TN Exhibit 3

Mercury Action Athletic Cash Flow Forecast ($ in thousands)

Operating Results:
Revenue
Less: Divisional Operating Expenses
Less: Corporate Overhead
EBIT
Less: Taxes
NOPAT
Plus: Depreciation
Less: Changes in Working Capital
Less: Capital Expenditures
Less: Change in Other Assets
Plus: Changes in Other Liabilities
Unlevered Free Cash Flow (FCF)

Net Working Capital Calculations

2007
479,329
423,836
8,487
47,006
(18,802)
28,203
9,587
(4,568)
(11,983)

2008
489,028
427,333
8,659
53,036
(21,214)
31,822
9,781
(2,649)
(12,226)

2009
532,137
465,110
9,422
57,605
(23,042)
34,563
10,643
(9,805)
(13,303)

2010
570,319
498,535
10,098
61,686
(24,675)
37,012
11,406
(8,687)
(14,258)

2011
597,717
522,522
10,583
64,612
(25,845)
38,767
11,954
(6,233)
(14,943)

21,239

26,727

22,097

25,473

29,545

TN Exhibit 4: Mercury WACC Estimation

Calculation of asset betas from publicly-traded comparables*

Casual & Athletic Shoe Companies:

D&B Shoe Company
General Shoe Corp.
Kinsley Coulter Products
Victory Athletic
Surfside Footwear
Alpine Company
Templeton Athletic
Average

Equity
Market Value
420,098
533,463
165,560
35,303,250
570,684
1,056,033
397,709
5,492,400

Net
Debt
125,442
171,835
82,236
7,653,207
195,540
300,550
169,579
1,242,627

D/E
29.9%
32.2%
49.7%
21.7%
34.3%
28.5%
42.6%
34.1%

Equity
Beta
2.68
1.92
1.12
0.97
2.13
1.27
0.98
1.58

Asset
Beta
2.06
1.45
0.75
0.80
1.59
0.99
0.69
1.19

Assumptions:
Marginal Tax Rate
Debt Beta

40.0%
0.00

Risk-Free Rate
MRP

4.93%
5.00%

Cost of Debt

6.00%

*Originally included companies with negative debt excluded

Calculation of WACC for Mercury at various leverage ratios

Debt/
Value
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
55.0%
60.0%

Debt/
Equity
0.0%
5.3%
11.1%
17.6%
25.0%
33.3%
42.9%
53.8%
66.7%
81.8%
100.0%
122.2%
150.0%

Asset
Beta
1.19
1.19
1.19
1.19
1.19
1.19
1.19
1.19
1.19
1.19
1.19
1.19
1.19

Equity
Beta
1.19
1.25
1.32
1.40
1.49
1.59
1.70
1.83
1.98
2.16
2.38
2.64
2.97

Cost of
Equity
10.88%
11.19%
11.54%
11.92%
12.36%
12.86%
13.42%
14.08%
14.84%
15.74%
16.82%
18.14%
19.79%

Cost of
Debt (PT)
6.00%
6.00%
6.00%
6.00%
6.00%
6.00%
6.00%
6.00%
6.00%
6.00%
6.00%
6.00%
6.00%

WACC
10.88%
10.81%
10.74%
10.68%
10.61%
10.54%
10.48%
10.41%
10.34%
10.28%
10.21%
10.14%
10.08%

TN Exhibit 5: DCF Valuation, NPV, and Sensitivity Analysis

DCF Valuation of Mercury: Base Case FCF Projections & Perpetuity-based TV ($ in thousands)
Unlevered Free Cash Flow:
NOPAT
Plus: Depreciation
Less: Changes in Working Capital
Less: Capital Expenditures
Unlevered Free Cash Flow
PV Factor
PV FCF

2006 (t=0)
25,998

2007
28,203
9,587
(4,568)
(11,983)
21,239
0.904
19,201

2008
31,822
9,781
(2,649)
(12,226)
26,727
0.817
21,846

2009
34,563
10,643
(9,805)
(13,303)
22,097
0.739
16,329

2010
37,012
11,406
(8,687)
(14,258)
25,473
0.668
17,018

Sum, PV FCF

92,240

92,240

92,240

Terminal value
PV TV

388,003
211,877

388,003
211,877

388,003
211,877

Enterprise Value

304,117

304,117

304,117

Less: Projected Acquisition Cost

223,586 (P/E)

NPV

80,531

314,175 (Fair Value)

(10,059)

2011
38,767
11,954
(6,233)
(14,943)
29,545
0.604
17,845

152,624 (EV/EBITDA)

151,493

Assume:
WACC
Growth rate

10.61%
2.78%

MERCURY ATHLETIC
Project:
Analysis:
Draft:
Footer:

Terminal Value Growth Estimates

MERCURY ATHLETIC
Terminal Value Growth Estimates
N
Harvard Business Publishing

TN Table 1: Long-Term Growth Rate Calculation

Long-Term Growth Rate:
NOPAT
Invested Capital (1)
ROC
Net Reinvestment
NOPAT
Reinvestment Rate
Est. Long-term Growth Rate

2011
38,767
331,381
11.7%
9,222
38,767
23.8%

Equals Total Assets (Exhibit 7)

Equals NOPAT divided by Invested Capital
Equals Capex + NWC - Depreciation
Equals Net Reinvestment divided by NOPAT

2.7829%

Equals ROC times Reinvestment Rate

Price to Earnings Multiple

P/E Multiple*
2006 Earnings
Projected Acquisition Cost

8.6
25,998
223,586

*Surfside Footwear used as comp

Fair Value Estimate (EV - net debt)

Debt
Less: Cash
Net Debt

20,735
(10,676)
10,059

Deferred Taxes + Pension Obligation

2006 value

EV
Net Debt
Projected Acquisition Cost

304,117
(10,059)
314,175

Calculated with DCF

EV/EBITDA
EV
EBITDA (2006)
EV/EBITDA multiple
X 2006 Earnings
Projected Acquisition Cost

304,117
51,804
6
25,998
152,624

Calculated with DCF

(1) Based on 2011 net operating assets

Acquisition Cost Estimates

Harvard Business Publishing