Item 1. Business - ----------------- (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 - ----------------- Broyhill Furniture Industries, Inc. - ----------------------------------- 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 - -------- 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 - -------------------------- 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. 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. Competition - ----------- 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 - ------------- 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. The Lane Company, Incorporated - ------------------------------ 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 - -------- 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. 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 - -------------------------- 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 - ----------- 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 - ------------- 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 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 - ---------------- The Florsheim Shoe Company - -------------------------- 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 - -------- 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 - -------------------------- 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. 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 - ----------- 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 - ------------- 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. 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 - ----------------- 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. - ------------- 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 - -------- 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 walking shoes, under the Converse name.
Research and Development - ------------------------ 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 - --------- 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 - ----------- The athletic footwear market is highly competitive. Industry 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 - ------------- 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 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.
Item 2.


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 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 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.
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.
Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ Not applicable.
PART II -------
Item 5.
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.
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. 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 =========================================================================== 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.
- --------------------------------------------------------------------------- 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:
- --------------------------------------------------------------------------- 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. 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 ============================================================================= 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.




Item 9. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure - --------------------
Not applicable. PART III --------
Item 10.


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
* Member of the Executive Committee 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.
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.
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.
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. PART IV -------
Item 14.
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.)
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 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.) 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. 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
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
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.
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
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)
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)