Independent Committee Discussion Materials
PROJECT ARROW
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Strictly Private and Confidential
November 15, 1999
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Table of Contents
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Overview of Proposed Transaction..................................... I
Stand Alone Financial Review of ARROW................................ II
Stand-Alone Valuation Analysis of ARROW.............................. III
Summary of CSI Fairness Opinion...................................... IV
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Overview of Proposed Transaction
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Overview of Proposed Transaction
Summary of Key Terms
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Key Term Overview
Overview WONDER increased its offer to acquire ARROW on November 11, 1999; financing in place;
principal terms and conditions of the Merger Agreement have been negotiated
Price $20.80 per share; increased from original offer of $20.50 per share
Enterprise Value Approximately $530 million
Premium to Pre-Announcement Close 18.4%
Consideration 100% Cash
Acquisition Financing Bank bridge commitment; matures in June 2000; interest rate of LIBOR+100 basis points
Structure Tender offer; to be followed with back-end merger
Merger Agreement / Tender Offer Non-solicitation; fiduciary out
Termination fee
Not subject to financing
Key tender offer conditions:
- 51% minimum
- HSR clearance
- Absence of prohibitions
- No material adverse effect
- No suspension of trading
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Overview of Proposed Transaction
Financial Overview of Offer
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Pre- Revised
($ in millions, except per share data) Announce Current Initial Offer Offer
ARROW Share Price $17.56 $19.63 $20.50 $20.80
% Premium to Pre-Announcement Share Price 0.0% 11.7% 16.7% 18.4%
% Premium to 52 Week Pre-Announcement High -5.4% 5.7% 10.4% 12.1%
Diluted Shares Outstanding(1) 20.65 20.83 20.89 20.95
Equity Value $362.7 $408.8 $428.3 $435.7
Plus: Net Debt(2) 96.1 96.1 96.1 96.1
------ ------ ------ ------
Enterprise Value $458.8 $504.9 $524.4 $531.8
Plus: A/P Adjustment 24.0 24.0 24.0 24.0
------ ------ ------ ------
Normalized Enterprise Value $482.8 $528.9 $548.4 $555.8
ARROW
Enterprise Value / Statistic
FY 1999 Revenue $410.8 1.12x 1.23x 1.28x 1.29x
FY 1999 EBITDA 68.6 6.7 7.4 7.6 7.7
CY 1999E EBITDA - ARROW Management 74.1 6.2 6.8 7.1 7.2
CY 1999E EBITDA - Wall Street Consensus 72.2 6.4 7.0 7.3 7.4
Normalized Enterprise Value /
FY 1999 Revenue $410.8 1.18x 1.29x 1.33x 1.35x
FY 1999 EBITDA 68.6 7.0 7.7 8.0 8.1
CY 1999E EBITDA - ARROW Management 74.1 6.5 7.1 7.4 7.5
CY 1999E EBITDA - Wall Street Consensus 72.2 6.7 7.3 7.6 7.7
Share Price /
FY 1999 EPS $1.28 13.7x 15.3x 16.0x 16.3x
CY 1999E EPS - ARROW Management 1.42 12.4 13.8 14.4 14.6
CY 1999E EPS - Wall Street Consensus 1.36 12.9 14.4 15.0 15.2
CY 2000E EPS - ARROW Management 1.74 10.1 11.3 11.8 12.0
CY 2000E EPS - Wall Street Consensus 1.56 11.2 12.6 13.1 13.3
(1) Based on 20.071 basic shares outstanding and 4.631 total options
outstanding as per the 7/3/99 Form 10-K. Calculated utilizing the
treasury stock method and in-the-money options only.
(2) Includes $97.3 million of debt and $1.2 million of cash as per 7/3/99
Form 10-K.
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Stand-Alone Financial Review of ARROW
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Stand-Alone Financial Review of ARROW
Pre-Announcement Public Market Overview
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($ and shares in millions)
Pre-Announcement Public Market Valuation
ARROW 10/8/99 Pre-Announcement Share Price $17.56
52 Week High / Low (Pre-Announcement) $18.56 / $13.13
Diluted Shares Outstanding(1) 20.653
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Market Value of Equity $362.7
Plus: Net Debt(1) 96.1
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Enterprise Value $458.8
Trading Multiples (2)
Enterprise Value Pre-Announcement Share Price
as a multiple of: as a multiple of:
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ARROW Mgt. ARROW Mgt. ARROW Mgt. Wall Street
Time Period Case Revenues Case EBITDA Case EPS Consensus
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FY1999 1.12x 6.7x 13.7x 13.7x
CY1999E 1.04 6.2 12.4 12.9
FY2000E 0.96 5.8 11.2 12.1
I/B/E/S 5 Year EPS Growth = 17.3%
Summary Financial Results (2)
ARROW Mgt. ARROW Mgt. ARROW Mgt. Wall Street
Time Period Case Revenues Case EBITDA Case EPS Consensus
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FY1999 $410.8 $68.6 $1.28 $1.28
CY1999 443.2 74.1 1.42 1.36
FY2000 475.5 79.5 1.56 1.45
(1) Source: FY1999 Form 10-K; diluted shares outstanding include 20.071 basic
shares plus net options calculated utilizing the treasury stock method on
in-the-money options only. Net Debt is $97.3 million total debt less
$1.2 million cash; does not include A/P adjustment of $24 million.
(2) Sources: ARROW Management projections and selected research reports.
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Stand-Alone Financial Review of ARROW
Recent Share Price Performance
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[GRAPH]
Average Daily Volume 10/8/97-11/12/99 = 73,473
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Stand-Alone Financial Review of ARROW
Pre-Announcement Share Volume Traded Performance
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[GRAPHS]
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Stand-Alone Financial Review of ARROW
Historical Financial Summary
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[GRAPHS]
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Stand-Alone Financial Review of ARROW
Portfolio Overview
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ARROW
FY2000E Revenue = $475.5 million
FY2000E EBITDA = $79.5 million; 17% Margin
Speedo Designer Swimwear Retail Stores
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FY2000E Revenue $242.1 million / 53% of Total $152.6 million / 34% of Total $65.7 million / 14% of Total
FY2000E EBITDA(1) $53.2 million / 22% Margin $31.3 million / 21% Margin $6.3 million / 10% Margin
3 Year Est. CAGR 9.0% 19.6% 11.4%
Business Overview Preeminent in competition Consists of women's swimwear 139 stores in major
swimwear market with over 60% marketed under nationally metropolitan areas that sell
market share; long-term recognized brands including: mainly Speedo branded
endorsement contracts with Catalina, Cole of California, products.
professional swimmers. Oscar de la Renta, Sandcastle,
Sunset Beach, Sporting Life
and White Stag . Recently launched
Other products marketed under Speedo.com, an Internet
the Speedo brand include swim website through which its
accessories, active fitness wear, Recently began sales under products can be purchased.
and leisure swimwear. exclusive worldwide license for
Polo Ralph Lauren-branded
swimwear for women.
Exclusive brand license in the
U.S., Mexico, Canada and the
Caribbean; Pentland Ventures, Sells Catalina brand mainly
Ltd. has exclusive rights to through licensing agreement
Speedo elsewhere. with Wal-Mart
Ubertech
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$15.1 million / 3% of Total
$1.0 million / 7% Margin
60+%
Recently acquired 70% interest in
Ubertech, a technology company
with several potential applications
in the apparel and footwear
industries.
Current growth driver is a
proprietary and patented system
that delivers 3-D graphics on
apparel by injecting a silicon
design directly into the cloth fibers.
Customer base currently includes
Nautica, Fubu, Calvin Klein, and
Chaps for Ralph Lauren.
Note: 2000E figures are ARROW Management projections.
(1) 2000E EBITDA is before corporate and other charges of $12.3 million.
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Stand-Alone Financial Review of ARROW
Summary of Selected Recent Wall Street Estimates
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Current Price EPS Estimates
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Date Firm Recommendation Price Target FY2000E FY2001E
- ------- -------------------------- -------------- ------- ------ ---------------
11/1/99 Bear Stearns & Co. Attractive $19.56 NA $1.45 $1.61
10/29/99 Morgan Stanley Dean Witter Outperform 19.44 $20.00 1.45 1.72
10/29/99 Merrill Lynch Accumulate 19.44 NA 1.48 1.70
8/18/99 Lazard Freres & Co. Hold 17.38 22.00 1.53 1.76
11/12/99 Wall Street Consensus $1.45 $1.67
ARROW Management Case 1.56 1.91
"The company continues to show strong momentum across several product
lines...Importantly, ARROW has obtained the worldwide license for Polo Ralph
Lauren swimwear for women and girls, which was launched in Spring 1999."
Morgan Stanley Dean Witter
"New entrants in the competitive swimwear category during recent years, such
as Nike and Adidas, plus additional recreational swimwear offerings from
lifestyle brands such as Quiksilver and Tommy Hilfiger, could intensify the
competitive environment...Competition could place a premium on ARROW's product
design, sourcing, execution, and servicing capabilities." Merrill Lynch
"We believe the ARROW model can deliver earnings growth of 15% or more in
FY2000 driven by growth brands such as Polo, Oscar, and Ann Cole, acquisitions
such as Ubertech, additional ASM retail stores, and the upcoming summer
Olympic games..." Lazard Freres
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Stand-Alone Financial Review of ARROW
Ownership Profile(1)
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(in thousands of shares)
Current Current Est.
Estimated % of Total Shares and % of Total Fully-
Owner Shares Held Primary Shares Options Held(2) Diluted Shares
- ------------------------------ ----------- -------------- --------------- -----------------
Institutional Holders
Pentland Ventures, Ltd. 5,067 25.2% 5,067 20.5%
John J. Lattanzio 2,209 11.0% 2,209 8.9%
General Electric Company 1,809 9.0% 1,809 7.3%
Omega Advisors Inc. 1,052 5.2% 1,052 4.3%
Fayez Sarofim & Company 744 3.7% 744 3.0%
Capital Guardian Trust Company 626 3.1% 626 2.5%
Jeffrey N. Vinik 557 2.8% 557 2.3%
Rothschild Asset Management, Inc. 505 2.5% 505 2.0%
Putnam Investment Management 422 2.1% 422 1.7%
Barclay's Bank Plc 365 1.8% 365 1.5%
All Other Institutional Holders 3,721 18.5% 3,721 15.1%
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Subtotal 17,076 85.1% 17,076 69.1%
Key Management and Directors
Linda J. Wachner 2,095 10.4% 4,836 19.6%
All Other Key Insiders 182 0.9% 565 2.3%
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Subtotal 2,277 11.3% 5,401 21.9%
Public Float and Other 718 3.6% 2,226 9.0%
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Total Shares Outstanding 20,071 100.0% 24,703 100.0%
(1) Sources: CDA Spectrum as of 9/30/99, FY1999 Form 10-K, 10/23/98 Proxy
Statement.
(2) Includes all outstanding stock options (i.e., including options that are not
yet exercisable or in-the-money).
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Stand-Alone Valuation Analysis of ARROW
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Stand-Alone Valuation Analysis of ARROW
Overview of Valuation Methodologies
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Stand-Alone Valuation Analysis
Comparable Public Comparable Discounted Cash Leveraged Buyout
Companies Transactions Flow Analysis Analysis
-------------------------- ------------------------------ ------------------------------- -------------------------------
Analysis of trading and Analysis of pricing of relevant Present value as of 12/31/99 of Determines the maximum
operating performance for acquisitions projected unlevered free cash amount a financial buyer would
relevant peer group flows theoretically be willing to pay
Review of transaction given the following:
Review of current trading multiples Terminal FY2002E EBITDA exit
multiples multiples of 5.5x - 7.0x - 20% to 30% Required Returns
Review of premiums paid to
Adjustments for non-recurring stand alone public market Discount rates of 12% - 14% for - ARROW Management and
items valuations ARROW based on Discount Wall Street Consensus
Rate (i.e., WACC) analysis for Projections
Adjustments for non-recurring peer group
items - Terminal FY2002E
Projection cases EBITDA exit multiples of
5.5x - 7.0x
- ARROW Management
- 10% Management
- Wall Street Consensus Promote
Chase estimates for - 4.5x Maximum Total Debt/
FY2002E based on CY1999E EBITDA
analyst growth rates
3.0x Maximum Senior
Debt/CY 1999E
EBITDA
9.25% Senior Debt
Interest Rate
13.0% Subordinated
Debt Interest Rate
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Stand-Alone Valuation Analysis of ARROW
Summary of Financial Projections
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[GRAPH]
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Stand-Alone Valuation Analysis of ARROW
Business Segment Financial Projections
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($ in millions) FY2000E FY2001E FY2002E KEY GROWTH DRIVERS
- --------------------- -------------- -------------- ----------------- -----------------------------
Revenue Breakdown
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ARROW Management Case Growth Growth Growth
- --------------------- ------ ------ ------
Speedo
Speedo $242.1 7.6% $265.3 9.6% $291.7 10.0% Accessories
Designer Swimwear 152.6 21.7% 182.1 19.3% 214.6 17.8% Women's Activewear
Retail Stores 65.7 9.0% 74.0 12.6% 83.3 12.6% Kids
Ubertech 15.1 NM 25.0 65.6% 40.0 60.0%
----- ----- -----
Total $475.5 15.7% $546.4 14.9% $629.6 15.2% Designer Swimwear
Polo - Internationally
Wall Street Consensus Catalina - Wal-Mart Penetration
Case Total $454.3 10.6% $497.7 9.6% $547.5 10.0%
EBITDA Breakdown
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ARROW Management Case Margin Margin Margin Retail Stores
------ ------ ------
Speedo $ 53.2 22.0% $ 58.0 21.9% $ 64.7 22.2% New Store Openings
Designer Swimwear 31.3 20.5% 38.9 21.4% 46.7 21.8% New Formats
Retail Stores 6.3 9.6% 5.1 6.9% 6.0 7.2% Potentially Internet
Ubertech 1.0 6.6% 2.5 10.0% 6.0 15.0%
Corporate and Other (12.3) NM (12.9) NM (13.6) NM
----- ----- ----- Ubertech
Total $ 79.5 16.7% $ 91.6 16.8% $109.8 17.4% T-Shirts
Wall Street Consensus Racing-Better Products
Case Total $ 75.8 16.7% $ 83.1 16.7% $ 91.4 16.7% Disney
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Stand-Alone Valuation Analysis of ARROW
Selected Key Opportunities and Risks
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Speedo Designer Swimwear Retail Stores
Key Opportunities Penetration of new distribution Polo Ralph Lauren growth Aggressive roll-out of new stores
channels for activewear and
accessory products - European launch and further - 10+ annual openings
global expansion
Introduction of new formats
New product offerings through - Roll-out of other Ralph
Ubertech acquisition Lauren brands - Airport stores
Additional product sourcing in Catalina line growth International expansion
Mexico
- Wal-Mart store openings
Incremental market share gains - Distribution in Canada and
in core product areas Mexico
Mexico / Canada expansion Broadening of other growth
brands such as Oscar de La
Renta and Ann Cole
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Key Risks Further consolidation of sporting Changing consumer tastes General economic sensitivity
goods channel
- Design Internet vulnerability
- Potential lost sales volumes
Inventory markdowns by - Partially mitigated by
- Enhanced customer pricing suppliers Speedo.com
leverage
Weather sensitivity
Intensified competitive
environment
- Nike, TYR
- New entrants and broadened
product lines
Weather sensitivity
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Stand-Alone Valuation Analysis of ARROW
Preliminary Valuation Summary (1)
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[GRAPH]
(1) Adjusts for $24 million A/P overstatement and seasonal borrowing costs.
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Stand-Alone Valuation Analysis of ARROW
Comparable Publicly-Traded Companies Summary
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Market Value
Company Name Symbol of Equity ($MM)
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Athletic-Related Apparel
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Columbia Sportswear Co. COLM $ 473.3
Russell Corp. RML 470.9
Nautica Enterprises Inc. NAUT 447.9
Quiksilver Inc. ZQK 363.4
North Face Inc. TNFI 70.0
Other Selected Apparel
- ----------------------
V.F. Corp. VFC $3,566.5
Tommy Hilfiger Corp. TOM 2,452.3
Polo Ralph Lauren Corp. RL 1,681.7
Guess Inc. GES 721.2
Kellwood Co KWD 505.0
Phillips Van Heusen Co. PVH 213.2
WONDER $ 791.0
ARROW - Pre-Announce 362.7
[GRAPH]
[GRAPH]
(1) Based on share prices as of 11/12/99; projected data is from I/B/E/S and
recent research reports.
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Stand-Alone Valuation Analysis of ARROW
Comparable Publicly-Traded Companies Summary (cont.)
Price Per Share / Enterprise Value /
% of Market ----------------- ------------------- LTM
52-week Value of CY1999E CY2000E Enterprise LTM LTM CY 1999E EBITDA Total Debt/ 5 Year
Company High Equity EPS EPS Value Revenue EBITDA EBITDA Margin LTM EBITDA EPS CAGR
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Athletic-Related Apparel
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Columbia Sportswear Co. 82.7% $ 473.3 14.9x 12.7x $578.2 1.26x 8.5x 8.1x 14.9% 1.7x 17.1%
Nautica Enterprises Inc. 64.1% 447.9 10.0 9.1 408.4 0.72 4.4 4.3 16.2% NM 13.5%
North Face Inc. 33.0% 70.0 NM 12.9 147.4 0.56 7.4 5.5 7.6% 4.1 19.0%
Quiksilver Inc. 50.7% 363.4 13.4 11.1 411.6 0.97 7.8 7.0 12.5% 1.0 22.3%
Russell Corp. 56.2% 470.9 8.5 7.2 921.0 0.80 5.7 5.0 14.1% 2.8 11.3%
Other Selected Apparel
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Guess Inc. 96.7% $ 721.2 15.4x 12.6x $ 778.6 1.45x 7.4x 6.9x 19.5% 1.0x 17.5%
Kellwood Co. 61.7% 505.0 7.1 5.9 825.4 0.39 5.0 4.4 7.8% 2.4 14.1%
Phillips Van Heusen Co. 73.5% 213.2 13.1 8.6 434.2 0.33 5.8 4.9 5.7% 3.3 12.2%
Polo Ralph Lauren Corp. 66.7% 1,681.7 12.0 10.3 1,843.1 1.02 6.7 6.1 15.2% 0.8 15.8%
Tommy Hilfiger Corp. 63.0% 2,452.3 10.9 9.2 2,809.6 1.47 6.3 6.3 23.3% 1.4 20.5%
V.F. Corp. 54.5% 3,566.5 10.0 9.0 4,566.1 0.83 5.4 5.5 15.3% 1.3 9.6%
High 15.4x 12.9x 1.47x 8.5x 8.1x 23.3% 4.1x 22.3%
Median 11.4 9.2 0.83 6.3 5.5 14.9% 1.5 15.8%
Mean 11.5 9.9 0.89 6.4 5.8 13.8% 2.0 15.7%
Low 7.1 5.9 0.33 4.4 4.3 5.7% 0.8 9.6%
WONDER 46.5% $ 791.0 6.0x 5.2x $1,679.1 0.83x 5.0x 4.8x 16.7% 2.4x 15.0%
ARROW - Pre-Announce. 94.6% 362.7 12.9 11.2 458.8 1.12 6.7 6.4 16.7% 1.4 17.3%
ARROW - Offer Price 112.1% 435.7 15.2 13.3 531.8 1.29 7.7 7.4 16.7% 1.4 17.3%
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Stand-Alone Valuation Analysis of ARROW
Relative Share Price Performance
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Pre-Announcement Relative Performance
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ARROW S&P500 Peer Index(1)
3 Years 63.4% 90.7% -46.6%
2 Years 13.3% 37.2% -44.7%
1 Year 29.5% 39.2% -13.4%
6 Months 6.4% -0.6% -21.0%
1 Month 0.0% -0.6% -13.6%
[GRAPH]
(1) Peer Index is composed of selected athletic apparel comparables including:
Columbia Sportswear, Nautica Enterprises, North Face, Quiksilver and Russell.
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Stand-Alone Valuation Analysis of ARROW
Comparable Transactions Summary
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LTM Multiples
Transaction --------------- EBITDA
Ann. Date Acquirer Target Value Revenue EBITDA Margin
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7/12/99 HIG Capital LLC Happy Kids Inc $94.5 0.45x 4.4x 10.4%
7/6/99 Robert Stephen Holdings plc Pentland Group plc 487.4(1) 0.58 6.9 8.4%
4/23/99 Doughty Hanson & Co Umbro Europe Holdings Ltd 145.4 0.36 NA NA
3/2/99 Jones Apparel Group Inc Nine West Group Inc 1,481.9 0.77 8.4 9.2%
2/3/99 Vestar Capital Partners Inc St. John Knits, Inc 483.8 1.69 8.1 20.9%
11/30/98 Kellwood Co Koret of California Inc
(Levi Strauss) 150.1 0.52 5.5 9.4%
9/10/98 Jones Apparel Group Inc Sun Apparel Inc 449.1 1.11 8.3 13.4%
5/1/98 Tropical Sportswear
International Farah Inc 158.0 0.58 11.6 5.0%
1/31/98 Tommy Hilfiger USA Pepe Jeans USA Inc 1,325.8 3.17 15.7 20.2%
7/22/97 Texas Pacific Group Inc J Crew Group Inc 492.1 0.59 10.1 5.9%
9/17/97 Warnaco Group, Inc Designer Holdings Ltd 410.4 0.84 6.6 12.7%
10/30/96 Investcorp S.A. The William Carter Co 249.2 0.81 7.0 11.6%
High 3.17x 15.7x 20.9%
Average 0.96 8.4 11.6%
Median 0.68 8.1 10.4%
Low 0.36 4.4 5.0%
(1) Value is grossed-up; acquisition represented remaining 37.7% stake.
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Stand-Alone Valuation Analysis of ARROW
Discounted Cash Flow Summary(1)(2)
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ARROW Management Case Wall Street Consensus Case
FY 2002E Exit EBITDA Multiple FY 2002E Exit EBITDA Multiple
5.5x 6.25x 7.0x 5.5x 6.25x 7.0x
12.0% $18.72 $21.23 $23.74 12.0% $14.94 $17.03 $19.12
Discount Discount
Rate 13.0% $18.25 $20.71 $23.16 Rate 13.0% $14.55 $16.59 $18.63
14.0% $17.80 $20.20 $22.60 14.0% $14.17 $16.17 $18.17
(1) DCF values calculated as of 12/31/99; based on 3 year projections.
(2) Adjusts for $24 million A/P overstatement and seasonal borrowing costs.
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Stand-Alone Valuation Analysis of ARROW
Leveraged Buyout Analysis Summary(1)(2)
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ARROW Management Case Wall Street Consensus Case
FY 2002E EBITDA Exit Multiple FY 2002E EBITDA Exit Multiple
5.5x 6.25x 7.0x 5.5x 6.25x 7.0x
20.0% $17.85 $19.69 $21.53 20.0% $14.67 $16.36 $18.06
Required Required
Equity Return 25.0% $17.04 $18.66 $20.28 Equity Return 25.0% $14.08 $15.57 $17.06
30.0% $16.36 $17.79 $19.22 30.0% $13.58 $14.90 $16.22
(2) Key assumptions include: i) maximum total debt / CY EBITDA of 4.5x, ii)
maximum senior debt / CY1999E EBITDA of 3.0x, iii) senior debt borrowing
cost of 9.25%, iv) subordinated debt borrowing cost of 13.0%, and
v) management promote of 10%.
(3) Adjusts for $24 million A/P overstatement and seasonal borrowing
costs.
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Summary of CSI Fairness Opinion
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Summary of CSI Fairness Opinion
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CSI is of the opinion that, as of the date hereof, the Consideration is fair,
from a financial point of view, to the holders of the Company Shares, other than
the Acquiror and its affiliates.
In arriving at our opinion, we have, among other things:
- Reviewed a draft dated November 12, 1999 of the Merger Agreement;
- Reviewed certain publicly available business and financial information we
deemed relevant relating to the Company and the industries in which it
operates;
- Reviewed certain internal non-public financial and operating data and
forecasts provided to us by the management of the Company relating to its
business;
- Discussed, with members of the senior management of the Company, the
Company's operations, historical financial statements and future
prospects;
- Compared the financial and operating performance of the Company with
publicly available information concerning certain other companies we
deemed comparable and reviewed the relevant stock prices of the Company
Shares and certain publicly traded securities of such other companies;
- Compared the proposed financial terms of the Transaction with the
financial terms of certain other transactions that we deemed relevant; and
- Made such other analyses and examinations as we have deemed necessary or
appropriate.
We have not been authorized by the Special Committee to solicit, nor have we
solicited, third-party indications of interest for the acquisition of all or
any part of the Company.
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