EXHIBIT (b)(4)
Confidential
------------
ST. JOHN KNITS
Presentation to the Independent Committee
of the Board of Directors of St. John Knits
February 2, 1999
Table of Contents
1. Executive Summary
2. Overview of St. John Knits
3. Valuation
EXECUTIVE SUMMARY
Overview of Proposal
- - Offer for 97.4% of the outstanding shares not owned by Chairman and Chief
Executive Officer Bob Gray and his family (the "Gray Family") plus part of
the Gray Family's holdings at $30.00 per share
- the Gray Family currently owns approximately 9.6% of the 17.4 million
shares and options outstanding
- the Gray Family is prepared to sell all of its approximately 460,000
options and approximately 20% of its shares
- - The $30.00 per share offer implies the following market capitalization,
trading multiples and premium to market:
Implied Market Capitalization (MM)
----------------------------------
Offer Price $30.00
Total Shares Outstanding 16.6
Total Options Outstanding 0.8
Average Strike Price of Options $12.47
------
Equity Market Value $ 512
Plus: Net Debt (19)
------
Adjusted Market Value $ 492
Implied Multiple
----------------
Adjusted Market Value
as a Multiple of
-------------------------------------------------------
Sales EBITDA P/E
------------------------- -------------------------- --------------------------
FY 1998 1.7x 7.5x 15.5x
Est. LTM 1/99/(2)/ 1.7x 8.1x 16.8x
FY 1999E/(3)/ 1.6x 6.9x 14.6x
Share Price Premium Comparison
------------------------------
1 Month 6 Month 1 Year 52 Week 52 Week
1 Day Average Average Average High/(1)/ Low/(1)/
------- -------- -------- --------- ----------- ---------
Share Price Prior to Original Offer Date $21.94 $19.59 $25.39 $33.91 $47.75 $13.25
Premium (Discount) 37% 53% 18% (12%) (37%) 126%
_________________________
(1) Based on daily closing prices.
(2) Latest Company estimate based on ten months ended November, December
actual sales and FY1999 Q1 budget.
(3) Based on management's 1999 budget.
1
Overview of Proposal (Cont'd)
Rationale: - Bob Gray has stated that the rationale for the transaction is
- to deliver "substantial, certain value to shareholders as we
undertake a strategy to refocus on our core business lines"
- to slow top-line growth to about 10 percent per year
Financing: - The proposal is backed by equity financing from Vestar Capital Partners
- Chase Manhattan Bank will issue a commitment letter for bank
financing and a highly confident letter for high-yield
financing (the "Commitment Letters")
Break-Up Fees: - $14MM, inclusive of expense reimbursements of $1.5MM
Material Conditions: - Shareholder approval; regulatory approval; migration of St. John Knits
International from Barbados to Delaware; financing on terms and
conditions substantially equivalent to the Commitment Letters
Accounting Treatment: - Transaction is structured to allow recap accounting which requires roll
over of portion of public ownership and results in no goodwill
(note: transaction is not conditioned on recap accounting)
Tax Treatment: - Consideration received by shareholders is taxable
Additional Terms: - Vestar will control the Board of Directors, while Bob Gray
will remain CEO for the foreseeable future
- Vestar currently has no written agreement with Mr. Gray
- In addition to rolling over portions of their current ownership
into the new entity, the Gray Family will receive stock
options for an additional 5.0%,/(1)/ subject to Vestar achieving a
20% IRR
- The post-transaction management team will also be eligible
for 2.5%/(1)/ in options based, in part, on the Company's future
performance
- The Company is to make available up to 5.0% of the primary
shares to non-Gray Family members of management for purchase at
Vestar's buy-in price
- Vestar will make financing available where appropriate
- The Company will provide a liquidity mechanism for Bob Gray's ownership
such that upon leaving his CEO position, at his option, he may cause the
Company to repurchase up to $5 million per year in stock
_________________________________
/(1)/ As a percentage of diluted shares; i.e., including options granted Gray
Family and post-transaction management team.
2
Transaction Structure - Overview
[CHART SHOWING STRUCTURE OF TRANSACTION APPEARS HERE IN THE PRINTED MATERIAL]
1. St. John Knits International ("SJKI"), a Barbados corporation, forms two
subsidiaries: New FSC, a Barbados corporation, and Mergerco, a California
Corporation
2. SJKI contributes FSC distributorship to the capital of New FSC
3. SJKI files certificate of domestication and certificate of incorporation
with Delaware and files necessary documentation with Barbados so that it no
longer is subject to Barbados laws
4. Vestar forms limited liability company ("LLC") and Newco, a Delaware
corporation
5. Merger of Mergerco with and into SJK, resulting in SJK becoming a wholly-
owned subsidiary of SJKI (the "Reorganization Merger"). Each holder of SJK
shares (subject to any dissenter or approval rights) will receive, in
exchange for each share of SJK common stock, one share of SJKI common stock
6. The Gray Family, and possibly other members of management, pursuant to
agreement with LLC and Newco, among other things, to contribute, following
Reorganization Merger but prior to Acquisition Merger (described in 7), all
their SJKI shares to LLC for LLC shares and cash
7. Merger of Newco with and into SJKI, with SJKI surviving the merger (the
"Acquisition Merger"). Each holder of SJKI Common stock (other than LLC)
will have the right to elect whether to retain its SJKI shares or receive
cash consideration (subject to proration)
3
Financing Structure - Sources & Uses ($MM)
Uses Sources
---- -------
Equity Purchase Price/(1)/ $521.9 Cash $ 20.0
Transaction Expenses 20.0 Option Proceeds 10.2
Bank Debt 155.0
Senior Subordinated Notes 160.0
Equity Rollver - Public 13.7
Equity Rollver - Gray Family 29.1
______ Vestar Equity/(2)/ 153.9
------
$541.9 $541.9
====== ======
_____________________________
(1) $30.00 per share times 17.4MM fully diluted shares (gross of option
proceeds).
(2) Including value of new management options.
4
Estimated Ownership Structure (Numbers in Thousands)
Current Ownership Rollover Equity Value
-------------------- -------------------- ----------------------
Shares/ Pct. of Shares/ New Total
Options Total Options Value Equity Equity
------- -------- ------- -------- -------- --------
Public 15,370 88.4% 457 $13,701 - $ 13,701
Gray Family 1,666 9.6% 969 29,069 - 29,069
Other Management 300 1.7% - - - -
New Mgmt (Vestar) - 0.0% - - $ 3,934 3,934
Directors 60 0.3% - - - -
Vestar - 0.0% - - 149,995 149,995
------ ----- ----- ------- -------- --------
17,396 100.0% 1,426 $42,770 $153,929 $196,699
====== ===== ===== ======= ======== ========
Post-Transaction
-----------------------------------------------------------------------------
Management Options
----------------------
Primary Pct. of Diluted Pct. of
Shares/(1)/ Total Percent/(2)/ Number Shares Total
----------- -------- ------------- ------ -------- -------
Public 457 7.0% 457 6.4%
Gray Family 969 14.8% 5.0% 354 1,323 18.7%
Other Management - 0.0% - 0.0%
New Mgmt (Vestar) 131 2.0% 2.5% 177 308 4.4%
Directors - 0.0% - 0.0%
Vestar 5,000 76.3% 5,000 70.5%
----- ----- ----- -----
6,557 100.0% 7,088 100.0%
===== ===== ===== =====
- ----------------------------
/(1)/ Based on value of total equity.
/(2)/ Percent of diluted shares; i.e., primary shares plus management options.
Subject to Vestar achieving 20% IRR.
5
Valuation Summary
[THE FOLLOWING INFORMATION IS DEPICTED IN A HORIZONTAL BAR GRAPH IN THE PRINTED
MATERIAL]
Discounted Cash Flow/(1)/ $26.65 - $34.14
Comparable Company
12.5x-14.5x 1999 P/E $25.63 - $29.73
6.0x-8.0x 1999 EBITDA $26.39 - $34.62
7.0x-9.0x Est. Q1 LTM EBITDA $26.13 - $33.11
Comparable Transaction
6.0x-9.0x Est. Q1 LTM EBITDA $22.64 - $33.11
Leveraged Buyout/(2)/ $27.00 - $30.00
Leveraged Recapitalization/(3)/ $22.70 - $30.15
Premiums Paid/(4)/ $26.33 - $28.52
Pre Announcement $21.94
Cash Portion/(5)/ $29.11
Offer $30.00
___________________________
/(1)/ Based on 12.5%-13.5% discount rate and 6.0x to 8.0x LTM EBITDA exit
multiple.
/(2)/ Based on Vestar provided debt levels (approximately 5x debt to EBITDA) and
required return of approximately 20% to 30%.
/(3)/ Based on repurchase of 40.0% to 60.0% of shares at $30.00 (implying
approximate debt to EBITDA levels of 3x to 5x) and a trading range for
remaining shares of 8.0x to 12.0x 1999 earnings.
/(4)/ Based on a 20% to 30% premium.
/(5)/ Assuming all shareholders elect cash, the pro-rata cash amount received
per share held is $29.11 (i.e., $0.89 pro-rata stock).
6
OVERVIEW OF ST. JOHN KNITS
7
Company Overview
- - St. John Knits, Inc. designs, manufactures and markets high-end woman's
clothing and accessories
- - The Company was founded in 1962 by Bob and Marie St. John Gray
- - SJK was sold to Escada in 1989 and spun-off as an independent public company
in 1993
- - Bob Gray, 73 years old, is the Chairman of the Board and Chief Executive
Officer
- there is currently no clear successor to Mr. Gray
- the apparent lack of management depth is an important issue for the
Company
- - Marie St. John Gray, as the Company's Chief Designer, and Kelly Gray, the
President and daughter of Bob Gray and Marie St. John Gray, are responsible
for the Company's design teams
- - St. John Knits' products currently fall into one of eight categories:
knitwear, sport, Griffith & Gray, SJK, coat collection, shoes, accessories
and fragrance
- the core knitwear collections account for more than 70% of total sales
- the coat collection and SJK to be eliminated
- - While the Company enjoys an outstanding reputation for fine, high-quality,
classic women's knitwear, it has been unable to stretch its brand name to
other categories with much success
- - St. John Knits is a vertically integrated manufacturer
- the Company has six manufacturing facilities in Southern California
- approximately 94% of St. John Knits products are manufactured in-house
- - The Company's products are distributed through specialty retailers and its
own boutiques
- Saks Fifth Avenue, Neiman Marcus and Nordstrom accounted for 45% of
fiscal 1998 sales
- there may be limited opportunity for growth through new doors within
this customer base
- the Company operates 17 retail boutiques and nine outlet stores,
accounting for approximately 26% of sales
- management has indicated that the Company's optimal number of retail
boutiques is no more than 25, limiting growth through building new
stores
- - foreign sales are around 8% of total
- aside from the Japan joint-venture, the Company's international
business ventures appear limited in scope at this point
- - In addition to international subsidiaries, the Company has a 51% stake in Amen
Wardy Home Stores, a retail home furnishing boutiques operator
- after experiencing continuous losses since late 1997 opening, CEO Amen
Wardy, Jr. was terminated in September 1998
8
St. John Knits by Category
Product Lines
-------------
Product Line Selected Products Range of Suggested
- ------------------ ----------------------------------------- Retail Prices
------------------
Knitwear
Collection Dresses, 2-Piece Suits, 3-Piece Suits, 350 - $1,300
Jackets, Pants, Skirts, Coats, Sweaters,
Separates
Dressy Dresses, Theater Suits, Dressy Separates 650 - 2,000
Basics Skirts, Jackets, Pants 160 - 690
Couture Dresses, Gowns, 2-Piece Suits 900 - 3,300
Accessories Jewelry, Scarves, Belts, Handbags 65 - 450
Shoes Pumps, Sling Backs, Loafers, Boots 220 - 495
Sport Jackets, Skirts, Pants, Tops, Jeans 120 - 700
Griffith & Gray Suits, Coats, Dresses, Separates, 300 - 1,200
Eveningwear
Coat Collection Faux Fur Coats 700 - 1,300
SJK Dresses, Skirts, Pants, Jackets, Sweaters 150 - 600
Fragrance Perfume, Bath Products 12 - 250
[THE FOLLOWING TABLES WERE DEPICTED AS PIE CHARTS IN THE PRINTED MATERIAL]
FY 1998 Sales ($282.0MM)/(1)/
-----------------------------
Jewelry,
Fragrances, Shoes Japan JV & Amen Company-Owned
and Accessories Wardy Core Knitwear Other Apparel /(2)/ Stores
---------------- ----- ------------- ------------- ------
6.2% 3.8% 70.4% 9.3% 26.4%
FY 1999E Sales ($314.2MM)/(1)/
------------------------------
Jewelry,
Fragrances, Shoes Japan JV & Amen Company-Owned
and Accessories Wardy Core Knitwear Other Apparel /(2)/ Stores
---------------- ----- ------------- ------------- ------
6.1% 5.7% 69.5% 5.8% 28.1%
_______________________
/(1)/ Percentages shown are before eliminations; totals thus exceed 100%.
/(2)/ Other apparel lines (SJK, Sport, Griffith & Gray and the Coat Collection).
9
Financial Summary ($MM)
Summary Financials Historical Projected
- ------------------ --------------------------------- Estimated ---------------
1995 1996 1997 1998 LTM /(1)/ Mgmt. Street
------ ------ ------ ------ -------- ------ ------
Sales $ 162 $ 203 $ 242 $ 282 $ 285 $ 314 $ 310
COGS 74 89 100 121 125 136 133
----- ----- ----- ----- ----- ----- -----
Gross Profit 88 114 143 161 160 178 177
SG&A 55 68 85 107 111 119 115
----- ----- ----- ----- ----- ----- -----
EBIT 33 46 58 54 49 58 62
Other Income 1 1 1 1 1 0 1
Income Taxes 14 20 24 22 20 24 26
----- ----- ----- ----- ----- ----- -----
Net Income $ 20 $ 27 $ 34 $ 33 $ 31 $ 35 $ 37
Reported Diluted EPS $1.19 $1.59 $2.01 $1.94 $1.79 $2.05 $2.17
Adjusted Diluted EPS $1.19 $1.59 $2.01 $1.94 $1.79 $2.05 $2.17
Avg. Shares Outstanding 16.4 17.0 17.1 17.2 17.1 17.0 17.0
D&A 5 7 9 11 12 13 10
----- ----- ----- ----- ----- ----- -----
EBITDA 38 53 67 65 61 72 72
Capital Expenditure 18 21 23 24 N/A 19 N/A
----- ----- ----- ----- ----- ----- -----
Operating Cash Flow 21 31 44 42 N/A 52 N/A
Sales Growth Rate 26.4% 25.4% 19.3% 16.5% -- 11.4% 9.9%
Effective Tax Rate 42.1% 42.4% 41.4% 39.7% 39.3% 40.7% 41.3%
Gross Margin 54.1% 56.2% 58.9% 57.1% 56.2% 56.6% 57.1%
EBITDA Margin 23.7% 26.0% 27.6% 23.2% 21.3% 22.8% 23.2%
EBIT Margin 20.4% 22.5% 24.0% 19.2% 17.2% 18.6% 20.0%
Net Income Margin 12.1% 13.4% 14.2% 11.9% 10.7% 11.1% 11.9%
Book Capitalization Amount Percent
- ------------------- ------ -------
Cash & Investments 20
Debt -- --
Minority Interest 1 0.4%
Stockholders' Equity 161 99.6%
---- -----
Total Capitalization 162 100.0%
[CAPTION]
10
Financial Summary (cont'd)
Offer
- -----
Offer Price $30.00
Shares Outstanding 16.6
Options Outstanding 0.8
Average Exercise Price $12.47
------
Market Value $ 512
Net Debt (19)
------
Adjusted Market Value $ 492
AMV as a multiple of: LTM/(1)/ 1999E/(2)/
- -------------------- ------- ----------
Sales 1.7x 1.6x
EBITDA 8.1 6.9
EBIT 10.0 8.4
Other:
- -----
Price/Earnings 16.8 14.6
MV/Book Value 3.1 2.6
_________________________
/(1)/ Management estimated LTM ended FY 1999 Q1 based on ten months ended
November, December sales and FY 1999 Q1 budget.
/(2)/ Based on Company budget.
11
Current Situation
- - During the last twelve months prior to the offer, St. John Knits stock
significantly underperformed other premium apparel stocks as well as the
broader market
- SJK stock declined 49% during this time period, compared to a decrease of
16% for comparable apparel index and an increase of 20% for the S&P 500
- the stock declined 49% from 5/28/98, the day that the Company announced
lower-than-expected Q2 earnings
- - SJK stock increased $6.00 or 27% from $21.94 to $27.94 on announcement of the
$28.00 offer and now trades at $26.50 per shares (as of 1/29/99)
- - Prior to the announcement of the offer, St. John Knits was trading at a
discount to comparable apparel companies
- SJK was trading at 4.9x LTM EBITDA and 10.1x LTM earnings/(1)/
- comparable U.S. apparel companies are currently trading at 9.0x LTM EBITDA
and 16.4x LTM earnings
- - At the time of the announcement, research analysts were neutral on the stock
given negative earnings announcements beginning in the second quarter of
fiscal 1998
- fourth quarter earnings declined 35% versus the prior year
- - Historically, St. John Knits has been a strong performer in the apparel
industry with high-quality knitted fashion apparel and related accessories,
vertical integration, tightly controlled distribution and earnings growth
rates in excess of 20%
- - The Company has attempted to meet its high growth objective through
diversification into new apparel lines and retail concepts
- diversification efforts have been largely unsuccessful (SJK bridge line
eliminated and Amen Wardy under review)
- the Company has recently suffered from overproduction and related markdowns
resulting in significant margin contraction
_________________________
/(1)/ Based on publicly available LTM information at the time (Q3).
12
One-Year Stock Price and Volume History
[GRAPH SHOWING THE WEEKLY STOCK PRICE PERFORMANCE AND TRADING VOLUME FOR THE
PERIOD COMMENCING ON 1/30/98 AND ENDING ON 1/29/99 WITH DESCRIPTION OF SPECIFIC
EVENTS APPEARS HERE]
13
One-Year Indexed Price History
[GRAPH SHOWING THE HISTORICAL INDEXED PRICE PERFORMANCE FOR THE COMPANY, AN
APPAREL INDEX, A LUXURY GOODS INDEX AND THE S&P 500 FOR THE PERIOD COMMENCING
ON 1/30/98 AND ENDING ON 1/29/99 APPEARS HERE]
Apparel Index includes: Donna Karan, Gucci, Hartmarx, Jones Apparel, Liz
Claiborne, Nautica, Polo Ralph Lauren and Tommy Hilfiger. A broader apparel
index which also includes Fruit of the Loom, Guess ?, Oshkosh B' Gosh, Kellwood,
Oxford Industries, Phillips Van Heusen, Russell, Tultex, V.F. Corp. and Warnaco
declined 6% over the same period.
Luxury Goods Index includes: Christian Dior, LVMH, Tiffany and Richemont.
14
Post-Announcement Trading Range
[GRAPH SHOWING THE DAILY STOCK PRICE PERFORMANCE AND DAILY TRADING RANGE FOR THE
PERIOD COMMENCING ON 12/9/98 AND ENDING ON 1/29/99 WITH DESCRIPTIONS OF SPECIFIC
EVENTS APPEARS HERE]
15
Wall Street Perspective before the Offer
[THE FOLLOWING INFORMATION APPEARS AS A CHART IN THE PRINTED MATERIAL, WITH EACH
BROKERAGE HOUSE PLACED IN A MANNER CORRESPONDING TO SHARE PRICE AS OF THE DAY
PRIOR TO PUBLICATION]
Strong Buy Buy Hold Sell
---------- ---- ---- ----
Black & Co. (10/12) Bear Stearns (11/5) Janney Montgomery Scott (8/26) Tucker Anthony (11/10)
Brean Murray (10/30)
BB Robertson Stephens (11/6)
Salomon SB (8/27)
CIBC Oppenheimer (9/10)
16
VALUATION
Valuation Summary
[THE FOLLOWING INFORMATION IS DEPICTED IN A HORIZONTAL BAR GRAPH IN THE PRINTED
MATERIAL]
Discounted Cash Flow/(1)/ $26.65 - $34.14
Comparable Company
12.5x-14.5x 1999 P/E $25.63 - $29.73
6.0x-8.0x 1999 EBITDA $26.39 - $34.62
7.0x-9.0x Est. Q1 LTM EBITDA $26.13 - $33.11
Comparable Transaction
6.0x-9.0x Est. Q1 LTM EBITDA $22.64 - $33.11
Leveraged Buyout/(2)/ $27.00 - $30.00
Leveraged Recapitalization/(3)/ $22.70 - $30.15
Premiums Paid/(4)/ $26.33 - $28.52
Pre Announcement $21.94
Cash Portion/(5)/ $29.11
Offer $30.00
_________________________
/(1)/ Based on 12.5%-13.5% discount rate and 6.0x to 8.0x LTM EBITDA exit
multiple.
/(2)/ Based on Vestar provided debt levels (approximately 5x debt to EBITDA) and
required return of approximately 20% to 30%.
/(3)/ Based on repurchase of 40.0% to 60.0% of shares at $30.00 (implying
approximate debt to EBITDA levels of 3x to 5x) and a trading range for
remaining shares of 8.0x to 12.0x 1999 earnings.
/(4)/ Based on a 20% to 30% premium.
/(5)/ Assuming all shareholders elect cash, the pro-rata cash amount received
per share held is $29.11 (i.e., $0.89 pro-rata stock).
18
Management Projections ($MM)
Actual Projected
---------------------------------------------------------------------
1997 1998 1999 2000 2001 2002 2003
------ ------ ------ ------ ------ ------ ------
Operating Results
Net Sales $242.1 $282.0 $314.2 $339.4 $366.5 $395.9 $427.5
Gross Profit $142.6 $161.1 $177.8 $193.4 $210.8 $227.6 $245.8
EBITDA $ 66.9 $ 65.4 $ 71.6 $ 80.4 $ 88.3 $ 94.7 $101.5
EBIT $ 58.0 $ 54.1 $ 58.4 $ 66.2 $ 73.3 $ 79.2 $ 85.5
Sales Growth
Annual 19.3% 16.5% 11.4% 8.0% 8.0% 8.0% 8.0%
2-Year CAGR 22.3% 17.9% 13.9% 9.7% 8.0% 8.0% 8.0%
3-Year CAGR 23.7% 20.3% 15.7% 11.9% 9.1% 8.0% 8.0%
Margins
Gross Margin 58.9% 57.1% 56.6% 57.0% 57.5% 57.5% 57.5%
EBITDA Margin 27.6% 23.2% 22.8% 23.7% 24.1% 23.9% 23.7%
EBIT Margin 24.0% 19.2% 18.6% 19.5% 20.0% 20.0% 20.0%
19
Historical and Projected Income Statement Data ($MM, except per share data)/(1)/
Historical Projected
-------------------------------------------------------------------------------------------
Financials 1995 1996 1997 1998 1999 2000 2001 2002 2003
------ ------ ------ ------ ------ ------ ------ ------ ------
Net Sales $161.8 $203.0 $242.1 $282.0 $314.2 $339.4 $366.5 $395.9 $427.5
Cost of Sales 74.3 88.9 99.5 120.9 136.4 145.9 155.8 168.2 181.7
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross Profit 87.5 114.1 142.6 161.1 177.8 193.4 210.8 227.6 245.8
SG&A 54.6 68.4 84.5 107.0 119.5 127.3 137.4 148.4 160.3
------ ------ ------ ------ ------ ------ ------ ------ ------
EBIT 33.0 45.7 58.0 54.1 58.4 66.2 73.3 79.2 85.5
Other Income 0.8 1.4 0.7 1.4 0.5 0.5 0.6 0.6 0.6
------ ------ ------ ------ ------ ------ ------ ------ ------
EBT 33.8 47.1 58.7 55.4 58.8 66.7 73.9 79.8 86.1
Income Taxes 14.2 19.9 24.3 22.0 24.0 27.2 30.1 32.5 35.1
------ ------ ------ ------ ------ ------ ------ ------ ------
Net Income 19.6 27.1 34.4 33.4 34.9 39.5 43.8 47.3 51.0
Diluted Shares 16.4 17.0 17.1 17.2 17.0 17.0 17.0 17.0 17.0
EPS $ 1.19 $ 1.59 $ 2.01 $ 1.94 $ 2.05 $ 2.32 $ 2.57 $ 2.78 $ 3.00
EBIT 33.0 45.7 58.0 54.1 58.4 66.2 73.3 79.2 85.5
add: D&A 5.3 7.0 8.9 11.4 13.2 14.2 15.0 15.5 16.0
------ ------ ------ ------ ------ ------ ------ ------ ------
EBITDA 38.3 52.7 66.9 65.4 71.6 80.4 88.3 94.7 101.5
Growth/Margins
Net Sales Growth 26.4% 25.4% 19.3% 16.5% 11.4% 8.0% 8.0% 8.0% 8.0%
COGS %Sales 45.9% 43.8% 41.1% 42.9% 43.4% 43.0% 42.5% 42.5% 42.5%
Gross Margin 54.1% 56.2% 58.9% 57.1% 56.6% 57.0% 57.5% 57.5% 57.5%
SG&A %Sales 33.7% 33.7% 34.9% 38.0% 38.0% 37.5% 37.5% 37.5% 37.5%
EBIT Margin 20.4% 22.5% 24.0% 19.2% 18.6% 19.5% 20.0% 20.0% 20.0%
Other Income %Sales 0.5% 0.7% 0.3% 0.5% 0.2% 0.2% 0.2% 0.2% 0.2%
EBT Margin 20.9% 23.2% 24.3% 19.7% 18.7% 19.7% 20.2% 20.2% 20.2%
Income Taxes %EBT 42.1% 42.4% 41.4% 39.7% 40.7% 40.7% 40.7% 40.7% 40.7%
Net Income Margin 12.1% 13.4% 14.2% 11.9% 11.1% 11.6% 11.9% 11.9% 11.9%
Change in Diluted Shares
0.2% 3.5% 0.7% 0.6% (1.4%) 0.0% 0.0% 0.0% 0.0%
EPS Growth 30.5% 34.0% 26.1% (3.5%) 5.7% 13.4% 10.7% 8.0% 8.0%
EBIT Margin 20.4% 22.5% 24.0% 19.2% 18.6% 19.5% 20.0% 20.0% 20.0%
D&A %Sales 3.3% 3.5% 3.7% 4.0% 4.2% 4.2% 4.1% 3.9% 3.7%
EBITDA Margin 23.7% 26.0% 27.6% 23.2% 22.8% 23.7% 24.1% 23.9% 23.7%
_________________________
/(1)/ Income tax rate at 40.7%; working capital (excluding cash) at 25.6% in
1999, 25.0% thereafter; capital expenditures at $19.4MM in 1999, $17.5MM
per year thereafter.
20
Quarterly Performance and Projections
1997 FY 1998 FY 1999 Budget
------------------------------------- ----------------------------------------- -----------------------------------
Financials Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Total
-- -- -- -- ----- -- -- -- -- ----- -- -- -- -- -----
Net Sales $56.2 $59.6 $54.8 $71.6 $242.1 $68.8 $69.8 $67.7 $75.7 $282.0 $72.8 $78.9 $77.0 $85.5 $314.2
COGS 24.4 23.7 22.6 28.8 99.5 29.0 28.9 28.3 34.7 120.9 33.1 34.1 33.3 35.8 136.4
----- ----- ----- ----- ------ ----- ----- ----- ----- ------ ----- ----- ----- ----- ------
Gross Profit 31.8 35.9 32.2 42.8 142.6 39.8 40.9 39.4 41.0 161.1 39.7 44.8 43.7 49.7 177.8
Operating
Expenses 19.4 21.0 20.1 24.0 84.5 24.2 25.2 27.5 30.2 107.0 30.2 29.7 28.4 31.2 119.5
----- ----- ----- ----- ------ ----- ----- ----- ----- ------ ---- ----- ----- ---- -----
EBIT 12.3 14.8 12.0 18.8 58.0 15.6 15.7 12.0 10.8 54.1 9.5 15.1 15.3 18.5 58.4
Interest/
Other Inc. 0.2 0.2 0.2 0.1 0.7 0.2 0.4 0.5 0.3 1.4 0.1 0.1 0.1 0.1 0.
----- ----- ----- ----- ----- ---- ---- ---- --- ------ ----- ---- ----- ---- ----
EBT 12.6 15.1 12.2 18.8 58.7 15.8 16.1 12.4 11.1 55.4 9.6 15.2 15.4 18.6 58.8
Income
Taxes 5.2 6.2 5.0 7.9 24.3 6.6 6.3 5.1 4.0 22.0 3.9 6.2 6.3 7.6 24.0
----- ----- ----- ----- ------ ---- ----- ----- ----- ------ ----- ----- ----- ---- ----
Net Income 7.4 8.9 7.2 11.0 34.4 9.2 9.8 7.3 7.1 33.4 5.7 9.0 9.1 11.1 34.9
Shares 17.1 17.1 17.1 17.1 17.1 17.0 17.2 17.2 17.0 17.2 17.0 17.0 17.0 17.0 17.0
EPS $0.43 $0.52 $0.42 $0.64 $ 2.01 $ 0.54 $0.57 $0.43 $0.42 $ 1.94 $0.33 $0.53 $0.54 $0.65 $2.05
D&A/(1)/ 2.0 2.3 2.2 2.3 8.9 2.6 2.7 2.9 3.1 11.4 3.3 3.3 3.3 3.3 13.2
EBITDA 14.4 17.2 14.2 21.1 66.9 18.2 18.4 14.9 13.9 65.4 12.8 18.4 18.6 21.8 71.6
Pct. of Net
Sales
COGS 43.5% 39.8% 41.3% 40.2% 41.1% 42.1% 41.4% 41.8% 45.8% 42.9% 45.5% 43.2% 43.3% 41.9% 43.4%
Gross Profit 56.5% 60.2% 58.7% 59.8% 58.9% 57.9% 58.6% 58.2% 54.2% 57.1% 54.5% 56.8% 56.7% 58.1% 56.6%
Operating
Expenses 34.6% 35.3% 36.7% 33.5% 34.9% 35.2% 36.1% 40.5% 39.9% 38.0% 41.4% 37.7% 36.9% 36.5% 38.0%
EBIT 22.0% 24.9% 22.0% 26.3% 24.0% 22.7% 22.5% 17.7% 14.3% 19.2% 13.0% 19.1% 19.9% 21.6% 18.6%
Interest/
Other Inc. 0.4% 0.4% 0.4% 0.1% 0.3% 0.3% 0.6% 0.7% 0.4% 0.5% 0.2% 0.1% 0.2% 0.1% 0.2%
EBT 22.3% 25.3% 22.3% 26.3% 24.3% 23.0% 23.0% 18.3% 14.7% 19.7% 13.2% 19.2% 20.0% 21.8% 18.7%
Income
Taxes 9.2% 10.4% 9.2% 11.0% 10.0% 9.6% 9.1% 7.5% 5.2% 7.8% 5.4% 7.8% 8.2% 8.8% 7.6%
Net Income 13.1% 14.9% 13.1% 15.3% 14.2% 13.4% 14.0% 10.8% 9.4% 11.9% 7.8% 11.4% 11.8% 12.9% 11.1%
D&A/(1)/ 3.6% 3.9% 4.0% 3.3% 3.7% 3.8% 3.9% 4.3% 4.1% 4.0% 4.5% 4.2% 4.3% 3.9% 4.2%
EBITDA 25.6% 28.8% 25.9% 29.5% 27.6% 26.5% 26.4% 22.0% 18.4% 23.2% 17.6% 23.3% 24.2% 25.5% 22.8%
_________________________
/(1)/ FY 1999 budget does not allocate D&A by quarter; assumed to be equally
distributed over the four quarters.
21
DCF Valuation Matrix ($MM, except per share data)/(1)/
Discount
Rate EBITDA Exit Multiple
---- --------------------
6.0x 7.0x 8.0x
---- ---- ----
PV of Cash Flow Stream $ 114 $ 114 $ 114
PV of Perpetuity 338 394 451
------ ------ ------
Enterprise Value $ 452 $ 508 $ 564
12.5% Less: Net Debt (19) (19) (19)
------ ------ ------
Equity Value $ 471 $ 527 $ 584
Implied Price Per Share $27.66 $30.90 $34.14
Implied FCF Growth in Perpetuity 5.4% 6.3% 7.1%
Enterprise Value Multiple to 1998 EBITDA 6.9x 7.8x 8.6x
PV of Cash Flow Stream $ 112 $ 112 $ 112
PV of Perpetuity 331 386 441
------ ------ ------
Enterprise Value $ 443 $ 498 $ 553
13.0% Less: Net Debt (19) (19) (19)
------ ------ ------
Equity Value $ 462 $ 517 $ 572
Implied Price Per Share $27.15 $30.31 $33.48
Implied FCF Growth in Perpetuity 5.8% 6.8% 7.5%
Enterprise Value Multiple to 1998 EBITDA 6.8x 7.6x 8.5x
PV of Cash Flow Stream $ 111 $ 111 $ 111
PV of Perpetuity 323 377 431
------ ------ ------
Enterprise Value $ 434 $ 488 $ 542
13.5% Less: Net Debt (19) (19) (19)
------ ------ ------
Equity Value $ 453 $ 507 $ 561
Implied Price Per Share $26.65 $29.74 $32.84
Implied FCF Growth in Perpetuity 6.3% 7.3% 8.0%
Enterprise Value Multiple to 1998 EBITDA 6.6x 7.5x 8.3x
_________________________
/(1)/ Based on 16.58MM shares and 0.82MM options with average strike price of
$12.47.
22
Weighted Average Cost of Capital
Estimated Enterprise Equity Net Debt/
Levered Value Value Total Unlevered
Company Beta/(1)/ ($MM) ($MM) Capital Beta
------- ---- ----- ----- ------- ----
Tommy Hilfiger 1.1 $3,715 $3,138 16% 1.0
Jones Apparel 1.2 3,529 3,088 13% 1.1
Polo Ralph Lauren 1.0 2,400 2,367 1% 1.0
Liz Claiborne 1.0 2,313 2,363 (2%) 1.0
Nautica 1.2 567 606 (7%) 1.2
Hartmarx 0.8 405 183 55% 0.5
Donna Karan 0.9 139 140 (1%) 0.9
--- ------ ------ --- ---
Mean 1.0 $1,867 $1,698 11% 1.0
=== ====== ====== === ===
Weighted Average Cost-of-Capital
- -------------------------------------------------------------------------------------
Capital Structure Cost of Equity Cost of Debt Wtd-Avg
- ----------------- -------------- ------------
Debt/ Debt/ Relevered Cost of Before After Cost of
Capital Equity Beta Equity Tax Tax Capital
- ---------- ------- --------- --------------- ------- ------ -------
0% 0% 0.96 14% 7.0% 4.2% 13.8%
10% 11% 1.03 14% 7.6% 4.6% 13.4%
20% 25% 1.11 15% 8.2% 4.9% 13.0%
30% 43% 1.21 16% 8.8% 5.3% 12.6%
40% 67% 1.35 17% 9.4% 5.6% 12.4%
50% 100% 1.54 18% 10.0% 6.0% 12.2%
Assumptions
-----------
Risk Free Rate of Return 4.6% Equity Risk Premium/(2)/ 7.8%
Marginal Tax Rate 40.0% Size Premium/(3)/ 1.7%
_________________________
/(1)/ Predicted betas. Source: Barra.
/(2)/ Long-horizon expected equity risk premium. Source: Ibbotson Associates.
/(3)/ Expected low-capitalization equity size premium. Source: Ibbotson
Associates.
23
Selected Apparel Companies - Historical Growth & Margin
[THE FOLLOWING TABLES WERE DEPICTED AS BAR GRAPHS IN THE PRINTED MATERIAL]
Sales Growth/(1)/
------------
Tommy Jones Polo Ralph Liz Donna St. John
Hilfiger /(3)/ Hartmarx Apparel/(3)/ Nautica Lauren Claiborne Karan Knits
-------- ------- ------ ------- ------ -------- ----- -----
27% 18% 14% 13% 12% 5% (3%) 16%
Mean = 12%
Median = 13%
EBITDA Margin/(2)/
-------------
Tommy Polo Ralph Jones Liz Donna St. John
Hilfiger Nautica Lauren Apparel Claiborne Hartmarx Karan Knits
-------- ------- ------ ------- --------- -------- ------ -----
23% 21% 16% 16% 13% 7% NM 23%
Mean = 16%
Median = 16%
EPS Growth/(1)/
----------
Tommy Jones Liz Polo Ralph Donna St. John
Hilfiger Apparel Nautica Claiborne Lauren Hartmarx Karan Knits
-------- ------- ------- --------- ------ -------- ----- -----
28% 27% 13% 8% 4% 3% NM (3%)
Mean = 14%
Median = 11%
EBIT Margin/(2)/
-----------
Tommy Polo Ralph Jones Liz Donna St. John
Nautica Hilfiger Lauren Apparel Claiborne Hartmarx Karan Knits
------- -------- ------ ------- --------- -------- ----- -----
18% 17% 14% 14% 11% 6% NM 19%
Mean = 13%
Median = 14%
_________________________
/(1)/ Actual and estimated growth from FY 1997 to FY 1998.
/(2)/ LTM margins.
/(3)/ Pro forma for major acquisitions.
24
Selected Apparel Companies - Projected Growth & Margin/(1)/
[THE FOLLOWING TABLES WERE DEPICTED AS BAR GRAPHS IN THE PRINTED MATERIAL]
Sales Growth/(1)/
------------
Tommy Jones Polo Ralph Liz Donna St. John
Nautica Hilfiger/(3)/ Apparel/(3)/ Lauren Hartmarx Claiborne Karan Knits
------- -------- ------- ------ -------- --------- ----- -----
16% 12% 11% 11% 5% 4% 2% 11%
Mean = 9%
Median = 11%
EBITDA Margin/(2)/
-------------
Tommy Jones Polo Ralph Liz Donna St. John
Hilfiger/(3)/ Nautica Apparel/(3)/ Lauren Claiborne Hartmarx Karan Knits
------- ------- ------- ------ --------- -------- ----- -----
33% 20% 17% 16% 14% 8% 5% 23%
Mean = 6%
Median = 16%
EPS Growth/(1)/
----------
Jones Tommy Polo Ralph Liz Donna St. John
Apparel Hilfiger Lauren Nautica Claiborne Hartmarx Karan Knits
------- -------- ------ ------- --------- -------- ----- -----
24% 20% 15% 12% 6% (27%) NM 6%
Mean = 8%
Median = 14%
EBIT Margin/(2)/
-----------
Tommy Jones Polo Ralph Liz Donna St. John
Nautica Hilfiger/(3)/ Apparel/(3)/ Lauren Claiborne Hartmarx Karan Knits
------- -------- ------- ------ --------- -------- ----- -----
18 % 18% 16% 13% 11% 7% 3% 19%
Mean = 12%
Median = 13%
_________________________
/(1)/ Estimated growth from FY 1998 to FY 1999.
/(2)/ NFY margin.
/(3)/ Pro forma for major acquisitions.
25
Selected Apparel Companies - LTM Multiples/(1)/
[THE FOLLOWING TABLES WERE DEPICTED AS BAR GRAPHS IN THE PRINTED MATERIAL]
Adjusted Market Value/LTM Sales
-------------------------------
Tommy Jones Polo Ralph Liz Donna SJK SJK
Hilfiger Apparel Lauren Nautica Claiborne Hartmarx Karan Pre-annc./(2)/ Proposal /(2)/
-------- ------- ------ ------- --------- -------- ----- -------- --------
2.6x 1.9x 1.6x 1.0x 1.0x 0.5x 0.2x 1.3x 1.7x
Mean = 1.3x
Median = 1.0x
Adjusted Market Value/LTM EBITDA
--------------------------------
Jones Tommy Polo Ralph Liz Donna SJK SJK
Apparel Hilfiger Lauren Hartmarx Claiborne Nautica Karan Pre-annc./(2)/ Proposal /(2)/
------- -------- ------ -------- --------- ------- ----- -------- --------
12.0x 11.7x 9.9x 8.1x 7.2x 5.1x NM 4.9x 8.1x
Mean = 9.0x
Median = 9.0x
Price/LTM Earnings
------------------
Jones Tommy Polo Ralph Donna SJK SJK
Apparel Hilfiger Lauren Claiborne Hartmarx Nautica Karan Pre-annc./(2)/ Proposal /(2)/
------- -------- ------ --------- -------- ------- ----- -------- --------
22.3x 21.1x 19.0x 13.6x 11.9x 10.3x NM 10.1x 16.8x
Mean = 16.4x
Median = 16.3x
Adjusted Market Value/LTM EBIT
-------------------------------
Tommy Jones Polo Ralph Liz Donna SJK SJK
Hilfiger Apparel Lauren Hartmarx Claiborne Nautica Karan Pre-annc./(2)/ Proposal /(2)/
-------- ------- ------ -------- --------- ------- ----- -------- --------
15.2x 13.4x 11.5x 9.8x 8.6x 5.7x NM 5.8x 10.0x
Mean = 10.7x
Median = 10.7x
_________________________
/(1)/ Stock prices as of 1/29/99.
/(2)/ SJK pre-announcement multiples based on LTM ended FY 1998 Q3 results
while proposal multiples based on estimated LTM ended FY 1999 Q1 results.
26
Selected Apparel Companies - NFY Multiples/(1)/
[THE FOLLOWING TABLES WERE DEPICTED AS BAR GRAPHS IN THE PRINTED MATERIAL]
Adjusted Market Value/NFY Sales
-------------------------------
Tommy Jones Polo Ralph Liz Donna SJK SJK
Hilfiger Apparel/(3)/ Lauren Claiborne Nautica Hartmarx Karan Pre-annc./(2)/ Proposal /(2)/
-------- ------- ------ --------- ------- -------- ----- --------- --------
2.2x 1.7x 1.4x 0.9x 0.9x 0.5x 0.2x 1.2x 1.6x
Mean = 1.1x
Median = 0.9x
Adjusted Market Value/NFY EBITDA
--------------------------------
Jones Tommy Polo Ralph Liz Donna SJK SJK
Apparel Hilfiger Lauren Claiborne Hartmarx Nautica Karan Pre-annc./(2)/ Proposal /(2)/
------- -------- ------ --------- -------- ------- ----- -------- --------
9.9x 9.5x 8.9x 6.8x 6.6x 4.5x 4.0x 4.9x 6.9x
Mean = 7.2x
Median = 6.8x
Price/NFY Earnings
------------------
Donna Jones Polo Ralph Tommy Liz SJK SJK
Karan Apparel Lauren Hilfiger Claiborne Hartmarx Nautica Pre-annc./(2)/ Proposal /(2)/
----- ------- ------ -------- --------- -------- ------- -------- --------
20.6X 17.7x 17.3x 15.4x 12.6x 9.3x 9.2x 9.8x 14.6x
Mean = 14.6x
Median = 15.4x
Adjusted Market Value/NFY EBIT
------------------------------
Tommy Jones Polo Ralph Liz Donna SJK SJK
Hilfiger Apparel Ralph Claiborne Karan Hartmarx Nautica Pre-annc./(2)/ Proposal /(2)/
-------- ------- ----- --------- ----- -------- ------- --------- --------
11.9x 10.8x 10.4x 8.1x 8.0x 7.8x 5.0x 5.6x 8.4x
Mean = 8.9x
Median = 8.1x
_________________________
/(1)/ Stock price as of 1/29/99.
/(2)/ SJK pre-announcement multiples based on street projected FY 1999 results
while proposal multiples based on management projected FY 1999 results.
27
Selected Comparable Transactions - Sales Multiples
[THE FOLLOWING INFORMATION WITH RESPECT TO SALES MULTIPLES WAS DEPICTED AS A
HORIZONTAL BAR GRAPH IN THE PRINTED MATERIAL]
Adjusted
Purchase
Price Annc.
Target/Aquiror ($MM)/(1)/ Date Sales Multiples
- -------------- --------- ---- ---------------
Pepe Jean USA, TJ Far East & Tomcan 3.4x
Investments/Tommy Hilfiger $1,395 1/98
Valentino/Holding di Partecipazioni 300 9/97 3.0x
Winning Ways/Jordan Co. 233 1/97 1.3x
Sun Apparel/Jones Apparel 449 9/98 1.1x
Helly Hansen/Investcorp 112 4/97 1.1x
Designer Holdings/Warnaco 398 9/97 0.8x
Severin Montres/Gucci 150 11/97 0.8x
The William Carter Co./Investcorp 208 10/96 0.7x
Lejaby-Euralis/Warnaco 79 5/96 0.7x
Jerrell/Haggar 37 12/98 0.6x
Sun Apparel/Vestar 156 10/97 0.6x
Farah/Tropical Sportswear 144 5/98 0.5x
Gerber Childrenswear/Citicorp Venture Capital 74 1/96 0.4x
Joop!/Wuensche AG 83 2/98 0.3x
Bidermann Industries/Vestar 360 3/98 N/A
Mean = 1.1x
Median = 0.8x
_________________________
/(1)/ Sum of purchase price and estimated net debt.
28
Selected Comparable Transactions - EBITDA Multiples
[THE FOLLOWING INFORMATION WITH RESPECT TO EBITDA MULTIPLES WAS DEPICTED AS A
HORIZONTAL BAR GRAPH IN THE PRINTED MATERIAL]
Adjusted
Purchase
Price Annc. EBITDA
Target/Aquiror ($MM)/(1)/ Date Multiples
- -------------- ---------- ---- ---------
Pepe Jean USA, TJ Far East & Tomcan 17.4x
Investments/Tommy Hilfiger $1,395 1/98
Farah/Tropical Sportswear 144 5/98 16.5x
Helly Hansen/Investcorp 112 4/97 8.9x
Sun Apparel/Jones Apparel 449 9/98 8.3x
The William Carter Co./Investcorp 208 10/96 6.8x
Designer Holdings/Warnaco 398 9/97 6.6x
Lejaby-Euralis/Warnaco 79 5/96 6.5x
Winning Ways/Jordan Co. 233 1/97 6.2x
Sun Apparel/Vestar 156 10/97 6.0x
Gerber Childrenswear/Citicorp Venture Capital 74 1/96 4.0x
Bidermann Industries/Vestar 360 3/98 N/A
Valentino/Holding di Partecipazioni 300 9/97 N/A
Severin Montres/Gucci 150 11/97 N/A
Joop!/Wuensche AG 83 2/98 N/A
Jerrell/Haggar 37 12/98 N/A
Mean = 8.7x
Median = 6.7x
_________________________
/(1)/ Sum of purchase price and estimated net debt.
29
LBO Summary ($MM, except per share data)
Price per Share
---------------
$27.00 $28.00 $29.00 $30.00
------ ------ ------ ------
Equity Value $459.5 $476.9 $494.3 $511.7
Enterprise Value 440.2 457.6 475.0 492.3
Bank Debt @ 8.0% 155.0 155.0 155.0 155.0
High Yield @ 11.0% 160.0 160.0 160.0 160.0
Equity Investment 104.5 121.0 137.5 153.9
Net Debt/Est. Q1 LTM EBITDA 5.2x 5.2x 5.2x 5.2x
Net Debt/1998 EBITDA 4.8 4.8 4.8 4.8
Est. Q1 LTM EBITDA/Interest 2.0 2.0 2.0 2.0
1998 EBITDA/Interest 2.1 2.1 2.1 2.1
Implied 5-Year Equity Returns @
6.0x LTM EBITDA 21.4% 18.7% 16.3% 14.1%
7.0x LTM EBITDA 27.3% 24.4% 21.9% 19.7%
8.0x LTM EBITDA 32.2% 29.2% 26.6% 24.3%
30
Leveraged Recapitalization Summary (MM, except per share data)
Percent of Primary Shares Repurchased
-------------------------------------
40.0% 50.0% 60.0%
----- ----- -----
Purchase Price per Share $30.00 $30.00 $30.00
Number of Shares Repurchased 6.6 8.3 9.9
Value of Shares Repurchased $199.0 $248.7 $298.4
Bank Debt @ 8.0% 36.6 87.4 138.2
High Yield @ 11.0% 150.0 150.0 150.0
Net Debt/Est. Q1 LTM EBITDA 3.1x 3.9x 4.8x
Net Debt/1998 EBITDA 2.9 3.6 4.4
Est. Q1 LTM EBITDA/Interest 3.0 2.5 2.1
1998 EBITDA/Interest 3.3 2.7 2.3
Implied Blended Value per Share @
8.0x 1999 P/E $22.70 $24.41 $26.10
10.0x 1999 P/E 25.37 26.76 28.13
12.0x 1999 P/E 28.05 29.11 30.15
31
Premiums Paid Summary
Time Horizon: January 1998 - present
Transaction Type: Control Acquisitions
Target Transaction Value Range: $100MM - $1BN
Company Universe: 167 public companies
% Stock Premium Before Announcement Date
----------------------------------------
1 Day 1 Week 4 Weeks
----- ------ -------
Adjusted Mean/(1)/ 24.1% 28.9% 34.7%
Mean 25.8% 31.9% 37.6%
Median 20.0% 28.4% 33.2%
High 126.4% 172.6% 166.7%
Low (48.5%) (42.1%) (36.8%)
_________________________
Source: Securities Data Company.
/(1)/ Excludes the highest 10% and the lowest 10% of universe.
32