108,097 $
11,631
24,267

43,381 $
(1,013)
12,197

(4,134)
30,919

131,636 $
17,720
39,543

58,787 $
9,196
34,966

95,897 $
9,109
22,526

54,258 $
462
15,056

(4,134)
30,919

Men's Athletic Men's Casual

Women's
Athletic

Women's
Casual

Unallocated
Corporate

2006 EBIT Margins

14.3%

16.0%

10.3%

-2.3%

-2.1%

2005 EBIT Margins

12.1%

16.4%

10.8%

-2.3%

-2.0%

2004 EBIT Margins

13.5%

15.6%

9.5%

0.9%

-1.2%

Consolidated
$

431,121
42,299
270,592

358,780
31,066
259,032

340,578
32,353
143,011

Consolidated
9.8%
8.7%
9.5%

Mercury Athletic Footwear

Base Case Projected Segment Performance ($ in thousands)
Exhibit 6
Men's Athletic
Revenue
(Operating Expenses)*
Operating Income
Men's Casual
Revenue
(Operating Expenses)*
Operating Income
Women's Athletic
Revenue
(Operating Expenses)*
Operating Income
Women's Casual
Revenue
(Operating Expenses)*
Operating Income

Consolidated Revenue
(Operating Expenses)
(Corporate Overhead)
Operating Income

Estimated Capital Expenditures

Estimated Depreciation

2007

2008

2009

2010

251,957
(218,435)
$
33,522

282,192
(244,647)
$
37,545

310,411
(269,112)
$
41,299

52,179
(43,834)
8,345

53,223
(44,711)
8,512

54,287
(45,605)
8,682

138,390
(124,302)
$
14,088

153,613
(137,976)
$
15,638

167,438
(150,393)
$
17,045

36,802
(37,265)
(463)

479,329
(423,837)
(8,487)
$
47,005

11,983
9,587

489,028
(427,333)
(8,659)
$
53,036

12,226
9,781

* Operating Expenses include an allocation of depreciation for each segment

532,137
(465,110)
(9,422)
$
57,605

13,303
10,643

335,244
(290,641)
$
44,603

55,916
(46,973)
8,943

179,159
(160,921)
$
18,238

570,319
(498,535)
(10,098)
$
61,686

14,258
11,406

2011
$

352,006
(305,173)
$
46,834

$
$

57,594
(48,382)
9,211

188,117
(168,967)
$
19,150

$
$

597,717
(522,522)
(10,583)
$
64,612

14,943
11,954

Mercury Athletic Footwear

Projection of Selected Balance Sheet Accounts, 2007-2011 ($ in thousands)
Exhibit 7
2007
Assets
Cash Used in Operations
Accounts Receivable
Inventory
Prepaid Expenses
Property Plant & Equipment
Trademarks & Other Intangibles
Goodwill
Other Assets
Liabilities
Accounts Payable
Accrued Expenses
Deferred Taxes
Pension Obligation
Current Assets
Current Liabilities
Working Capital

2008

2010

4,161
47,888
83,770
14,474

4,195
48,857
85,465
14,767

4,566
53,164
92,999
16,069

4,894
56,978
99,672
17,222

35,015
43,853
43,051
11,162

37,460
43,853
43,051
11,162

40,120
43,853
43,051
11,162

42,972
43,853
43,051
11,162

18,830
22,778

18,985
22,966

20,664
24,996

22,149
26,792

11,654
9,080
$
$
$

2009

150,293 $
41,608 $
108,685 $

11,654
9,080
153,284 $
41,951 $
111,333 $

11,654
9,080
166,798 $
45,660 $
121,138 $

11,654
9,080
178,766
48,941
129,825

2011
$

5,130
59,715
104,460
18,049

45,961
43,853
43,051
11,162

23,214
28,081
11,654
9,080

$
$
$

187,354
51,295
136,059

Mercury Athletic Footwear - Acquisition Analysis

ACTIVE GEAR COST OF CAPITAL ASSUMPTIONS
Tax Rate
Cost of Debt
Risk Free Rate
Expected Market Return
Market Risk Premium
Asset eta
Debt-to-Value Ratio
Debt-to-Equity Ratio
Equity Beta

40.0%
6.00%
4.69%
9.70%
5.01%
1.280
20.0%
25.0%
1.560

Cost of Equit
Cost of Debt

12.51%
6.00%

Cost of Capital

CASH FLOW AND OPERATING ASSUMPTIONS

2007 Revenue
Men's Athletic
Men's Casual
Women's Athletic
Women's Casual

###
$ 52,179
###
$ 36,802

Growth Rates
Men's Athletic
Men's Casual
Women's Athletic
Women's Casual

2007
N/A
N/A
N/A
N/A

2008
12.0%
2.0%
11.0%
-100.0%

2009
10.0%
2.0%
9.0%
0.0%

2010
8.0%
3.0%
7.0%
0.0%

Operating Margin
Men's Athletic
Men's Casual
Women's Athletic
Women's Casual

2007
13.30%
15.99%
10.18%
-1.26%

2008
13.30%
15.99%
10.18%
0.00%

2009
13.30%
15.99%
10.18%
0.00%

2010
13.30%
15.99%
10.18%
0.00%

2006
35.0%
N/A
N/A
N/A

2007
40.0%
$ 8,487
$ 9,587
$ 11,983
###
$ 41,608
###
$ 4,569

2008
40.0%
$ 8,659
$ 9,781
$ 12,226
###
$ 41,951
$111,333
$ 2,648

2009
40.0%
$ 9,422
$ 10,643
$ 13,303
###
$ 45,660
###
$ 9,805

Tax Rate
Corporate Overhead
Depreciation
Capital Expenditures
Current Assets
Current Liabilities
Net Working Capital (CA - CL)
Net Working Capital
Post 2011 Growth Rate

###
$ 35,791
$104,116
N/A

2.783%
Calculated as (NOPAT / Capital) x (Net Reinvestment / NOPAT), or (Net Reinvestment / Capital)
Net Reinvestment in
= sum or Cap Ex, NWC change an
$9,223

Capital in 2011 =

$331,381

= sum of Total Assets in 2011

TIONS

BASE CASE NPV

(ENTERPRISE VALUE)
$321,496

10.73%

IONS

WACC without 2 Negative Debt Firms

2011
5.0%
3.0%
5.0%
0.0%
2011
13.30%
15.99%
10.18%
0.00%
2010
40.0%
$ 10,098
$ 11,406
$ 14,258
###
$ 48,941
###
$ 8,687

Asset Beta
Equity Beta
Cost of Equity
WACC
NPV / EV

1.189
1.486
12.1%
10.4%
$326,498

WACC without Victory

Asset Beta
Based on Liedtke's projections
Equity Beta
Based on Liedtke's projections
Cost of Equity
Based on Liedtke's projections
WACC
Based on Liedtke's projections
NPV / EV

0.000
0.000
5.0%
11.6%
$272,630

Based on Liedtke's projections

Based on Liedtke's projections
Based on Liedtke's projections

2011
40.0%
$ 10,583
$ 11,954
$ 14,943
###
$ 51,295
###
$ 6,234

Net Reinvestment / Capital)

or Cap Ex, NWC change and Depreciation in year 2011

Based on Liedtke's projections

Based on Liedtke's projections
Based on Liedtke's projections
Based on Liedtke's projections
Based on Liedtke's projections

of Total Assets in 2011

Mercury Athletic Footwear - Acquisition Analysis

CASH FLOW ANALYSIS
2007

2008

2009

2010

Revenue
Men's Athletic
Men's Casual
Women's Athletic
Women's Casual
Total Revenue

###
52,179
138,390
36,802
###

###
53,223
153,613
0
###

$310,411
54,287
167,438
0
###

###
55,916
179,159
0
###

Operating Expenses
Men's Athletic
Men's Casual
Women's Athletic
Women's Casual
Total Operating Expenses

###
-43,834
-124,302
-37,265
###

###
-44,711
-137,976
0
###

###
-45,605
-150,393
0
###

###
-46,973
-160,921
0
###

Total Operating Income

Corporate Overhead

$ 55,492
(8,487)

$ 61,695
(8,659)

$ 67,026
(9,422)

$ 71,784
(10,098)

Net Operating Income (EBT)

Less: Income Taxes
Net Operating Profit After Tax

$ 47,005
(18,802)
$ 28,203

$ 53,036
(21,214)
$ 31,821

$ 57,604
(23,042)
$ 34,562

$ 61,686
(24,674)
$ 37,012

Plus: Depreciation
Less: Increase in NWC
Less: Capital Expenditures

$ 9,587
(4,569)
(11,983)

$ 9,781
(2,648)
(12,226)

$ 10,643
(9,805)
(13,303)

$ 11,406
(8,687)
(14,258)

$ 21,238

$ 26,728

$ 22,097

$ 25,473

NET CASH FLOW

2011
###
57,594
188,117
0
###

###
-48,382
-168,967
0
###
$ 75,195
(10,583)
$ 64,612
(25,845)
$ 38,767
$ 11,954
(6,234)
(14,943)
$ 29,544

Mercury Athletic Footwear - Acquisition Analysis

CASH FLOW ANALYSIS
2007
1

2008
2

2009
3

NET CASH FLOW

$21,238

$26,728

$22,097

Cost of Capital

10.73%

10.73%

10.73%

Present Value of Net Cash Flow

$19,180

$21,799

$16,276

Present Value of All Cash Flows (A)

$91,947

Terminal Value:
2012 Net Cash Flow
2012 Discount Rate
Post-2012 Growth Rate

$30,366
10.73%
2.78%

2011 Present Value

2007 Present Value (B)

$382,122
$229,549

Enterprise Value (A) + (B)

$321,496

LYSIS
2010
4

2011
5

$25,473

$29,544

10.73%

10.73%

$16,944

$17,748

Mercury Athletic Footwear - Acquisition Analysis

SENSITIVITY OF NPV - WITH BASE CA

0.50
0.55
0.60
0.65
0.70
0.75
0.80

0%
$587,481
$555,312
$526,430
$500,356
$476,701
$455,144
$435,418

5%
$594,970
$562,012
$532,459
$505,811
$481,659
$459,670
$439,566

10%
$602,650
$568,873
$538,626
$511,383
$486,719
$464,285
$443,791

15%
$610,527
$575,901
$544,935
$517,077
$491,884
$468,991
$448,098

TARGETED DEBT-TO-VALUE RATIO

20%
25%
$618,610
$626,905
$583,102
$590,482
$551,390
$557,997
$522,897
$528,847
$497,158
$502,544
$473,792
$478,691
$452,487
$456,960

0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
1.30
1.35
1.40
1.45
1.50
1.55
1.60
1.65
1.70
1.75
1.80
1.85
1.90
1.95
2.00

$417,299
$400,600
$385,161
$370,843
$357,531
$345,121
$333,525
$322,667
$312,478
$302,898
$293,874
$285,361
$277,315
$269,699
$262,481
$255,629
$249,117
$242,921
$237,017
$231,386
$226,010
$220,872
$215,955
$211,247

$421,114
$404,121
$388,420
$373,869
$360,347
$347,749
$335,983
$324,970
$314,641
$304,933
$295,793
$287,172
$279,027
$271,321
$264,019
$257,090
$250,507
$244,243
$238,278
$232,589
$227,159
$221,970
$217,007
$212,255

$424,998
$407,703
$391,733
$376,943
$363,207
$350,416
$338,476
$327,306
$316,833
$306,995
$297,736
$289,005
$280,761
$272,962
$265,575
$258,567
$251,911
$245,580
$239,551
$233,804
$228,319
$223,079
$218,068
$213,271

$428,953
$411,347
$395,103
$380,067
$366,111
$353,123
$341,006
$329,674
$319,056
$309,084
$299,703
$290,862
$282,515
$274,623
$267,149
$260,061
$253,330
$246,931
$240,838
$235,032
$229,491
$224,199
$219,140
$214,297

$432,981
$415,056
$398,529
$383,242
$369,062
$355,872
$343,572
$332,077
$321,309
$311,202
$301,697
$292,742
$284,291
$276,303
$268,741
$261,572
$254,766
$248,296
$242,139
$236,272
$230,675
$225,330
$220,221
$215,333

ESTIMATED ASSET BETA

N PV

$437,083
$418,831
$402,014
$386,470
$372,059
$358,662
$346,177
$334,513
$323,593
$313,347
$303,716
$294,646
$286,089
$278,004
$270,352
$263,100
$256,217
$249,676
$243,453
$237,525
$231,871
$226,473
$221,314
$216,378

OF NPV - WITH BASE CASE CASH FLOWS

$441,262
$422,674
$405,560
$389,751
$375,104
$361,496
$348,820
$336,985
$325,909
$315,522
$305,762
$296,574
$287,909
$279,725
$271,981
$264,645
$257,684
$251,072
$244,781
$238,790
$233,078
$227,626
$222,417
$217,434

$445,520
$426,586
$409,167
$393,087
$378,198
$364,374
$351,504
$339,493
$328,258
$317,727
$307,835
$298,527
$289,752
$281,466
$273,630
$266,208
$259,168
$252,482
$246,123
$240,069
$234,298
$228,791
$223,530
$218,499

40%
$653,159
$613,765
$578,787
$547,523
$519,411
$494,000
$470,918

45%
$662,397
$621,932
$586,059
$554,039
$525,283
$499,319
$475,758

50%
$671,896
$630,316
$593,513
$560,709
$531,287
$504,751
$480,696

55%
$681,668
$638,925
$601,155
$567,539
$537,427
$510,300
$485,736

$449,859
$430,570
$412,837
$396,479
$381,343
$367,297
$354,228
$342,037
$330,640
$319,961
$309,936
$300,505
$291,618
$283,230
$275,299
$267,789
$260,669
$253,908
$247,480
$241,362
$235,531
$229,968
$224,655
$219,575

$454,282
$434,628
$416,572
$399,929
$384,539
$370,266
$356,993
$344,619
$333,056
$322,227
$312,064
$302,509
$293,508
$285,014
$276,987
$269,389
$262,187
$255,350
$248,852
$242,668
$236,776
$231,156
$225,790
$220,661

$458,791
$438,760
$420,374
$403,438
$387,788
$373,282
$359,801
$347,239
$335,507
$324,524
$314,222
$304,539
$295,421
$286,821
$278,696
$271,007
$263,721
$256,807
$250,238
$243,987
$238,034
$232,357
$226,937
$221,758

$463,389
$442,971
$424,245
$407,008
$391,091
$376,347
$362,652
$349,899
$337,993
$326,853
$316,408
$306,596
$297,359
$288,650
$280,425
$272,645
$265,274
$258,281
$251,639
$245,321
$239,305
$233,569
$228,095
$222,865

N PV

TERMINAL PERIOD (POST-2011) GROWTH RATE

ETED DEBT-TO-VALUE RATIO

30%
35%
$635,422
$644,170
$598,047
$605,806
$564,762
$571,690
$534,932
$541,155
$508,046
$513,667
$483,689
$488,791
$461,522
$466,173

1.00%
1.1%
1.2%
1.3%
1.4%
1.5%
1.6%
1.7%
1.8%
1.9%
2.0%
2.1%
2.2%
2.3%
2.4%
2.5%
2.6%
2.7%
2.8%
2.9%
3.0%
3.1%
3.2%
3.3%
3.4%
3.5%
3.6%
3.7%
3.8%
3.9%
4.0%

N PV
$279,427
$281,374
$283,361
$285,391
$287,465
$289,583
$291,748
$293,960
$296,222
$298,536
$300,902
$303,324
$305,802
$308,338
$310,936
$313,597
$316,323
$319,118
$321,982
$324,920
$327,934
$331,027
$334,202
$337,462
$340,812
$344,254
$347,793
$351,432
$355,176
$359,030
$362,999