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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark one)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee required)
For the fiscal year ended December 31, 1993 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (No fee required)
For the transition period from _________________ to _________________
Commission file number I-91
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INTERCO INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 43-0337683
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 South Hanley Road, St. Louis, Missouri 63105
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 314/863-1100
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange on
Title of each class which registered
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Common Stock - $1.00 Stated Value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ X ]
The aggregate market value of the voting stock held by non-affiliates of
The registrant as of February 28, 1994, was approximately $217,787,600.
2
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [X]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
50,014,055 shares as of February 28, 1994
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Definitive Proxy Statement for Annual Meeting
of Stockholders on May 4, 1994 .................... Part III
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PART I
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Item 1. Business
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(b) Financial Information about Industry Segments:
Industry segment information is included in Note 17 to the consolidated
financial statements of the Company.
(c) Narrative Description of Business:
(1) The Company is a manufacturer of furniture and a manufacturer and
retailer of footwear. The business of the Company is represented by
the following two industry segments:
Furniture Segment
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Broyhill Furniture Industries, Inc.
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Broyhill began in 1926 as The Lenoir Chair Company and has grown through
acquisitions of local furniture factories and internally generated
expansion. Broyhill was acquired by the Company in 1980 and employs
approximately 6,800 people.
Products
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Broyhill produces medium-priced bedroom, dining room, living room,
occasional and stationary and reclining furniture aimed at the middle-
income consumer. Its residential furniture divisions produce a wide
range of furnishings in colonial, country, traditional and contemporary
styles. The widely recognized Broyhill trademarks include Broyhill,
Broyhill Premier, Broyhill Showcase Gallery, Broyhill Contract and
Highland House. Broyhill considers these trademarks and trade names to
be material to its business.
The flagship Broyhill product line concentrates on bedroom, dining room
and living room furniture, as well as upholstered and occasional
furniture.
The Broyhill Premier product line enjoys an excellent reputation for
classically styled, complete furniture collections in the upper-medium
price range. Highland House operates in an upper-medium to high niche
with premium benchmade upholstered products.
The Broyhill Contract division produces contract furnishings for hotels,
motels and health care facilities (including nursing homes and
retirement communities). This division concentrates on manufacturing
and marketing a complete line of residentially-styled furniture in the
medium to lower-medium price range.
Marketing and Distribution
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Broyhill's management has been innovative in designing new programs to
promote the Broyhill line. Key elements of the marketing program
include a focused effort on Broyhill's department store and national and
regional chain accounts, expansion of the Broyhill Showcase Gallery
dealer network, expansion of the Independent Dealer Program and
development of the contract market.
Broyhill furniture products are sold primarily through approximately
4,000 retail furniture dealers. Broyhill maintains showrooms in High
Point, North Carolina and Chicago, Illinois.
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The corporate effort with national and regional chains has resulted in
increased business from major regional and national accounts. New
merchandise assortments and selective distribution commitments have
generated promotional and advertising activities with this retailer
group which have resulted in improved rates of sales.
Initiatives to profile the Broyhill consumer and identify their needs,
wants, lifestyles and product use habits are providing insight into
activities ranging from product development to channels of distribution
to communication methods. Broyhill communicates with its targeted
consumers through an extensive print media campaign.
Through its Consumer Assistance Center 800 number, Broyhill provides
assistance to almost 100,000 consumers annually by answering product
questions, supplying literature and making referrals to retailers for
product presentations.
The Broyhill Showcase Gallery program, which has been established for
over twelve years, now has over 300 participating dealer locations. A
showcase gallery displays Broyhill furniture in complete, fully-
accessorized room settings. This program incorporates a core
merchandise stocking program, advertising material support, in-store
merchandising events and educational opportunities for the retail store
sales and management personnel. New retailers are attracted to the
program because it provides for continuity of product and service.
Broyhill believes retailers can substantially increase their sales per
square foot by conversion to a gallery format. Inventory stock turns
for galleries are also normally higher than those for non-gallery
programs because more complete room settings are sold from fully-
accessorized displays.
For the smaller Broyhill dealer unable to make a gallery commitment, the
Independent Dealer Program was launched in 1987. This concept was
designed to overcome some of the significant difficulties in running a
small independent furniture business and to provide smaller dealers with
many of the same advantages of product and service continuity available
to larger competitors. Participating retailers commit to a minimum
preselected lineup of Broyhill merchandise and receive a detailed
advertising and merchandising plan. The program includes four major
sales events per year and monthly promotional themes. Professionally-
prepared advertising and promotional materials are provided to the
dealer at nominal cost to help attract consumer attention at the local
level. The program currently has more than 600 retail locations
enrolled. During 1992, Broyhill launched an upgraded version of the
Independent Dealer Program called the Broyhill Furniture Center. This
program includes all the benefits of the Independent Dealer Program plus
additional marketing, designing, advertising and financing assistance.
Through its Contract Division, Broyhill offers a complete line of
hospitality furnishings to the hotel, motel and health care industries.
As hotels and health care facilities turn to residentially-styled
products and move away from a commercial look, Broyhill believes it will
be well positioned to serve this market as it can supply a complete
project with all of the furnishings required.
Many of Broyhill's large retail customers have reduced the level of
furniture inventory they hold and now look to manufacturers to provide
short turnaround delivery availability. Broyhill is instituting a
customer sales forecasting system that is designed to enhance customer
service while addressing the need for aggressive inventory management.
Broyhill's business is not highly seasonal by nature.
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Competition
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Based on published industry information, management believes Broyhill is
one of the largest and best known brands in the furniture industry. The
majority of furniture manufacturers in the United States are small
specialty firms with limited market identity.
The furniture manufacturing business is highly competitive and furniture
industry sales have historically been cyclical in nature. Broyhill
products compete with products made by a number of furniture
manufacturers, including Masco Corporation, Armstrong World Industries,
La-Z-Boy Chair Company, Ladd Furniture, Inc., Bassett Furniture
Industries, Inc. and Singer Furniture, as well as numerous smaller
producers. The elements of competition include pricing, styling,
quality and marketing. Broyhill furniture products are priced in a
popular price range and styled to appeal to the growing young to middle-
aged adult population. Product quality is monitored carefully through
the use of quality assurance programs and customer feedback. Broyhill
designers follow the marketplace closely to detect trends in product
design. Broyhill believes it is a major manufacturer in the mid-price
range in terms of sales volume and product selection offered.
Manufacturing
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Broyhill is a leader in automated furniture manufacturing. To meet the
demand for affordable quality products, Broyhill has emphasized the use
of mass production techniques.
Modern facilities, state-of-the-art technology and economies of scale
make Broyhill an efficient producer. The mid-price range products in
which it specializes are well suited to automated assembly line
techniques. Short set-up times and flexible manufacturing test runs
have reduced both manufacturing costs and overhead.
Broyhill believes it is one of the lowest-cost producers in the industry
and the most efficient producer in the medium-priced segment of the
industry in which it competes because of the degree of automation in its
manufacturing facilities, the close proximity of its manufacturing
facilities to each other and the size of the company. Its large size
enables it to negotiate more favorable agreements with suppliers for raw
materials and to achieve economies of scale by utilizing longer
productions runs. The high degree of automation also results in
substantial additional capacity which can be utilized by adding labor to
the present shift and by implementing second or third shifts.
In addition to the Broyhill brand products, Broyhill also manufactures
furniture-related products such as particleboard, drawer sides and
veneer for internal use and limited sale within the furniture industry.
Broyhill operates 16 finished goods production and warehouse facilities
totalling over 4.9 million square feet of manufacturing and warehouse
space. Several small supply factories are also maintained for parts
production. All but one of the plants are located within 60 miles of
Broyhill's Lenoir, North Carolina headquarters, which coordinates
centralized accounting, purchasing, credit, traffic and data processing
services.
Broyhill's major raw materials include lumber products, glass, finishing
materials, adhesive and upholstered goods, such as foam and fabrics.
Raw materials are generally abundant and available from many suppliers.
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The Lane Company, Incorporated
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Lane was founded by E.H. Lane in 1912 as a cedar chest maker and has
grown internally and by acquiring other furniture companies. Lane was
acquired by the Company in 1987. It employs approximately 6,500 people.
Lane designs and produces furniture through seven operating divisions --
Lane Division, Action Industries, Inc. ("Action Industries"), Hickory
Chair Company ("Hickory Chair"), The Pearson Company, Lane Upholstery,
Venture Furniture Company ("Venture") and Hickory Business Furniture
("HBF"). All divisions benefit from Lane's management systems,
marketing expertise and well-known corporate name. Management believes
this decentralized strategy allows the divisions to focus on their
competitive strengths and has been a key source of Lane's historical
success.
Products
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Lane manufactures and sells wood, metal and upholstered furniture,
reclining furniture and related furniture components. The collections
of related groups of furniture and other products currently include more
than 3,000 different items. Lane's product mix is approximately 25%
wood furniture and 75% upholstered furniture and other items. Products
are sold under the Lane name and other trademarks. Lane considers the
Lane, Action, Hickory Chair and James River Collection trademarks and
trade names to be material to its business.
The Lane Division manufactures and sells cedar chests, occasional living
room tables, bedroom and dining room furniture, wall systems, desks,
console tables and mirrors and other occasional wood pieces. Lane
Division furniture is sold in the medium to higher price ranges. In
1993, Lane Division positioned itself for future growth with the
installation of a state-of-the-art finishing system that will produce
excellent product quality at attractive prices.
Action Industries was acquired by Lane in 1972. Action Industries
manufactures and markets reclining chairs and other motion furniture in
the medium price range. Based on published industry information,
management believes it is the second largest manufacturer of reclining
chairs in the United States, with an approximate 20% share of the
market. Lane's Royal Development Company ("Royal Development") designs
and manufactures the mechanisms used in Action Industries reclining
furniture products. Action Industries' line of "motion furniture" which
incorporates a recliner within a sofa or loveseat, has produced strong
sales since its introduction in November, 1990. To meet the increasing
demand for its motion furniture, Action Industries completed
construction of a new 396,000 square-foot manufacturing facility in
1993.
Hickory Chair manufactures and sells traditional styles of upholstered
furniture, dining room chairs and occasional tables, principally in the
higher price range. Hickory Chair has been crafting fine 18th century-
style furniture for the past 80 years, including its James River
Collection of dining room, bedroom and occasional furniture, consisting
of reproductions inspired by heirlooms from historical James River
plantation homes in Virginia. It also manufactures and markets the Mark
Hampton Collection of fine home furnishings. Hickory Chair has recently
expanded its product line to other traditional styles to appeal to a
broader market. In 1993, Hickory Chair was selected as the licensee for
furniture reproductions from George Washington's Mount Vernon home.
The Pearson Company for over 50 years has been manufacturing and selling
contemporary and traditional styles of upholstered furniture including
sofas, love seats, chairs and ottomans in the upper-medium price range.
In 1992, Pearson introduced the Viceroy Collection by Victoria Moreland.
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Lane Upholstery includes two product lines one of which is composed of
contemporary and modern upholstered furniture and metal and glass
occasional and dining tables and the other of which is composed of
traditional and contemporary upholstered furniture, primarily sofas,
love seats, chairs and ottomans. Lane Upholstery sells in the medium
price range.
The Venture product line is composed of upholstered furniture made from
wicker, rattan and bamboo, together with tables, occasional wood pieces
and other home furnishing accessories. Venture manufactures and sells
an exclusive line of premium all-weather wicker and upholstered outdoor
furniture under the WeatherMaster trademark.
HBF manufactures and sells a line of office chairs, tables, desks and
credenzas in the upper-medium price range.
Marketing and Distribution
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Lane's furniture products are distributed nationally, principally to
retail outlets, including department stores, leading chain stores,
individual retail furniture stores and decorating studios. Lane
generally manufactures to order, so that large inventory build-ups are
avoided. Lane serves a broad-based clientele of over 12,000 active
accounts. Lane's sales force, which is organized by division, is
comprised of approximately 220 straight-commission salesmen, most of
whom represent Lane exclusively. Lane maintains showrooms for the
national furniture market in High Point, North Carolina. Lane operates
Lane Group Showrooms for the design trade in Chicago, Illinois; Atlanta,
Georgia; and San Francisco, California.
Lane has a growing gallery program in which selected dealers commit
floor space to a Lane furniture gallery. The dealers own the galleries
and the Lane furniture inventory, while Lane is responsible for
decorating the gallery and charges dealers for this service.
Approximately 120 dealers currently participate in Lane's gallery
program.
Lane advertises heavily in national magazines. Lane believes its long-
standing Lane "Keepsake" promotional program has made the Lane cedar
chest one of the best-known furniture products in the industry and
contributes to the high level of consumer recognition which Lane enjoys.
Lane's business is not highly seasonal in nature except for some
seasonality in the retailing of recliner products with peaks in June
(Father's Day) and December (Christmas).
Competition
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Lane competes in the medium to high price range, where styling and
quality considerations are more important competitive factors than
price. Lane maintains a policy of providing its customers with high
quality and current styles. To meet changing consumer tastes, Lane
updates its product offerings on a continuous basis, combining its line
of traditional models with up-to-date styles. Lane's primary
competitors are other manufacturers of furniture, including La-Z-Boy
Chair Company, Thomasville Furniture Industries, Inc. (a subsidiary of
Armstrong World Industries, Inc.), Masco Corporation's furniture
divisions, Century Furniture Co. and Ladd Furniture, Inc.
Manufacturing
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Lane operates 15 finished goods production and warehouse facilities.
Recent investment in advanced technology manufacturing equipment has
increased factory productivity. Lane's company headquarters are located
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in Altavista, Virginia, with major plants located there and in Rocky
Mount, Virginia and Hickory and High Point, North Carolina. Action
Industries' main plant and headquarters is located in Verona,
Mississippi with three other plants in Tupelo, Pontotoc and Saltillo,
Mississippi.
Lane's major raw materials include lumber products, glass, paints and
stains, adhesives and upholstery components, such as foam and fabrics.
In addition, Lane purchases finished furniture goods made to its
specifications, which are then sold to Lane customers. Raw materials
are generally abundant and available from many suppliers.
Footwear Segment
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The Florsheim Shoe Company
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Based on published industry information, management believes Florsheim
is a leading manufacturer and retailer of quality men's dress and dress
casual footwear. Florsheim was founded in 1892 and was acquired by
INTERCO in 1952. Florsheim employs approximately 3,600 people
worldwide.
Products
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Florsheim offers a broad line of men's quality dress, dress casual and
casual footwear in the medium to higher price range. Management
estimates Florsheim holds approximately 20% of the market for men's
dress and dress casual footwear in its retail price range ($60 and
above). Florsheim also manufactures and sells a line of safety footwear
under the Hy-Test trade name.
The major trademarks and trade names under which Florsheim's men's
footwear are sold are: Florsheim, Florsheim ComforTech, Florsheim
Outdoorsman, Florsheim Imperial, and Florsheim Royal Imperial.
Florsheim considers each of these trademarks and trade names to be
material to its business.
The dramatic growth in athletic footwear in the 1980's significantly
altered the characteristics of the domestic footwear industry.
Florsheim has maintained a significant position in the industry in spite
of this change. Management has responded to changing consumer tastes by
substantially expanding its product line. In addition to its
traditional dress shoes, Florsheim has expanded its product line to
include a complete selection of casual looks. These new products
supported by increased advertising are targeted to produce market share
gains in both dress and casual shoes and are positioned to attract a new
generation of consumers to Florsheim.
Marketing and Distribution
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Florsheim markets its products worldwide, with domestic sales comprising
approximately 85% of total sales. Florsheim distributes its products
through a network of approximately 300 Florsheim-operated retail shops
and outlets in the United States and through approximately 60 retail
shops in Canada and Australia, primarily in major metropolitan areas,
and through approximatley 5,000 thousand independent dealer locations
worldwide. In addition to its existing foreign markets in Canada,
Australia, Mexico and Hong Kong, Florsheim exports product to a variety
of customers in many countries and is developing new markets in Europe
and the Pacific Rim.
Florsheim's strategy is to sell exclusively Florsheim branded products
in its company operated retail shops. This strategy enhances
Florsheim's image of quality and value and builds public awareness of
the brand and of Florsheim's dedication to customer service. Florsheim
is currently in process of updating the interiors of many of its retail
shops to appeal to more of today's consumers.
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Florsheim is concentrating on expanding its wholesale business. These
expansion plans focus on smaller independent dealers and secondary
markets (strip centers and malls in mid-sized cities), and on selected
department stores, mass merchandisers and men's clothing stores.
Florsheim also markets its footwear through its Express Shop Program.
The Express Shop is a computer console that allows a customer to select
any size, style or color of footwear from Florsheim's product line.
Express orders are processed at a centrally-located warehouse and can be
delivered to the customer's home or office within a week. Approximately
500 Express Shop machines are now in operation.
Competition
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Management believes Florsheim's brand recognition, reputation for
quality and value and extensive retail and wholesale distribution
network will continue to provide strategic advantages over the long
term.
The dramatic growth in athletic footwear during the 1980's significantly
altered the competitive characteristics and the retail distribution
patterns in the domestic footwear industry. From 1985 through 1993 the
dress and casual footwear market experienced marginal increases in
revenue. Several factors lead industry observers to forecast a return
to growth for the traditional dress and casual footwear industry. For
example, the cost differential between athletic and traditional footwear
has narrowed considerably. Also, traditional footwear manufacturers are
now incorporating into their products some comfort-related features
previously associated with athletic footwear. Florsheim's ComforTech
line is designed to address this trend.
In addition to competition from athletic footwear, traditional domestic
manufacturers of men's dress and casual footwear experience significant
competition from imports. Florsheim has addressed this trend by
increasing foreign manufacturing and sourcing. Approximately 70% of
Florsheim's sourcing requirements are currently fulfilled outside of the
United States.
The consolidation of the retail footwear industry since the 1970s has
also affected Florsheim's operations. In response to this
consolidation, Florsheim has focused on the most productive stores and
eliminated stores in unprofitable or non-strategic locations.
Manufacturing
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Florsheim footwear products are manufactured both domestically and
overseas. Florsheim owns manufacturing plants in Cape Girardeau and
Kirksville, Missouri, as well as a warehouse/distribution center in
Jefferson City, Missouri. Florsheim manufactures its Hy-Test product
line in a leased facility in West Plains, Missouri. Approximately 70%
of Florsheim's non-domestic production is performed in India, where
Florsheim is a participant in a joint venture arrangement with a local
operator, and the remaining 30% of non-domestic production is sourced
from a variety of foreign suppliers in a number of other countries.
By using a mix of domestic and overseas production, Florsheim is able to
benefit from lower costs for certain labor-intensive operations while
maintaining a manufacturing base close to its primary end market.
Florsheim's foreign operations are subject to the usual risks of doing
business abroad such as currency fluctuations, labor unrest, political
instability, restrictions on transfer of funds, export duties and quotas
and to United States customs and tariffs.
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Florsheim's major raw materials include leather uppers, linings and
outsoles. Florsheim obtains raw materials and components from a wide
variety of sources located throughout the world and has alternate
sources for all leathers, components and other materials. Leather
pricing and availability are subject to fluctuating supply and
demand cycles; however, Florsheim management believes it has
adequate sourcing arrangements to ensure an uninterrupted supply of raw
materials.
Other Information
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As a large majority of Florsheim's wholesale sales are "at once" orders,
Florsheim is required to maintain substantial inventory levels.
Florsheim's retail outlets generally sell products inventoried at the
store location. Florsheim believes its retail outlets maintain somewhat
greater inventory levels than its competitors as they carry a larger
selection of shoe sizes and widths.
Florsheim's retail and wholesale sales tend to be somewhat seasonal in
nature, however, such sales complement each other such that seasonality
is not a significant factor in its business.
Converse Inc.
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Converse Inc. was founded in 1908, sold its first branded athletic shoe
in 1911, and was acquired by the Company in 1986. Converse employs
approximately 3,100 people worldwide.
Products
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Converse's traditional strength is its men's basketball shoes, marketed
under the Converse name. Men's basketball shoes currently account for
approximately 42% of its total revenues. Converse has a leading
position as a provider of footwear to basketball players in the National
Basketball Association (where it is the official shoe), on college
basketball teams, including National Collegiate Athletic Association
teams, and on high school athletic teams. Converse currently supplies
approximately 35% of the athletic footwear needs of the United States
college basketball teams. This visibility enhances the performance
image of its product line. Management believes the Converse basketball
line is recognized by consumers as one of the most technologically sound
lines in the business. It is Converse's belief that a performance-
oriented brand image should result in increased sales and an expansion
of its distribution network.
Converse's Athleisure footwear lines generated approximately 35% of
Converse's total revenues in calendar 1993. The All Star line
represents the vast majority of athleisure sales. This line is most
popular with male and female consumers between 16 and 26 years of age.
During 1993, domestic demand for the All Star product continued to
surge, more than compensating for weaknesses in the international
economies where the product line is sold.
Converse supplements the All Star line with its Jack Purcell and One
Star lines. As part of its effort to build demand for all of these
products, Converse has developed seasonal and specialty collections of
product.
Converse's children's footwear category had a strong year in 1993,
growing to approximately 12% of total revenues. This category, which
typically consists of sized down versions of the popular adult models,
has been targeted for growth. New footwear products, "for children
only" continue to be developed and sold under the Converse name.
Converse also markets a full line of athletic footwear for both men and
women, including tennis, cleated, running, cross training, outdoor and
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walking shoes, under the Converse name.
Research and Development
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Converse has invested significantly to maintain its position as a
respected manufacturer of performance athletic footwear. Its
biomechanics laboratory is one of the most advanced facilities of its
kind in the industry. Converse's biomechanics laboratory continually
conducts extensive research on new performance enhancement technologies.
The laboratory is also involved in the design stages of performance
footwear to maximize the attributes required for each sport, and to help
protect the athletes wearing Converse products. In 1993, Converse spent
approximately $6.1 million on research and development, compared to $5.1
million in 1992 and $4.9 million in 1991.
Marketing
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Converse markets its footwear products domestically through
approximately 7,500 retail accounts consisting of sporting goods stores,
specialty athletic footwear stores, shoe stores and department stores.
In the United States, Converse's sales are strongest in the metropolitan
areas and in the Midwest and West regions. Converse estimates that
roughly 75% of its footwear products are purchased by men. Converse
also sells in-line product and excess inventory through 21 company-
operated factory outlet stores.
Approximately 99% of domestic sales are generated by Converse's direct
sales force. Converse salespeople follow a commission schedule
structured to reward future-order business (orders placed four to six
months before delivery). Converse has special selling arrangements that
support certain large-volume accounts.
Outside of the United States, Converse currently distributes its
products in more than 90 countries. Generally, international sales are
made through a network of independent distributors, independent
licensees and, to a lesser extent, direct sales. Converse receives
royalties, based on a percentage of sales, from its licensees and has
final approval over all products distributed through such licensees.
Western Europe, Japan, Latin America, Canada and the United Kingdom
represent important markets for Converse. Converse believes it has
significant international growth potential once the international
economies recover from their current weakness. In 1993, international
sales were approximately 30% of Converse's total revenues. As part of
its long-term strategic plan, Converse is negotiating partnership
arrangements in key international countries.
Converse has continued its expansion of media-based advertising. The
combination of exciting endorsers and creative advertising has helped to
fuel Converse's growth. Converse will continue to use a blend of
creative advertising and associations with professional athletes and
amateur teams. Contractually-obligated professional endorsers include
Larry Johnson, Kevin Johnson, and J.R. Rider, among others. Converse
has contractual associations with colleges and universities including
Kentucky, Kansas, Arkansas, Indiana and Louisville. Converse spends
approximately 10% of net revenues on promotion and advertising.
Sales of athletic footwear tend to be seasonal in nature, with the
strongest sales occurring in the first and third quarters.
Competition
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The athletic footwear market is highly competitive. Industry
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participants compete with respect to performance, comfort, fashion,
durability and price. The athletic footwear industry in the United
States can be broken down into several groups. Two companies, Nike and
Reebok, each generate worldwide revenues in excess of $3 billion
annually and control approximately 50% of the domestic market. These
companies have full lines of product offerings and distribute to more
than 10,000 outlets. Neither Nike nor Reebok is highly leveraged.
These two companies spend substantially more on product advertising than
Converse. Adidas, ASICS, Fila, L.A. Gear and Stride Rite (Keds) along
with Converse form a second tier of competitors with 1993 revenues of
between $300 million and $1 billion. These companies, as well as Nike
and Reebok, also compete with Converse for suppliers and for foreign
manufacturing facilities.
In addition to these competitors, there is a third tier of companies
with domestic revenues of $100 to $300 million, consisting of Avia
(owned by Reebok), British Knights, Etonic, K-Swiss, New Balance and
Saucony, among others.
Manufacturing
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Converse currently sources athletic footwear almost equally on a pairage
basis between its own domestic facilities and international suppliers
(although Converse relies exclusively on the Far East for sourcing
leather footwear requirements). Converse is the only major athletic
footwear company with significant domestic manufacturing capabilities.
Converse's manufacturing strategy gives it the flexibility to adjust
production to reduce costs, avoid large duty-related costs on canvas
products and provide insulation against disruption of the production
process.
Converse presently owns and operates a manufacturing facility in
Lumberton, North Carolina which is used to produce canvas shoes.
Converse also owns a manufacturing operation in Reynosa, Mexico which it
uses to stitch footwear uppers for incorporation into footwear at the
Lumberton facility. The Mexican facility has the advantage of offering
Converse lower labor rates and shorter lead times than the Far East, and
more efficient use of its domestic production facilities. Converse is
in the process of opening a second domestic manufacturing plant to
expand the production of All Star products. This new manufacturing
facility is located in Mission, Texas across the border from Converse's
Reynosa facility.
Over twenty foreign manufacturers supply Converse, most of which are
located in the Far East, particularly South Korea, Taiwan, Indonesia,
and China. Products are purchased from foreign suppliers using
individual purchase orders as opposed to long-term contracts. Converse
competes with Nike, Reebok and other competitors for access to these
foreign manufacturers.
Like its major competitors, Converse's foreign operations are subject to
the usual risks of doing business abroad, such as export duties, quotas,
currency fluctuations, restrictions on the transfer of funds, labor
unrest and political instability. In addition, products manufactured
overseas are subject to United States customs duties.
The principal materials used in Converse's products are canvas, rubber,
nylon and leather. These materials are generally obtained from a
variety of sources. Converse has elected for cost purposes to obtain
certain of its raw materials from single sources, but alternative
sources are available.
Trademarks and Trade Names
- --------------------------
Converse considers all of its trademarks and trade names to be material
to its business and aggressively protects such rights. The loss of any
13
of the Converse, All Star, Chuck Taylor, Cons, Jack Purcell, REACT,
Run'N Slam, TAR MAX, Star logo or Chevron and Star logo trade names and
trademarks could have a material impact on Converse's business.
Backlog
- -------
In the Furniture Segment, the order backlog at the end of December, 1993
aggregated approximately $152 million, compared to approximately $128
million at the end of December, 1992. In the Footwear Segment, the
order backlog at the end of December, 1993 aggregated approximately $156
million, compared to approximately $135 million at the end of December,
1992.
Trademarks and Trade Names
- --------------------------
Each of the operating companies utilizes trademarks and trade names
extensively to promote brand loyalty among consumers. The Company
aggressively protects its trademarks and trade names by taking
appropriate legal action against anyone who infringes upon or misuses
them.
Governmental Regulations
- ------------------------
The Company does not believe compliance by it with federal, state and
local provisions which have been enacted or adopted regulating the
discharge of materials into the environment, or otherwise relating to
the protection of the environment, will have a material effect upon
capital expenditures, earnings or competitive position. See - "Legal
Proceedings".
Employees
- ---------
As of December 31, 1993, the Company and its subsidiaries employed
approximately 20,045 people, of which approximately 13,300 and 6,700
were employed in the Furniture Segment and the Footwear Segment,
respectively, with the remainder (approximately 45) employed at Company
headquarters. Approximately one-half of Florsheim's work force is
represented by unions.
14
Item 2. Properties
- -------------------
The Company owns or leases the following principal plants, offices and
warehouses:
Floor Owned
Type of Space or
Division Location Facility (Sq. Ft.) Leased
- -------- -------- -------- --------- ------
INTERCO St. Louis, MO Headquarters 26,800 Leased
Broyhill Lenoir, NC Headquarters 136,000 Leased
Broyhill Lenoir, NC Plant/Warehouse 312,632 Owned
Broyhill Newton, NC Plant/Warehouse 382,626 Owned
Broyhill Lenoir, NC Plant/Warehouse 628,000 Owned
Broyhill Rutherfordton, NC Plant/Warehouse 575,656 Owned
Broyhill Lenoir, NC Plant/Warehouse 419,000 Owned
Broyhill Lenoir, NC Plant/Warehouse 364,000 Owned
Broyhill Conover, NC Plant/Warehouse 313,580 Owned
Broyhill Lenoir, NC Plant 345,439 Owned
Broyhill Lenoir, NC Plant 165,640 Owned
Broyhill Lenoir, NC Plant/Warehouse 252,380 Owned
Broyhill Taylorsville, NC Plant/Warehouse 212,754 Owned
Broyhill Lenoir, NC Plant 124,700 Leased
Broyhill Hickory, NC Plant/Warehouse 215,500 Leased
Broyhill Marion, NC Plant 22,712 Owned
Broyhill Lenoir, NC Warehouse 96,000 Owned
Broyhill Lenoir, NC Warehouse 503,250 Leased
Lane Altavista, VA Plant/Warehouse 1,091,600 Owned
Lane Altavista, VA Headquarters 62,000 Owned
Lane Conover, NC Plant/Warehouse 212,000 Owned
Lane Conover, NC Plant/Warehouse 348,180 Owned
Lane Conover, NC Plant 150,130 Owned
Lane Hickory, NC Plant/Warehouse 641,214 Owned
Lane Hickory, NC Plant/Warehouse 169,902 Owned
Lane High Point, NC Plant 187,162 Owned
Lane High Point, NC Plant/Warehouse 156,000 Owned
15
Floor Owned
Type of Space or
Division Location Facility (Sq. Ft.) Leased
- -------- -------- -------- --------- ------
Lane Pontotoc, MS Plant/Warehouse 352,740 Owned
Lane Rocky Mount, VA Plant/Warehouse 598,962 Owned
Lane Verona, MS Plant/Warehouse 395,050 Owned
Lane Saltillo, MS Plant/Warehouse 567,500 Owned
Lane Tupelo, MS Plant/Warehouse 396,175 Owned
Lane Rocky Mount, VA Plant 50,300 Owned
Lane Smyrna, TN Plant 28,300 Owned
Florsheim Chicago, IL Headquarters 285,000 Owned
Florsheim Jefferson City, MO Warehouse 562,770 Owned
Florsheim Cape Girardeau, MO Plant 90,000 Owned
Florsheim Kirksville, MO Plant 104,203 Owned
Florsheim West Plains, MO Plant 89,841 Leased
Florsheim Preston, Australia Plant/Warehouse 59,300 Leased
Converse North Reading, MA Headquarters 106,800 Owned
Converse Lumberton, NC Plant 386,761 Owned
Converse Charlotte, NC Distribution Center/
Sales Office 431,665 Leased
Converse Reynosa, Mexico Plant 41,000 Owned
Converse Mission, TX Plant 55,552 Leased
_______________
Substantially all of the owned properties listed above are encumbered by a
first priority lien and mortgage pursuant to the Company's Credit Agreement
with BT Commercial Corporation, as Agent, and the banks named therein, dated
as of July 16, 1992, as amended, and by subordinate liens and mortgages
pursuant to the Company's Secured Term Loan Agreement, dated as of July 16,
1992, as amended, the ILGWU Fund Note, dated July 16, 1992 and the Indentures,
dated as of July 16, 1992, relating to the Company's 10% Secured Notes due
2001, 9% Secured Notes due 2004 and 8.5% Secured Notes due 1997. In addition,
the North Reading, Massachusetts and the Tupelo, Mississippi facilities are
encumbered by mortgages and first liens securing industrial revenue bonds.
The Company believes its properties are generally well maintained, suitable
for its present operations and adequate for current production requirements.
Productive capacity and extent of utilization of the Company's facilities are
difficult to quantify with certainty because in any one facility maximum
capacity and utilization varies periodically depending upon the product that
16
is being manufactured, the degree of automation and the utilization of the
labor force in the facility. In this context, the Company estimates that
overall its production facilities were effectively utilized during calendar
1993 at moderate to high levels of productive capacity and believes that in
general its facilities have the capacity, if necessary, to expand production
to meet anticipated product requirements.
Item 3. Legal Proceedings
- --------------------------
Notwithstanding the confirmation and effectiveness of the Company's
Amended Joint Plan of Reorganization under Chapter 11 (the "Plan"), the
Court continues to have jurisdiction to, among other things, resolve
disputed pre-petition claims against the Company, resolve matters
related to the assumption, assumption and assignment, or rejection of
executory contracts pursuant to the Plan, and to resolve other matters
that may arise in connection with or relate to the Plan. Pursuant to
the Plan, the Company, on the effective date, paid into a Disputed
Claims Trust the face amount of certain claims still to be resolved.
Since those unresolved claims were funded at their face amounts, the
Company has no further financial exposure with respect to those claims.
The Company is or may become a defendant in a number of pending or
threatened legal proceedings in the ordinary course of business. In the
opinion of management, the ultimate liability, if any, of the Company
from all such proceedings will not have a material adverse effect upon
the consolidated financial position or results of operations of the
Company and its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
PART II
-------
Item 5. Market for The Registrant's Common Equity and Related Stockholder
- --------------------------------------------------------------------------
Matters
- -------
As of February 28, 1994, there were approximately 3,775 holders of
record of Common Stock.
Shares of the Company's Common Stock are traded on the New York Stock
Exchange. The reported high and low sale prices for the Company's
Common Stock on the New York Stock Exchange is included in Note 18 to
the consolidated financial statements of the Company.
The Company has not paid dividends on its Common Stock during the two
years ended December 31, 1992 and December 31, 1993.
A discussion of restrictions on the Company's ability to pay cash
dividends is included in Note 10 to the consolidated financial
statements of the Company.
17
Item 6. Selected Financial Data
- --------------------------------
FIVE YEAR CONSOLIDATED FINANCIAL REVIEW
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands except per Year Ended Five Months Ended Fiscal Years Ended
share data) ---------- ---------------------- ------------------------------------
Dec. 31, Dec. 31,\ Aug. 2, Feb. 29, Feb. 23, Feb. 24,
1993 1992 \ 1992 1992 1991 1990
- -------------------------------------------------------------\--------------------------------------------------------
\
Summary of Operations: \
Net sales $1,656,814 $ 662,274 \ $ 603,573 $ 1,471,745 $ 1,439,246 $ 1,656,079
Cost of sales 1,114,867 442,646 \ 415,030 998,354 992,209 1,102,572
Interest expense 56,472 23,967 \ 36,898 106,199 259,495 303,123
Earnings (loss) before income tax \
expense (benefit), discontinued \
operations, extraordinary item \
and cumulative effect of \
accounting change 75,972 35,876 \ 135,356 (45,235) (215,482) (63,580)
Income tax expense (benefit) 30,604 14,550 \ (1,044) 3,657 (64,108) (9,752)
Net earnings (loss) before \
discontinued operations, \
extraordinary item and \
cumulative effect of \
accounting change 45,368 21,326 \ 136,400 (48,892) (151,374) (53,828)
Discontinued operations - - \ - - (24,962) 86,082
Extraordinary item - - \ 1,075,466 - - -
Cumulative effect of accounting \
change - - \ (25,544) - - -
Net earnings (loss) applicable to \
common stock $ 45,368 $ 21,326 \ $1,186,322 $ (48,892)$ (272,097) $ (51,584)
\
Per share of common stock - \
primary and fully diluted: \
Net earnings (loss) before \
discontinued operations, \
extraordinary item and \
cumulative effect of \
accounting change $ 0.88 $ 0.43 \ $ 3.52 $ (1.26)$ (6.38) $ (3.57)
Discontinued operations - - \ - - (0.65) 2.23
Extraordinary item - - \ 27.72 - - -
Cumulative effect of accounting \
change - - \ (0.66) - - -
Net earnings (loss) applicable \
to common stock $ 0.88 $ 0.43 \ $ 30.58 $ (1.26)$ (7.03) $ (1.34)
\
Weighted average common and common \
equivalent shares outstanding - \
fully diluted (in thousands) 51,397 50,000 \ 38,796 38,731 38,720 38,585
\
Cash dividends paid: $ - $ - \ $ - $ - $ - $ -
Common stock $ - $ - \ $ - $ - $ - $ -
Preferred stock $ - $ - \ $ - $ - $ - $ -
\
Other Information: \
Working capital $ 533,915 $ 503,875 \ $ 518,983 $ 708,706 $ 719,738$(1,242,776)
Property, plant and equipment, net 216,301 202,285 \ 203,904 165,633 172,112 186,919
Capital expenditures 43,938 12,936 \ 10,099 28,369 19,612 29,663
Total assets 1,205,679 1,177,537 \ 1,202,316 1,250,083 1,145,562 1,161,230
Long-term debt 576,804 585,968 \ 635,721 - - 3,176
Liabilities subject to compromise - - \ - 2,165,311 2,137,658 -
Shareholders' equity (deficit) $ 338,557 $ 293,114 \ $ 275,400 $(1,186,522) $(1,135,211) $ (958,958)
-----------------------------------------------------------\-----------------------------------------------------------
As discussed in Note 2 to the Consolidated Financial Statements, the Company changed its fiscal year to end on December
also discussed in Note 2, the Company's adoption of fresh-start reporting required reporting calendar 1992 results in two
periods.
As discussed in Note 2 to the Consolidated Financial Statements, the Company stopped providing for preferred dividend requ
in fiscal 1992.
In connection with the adoption of fresh-start reporting, property, plant and equipment was adjusted to fair value resulti
increase of approximately $42,400 as of August 2, 1992.
$1,055,132 and $1,007,882 of long-term debt are included in liabilities subject to compromise as of February 29, 1992 and
23, 1991, respectively.
$600,536 of long-term debt was reclassified as current liabilities as of February 24, 1990.
/TABLE
18
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
- ---------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Results of Operations
INTERCO INCORPORATED (the "Company") is a major manufacturer of residential
furniture and one of the leading manufacturers and retailers of footwear
through two operating segments. The furniture segment consists of Broyhill
Furniture Industries, Inc. and The Lane Company, Incorporated and the footwear
segment consists of The Florsheim Shoe Company and Converse Inc.
On January 24, 1991, INTERCO INCORPORATED and its domestic subsidiaries
filed petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Eastern District
of Missouri (the "Court"). On June 26, 1992, the Court approved and confirmed
the Amended Joint Plan of Reorganization of the Company (the "Plan") and the
order was docketed on June 30, 1992. The Company emerged from Chapter 11
effective with the beginning of business on August 3, 1992. In general, the
Plan provided for resolution of all claims against the Company as of January
24, 1991, the Chapter 11 filing date, as well as resolution of certain legal
disputes, in exchange for cash, new indebtedness and/or new common equity
securities. The distribution record date for determining those creditors to
whom distributions were made was June 30, 1992. The Plan provided for no
distributions to the holders of the Company's Series D Preferred Stock, Series
E Preferred Stock or common stock, and all outstanding shares of those equity
securities were cancelled as of the effective date of the Plan.
As of August 2, 1992, in accordance with the AICPA Statement of Position
90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code", the Company was required to adopt "fresh-start" reporting and reflect
the effects of such adoption in the financial statements for the five months
ended August 2, 1992. Accordingly, a vertical black line is shown to separate
post-emergence operations from those prior to August 3, 1992 in the
consolidated financial statements since they have not been prepared on a
comparable basis.
Effective December 31, 1992, the Company changed its fiscal year end to
December 31. For purposes of this discussion, calendar 1993 refers to the 12
month period ended December 31, 1993, calendar 1992 refers to the two five
month periods ended December 31, 1992 and August 2, 1992, and fiscal 1992
refers to the 12 month period ended February 29, 1992.
Net Sales
Net sales of the operating companies, by segment, for the last three years
were as follows:
- ----------------------------------------------------------------------------
(In millions) Calendar 1992
------------------------
Calendar 1993 Five Months \Five Months Fiscal 1992
Year Ended Ended \ Ended Year Ended
December 31, December 31,\ August 2, February 29,
1993 1992 \ 1992 1992
- ---------------------------------------------------\------------------------
Furniture segment $ 980.5 $394.9 \ $356.7 $ 819.3
Footwear segment 676.3 267.4 \ 246.9 652.4
- ---------------------------------------------------\------------------------
$1,656.8 $662.3 \ $603.6 $1,471.7
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
19
Furniture segment sales for calendar 1993 were $980.5 million,
representing an increase of 10.3% over the comparable (12 month) period last
year. Furniture segment sales increased 10.2% in calendar 1992 (ten month
period) over the same period in the prior year, while fiscal 1992 sales
increased 4.2%. Broyhill and Lane each realized sales increases in calendar
1993. New product offerings and marketing programs at both furniture
companies continued to be well received with order levels for incoming
business reflecting an improving U.S. economy and favorable industry
conditions.
For calendar 1993, footwear segment sales were $676.3 million representing
an increase of 4.8% over the comparable period a year ago. Footwear segment
sales in calendar 1992 (ten month period) decreased 1.4% from the same period
in the prior year, while fiscal 1992 sales were about even with those reported
in the previous year. The sales increase in calendar 1993 occurred at
Converse and was attributable to higher shipments of performance basketball,
athleisure (canvas) and children's footwear to primarily domestic customers,
resulting from new product introductions and aggressive advertising and
promotion programs. Florsheim's calendar 1993 sales were down from the
comparable prior year period due to fewer price promotions in the current year
and nonrecurring sales last year from retail stores since closed. For
calendar 1992, Florsheim's sales declined due to the disposal of its retail
business in Mexico and its Bowen Shoe operation and the closing of a number of
retail stores during the year. Converse's sales increased during calendar
1992, helped by expanded advertising and promotion programs. For fiscal 1992,
Converse's sales increased; however, Florsheim's sales were impacted by the
dispositions noted previously.
Earnings (EBITDA)
Upon emergence from Chapter 11, the Company was required to adopt fresh-
start reporting which resulted in the revaluation of all assets and
liabilities to reflect the Company's estimated reorganization value. As a
result, gross profits and operating earnings subsequent to August 2, 1992 are
not comparable with those of prior periods. However, earnings before interest
expense, income taxes, depreciation and amortization, and other income and
expense ("EBITDA") are comparable on both a segment and consolidated basis;
consequently, the following management discussion and analysis of
profitability begins at that point.
- ------------------------------------------------------------------------------
(In millions) Calendar 1992
------------------------
Calendar 1993 Five Months \Five Months Fiscal 1992
Year Ended Ended \ Ended Year Ended
December 31, December 31,\ August 2, February 29,
1993 1992 \ 1992 1992
- -----------------------------------------------------\------------------------
Earnings before interest \
expense, income taxes, \
depreciation and \
amortization, and other \
income and expense: \
Furniture segment $121.7 $ 49.3 \ $ 34.1 $ 88.4
Footwear segment 61.2 23.8 \ 11.8 41.7
--------------------\------------------------
182.9 73.1 \ 45.9 130.1
Corporate administration (9.7) (3.6)\ (3.8) (8.6)
Miscellaneous expenses (4.5) (0.9)\ (2.3) (2.3)
- -----------------------------------------------------\------------------------
168.7 68.6 \ 39.8 119.2
Depreciation and amortization (36.2) (13.7)\ (13.2) (32.2)
- -----------------------------------------------------\------------------------
Earnings from operations $132.5 $ 54.9 \ $ 26.6 $ 87.0
==============================================================================
20
EBITDA of the combined operating segments for calendar 1993 was 11.0% of
net sales, as compared to 9.2% for the comparable (12 month) period last year.
Furniture segment EBITDA for calendar 1993 was 12.4% of net sales versus 10.8%
in the comparable prior year. The improved EBITDA performance for the period
reflected favorable factory utilization and sales of higher margin products
resulting from the furniture companies' internal profit improvement programs.
As a percent of net sales, footwear segment EBITDA for calendar 1993 increased
to 9.0%, compared to 7.1% last year. The improved EBITDA performance
reflected strong sales of higher margin products, particularly at Converse,
less closeout merchandise requiring price promotion at both companies, the
closing of unprofitable retail stores by Florsheim and increased royalty
income.
For calendar 1992 (ten month period), EBITDA of the combined operating
segments was 9.4% of net sales, as compared to 8.9% for the prior year
comparable period. Furniture segment EBITDA for the ten months ended December
31, 1992 was 11.1% of net sales, equal to the same period in the prior year.
As a percent of net sales, footwear segment EBITDA for calendar 1992 (ten
month period) increased to 6.9%, compared to 6.1% in the previous year. The
improved EBITDA performance reflected the sale of higher margin products,
reduced closeout merchandise, the closing of unprofitable retail stores and
increased royalty income.
Fiscal 1992 EBITDA of the combined operating segments was 8.8% of net
sales, as compared to 7.7% in fiscal 1991. Furniture segment EBITDA decreased
to 10.8% of net sales, compared to 11.6% for the same period in the prior
year, due primarily to product mix and underutilization of manufacturing
facilities. Footwear segment EBITDA, as a percent of net sales, increased to
6.4%, compared to 3.0% in fiscal 1991. The improved EBITDA performance
resulted from benefits achieved from Converse's fiscal 1991 restructuring
program. Florsheim's fiscal 1992 operating margins were down due to its
restructuring program and disappointing retail traffic levels.
Miscellaneous expenses for calendar 1993 included nonrecurring costs
primarily associated with the Company's settlement of certain litigation as
well as legal and accounting fees related to debt and equity securities'
registrations completed during the year.
Interest Expense
Interest expense for calendar 1993 totaled $56.5 million. As of August 3,
1992, the Company, in connection with its emergence from Chapter 11 and
pursuant to the Plan, issued long-term debt (along with cash, common stock and
warrants to purchase common stock) to settle pre-petition liabilities. As a
result, interest expense for calendar 1993 was based on the Company's post-
emergence debt structure and, therefore, is not comparable to the same periods
of the prior year.
Interest expense for the five months ended December 31, 1992, which
totaled $24.0 million, was also based on the Company's post-emergence debt
structure whereas interest expense for the five months ended August 2, 1992,
which totaled $36.9 million, was based on the Company's former (pre-emergence)
debt structure.
Fiscal 1992 interest expense totaled $106.2 million which decreased from
the prior year due primarily to the Company stopping interest accruals on its
debt obligations considered unsecured as of January 24, 1991.
Other Income (Expense), Net
Other income (expense), net for calendar 1993 totaled $(0.1) million
compared to $4.9 million for the ten months ended December 31, 1992 and $2.0
million for fiscal 1992. Other income (expense), net for calendar 1993
consisted of interest income on short-term investments of $1.0 million and
other miscellaneous income and (expense) items totaling $(1.1) million.
21
Reorganization Items
Reorganization items consist of: adjustments to record assets and
liabilities at fair value in connection with the Company's implementation of
fresh-start reporting; and income, expenses and other costs directly related
to the reorganization of the Company from the Chapter 11 filing date to its
emergence from bankruptcy effective August 3, 1992. Additional information is
presented in Note 3 of the Notes to Consolidated Financial Statements.
Income Tax Expense (Benefit)
For calendar 1993, the Company provided for income taxes totaling $30.6
million on earnings before income tax expense totaling $76.0 million,
producing an effective tax rate of 40.3%. The effective tax rate was
adversely impacted by certain nondeductible expenses incurred, provisions for
state, local and foreign taxes and an increase in the Federal income tax rate,
partially offset by certain deductible expenses provided for in the prior
year.
The effective tax rates for calendar 1992 and fiscal 1992 were each
adversely impacted by certain nondeductible expenses incurred, including a
substantial portion of the expenses relating to the reorganization items, and
provisions for state, local and foreign taxes.
Extraordinary Item - Gain on Extinguishment of Debt
Pursuant to the Plan, on the effective date (August 3, 1992) the Company
distributed cash, debt securities, common stock and warrants to purchase
common stock in settlement of its pre-petition liabilities. The book value of
cash and securities distributed was approximately $1.1 billion less than the
pre-petition liabilities, and the resultant gain was recorded as an
extraordinary item.
Cumulative Effect of Accounting Changes
In connection with the adoption of fresh-start reporting, the Company was
required to adopt SFAS No. 106, "Employers' Accounting for Postretirement
Benefits other than Pensions", as of August 2, 1992. The Company recognized
the full amount of the initial liability upon adoption of SFAS No. 106. The
cumulative effect of the change on retained earnings prior to the adoption of
fresh-start reporting at August 2, 1992 was a charge of $23.6 million, net of
income taxes of $13.2 million. In addition, the Company was required to adopt
SFAS No. 109, "Accounting for Income Taxes", as of August 2, 1992. The
cumulative effect of the change on retained earnings prior to the adoption of
fresh-start reporting at August 2, 1992 was a charge of $1.9 million.
Net Earnings (Loss) Per Common Share
Net earnings per common share on a primary and fully diluted basis were
$0.88 for calendar 1993. Pursuant to the Plan, the Company cancelled all
outstanding equity securities effective with the beginning of business on
August 3, 1992 and issued new common stock. Accordingly, net earnings (loss)
per common share for periods prior to August 3, 1992 are not comparable.
Weighted average shares used in the calculation of primary and fully
diluted net earnings per common share for calendar 1993 were 51,375,000 and
51,397,000, respectively.
22
Financial Condition
Working Capital
Cash and cash equivalents at December 31, 1993 totaled $45.3 million,
compared to $68.0 million at December 31, 1992. For calendar 1993, net cash
provided by operating activities totaled $49.6 million. Net cash used by
investing activities totaled $43.2 million, including $43.9 million of capital
expenditures incurred by the operating companies to add, upgrade or replace
property, plant and equipment. Net cash used by financing activities during
calendar 1993 totaled $29.1 million, substantially all of which pertained to
payments made on long-term debt.
Working capital was $533.9 million at December 31, 1993, compared to
$503.9 million at December 31, 1992. The current ratio was 4.2 to 1 at
December 31, 1993, compared to 3.9 to 1 at December 31, 1992. The increase in
working capital between years is a result of the growth incurred by each
operating segment as demonstrated by the improved sales and earnings
performance described previously.
Financing Arrangements
At December 31, 1993, long-term debt, including current maturities,
totaled $586.1 million, compared to $615.3 million at December 31, 1992. The
reduction in long-term debt, totaling $29.2 million, was a result of scheduled
debt payments made by the Company, including $23.2 million in excess cash flow
debt payments pertaining to calendar 1992 results of operations. As a result,
the Company's debt-to-capitalization ratio improved to 63.4% at December 31,
1993, compared to 67.7% at December 31, 1992.
To meet short-term working capital and other financial requirements, the
Company maintains a $135 million working capital facility with a group of
banks. The working capital facility allows for both issuance of letters of
credit and cash borrowings. Letter of credit issuances are limited to no more
than $100 million; cash borrowings are limited only by the facility's maximum
availability less letters of credit outstanding. Maximum availability under
the facility is determined by the amount of eligible accounts receivable and
inventory at each month end (referred to in aggregate as a "borrowing base").
As of December 31, 1993, the Company's borrowing base pertaining to the
facility totaled $266.3 million. On January 31, 1994, the Company and its
bank group executed an amendment to the working capital facility which
increases the maximum availability to $140 million, reduces the cash borrowing
interest rates, letter of credit fees and certain administrative costs, and
extends the term to February 3, 1997. See Note 7 of the Notes to Consolidated
Financial Statements for additional information.
At December 31, 1993, there were no cash borrowings outstanding under the
working capital facility; however, there were $65.2 million in letters of
credit outstanding.
The Company believes its working capital facility, together with cash
generated from operations, will be adequate to meet liquidity requirements for
the foreseeable future.
23
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
CONSOLIDATED BALANCE SHEET
- -----------------------------------------------------------------------------
(Dollars in thousands) December 31, December 31,
1993 1992
- -----------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 45,286 $ 68,055
Receivables, less allowances of
$7,208 ($7,342 at December 31, 1992) 277,691 262,595
Inventories (Note 6) 341,808 313,079
Prepaid expenses and other current
assets 36,159 35,629
- -----------------------------------------------------------------------------
Total current assets 700,944 679,358
Property, plant and equipment:
Land 11,951 11,586
Buildings and improvements 122,530 105,652
Machinery and equipment 120,517 95,232
- -----------------------------------------------------------------------------
254,998 212,470
Less accumulated depreciation 38,697 10,185
- -----------------------------------------------------------------------------
Net property, plant and equipment 216,301 202,285
Reorganization value in excess of
amounts allocable to identifiable
assets, net (Note 2) 97,107 102,333
Trademarks and trade names, net (Note 2) 153,248 157,218
Other assets 38,079 36,343
- -----------------------------------------------------------------------------
$1,205,679 $1,177,537
=============================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term
debt (Note 8) $ 9,305 $ 29,289
Accounts payable 77,413 63,371
Accrued employee compensation 22,059 19,501
Accrued interest expense 4,731 4,903
Other accrued expenses 40,438 49,948
Income taxes payable 13,083 8,471
- -----------------------------------------------------------------------------
Total current liabilities 167,029 175,483
Long-term debt, less current
maturities (Note 8) 576,804 585,968
Other long-term liabilities 123,289 122,972
Shareholders' Equity:
Preferred stock, authorized
10,000,000 shares, no par value -
issued, none (Note 9) - -
Common stock, authorized
100,000,000 shares, $1.00 stated
value - issued 50,004,282 and
50,000,000 shares at December 31,
1993 and 1992 (Note 10) 50,004 50,000
Paid-in capital 226,391 225,400
Retained earnings 62,162 17,714
- -----------------------------------------------------------------------------
Total shareholders' equity 338,557 293,114
- -----------------------------------------------------------------------------
$1,205,679 $1,177,537
=============================================================================
See accompanying notes to consolidated financial statements.
24
CONSOLIDATED STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------------------
(Dollars in thousands except per Five Months \Five Months
share data) Year Ended Ended \ Ended Year Ended
December 31, December 31,\ August 2, February 29,
1993 1992 \ 1992 1992
- ------------------------------------------------------------------\------------------------
\
Net sales $ 1,656,814 $ 662,274 \$ 603,573 $ 1,471,745
Cost of sales 1,114,867 442,646 \ 415,030 998,354
- ------------------------------------------------------------------\------------------------
Gross profit 541,947 219,628 \ 188,543 473,391
\
Selling, general and administrative \
expenses 421,372 169,791 \ 165,514 394,138
Royalty income 11,946 5,104 \ 3,557 7,752
- ------------------------------------------------------------------\------------------------
Earnings from operations 132,521 54,941 \ 26,586 87,005
Interest expense 56,472 23,967 \ 36,898 106,199
Other income (expense), net (77) 4,902 \ (20) 2,006
- ------------------------------------------------------------------\------------------------
Earnings (loss) before reorganization \
items, income tax expense (benefit), \
extraordinary item and cumulative \
effect of a change in accounting \
principle 75,972 35,876 \ (10,332) (17,188)
Reorganization items (Note 3) - - \ 145,688 (28,047)
- ------------------------------------------------------------------\------------------------
Earnings (loss) before income tax \
expense (benefit), extraordinary \
item and cumulative effect of a \
change in accounting principle 75,972 35,876 \ 135,356 (45,235)
Income tax expense (benefit) (Note 12) 30,604 14,550 \ (1,044) 3,657
- ------------------------------------------------------------------\------------------------
Net earnings (loss) before \
extraordinary item and cumulative \
effect of a change in accounting \
principle 45,368 21,326 \ 136,400 (48,892)
Extraordinary item - gain on \
extinguishment of debt (Note 4) - - \ 1,075,466 -
Cumulative effect on prior years of \
a change in accounting for \
postretirement benefits other than \
pensions and income taxes (Note 5) - - \ (25,544) -
- ------------------------------------------------------------------\------------------------
Net earnings (loss) $ 45,368 $ 21,326 \$ 1,186,322 $ (48,892)
==================================================================\========================
Net earnings (loss) per common share - \
primary and fully diluted (Note 2): \
Net earnings (loss) before \
extraordinary item and cumulative \
effect of a change in accounting \
principle $ 0.88 $ 0.43 \$ 3.52 $ (1.26)
Extraordinary item - gain on \
extinguishment of debt - - \ 27.72 -
Cumulative effect on prior years of \
a change in accounting for \
postretirement benefits other \
than pensions and income taxes - - \ (0.66) -
- ------------------------------------------------------------------\------------------------
Net earnings (loss) per common share $ 0.88 $ 0.43 \$ 30.58 $ (1.26)
===========================================================================================
See accompanying notes to consolidated financial statements.
/TABLE
25
CONSOLIDATED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------------------
(Dollars in thousands) Five Months \Five Months
Year Ended Ended \ Ended Year Ended
December 31, December 31,\ August 2, February 29,
1993 1992 \ 1992 1992
- ------------------------------------------------------------------\------------------------
\
Cash Flows from Operating Activities: \
Net earnings (loss) $ 45,368 $ 21,326 \$ 1,186,322 $ (48,892)
Adjustments to reconcile net earnings \
(loss) to net cash provided by \
operating activities: \
(Gain) loss on disposal of assets - (1,797)\ 684 3,900
Net adjustment in accounts for fair value - - \ (158,698) -
Gain on extinguishment of debt - - \ (1,075,466) -
Cumulative effect of a change in \
accounting for postretirement \
benefits other than pensions \
and income taxes - - \ 25,544 -
Depreciation of property, plant and \
equipment 29,190 10,764 \ 12,105 29,306
Amortization of intangible assets 7,034 2,931 \ 1,125 2,916
Noncash interest and other expense 3,089 339 \ 866 3,555
(Increase) decrease in receivables (15,096) (8,753)\ 25,602 (19,708)
(Increase) decrease in income tax \
refund receivable - 6,327 \ (1,317) 76,658
(Increase) decrease in inventories (28,729) 5,639 \ 1,731 16,905
(Increase) decrease in prepaid \
expenses and other assets (3,964) 6,310 \ (6,259) (5,035)
Increase (decrease) in accounts \
payable, accrued interest expense \
and other accrued expenses 6,918 (24,580)\ 37,403 124,560
Increase (decrease) in income taxes \
payable 4,612 (152)\ (485) (1,174)
Increase (decrease) in net deferred \
tax liabilities 2,410 68 \ (1,560) (6,014)
Increase (decrease) in other long- \
term liabilities (1,237) 4,677 \ (681) (6,325)
Increase in liabilities subject to \
compromise - - \ - 27,653
Reorganization costs, net - - \ - 7,253
- ------------------------------------------------------------------\------------------------
49,595 23,099 \ 46,916 205,558
Net cash provided by discontinued \
operations - - \ - 38,225
- ------------------------------------------------------------------\------------------------
Net cash provided by operating \
activities 49,595 23,099 \ 46,916 243,783
- ------------------------------------------------------------------\------------------------
Cash Flows from Investing Activities: \
Proceeds from the disposal of assets 680 2,361 \ 1,485 1,781
Additions to property, plant and \
equipment (43,938) (12,936)\ (10,099) (28,369)
- ------------------------------------------------------------------\------------------------
Net cash used by investing activities (43,258) (10,575)\ (8,614) (26,588)
- ------------------------------------------------------------------\------------------------
Cash Flows from Financing Activities: \
Net change in notes and loans payable - (577)\ 577 (951)
Payments of long-term debt (29,148) (27,034)\ - -
Proceeds from the issuance of common stock 42 - \ - -
- ------------------------------------------------------------------\------------------------
Net cash provided (used) by financing \
activities (29,106) (27,611)\ 577 (951)
- ------------------------------------------------------------------\------------------------
Cash Flows from Reorganization Activities: \
Payments of liabilities subject to \
compromise - - \ (293,135) -
Payments of deferred financing fees \
and expenses - - \ (2,756) -
Proceeds from cash held in trust - - \ 27,351 -
- ------------------------------------------------------------------\------------------------
Net cash used by reorganization activities - - \ (268,540) -
- ------------------------------------------------------------------\------------------------
Net increase (decrease) in cash and cash \
equivalents (22,769) (15,087)\ (229,661) 216,244
Cash and cash equivalents at beginning \
of period 68,055 83,142 \ 312,803 96,559
- ------------------------------------------------------------------\------------------------
Cash and cash equivalents at end of period $ 45,286 $ 68,055 \$ 83,142 $ 312,803
===========================================================================================
Supplemental Disclosure: \
Cash payments (refunds) for income \
taxes, net $ 23,786 $ 8,091 \$ 1,360 $ (75,031)
==================================================================\========================
Cash payments for interest, exclusive \
of reorganization activities $ 54,508 $ 41,892 \$ 208 $ 4,005
===========================================================================================
See accompanying notes to consolidated financial statements.
/TABLE
26
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------
(Dollars in thousands Retained
except per share data) Preferred Stock Common Paid-In Earnings
Series D Series E Stock Capital (Deficit) Total
- ---------------------------------------------------------------------------------------------
Balance February 23, 1991 $ 1,151 $ 3,321 $ 3,873 $ 199,079 $(1,342,635) $(1,135,211)
Net loss (48,892) (48,892)
Conversion of preferred
stock:
Series D - 50 shares (5) 5 -
Foreign currency translations (2,419) (2,419)
- ---------------------------------------------------------------------------------------------
Balance February 29, 1992 1,146 3,321 3,873 199,084 (1,393,946) (1,186,522)
Net earnings - Five months
ended August 2, 1992 1,186,322 1,186,322
Conversion of preferred
stock:
Series D - 1,600 shares (160) 15 145 -
Foreign currency translations
- Five months ended
August 2, 1992 200 200
Fresh-start adjustments:
Cancellation of former
equity and elimination
of deficit (986) (3,321) (3,888) (199,229) 207,424 -
Issuance of new equity 50,000 225,400 275,400
Net earnings - Five months
ended December 31, 1992 21,326 21,326
Foreign currency translations
- Five months ended
December 31, 1992 (3,612) (3,612)
- ---------------------------------------------------------------------------------------------
Balance December 31, 1992 - - 50,000 225,400 17,714 293,114
Net earnings 45,368 45,368
Common stock activity:
Stock option grants and
exercises (Note 10) 4 988 992
Warrant exercises - 282
shares 3 3
Foreign currency translations (920) (920)
- ---------------------------------------------------------------------------------------------
Balance December 31, 1993 $ - $ - $50,004 $ 226,391 $ 62,162 $ 338,557
=============================================================================================
See accompanying notes to consolidated financial statements.
/TABLE
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
1. Reorganization and Emergence from Chapter 11
INTERCO INCORPORATED (the "Company") is a major manufacturer of
residential furniture and one of the leading manufacturers and retailers
of footwear through two operating segments. The furniture segment
consists of Broyhill Furniture Industries, Inc. and The Lane Company,
Incorporated and the footwear segment consists of The Florsheim Shoe
Company and Converse Inc.
On January 24, 1991, INTERCO INCORPORATED and its domestic
subsidiaries filed petitions for reorganization under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court for
the Eastern District of Missouri (the "Court"). On June 26, 1992, the
Court approved and confirmed the Amended Joint Plan of Reorganization of
the Company (the "Plan") and the order was docketed on June 30, 1992. The
Company emerged from Chapter 11 effective with the beginning of business
on August 3, 1992. In general, the Plan provided for resolution of all
claims against the Company as of January 24, 1991, the Chapter 11 filing
date, as well as resolution of certain legal disputes, in exchange for
cash, new indebtedness and/or new common equity securities. The
distribution record date for determining those creditors to whom
distributions were made was June 30, 1992. The Plan provided for no
distributions to the holders of the Company's Series D Preferred Stock,
Series E Preferred Stock or common stock, and all outstanding shares of
those equity securities were cancelled as of the effective date of the
Plan.
2. Significant Accounting Policies
The Company follows generally accepted accounting principles to
present fairly its consolidated financial position, results of operations,
cash flows and shareholders' equity. The major accounting policies of the
Company are set forth below.
Fresh-Start Reporting
As of August 2, 1992, in accordance with the AICPA Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code" ("SOP 90-7"), the Company was required to adopt
"fresh-start" reporting and reflect the effects of such adoption in the
financial statements for the five months ended August 2, 1992. The
ongoing impact of the adoption of fresh-start reporting is reflected in
the financial statements for the year ended December 31, 1993 and five
months ended December 31, 1992.
In adopting fresh-start reporting, the Company, with the assistance
of its financial advisors, was required to determine its reorganization
value, which represents the fair value of the entity before considering
liabilities and approximates the amount a willing buyer would pay for the
assets of the Company immediately after its emergence from Chapter 11
status. The reorganization value of the Company was determined by
consideration of several factors, including: the discounted residual value
of the Company; market share, position and competition of each operating
company; projected sales, profitability growth and working capital
requirements; and general economic considerations. Various valuation
methods were relied upon, including: discounted cash flow, price/earnings
ratios, comparable merger and acquisition activities and other applicable
ratios and industry indices.
28
The adjustments to reflect the consummation of the Plan (including the
gain on extinguishment of debt relating to pre-petition liabilities) and
the adjustment to record assets and liabilities at their fair values
(including the establishment of reorganization value in excess of amounts
allocable to identifiable assets) have been reflected in the accompanying
consolidated financial statements. Accordingly, a vertical black line is
shown in the consolidated financial statements to separate post-emergence
operations from those prior to August 3, 1992 since they have not been
prepared on a comparable basis.
Fiscal Year
Effective December 31, 1992, the Company changed its fiscal year end
to December 31. Prior to December 31, 1992, the Company's fiscal year
ended on the last Saturday in February.
For purposes of this annual report, calendar 1993 refers to the 12
month period ended December 31, 1993, calendar 1992 refers to the two five
month periods ended August 2, 1992 and December 31, 1992, and fiscal 1992
refers to the 12 month period ended February 29, 1992.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and all its subsidiaries, the majority of which are wholly owned.
All material intercompany transactions are eliminated in consolidation.
The operating companies included in the consolidated financial statements
report their results of operations as of the Saturday closest to December
31. Accordingly, the results of operations will periodically include a 53
week fiscal year. Calendar 1993 represented a 52 week fiscal year. As a
result of adopting fresh-start reporting, calendar 1992 included a 22 week
period ended August 2, 1992 and a 22 week period ended January 2, 1993 for
the operating companies.
Cash and Cash Equivalents
The Company considers all short-term investments with an original
maturity of three months or less to be cash equivalents. Short-term
nvestments are recorded at amortized cost, which approximates market.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost when acquired.
Expenditures for improvements are capitalized while normal repairs and
maintenance are expensed as incurred. When properties are disposed of,
the related cost and accumulated depreciation or amortization are removed
from the accounts, and gains or losses on the dispositions are reflected
in results of operations. For financial reporting purposes, the Company
utilizes both accelerated and straight-line methods of computing
depreciation and amortization. Such expense is computed based on the
estimated useful lives of the respective assets, which generally range
from 3 to 45 years for buildings and improvements and from 3 to 11 years
for machinery and equipment.
29
Reorganization Value in Excess of Amounts Allocable to Identifiable Assets
As a result of adopting fresh-start reporting, the Company recorded
reorganization value in excess of amounts allocable to identifiable assets
of approximately $104,500. This intangible asset is being amortized on a
straight-line basis over a 20 year period.
Trademarks and Trade Names
In connection with the adoption of fresh-start reporting, the Company
recorded approximately $158,900 in fair value of trademarks and trade
names based upon an independent appraisal. Such trademarks and trade
names are being amortized on a straight-line basis over a 40 year period.
Reorganization Items
Reorganization items consist of income, expenses and other costs
directly related to the reorganization of the Company during the Chapter
11 period.
Income Tax Expense (Benefit)
In connection with the adoption of fresh-start reporting, the Company
was required to adopt Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109") as of August 2, 1992.
Under the asset and liability method of SFAS No. 109, deferred tax assets
and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected
to be recovered or settled. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in income in the period
that includes the enactment date.
Extraordinary Item
The extraordinary item for the five months ended August 2, 1992
represents the gain, net of income taxes, resulting from the discharge of
pre-petition liabilities in accordance with the Plan.
Cumulative Effect on Prior Years of a Change in Accounting for
Postretirement Benefits other than Pensions and Income Taxes
In connection with the adoption of fresh-start reporting, the Company
was required to adopt Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits other than Pensions"
("SFAS No. 106") as of August 2, 1992. SFAS No. 106 requires the cost of
these benefits be recognized in the financial statements over an
employee's service period with the Company. Prior to August 2, 1992, the
Company recognized these benefits on a cash payment basis. The adoption
of SFAS No. 106 and SFAS No. 109 (described above under Income Tax Expense
(Benefit)) represents a change in accounting principle.
Net Earnings (Loss) Per Common Share
Net earnings (loss) per common share is based on the weighted average
number of shares of common stock and common stock equivalents outstanding
during the year. Subsequent to the Company's emergence from Chapter 11,
net earnings (loss) per common share is calculated based on the common
stock and common stock equivalents issued in accordance with the Plan.
The stock options and warrants issued pursuant to the Plan (Note 10) are
considered common stock equivalents. Weighted average shares used in the
calculation of primary and fully diluted net earnings per common share for
calendar 1993 were 51,375,000 and 51,397,000, respectively.
30
Prior to the Company's emergence from Chapter 11, common stock
equivalents and the conversion of Series D Preferred Stock were not
included in computations of net earnings (loss) per common share as they
were not dilutive. As a result of the Chapter 11 filing, the Company
stopped providing for preferred dividend requirements.
Reclassification
Certain calendar 1992 and fiscal 1992 amounts have been reclassified
to conform to the calendar 1993 presentation.
3. Reorganization Items
Reorganization items consist of income, expenses and other costs
directly related to the reorganization of the Company during the Chapter
11 period. Reorganization items included in the consolidated statement of
operations are summarized as follows:
- ----------------------------------------------------------------------------
Five Months
Ended Year Ended
August 2, February 29,
1992 1992
- ----------------------------------------------------------------------------
Adjustments to fair value $158,698 $ -
Fees for services rendered (12,813) (25,135)
Other reorganization costs
and expenses (3,991) (7,865)
Debtor-in-possession financing
fee amortization and expenses (481) (3,644)
Interest earned on accumulated
cash resulting from Chapter 11
proceedings 4,275 8,597
- ----------------------------------------------------------------------------
$145,688 $(28,047)
============================================================================
Adjustments to fair value reflect the net change to state assets and
liabilities at fair value in accordance with the provisions of SOP 90-7.
4. Extraordinary Item - Gain on Extinguishment of Debt
The Plan resulted in the discharge of approximately $2,200,000 of
pre-petition liabilities against the Company through the distribution to
creditors of $293,100 in cash, $642,300 in various debt instruments, 50.0
million shares of common stock and 5.0 million warrants to purchase common
stock. The book value of cash and securities distributed was
approximately $1,100,000 less than the pre-petition liabilities, and the
resultant gain was recorded as an extraordinary item for the five months
ended August 2, 1992.
5. Cumulative Effect of Accounting Changes
In connection with the adoption of fresh-start reporting, the Company
adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits
other than Pensions", as of August 2, 1992. The cumulative effect of the
change on retained earnings, prior to the adoption of fresh-start
reporting at August 2, 1992, was approximately $23,600, net of
approximately $13,200 in income taxes. The Company also adopted SFAS No.
109, "Accounting for Income Taxes", as of August 2, 1992. The cumulative
effect of the change on retained earnings, prior to the adoption of fresh-
start reporting at August 2, 1992, was a charge of approximately $1,900.
31
6. Inventories
Inventories are summarized as follows:
- ----------------------------------------------------------------------------
December 31, December 31,
1993 1992
- ----------------------------------------------------------------------------
Retail merchandise $ 67,690 $ 64,104
Finished products 164,958 146,568
Work-in-process 41,419 40,628
Raw materials 67,741 61,779
- ----------------------------------------------------------------------------
$341,808 $313,079
============================================================================
7. Short-Term Financing
The Company maintains a $135,000 working capital facility with a
group of banks. The working capital facility allows for both issuance of
letters of credit and cash borrowings. Letter of credit issuances are
limited to no more than $100,000; cash borrowings are limited only by the
facility's maximum availability less letters of credit outstanding.
Maximum availability under the facility is determined by the amount of
eligible accounts receivable and inventory at each month end (referred to
in aggregate as a "borrowing base"). As of December 31, 1993, the
Company's borrowing base pertaining to the facility totaled $266,251.
The working capital facility is secured by a first priority lien on
and security interest in substantially all property of the Company. In
1992, the Company paid an origination fee of 2.0% of the commitment of
$135,000 to the banks. The Company is required to pay an annual unused
line (commitment) fee of 1/2 of 1% on the average daily unused portion of
the commitment of the banks, payable quarterly in arrears, until such
commitments are terminated. The Company also pays an annual collateral
management fee of $250.
The outstanding cash borrowings under the revolving credit loan
facility bear interest at prime rate plus 1.75% or at an adjusted
Eurodollar rate plus 2.75% depending upon which type of loan the Company
executes. At December 31, 1993, there were no cash borrowings outstanding
under the revolving credit loan facility. Average cash borrowings
outstanding during calendar 1993 were $9,583 with a weighted average
interest rate thereon of 6.1%. The maximum cash borrowings outstanding at
any month end during calendar 1993 were $35,000. For the five months
ended December 31, 1992, no cash borrowings were made under the facility.
Under the letter of credit facility, a fee of 1.5% per annum in the
case of commercial (trade) letters of credit and 2.75% per annum in the
case of stand-by letters of credit is assessed for the account of the
lenders ratably. A further fee of 1/2 of 1% is assessed on stand-by
letters of credit representing a facing fee. A customary administrative
charge for issuance of letters of credit is also payable to the relevant
issuing banks. Letters of credit fees are payable quarterly in arrears.
At December 31, 1993, there were $65,161 in letters of credit outstanding
under the working capital facility.
On January 31, 1994, the Company and its bank group executed an
amendment to the working capital facility which increases the maximum
availability to $140,000 and extends the term to February 3, 1997. The
amendment also reduces the cash borrowing interest rate to prime rate plus
1.25% or adjusted Eurodollar rate plus 2.0%, and the letter of credit fee
(both commercial and stand-by) to 1.0% per annum. Certain administrative
charges and processing fees are also reduced or eliminated. The Company
paid the bank group a fee of 0.50% of the $140,000 commitment for the
amendment.
32
With the Company's emergence from bankruptcy effective with the
beginning of business on August 3, 1992, the debtor-in-possession
financing facility (the "DIP Financing Facility") previously in effect was
terminated. No cash borrowings occurred while the DIP Financing Facility
was active. Letters of credit issued under the DIP Financing Facility
that were outstanding on its termination date were indemnified by issuance
of letters of credit under the Company's working capital facility.
8. Long-Term Debt
Long-term debt consisted of the following:
- ----------------------------------------------------------------------------
December 31, December 31,
1993 1992
- ----------------------------------------------------------------------------
10.0% secured notes due 2001 $104,734 $109,199
9.0% secured notes due 2004 149,274 155,636
8.5% secured notes due 1997 9,334 11,208
Secured term loan 289,881 302,238
ILGWU fund note 16,150 19,150
Industrial revenue bonds 12,768 13,193
Federal tax obligation 3,968 4,633
- ----------------------------------------------------------------------------
586,109 615,257
Less current maturities (9,305) (29,289)
- ----------------------------------------------------------------------------
$576,804 $585,968
============================================================================
The common stock of the Company's principal subsidiaries,
substantially all of the Company's cash, working capital and property,
plant and equipment have been pledged or mortgaged as security for various
components of the long-term debt (on a shared basis) and the working
capital facility. The liens securing the long-term debt are subordinate
to the liens on such property securing the working capital facility. In
addition, the debt instruments pursuant to which the long-term debt and
working capital facility were issued contain a number of restrictive
covenants and events of default, including covenants limiting capital
expenditures and incurrence of debt, and require the Company to achieve
certain financial ratios, some of which become more restrictive over time.
The Company was in compliance with all covenants applicable at December
31, 1993.
Under certain circumstances, the Company will be required to apply to
the repayment or redemption of the Secured Notes, the Secured Term Loan
and the ILGWU Fund Note, a portion of the net proceeds realized from (i)
the sale, conveyance, or other disposition of collateral securing such
debt or (ii) the sale by the Company for its own account of additional
subordinated debt and/or shares of its common stock.
The following discussion summarizes certain provisions of the long-
term debt.
10.0% Secured Notes Due 2001
The 10.0% Notes are secured obligations of the Company which mature
on June 1, 2001 and bear interest at the rate per annum of 10.0%.
Interest is payable semi-annually, on December 1 and June 1.
For fiscal years ending prior to June 1, 1995, excess cash flow (as
specifically defined in the indenture) is applied, on a pro rata basis
with the 9.0% Notes and Secured Term Loan, to the redemption of the 10.0%
Notes with such payments occurring on or before the April 1 succeeding
each fiscal year end. Mandatory sinking fund payments, exclusive of any
credits resulting from potential future excess cash flow payments, are due
as follows:
33
- ------------------------------------------------------------------------------
PAYMENT DATE AMOUNT PAYMENT DATE AMOUNT
- ------------------------------------------------------------------------------
June 1, 1996 $ 8,151 June 1, 1999 $14,134
June 1, 1997 14,134 June 1, 2000 14,134
June 1, 1998 14,134 June 1, 2001 Remaining balance
- ------------------------------------------------------------------------------
9.0% Secured Notes Due 2004
The 9.0% Notes are secured obligations of the Company which mature on
June 1, 2004 and bear interest at the rate per annum of 9.0%. Interest is
payable semi-annually, on December 1 and June 1.
Excess cash flow (as specifically defined in the indenture) is
applied, on a pro rata basis with the 10.0% Notes (until June 1, 1995) and
the Secured Term Loan, to the redemption of the 9.0% Notes with such
payments occurring on or before the April 1 succeeding each fiscal year
end. Mandatory sinking fund payments, exclusive of any credits resulting
from potential future excess cash flow payments, are due as follows:
- ------------------------------------------------------------------------------
PAYMENT DATE AMOUNT PAYMENT DATE AMOUNT
- ------------------------------------------------------------------------------
June 1, 2000 $4,502 December 1, 2002 $5,445
June 1, 2001 4,805 June 1, 2003 5,445
December 1, 2001 5,285 December 1, 2003 5,445
June 1, 2002 5,285 June 1, 2004 Remaining balance
- ------------------------------------------------------------------------------
8.5% Secured Notes Due 1997
The 8.5% Notes are secured obligations of the Company which mature on
June 1, 1997 and bear interest at the rate per annum of 8.5%. Interest is
payable semi-annually, on December 1 and June 1. Mandatory sinking fund
payments began on June 1, 1993, and continue on each subsequent June 1,
ending on June 1, 1997. Each principal payment will equal 20% of the
original principal amount, less any optional prepayments made by the
Company prior to a mandatory payment.
Secured Term Loan
The Secured Term Loan is a secured obligation of the Company which
matures on June 1, 2004. From March 1, 1992 to June 1, 1997, the Secured
Term Loan will bear interest at the rate per annum of 9.0%. Commencing
June 1, 1997, the interest rate converts to LIBOR plus 2.5%, adjusted
annually on each June 1; however, such annual interest rate adjustment
shall be limited as to not allow pro forma consolidated interest coverage
to be less than 2.5 to 1. The interest rate in no case shall fall below
9.0%. Interest is payable quarterly, on September 1, December 1, March 1
and June 1.
Excess cash flow (as specifically defined in the Secured Term Loan
Agreement) is applied, on a pro rata basis with the 10.0% Notes (until
June 1, 1995) and the 9.0% Notes, to the prepayment of the Secured Term
Loan with such payments occurring on or before the April 1 succeeding each
fiscal year end. Scheduled amortization payments, exclusive of any
credits resulting from potential future excess cash flow payments, are due
as follows:
- ------------------------------------------------------------------------------
PAYMENT DATE AMOUNT PAYMENT DATE AMOUNT
- ------------------------------------------------------------------------------
June 1, 2000 $ 8,736 December 1, 2002 $10,574
June 1, 2001 9,329 June 1, 2003 10,574
December 1, 2001 10,264 December 1, 2003 10,574
June 1, 2002 10,264 June 1, 2004 Remaining balance
- ------------------------------------------------------------------------------
34
ILGWU Fund Note
The ILGWU Fund Note is a secured obligation of the Company which
matures July 1, 1998 and bears interest at the rate per annum of 6.5%.
Interest is payable quarterly, on October 1, January 1, April 1 and July
1. Quarterly principal payments of $750 commenced on October 1, 1992 and
continue through July 1, 1997. Quarterly principal payments of $1,225
commence on October 1, 1997 and continue through April 1, 1998, with the
remaining balance due on July 1, 1998.
Industrial Revenue Bonds
The Company has obligations under several Industrial Revenue Bonds
which were reinstated upon emergence from Chapter 11 status. These
obligations mature in varying amounts through 2004 and bear interest at
rates per annum ranging from 6.0% to 8.75%.
Federal Tax Obligation
In settlement of certain Federal tax obligations, the Company entered
into an unsecured obligation with the Internal Revenue Service which
matures on August 3, 1998, and bears interest at 8.0%. Interest and
principal are paid quarterly based upon a predetermined amortization
schedule.
Other Information
On October 27, 1992 and December 1, 1992, the Company made optional
prepayments on the 10.0%, 9.0% and 8.5% Secured Notes and the Secured Term
Loan totaling $15,104 in face value. These optional prepayments were made
on a pro rata basis among the debt instruments and were applied to the
forward order of maturity of each such instrument in accordance with the
provisions of each indenture and credit agreement. The optional
prepayments of the 10.0% and 9.0% Secured Notes were executed by purchases
made in the open market. These purchases were made at a discount to face
value resulting in a gain of $444 which has been included in other income
(expense), net.
On December 10, 1992, the Company made an advance payment of its
excess cash flow requirement for calendar 1992 pertaining to the 10.0% and
9.0% Secured Notes and the Secured Term Loan totaling $10,127 in face
value. This advance payment was made on a pro rata basis among the debt
instruments and was applied on a pro rata order of maturity basis for each
such instrument in accordance with the provisions of each indenture and
credit agreement. The advance payment of the 10.0% and 9.0% Secured Notes
was executed by purchases made in the open market. These purchases were
made at a discount to face value resulting in a gain of $279 which has
been included in other income (expense), net.
Maturities of long-term debt are $9,305, $7,258, $15,468, $21,992 and
$19,580 for calendar years 1994 through 1998, respectively. Current
maturities of long-term debt at December 31, 1993 include $373
representing the calendar 1993 excess cash flow requirement.
9. Preferred Stock
The Company's restated certificate of incorporation includes
authorization to issue up to 10.0 million shares of no par value,
preferred stock. As of December 31, 1993, no preferred stock has been
issued.
In accordance with the Plan, all shares of the Company's preferred
stock (Series D and E) outstanding prior to the Plan's effective date were
cancelled.
35
10. Common Stock
The Company's restated certificate of incorporation includes
authorization to issue up to 100.0 million shares of common stock with a
$1.00 stated value. As of December 31, 1993, 50,004,282 shares of common
stock had been issued and were outstanding.
The holders of the common stock are entitled to one vote for each
share held of record on all matters submitted to a vote of stockholders.
Subject to preferential rights that may be applicable to any preferred
stock (none of which has been issued as of December 31, 1993), holders of
common stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available
therefor. However, it is not presently anticipated that dividends will be
paid on common stock in the foreseeable future and certain of the debt
instruments to which the Company is a party restrict the payment of
dividends. All of the outstanding shares of common stock are fully paid
and nonassessable.
Shares of common stock were reserved for the following purposes at
December 31, 1993:
- -----------------------------------------------------------------------------
NUMBER
OF SHARES
- -----------------------------------------------------------------------------
Common stock options:
Granted 2,915,000
Available for grant 581,000
Common stock warrants 4,999,311
- -----------------------------------------------------------------------------
8,495,311
=============================================================================
On May 5, 1993, shareholders approved the 1992 Stock Option Plan
including an amendment thereto which increased the number of common shares
reserved for issuance from 2.5 million shares to 3.5 million shares.
Under the Company's 1992 Stock Option Plan, certain key employees may be
granted nonqualified options, incentive options or combinations thereof.
Nonqualified and incentive options may be granted to expire up to ten
years after the date of grant. Options granted become exercisable at
varying dates depending upon the achievement of certain performance
targets and/or the passage of certain time periods.
Shareholders also approved an amendment to the 1992 Stock Option Plan
authorizing grants of options to purchase common shares at less than fair
market value on the date of grant. During calendar 1993, an option grant
of 250 thousand common shares was made by the Company at less than market
value resulting in a credit to paid-in capital and a charge to
compensation expense of approximately $1.0 million.
Changes in options granted are summarized as follows:
Year Ended Five Months Ended
December 31, 1993 December 31, 1992
-------------------- --------------------
Average Average
Shares Price Shares Price
--------- ------- --------- -------
Beginning of period 2,500,000 $ 7.00 - $ -
Granted 461,000 9.58 2,500,000 7.00
Exercised (4,000) 7.00 - -
Cancelled (42,000) 7.92 - -
--------- ---------
End of period 2,915,000 $ 7.39 2,500,000 $ 7.00
========= ======= ========= =======
Exercisable at end of period 586,750 -
========= =========
36
The Company issued, upon emergence from Chapter 11 status, 5.0
million warrants to purchase common stock. Each warrant entitles the
holder thereof to purchase one share of common stock at $12.00 per share;
provided however, that in the event of certain mergers, acquisitions,
liquidations and tender offers involving the Company, the purchase price
and number of shares of common stock shall be subject to adjustment in
accordance with the warrant agreement. The warrants were issued in two
series; Series 1 warrants include a five year call protection, whereas
Series 2 warrants do not include such a feature. All other terms and
conditions of the two series of warrants are identical. The warrants
trade on the over-the-counter market.
In accordance with the Plan, all shares of the Company's common stock
outstanding prior to the Plan's effective date were cancelled, as were all
option shares outstanding, shares available for grant, existing stock
option plans and common share purchase rights.
11. Discontinued Operations
In fiscal 1992, the Company completed the controlled liquidations of
the assets of Megastar Apparel Group and Abe Schrader Corporation, except
for the disposal of certain real estate which continues to be offered for
sale. Those asset liquidations, along with certain miscellaneous real
estate sales, generated approximately $34,000 in cash.
All estimated costs and expenses (including anticipated operating
losses through the final liquidation date) are accrued. Management
anticipates the net gains to be realized on the disposal of real estate
held for sale should at least equal the future carrying costs associated
with the real estate.
12. Income Taxes
Income tax expense (benefit) was comprised of the following:
- ---------------------------------------------------------------------------
Five Months Five Months
Year Ended Ended Ended Year Ended
December 31, December 31, August 2, February 29,
1993 1992 1992 1992
- ---------------------------------------------------------------------------
Current:
Federal $22,693 $ 9,972 $(1,373) $(4,708)
State and local 4,161 3,213 1,760 3,631
Foreign 1,340 1,297 129 1,753
- ---------------------------------------------------------------------------
28,194 14,482 516 676
Deferred 2,410 68 (1,560) 2,981
- ---------------------------------------------------------------------------
$30,604 $14,550 $(1,044) $ 3,657
===========================================================================
The following table reconciles the differences between the Federal
corporate statutory rate and the Company's effective income tax rate:
37
- -------------------------------------------------------------------------------
Five Months \Five Months
Year Ended Ended \ Ended Year Ended
December 31, December 31,\ August 2, February 29,
1993 1992 \ 1992 1992
- ------------------------------------------------------\------------------------
Federal corporate \
statutory rate 35.0% 34.0%\ 34.0% 34.0%
State and local income \
taxes, net of Federal \
tax benefit 3.6 3.3 \ 0.8 (5.3)
Foreign taxes, including \
foreign currency \
translation effects 0.8 4.1 \ 0.4 (16.3)
Reorganization items - - \ (37.3) (19.2)
Other 0.9 (0.8)\ 1.3 (1.3)
- ------------------------------------------------------\------------------------
Effective income tax rate 40.3% 40.6%\ (0.8)% (8.1)%
===============================================================================
The sources of the tax effects for temporary differences that give
rise to the deferred tax assets and liabilities were as follows:
- -----------------------------------------------------------------------------
December 31, December 31,
1993 1992
- -----------------------------------------------------------------------------
Deferred tax assets:
Employee postretirement benefits other than
pensions $ 13,741 $ 13,152
Interest expense 8,199 8,751
Expense accruals 8,019 9,583
Valuation reserves 6,812 5,473
Inventory costs capitalized 2,471 2,125
Other 517 944
- -----------------------------------------------------------------------------
Total gross deferred tax assets 39,759 40,028
Valuation allowance - -
- -----------------------------------------------------------------------------
Total net deferred tax assets 39,759 40,028
Deferred tax liabilities:
Fair value adjustments (62,367) (62,519)
Depreciation (7,778) (7,964)
Employee pension plans (5,608) (4,015)
Other (8,029) (7,143)
- -----------------------------------------------------------------------------
Total deferred tax liabilities (83,782) (81,641)
- -----------------------------------------------------------------------------
Net deferred tax liabilities $(44,023) $(41,613)
=============================================================================
The net deferred tax liabilities are included in the consolidated
balance sheet as follows:
- -----------------------------------------------------------------------------
December 31, December 31,
1993 1992
- -----------------------------------------------------------------------------
Prepaid expenses and other current assets $ 22,039 $ 22,895
Other long-term liabilities (66,062) (64,508)
- -----------------------------------------------------------------------------
$(44,023) $(41,613)
=============================================================================
The Federal income tax returns of the Company and its major
subsidiaries have been examined by the Internal Revenue Service ("IRS")
through February 23, 1991. For tax periods beginning January 1, 1982 and
ending February 23, 1991, the Company settled claims by the IRS by
entering into an unsecured obligation of approximately $4,800 (See Note
8).
38
13. Employee Benefits
The Company sponsors or contributes to retirement plans covering
substantially all employees. The total cost of all plans for calendar
1993, calendar 1992 (ten months) and fiscal 1992 was $5,174, $3,410 and
$3,249, respectively.
Company-Sponsored Defined Benefit Plans
Annual cost for defined benefit plans is determined using the
projected unit credit actuarial method. Prior service cost is amortized
on a straight-line basis over the average remaining service period of
employees expected to receive benefits.
It is the Company's practice to fund pension costs to the extent that
such costs are tax deductible and in accordance with ERISA. Funding
decisions made in calendar 1993 contributed towards the deferred or
prepaid pension cost. The assets of the various plans include corporate
equities, government securities, corporate debt securities and insurance
contracts. The table below summarizes the funded status of the Company-
sponsored defined benefit plans.
- -----------------------------------------------------------------------------
December 31, December 31,
1993 1992
- -----------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $299,309 $270,852
=======================
Accumulated benefit obligation $302,823 $277,076
=======================
Projected benefit obligation $331,058 $301,711
Plan assets at fair value 358,812 343,662
- -----------------------------------------------------------------------------
Projected benefit obligation less than
plan assets 27,754 41,951
Unrecognized net (gain) loss 944 (8,340)
Unrecognized prior service cost 7,609 -
- -----------------------------------------------------------------------------
Prepaid pension cost $ 36,307 $ 33,611
=============================================================================
Net periodic pension cost for calendar 1993, calendar 1992 and fiscal
1992 includes the following components:
- --------------------------------------------------------------------------------
Five Months \Five Months
Year Ended Ended \ Ended Year Ended
December 31, December 31,\ August 2, February 29,
1993 1992 \ 1992 1992
- -------------------------------------------------------\------------------------
\
Service cost-benefits earned \
during the period $ 6,391 $ 2,610 \ $ 2,668 $ 5,146
Interest cost on the projected \
benefit obligation 22,631 9,654 \ 9,553 22,070
Actual return on plan assets (32,054) (19,982)\ (1,388) (51,287)
Net amortization and deferral 3,459 8,340 \ (10,757) 23,995
- -------------------------------------------------------\------------------------
Net periodic pension cost $ 427 $ 622 \ $ 76 $ (76)
================================================================================
Employees are covered primarily by noncontributory plans, funded by
Company contributions to trust funds, which are held for the sole benefit
of employees. Monthly retirement benefits generally are based upon
service, pay, or both, with employees generally becoming vested upon
completion of five years of service.
39
The expected long-term rate of return on plan assets was 8.0%-9.5% in
calendar 1993 and calendar 1992, and 8.0%-8.5% in fiscal 1992.
Measurement of the projected benefit obligation was based upon a weighted
average discount rate of 7.25%, 7.75% and 7.75% and a long-term rate of
compensation increase of 4.5%, 5.0% and 5.5% for calendar 1993, calendar
1992 and fiscal 1992, respectively.
Other Retirement Plans and Benefits
In addition to defined benefit plans, the Company makes contributions
to various defined contribution, union-negotiated and foreign plans. The
cost of these plans is included in the total cost for all plans reflected
above.
The Company also sponsors two savings plans and an Employee Stock
Ownership Plan ("ESOP"). The total cost of these plans for calendar 1993
and 1992 and fiscal 1992 was $685, $453 and $508, respectively. On
November 9, 1993, the Board of Directors approved the termination of the
ESOP. At December 31, 1993, the ESOP held 4,463 shares of INTERCO
INCORPORATED common stock and 1,772 INTERCO INCORPORATED Series 1 Warrants
for the benefit of the ESOP participants.
In addition to pension and other supplemental benefits, certain
retired employees are currently provided with specified health care and
life insurance benefits. Eligibility requirements for such benefits vary
by division and subsidiary, but generally state that benefits are
available to employees who retire after a certain age with specified years
of service if they agree to contribute a portion of the cost. The Company
has reserved the right to modify or terminate these benefits. Health care
and life insurance benefits are provided to both retired and active
employees through medical benefit trusts, third-party administrators and
insurance companies.
The following table sets forth the combined financial status of
postretirement benefits other than pensions:
- ---------------------------------------------------------------------------
December 31, December 31,
1993 1992
Accumulated postretirement benefit obligation:
Retirees $20,496 $20,118
Fully eligible active plan participants 3,597 7,052
Other active plan participants 5,871 10,359
- ---------------------------------------------------------------------------
Total 29,964 37,529
Plan assets at fair value 3,952 3,800
- ---------------------------------------------------------------------------
Accumulated postretirement benefit obligation
in excess of plan assets 26,012 33,729
Unrecognized net gain 6,014 3,745
Unrecognized prior service gain 5,098 -
- ---------------------------------------------------------------------------
Accrued postretirement benefit obligation $37,124 $37,474
===========================================================================
Net periodic postretirement benefit costs include the following
components:
- ---------------------------------------------------------------------------
Five Months
Year Ended Ended
December 31, December 31,
1993 1992
- ---------------------------------------------------------------------------
Service cost-benefits earned during the period $ 753 $ 480
Interest cost on the postretirement benefit obligation 2,283 1,165
Actual return on plan assets (409) -
Net amortization and deferral (395) -
- ---------------------------------------------------------------------------
Net periodic postretirement benefit cost $2,232 $1,645
===========================================================================
40
For measurement purposes, a 17.0% and 18.0% annual rate of increase
in the cost of health care benefits for pre-age 65 retirees and 13.0% and
14.0% for post-age 65 retirees was assumed for calendar 1993 and 1992,
respectively. For calendar 1993 and calendar 1992, the rates are assumed
to decrease gradually to 8.0% in the year 2002 for pre-age 65 retirees and
to 7.0% in 1999 for post-age 65 retirees and remain at those levels
thereafter. The health care cost trend rate assumption has an effect on
amounts reported. For example, increasing the health care cost trend rate
by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1993 by approximately
$1,522 and the net periodic cost by $308 for the year.
The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 7.25% and 7.75% for
calendar 1993 and 1992, respectively. The expected long-term rate of
return on plan assets was 8.0%.
14. Lease Commitments
Substantially all of the Company's retail outlets and certain other
real properties and equipment are operated under lease agreements expiring
at various dates through the year 2005. Leases covering retail outlets
and equipment generally require, in addition to stated minimums,
contingent rentals based on retail sales and equipment usage. Generally,
the leases provide for renewal for various periods at stipulated rates.
Rental expense under operating leases was as follows:
- ----------------------------------------------------------------------------
Five Months \Five Months
Year Ended Ended \ Ended Year Ended
December 31, December 31,\ August 2, February 29,
1993 1992 \ 1992 1992
- --------------------------------------------------\------------------------
Basic rentals $27,817 $11,399 \ $12,085 $31,861
Contingent rentals 8,212 4,113 \ 4,339 8,367
- --------------------------------------------------\------------------------
36,029 15,512 \ 16,424 40,228
Less: sublease rentals 479 386 \ 387 479
- --------------------------------------------------\------------------------
$35,550 $15,126 \ $16,037 $39,749
==================================================\========================
Future minimum lease payments under operating leases, reduced by
minimum rentals from subleases of $1,264 at December 31, 1993, aggregate
$105,586. Annual payments under operating leases are $24,407, $20,653,
$17,835, $13,201 and $9,199 for 1994 through 1998, respectively.
15. Fair Value of Financial Instruments
Cash and Cash Equivalents, Receivables, Accounts Payable and Accrued
Expenses
The carrying amounts approximate fair value because of the short
maturity of these financial instruments.
Long-Term Debt
The fair values of the following long-term debt instruments are based
on quoted market prices as determined through discussions with various
market participants, where available.
41
- ---------------------------------------------------------------------------
December 31, 1993 December 31, 1992
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- ---------------------------------------------------------------------------
10.0% secured notes due 2001$104,734 $106,043 $109,199 $107,015
9.0% secured notes due 2004 149,274 148,528 155,636 141,629
8.5% secured notes due 1997 9,334 9,334 11,208 9,863
Secured term loan 289,881 289,881 302,238 302,238
- ---------------------------------------------------------------------------
The ILGWU Fund Note, Industrial Revenue Bonds and Federal Tax
Obligation are considered special purpose financing for settlement of
certain claims and as an incentive to acquire specific real estate.
Accordingly, the Company believes the carrying amounts approximate fair
value given the circumstances under which such financing was acquired.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot
be determined with precision. Changes in assumptions could significantly
affect the estimates.
16. Litigation
Notwithstanding the confirmation and effectiveness of the Plan, the
Court continues to have jurisdiction, among other things, to resolve
disputed pre-petition claims against the Company, to resolve matters
related to the assumption, assumption and assignment, or rejection of
executory contracts pursuant to the Plan, and to resolve other matters
that may arise in connection with or relate to the Plan. Pursuant to the
Plan, the Company, on the effective date, paid into a Disputed Claims
Trust the face amount of certain claims still to be resolved. Since those
unresolved claims were funded at their face amounts, the Company has no
further financial exposure with respect to those claims.
The Company is or may become a defendant in a number of pending or
threatened legal proceedings in the ordinary course of business. In the
opinion of management, the ultimate liability, if any, of the Company from
all such proceedings will not have a material adverse effect upon the
consolidated financial position or results of operations of the Company
and its subsidiaries.
17. Business Segment Information
The Company's two business segments are furniture and footwear.
Summarized financial information by business segment is as follows:
42
- --------------------------------------------------------------------------------
Five Months \Five Months
Year Ended Ended \ Ended Year Ended
December 31, December 31,\ August 2, February 29,
1993 1992 \ 1992 1992
- -------------------------------------------------------\------------------------
\
Net sales: \
Furniture segment $ 980,532 $394,873 \ $356,705 $ 819,359
Footwear segment 676,282 267,401 \ 246,868 652,386
- -------------------------------------------------------\------------------------
Total $1,656,814 $662,274 \ $603,573 $1,471,745
=======================================================\========================
Earnings before interest \
expense, income taxes, \
depreciation and \
amortization and other \
income (expense), net: \
Furniture segment $ 121,685 $ 49,263 \ $ 34,135 $ 88,362
Footwear segment 61,176 23,881 \ 11,764 41,715
------------------------\------------------------
182,861 73,144 \ 45,899 130,077
Corporate administration (9,728) (3,638)\ (3,770) (8,542)
Miscellaneous expenses (4,388) (870)\ (2,313) (2,308)
- -------------------------------------------------------\------------------------
168,745 68,636 \ 39,816 119,227
Depreciation and amortization: \
Furniture segment (35,878) (13,964)\ (8,027) (18,363)
Footwear segment (1,769) (325)\ (5,120) (13,633)
Corporate administration 1,423 594 \ (83) (226)
- -------------------------------------------------------\------------------------
Earnings from operations: \
Furniture segment 85,807 35,299 \ 26,108 69,999
Footwear segment 59,407 23,556 \ 6,644 28,082
Corporate administration and \
miscellaneous expenses (12,693) (3,914)\ (6,166) (11,076)
-----------------------\------------------------
132,521 54,941 \ 26,586 87,005
\
Interest expense (56,472) (23,967)\ (36,898) (106,199)
Other income (expense), net \
and reorganization items (77) 4,902 \ 145,668 (26,041)
- -------------------------------------------------------\------------------------
Earnings (loss) before income \
tax expense (benefit), \
extraordinary item and \
cumulative effect of a change \
in accounting principle $ 75,972 $ 35,876 \ $135,356 $ (45,235)
=======================================================\========================
Capital expenditures: \
Furniture segment $ 30,066 $ 8,840 \ $ 7,008 $ 20,075
Footwear segment 13,741 4,087 \ 3,058 8,269
================================================================================
- ---------------------------------------------------------------------------
December 31, December 31,
1993 1992
- ---------------------------------------------------------------------------
Identifiable assets:
Furniture segment $ 819,415 $ 800,176
Footwear segment 347,509 296,267
Corporate administration 38,755 81,094
- ---------------------------------------------------------------------------
$1,205,679 $1,177,537
===========================================================================
Substantially all of the Company's sales are made to unaffiliated
customers. The Company has a diversified customer base with no one
customer accounting for 10% or more of consolidated sales and no
particular concentration of credit risk in one economic section. Foreign
operations are not material.
43
As discussed in Note 2, the Company adjusted its assets to fair value
in connection with the adoption of fresh-start reporting. These
adjustments were impacted by the requirement to state each operating
company's total assets at its reorganization value. As a result, the
depreciation and amortization expense after August 2, 1992 for each
segment is not comparable to prior periods.
Identifiable assets are those used by each segment in its operations.
Corporate administration assets consist primarily of cash and cash
equivalents, and miscellaneous real estate held for sale.
18. Quarterly Financial Information (Unaudited)
Following is a summary of unaudited quarterly information:
- --------------------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------
Year ended December 31, 1993:
Net sales $411,747 $423,852 $404,352 $ 416,863
Gross profit 136,660 136,261 131,432 137,594
Net earnings $ 12,875 $ 9,194 $ 8,901 $ 14,398
Net earnings per
common share $ 0.25 $ 0.18 $ 0.17 $ 0.28
Common stock price range
(High-Low) $ 15-3/8-13 $ 14-5/8-12 $ 15-3/4-12 $ 14-7/8-
0-3/8
==========================================================================
- ------------------------------------------------------------------------------
Third Quarter
------------------------
September 30,\ August 2,
Fourth 1992 \ 1992 Second First
Quarter (Two Months)\(One Month) Quarter Quarter
- -----------------------------------------------\-----------------------------
Year ended December 31, 1992: \
Net sales $398,090 $264,184 \$ 125,476 $355,398 $390,875
Gross profit 133,534 86,094 \ 35,102 114,600 125,411
Net earnings (loss) \
before extraordinary \
item and cumulative \
effect of accounting \
change 13,214 8,112 \ 145,978 (7,696) (8,864)
Extraordinary item - - \ 1,075,466 - -
Cumulative effect of \
accounting change - - \ (25,544) - -
Net earnings (loss) $ 13,214 $ 8,112 \$1,195,900 $ (7,696)$ (8,864)
\
Net earnings (loss) per \
common share: \
Net earnings (loss) \
before extraordinary \
item and cumulative \
effect of accounting \
change $ 0.27 $ 0.16 \$ 3.77 $ (0.20)$ (0.23)
Extraordinary item - - \ 27.72 - -
Cumulative effect of \
accounting change - - \ (0.66) - -
Net earnings (loss)$ 0.27 $ 0.16 \$ 30.83 $ (0.20)$ (0.23)
Common stock price range \
(High-Low) $ 9-3/8- $ 8-5/8-\$ 1/8- $ 5/32- $ 1-1/16
6-3/4 6-7/8 \ 1/16 3/64
=============================================================================
44
The Company has not paid dividends on its common stock during the two
years ended December 31, 1993. The closing market price of the Company's
common stock on December 31, 1993 was $13.125 per share.
As a result of adopting fresh-start reporting, the Company's third
quarter in calendar 1992 includes two periods - July 1, 1992 through
August 2, 1992, and August 3, 1992 through September 30, 1992. Operating
results after August 2, 1992 are presented on a different cost basis and
reflect the adoption of SFAS No. 106 and No. 109. The quarterly results
of operations for the year ended December 31, 1992 have been restated to a
calendar year basis.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
45
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
Pages 4 to 6 of the Company's Definitive Proxy Statement for the Annual
Meeting of Stockholders on May 4, 1994 are incorporated herein by reference.
Executive Officers of the Registrant
Appointed
Name Age Position Positions or Elected
---- --- -------- --------- ----------
*Richard B. Loynd 66 Chairman of the Board of the
Subsidiary - Converse Inc. X 1982
Vice-President 1987
Director X 1987
President X 1989
Chief Operating Officer 1989
Chief Executive Officer X 1989
Chairman of the Board X 1990
Eugene F. Smith 61 Senior Vice-President, Finance 1982
Executive Vice-President X 1989
Ronald J. Mueller 59 President and Chief Executive
Officer of the Division -
The Florsheim Shoe Company X 1985
Vice-President X 1987
Brent B. Kincaid 62 President and Chief Executive
Officer of the Subsidiary -
Broyhill Furniture Industries,
Inc. X 1992
K. Scott Tyler, Jr. 54 President of the Subsidiary -
The Lane Company, Incorporated X 1989
Chief Executive Officer of the
Subsidiary - The Lane Company,
Incorporated X 1991
Gilbert Ford 62 President and Chief Executive
Officer of the Subsidiary -
Converse Inc. X 1986
Duane A. Patterson 62 Secretary X 1973
Director 1991
Vice-President X 1992
Robert T. Hensley, Jr. 61 Treasurer X 1979
David P. Howard 43 Controller X 1990
Vice President X 1991
The following officer retired on January 31, 1993:
Stanley F. Huck 63 Controller 1975
Assistant Vice-President, Finance 1990
_________________________
* Member of the Executive Committee
46
There are no family relationships between any of the executive officers of the
Registrant.
The executive officers are elected at the organizational meeting of the Board
of Directors which follows the annual meeting of stockholders and serve for
one year and until their successors are elected and qualified.
Each of the executive officers has held the same position or other executive
positions with the same employer during the past five years.
Item 11. Executive Compensation
- -------------------------------
Pages 6 to 14 of the Company's Definitive Proxy Statement for the Annual
Meeting of Stockholders on May 4, 1994, are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
Pages 2 to 4 of the Company's Definitive Proxy Statement for the Annual
Meeting of Stockholders on May 4, 1994, are incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
Page 7 of the Company's Definitive Proxy Statement for the Annual Meeting of
Stockholders on May 4, 1994, is incorporated herein by reference.
47
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) List of documents filed as part of this report:
Consolidated balance sheet, December 31, 1993 and December 31,
1992.
Consolidated statement of operations for the year ended December
31, 1993, for the five months ended December 31, 1992 and August 2,
1992 and for the year ended February 29, 1992.
Consolidated statement of cash flows for the year ended December
31, 1993, for the five months ended December 31, 1992 and August 2,
1992 and for the year ended February 29, 1992.
Consolidated statement of shareholders' equity for the year ended
December 31, 1993, for the ten months ended December 31, 1992 and
for the year ended February 29, 1992.
Notes to consolidated financial statements.
Independent Auditors' Report
Financial statements of the Registrant have been omitted since there are
no restrictions as to the transfer of funds from its subsidiaries and
the net assets of the subsidiaries are generally not restricted.
Separate financial statements and other disclosures with respect to the
Company's subsidiaries are omitted as such separate financial statements
and other disclosures are not deemed material to investors.
2. Financial Statement Schedules:
Valuation and qualifying accounts (Schedule VIII).
Supplementary income statement information (Schedule X).
All other schedules are omitted as the required information is presented
in the consolidated financial statements or related notes or are not
applicable.
3. Exhibits:
3(a) Restated Certificate of Incorporation of the Company.
(Incorporated by reference to Exhibit 2.1 to INTERCO
INCORPORATED's Registration Statement on Form 8-A, dated
June 29, 1992.)
3(b) By-Laws of the Company revised and amended as of November
17, 1992. (Incorporated by reference to Exhibit 3 to
INTERCO INCORPORATED's Quarterly Report on Form 10-Q for the
quarter ended on November 30, 1992.)
4(a) Indenture, dated as of July 16, 1992, among the Company,
certain Subsidiary Obligors and The Connecticut National
Bank, as Trustee, with respect to 10% Secured Notes due 2001
and 8.5% Secured Notes due 1997. (Incorporated by reference
to Exhibit 4.1 to INTERCO INCORPORATED's Current Report on
Form 8-K, dated August 18, 1992.)
48
4(b) Series A Supplemental Indenture, dated as of July 16, 1992,
to Indenture, dated as of July 16, 1992, among the Company,
certain Subsidiary Obligors and The Connecticut National
Bank, as Trustee, with respect to 10% Secured Notes due
2001. (Incorporated by reference to Exhibit 4.2 to INTERCO
INCORPORATED's Current Report on Form 8-K, dated August 18,
1992.)
4(c) Series C Supplemental Indenture, dated as of July 16, 1992,
to Indenture, dated as of July 16, 1992, among the Company,
certain Subsidiary Obligors and The Connecticut National
Bank, as Trustee, with respect to 8.5% Secured Notes due
1997. (Incorporated by reference to Exhibit 4.3 to INTERCO
INCORPORATED's Current Report on Form 8-K, dated August 18,
1992.)
4(d) First Supplement, dated as of October 22, 1992, to
Indenture, dated as of July 16, 1992, among the Company,
certain Subsidiary Obligors and The Connecticut National
Bank, as Trustee, with respect to 10% Secured Notes Due 2001
and 8.5% Secured Notes Due 1997. (Incorporated by reference
to Exhibit 4(d) to INTERCO INCORPORATED's Annual Report on
Form 10-K for the year ended December 31, 1993.)
4(e) Indenture, dated as of July 16, 1992, among the Company,
certain Subsidiary Obligors and Security Pacific National
Trust Company (New York), as Trustee, with respect to 9%
Secured Notes Due 2004. (Incorporated by reference to
Exhibit 4.4 to INTERCO INCORPORATED's Current Report on Form
8-K, dated August 18, 1992.)
4(f) First Supplement, dated as of October 22, 1992, to
Indenture, dated as of July 16, 1992, among the Company,
certain Subsidiary Obligors and Security Pacific National
Trust Company (New York), as Trustee, with respect to 9%
Secured Notes Due 2004. (Incorporated by reference to
Exhibit 4(f) to INTERCO INCORPORATED's Annual Report on Form
10-K for the year ended December 31, 1993.)
4(g) Secured Term Loan Agreement, dated as of July 16, 1992,
among the Company, certain Subsidiary Obligors, Morgan
Guaranty Trust Company of New York, as Agent, and as
Administrative Agent, and the banks named therein.
(Incorporated by reference to Exhibit 10.2 to INTERCO
INCORPORATED's Current Report on Form 8-K, dated August 18,
1992.)
4(h) First Amendment, dated as of October 22, 1992, to the
Secured Term Loan Agreement, dated as of July 16, 1992,
among the Company, certain Subsidiary Obligors, Morgan
Guaranty Trust Company of New York, as Agent, and as
Administrative Agent, and the banks named therein.
(Incorporated by reference to Exhibit 4(h) to INTERCO
INCORPORATED's Annual Report on Form 10-K for the year ended
December 31, 1993.)
4(i) ILGWU Fund Note, dated July 16, 1992. (Incorporated by
reference to Exhibit 10.3 to INTERCO INCORPORATED's Current
Report on Form 8-K, dated August 18, 1992.)
4(j) Shared Collateral Trust Agreement, dated July 16, 1992,
among the Company, certain Subsidiary Obligors, The
Connecticut National Bank, as Series A and Series C
49
Indenture Trustee, Security Pacific National Trust Company
(New York), as Series B Indenture Trustee, Morgan Guaranty
Trust Company of New York, as Agent and Administrative Agent
under the Secured Term Loan Agreement, the ILGWU National
Retirement Fund, First Fidelity Bank, National Association,
as corporate trustee, and Joseph F. Ready, as individual
trustee. (Incorporated by reference to Exhibit 10.4 to
INTERCO INCORPORATED's Current Report on Form 8-K, dated
August 18, 1992.)
4(k) Credit Agreement, dated as of July 16, 1992, among the
Company and certain of its subsidiaries, BT Commercial
Corporation, as Agent, and the banks named therein.
(Incorporated by reference to Exhibit 10.1 to INTERCO
INCORPORATED's Current Report on Form 8-K, dated August 18,
1992.)
4(l) Waiver #2, dated as of September 21, 1992, to the Credit
Agreement, dated as of July 16, 1992, among the Company and
certain of its subsidiaries, BT Commercial Corporation, as
Agent, and the banks named therein. (Incorporated by
reference to Exhibit 4 to INTERCO INCORPORATED's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1992.)
4(m) Waiver #3, dated as of January 25, 1993, to the Credit
Agreement, dated as of July 16, 1992, among the Company and
certain of its subsidiaries, BT Commercial Corporation, as
Agent, and the banks named therein.
4(n) First Amendment, dated as of November 9, 1992, to the Credit
Agreement, dated as of July 16, 1992, among the Company and
certain of its subsidiaries, BT Commercial Corporation, as
Agent, and the banks named therein. (Incorporated by
reference to Exhibit 4(m) to INTERCO INCORPORATED's Annual
Report on Form 10-K for the year ended December 31, 1993.)
4(o) Second Amendment, dated as of May 14, 1993, to the Credit
Agreement, dated as of July 16, 1992, among the Company and
certain of its subsidiaries, BT Commercial Corporation, as
Agent, and the banks named therein.
4(p) Third Amendment, dated as of January 31, 1994, to the Credit
Agreement, dated as of July 16, 1992, among the Company and
certain of its subsidiaries, BT Commercial Corporation, as
agent, and the banks named therein.
4(q) Warrant Agreement, dated as of August 3, 1992, between the
Company and Society National Bank, as Warrant Agent.
(Incorporated by reference to Exhibit 4.5 to INTERCO
INCORPORATED's Current Report on Form 8-K, dated August 18,
1992.)
4(r) Agreement to furnish upon request of the Commission copies
of other instruments defining the rights of holders of long-
term debt of the Company and its subsidiaries which debt
does not exceed 10% of the total assets of the Company and
its subsidiaries on a consolidated basis. (Incorporated by
reference to Exhibit 4(c) to INTERCO INCORPORATED's Annual
Report on Form 10-K for the year ended February 28, 1981.)
10(a) Employment Agreement, dated as of August 8, 1988, between
the Company and Ronald J. Mueller. (Incorporated by
reference to Exhibit 10.2 to INTERCO INCORPORATED's
Registration Statement on Form S-4, File No. 33-34965.)
50
10(b) INTERCO INCORPORATED's 1992 Stock Option Plan.
(Incorporated by reference to Exhibit 10(b) to INTERCO
INCORPORATED's Annual Report on Form 10-K for the year ended
December 31, 1992.)
10(c) INTERCO INCORPORATED's PerformanceIncentive Plan. (Incorpor-
ated by reference to Exhibit 10.10 to INTERCO
INCORPORATED's Registration Statement on Form S-4, File No.
33-34965.)
10(d) Form of Indemnification Agreement between the Company and
Richard B. Loynd, Donald E. Lasater and Lee M. Liberman.
(Incorporated by reference to Exhibit 10(h) to INTERCO
INCORPORATED's Annual Report on Form 10-K for the year ended
February 29, 1988.)
10(e) Consulting Agreement, dated as of September 23, 1992,
between the Company and Apollo Advisors, L.P. (Incorporated
by reference to Exhibit 10(e) to INTERCO INCORPORATED's
Annual Report on Form 10-K for the year ended December 31,
1992.)
10(f) Registration Rights Agreement, dated as of August 3, 1992,
among the Company, Apollo Investment Fund, L.P. and Altus
Finance. (Incorporated by reference to Exhibit 10(f) to
INTERCO INCORPORATED's Annual Report on Form 10-K for the
year ended December 31, 1992.)
10(g) Registration Rights Agreement, dated as of August 3, 1992,
between the Company and Apollo Interco Partners, L.P.
(Incorporated by reference to Exhibit 10(g) to INTERCO
INCORPORATED's Annual Report on Form 10-K for the year ended
December 31, 1992.)
10(h) Written description of bonus agreements for executive
officers of the Company and retirement plan for non-employee
directors.
11 Statement regarding computation of per share earnings.
21 List of Subsidiaries of the Company.
23 Consent of KPMG Peat Marwick
(b) Reports on Form 8-K.
A Form 8-K was not required to be filed during the three month period
ended December 31, 1993.
SHAREHOLDERS REQUESTING COPIES OF EXHIBITS TO FORM 10-K
WILL BE SUPPLIED ANY OR ALL SUCH EXHIBITS AT A CHARGE OF
TEN CENTS PER PAGE.
51
INTERCO INCORPORATED AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedules
Consolidated Financial Statements:
Consolidated balance sheet, December 31, 1993 and December 31,
1992.
Consolidated statement of operations for the year ended December
31, 1993, for the five months ended December 31, 1992 and August 2,
1992 and for the year ended February 29, 1992.
Consolidated statement of cash flows for the year ended December
31, 1993, for the five months ended December 31, 1992 and August 2,
1992 and for the year ended February 29, 1992.
Consolidated statement of shareholders' equity for the year ended
December 31, 1993, for the ten months ended December 31, 1992 and
for the year ended February 29, 1992.
Notes to consolidated financial statements.
Independent Auditors' Report
Consolidated Financial Statement Schedules:
Schedule
--------
Valuation and qualifying accounts VIII
Supplementary income statement information X
52
SCHEDULE VIII
- -------------
INTERCO INCORPORATED AND SUBSIDIARIES
Valuation and Qualifying Accounts
(Dollars in Thousands)
------------------------------------------------------
Additions
Balance at Charged to Deductions Balance at
Beginning Costs and from End of
of Period Expenses Reserves Period
Description ---------- ---------- ---------- ----------
- -----------
Year Ended December 31, 1993
- ----------------------------
Allowances deducted from
receivables on balance sheet:
Allowance for doubtful accounts $ 6,307 $ 3,412 $ (3,299) (a) $ 6,420
Allowance for cash discounts and chargebacks 1,035 5,414 (5,661) (b) 788
------- ------- -------- -------
$ 7,342 $ 8,826 $ (8,960) $ 7,208
======= ======= ======== =======
Five Months Ended December 31, 1992
- -----------------------------------
Allowances deducted from
receivables on balance sheet:
Allowance for doubtful accounts $ 8,171 $ 1,272 $ (3,136) (a) $ 6,307
Allowance for cash discounts and chargebacks 1,357 2,257 (2,579) (b) 1,035
------- ------- -------- -------
$ 9,528 $ 3,529 $ (5,715) $ 7,342
======= ======= ======== =======
Five Months Ended August 2, 1992
- --------------------------------
Allowances deducted from
receivables on balance sheet:
Allowance for doubtful accounts $ 7,797 $ 3,674 $ (3,300) (a) $ 8,171
Allowance for cash discounts and chargebacks 1,300 2,402 (2,345) (b) 1,357
------- ------- -------- -------
$ 9,097 $ 6,076 $ (5,645) $ 9,528
======= ======= ======== =======
Year Ended February 29, 1992
- ----------------------------
Allowances deducted from
receivables on balance sheet:
Allowance for doubtful accounts $ 6,052 $ 9,633 $ (7,888) (a) $ 7,797
Allowance for cash discounts and chargebacks 1,374 7,770 (7,844) (b) 1,300
------- ------- -------- -------
$ 7,426 $17,403 $(15,732) $ 9,097
======= ======= ======== =======
(a) Uncollectible accounts written off, net of recoveries.
(b) Cash discounts taken by customers.
See accompanying independent auditors' report.
/TABLE
53
SCHEDULE X
- ----------
INTERCO INCORPORATED AND SUBSIDIARIES
Supplementary Income Statement Information
(Dollars in Thousands)
Charged to Costs and Expenses
---------------------------------------------------------------
Year Ended Five Months Five Months Year Ended
December 31, Ended Ended February 29,
1993 December 31, 1992 August 2, 1992 1992
----------- ----------------- -------------- -----------
Advertising $82,712 $32,863 $32,505 $67,620
======= ======= ======= =======
Maintenance
and repairs $17,343 $ 6,706 $ 6,538 $16,305
======= ======= ======= =======
See accompanying independent auditors' report.
54
Independent Auditors' Report
----------------------------
The Board of Directors and Shareholders
INTERCO INCORPORATED:
We have audited the consolidated financial statements of INTERCO INCORPORATED
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedules as listed in the accompanying index. These
consolidated financial statements and financial statement schedules are the
responsibility of the company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of INTERCO
INCORPORATED and subsidiaries at December 31, 1993 and 1992, and the results
of their operations and their cash flows for the year ended December 31, 1993,
five months ended December 31, 1992, five months ended August 2, 1992, and
year ended February 29, 1992 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules,
when considered in relation to the basic consolidated financial statements
taken as a whole, present fairly, in all material respects, the information
set forth therein.
As discussed in Note 2 to the consolidated financial statements, effective
August 2, 1992, INTERCO INCORPORATED was required to adopt "fresh-start"
reporting principles in accordance with AICPA Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code."
As a result, the financial statements for the period subsequent to the
adoption of fresh-start reporting are presented on a different cost basis than
that for prior periods and, therefore, are not comparable.
As discussed in Notes 2 and 5 to the consolidated financial statements, the
company changed its method of accounting for postretirement benefits and
income taxes in calendar year 1992.
KPMG PEAT MARWICK
St. Louis, Missouri
February 8, 1994
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
INTERCO INCORPORATED
---------------------------------
(Registrant)
By Richard B. Loynd
-----------------------------
Richard B. Loynd
Chairman of the Board
Date: March 28, 1994
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 28, 1994.
Signature Title
--------- -----
Richard B. Loynd Chairman of the Board,
- ------------------------------
(Richard B. Loynd) President and Director
(Principal Executive Officer)
Donald E. Lasater Director
- ------------------------------
(Donald E. Lasater)
Lee M. Liberman Director
- ------------------------------
(Lee M. Liberman)
Leon D. Black Director
- ------------------------------
(Leon D. Black)
Craig M. Cogut Director
- ------------------------------
(Craig M. Cogut)
Robert H. Falk Director
- ------------------------------
(Robert H. Falk)
Michael S. Gross Director
- ------------------------------
(Michael S. Gross)
John J. Hannan Director
- ------------------------------
(John J. Hannan)
Bruce A. Karsh Director
- ------------------------------
(Bruce A. Karsh)
56
Signature Title
John H. Kissick Director
- ------------------------------
(John H. Kissick)
Matthew J. Morahan Director
- ------------------------------
(Matthew J. Morahan)
Eric B. Siegel Director
- ------------------------------
(Eric B. Siegel)
Basil Vasiliou Director
- ------------------------------
(Basil Vasiliou)
Eugene F. Smith Executive Vice President
- ------------------------------ (Principal Financial Officer)
(Eugene F. Smith)
David P. Howard Vice President and Controller
- ------------------------------ (Principal Accounting Officer)
(David P. Howard)