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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR THE ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 3, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-13474
FLORSHEIM GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3520923
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 NORTH LASALLE STREET, CHICAGO, ILLINOIS 60601-1014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312)458-2500
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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12 3/4% Senior Notes due 2002 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, WITHOUT PAR VALUE
(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 March 6, 1998, was approximately $24,765,688 based on the
closing price of the registrant's common stock as reported on The NASDAQ Stock
Market on March 6, 1998.
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. Yes [ ] No [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
8,412,901 shares as of March 6, 1998
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on May 20, 1998, are incorporated by reference into
Part III of this report.
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PART I
Item 1. Business
This report contains forward-looking statements that address, among other
things, distribution efforts, sourcing arrangements, projected capital
expenditures, future cost of compliance with environmental laws and the
adequacy of financing arrangements to meet debt service, capital expenditures,
and other liquidity requirements. These statements may be found under Item 1.
"Business" and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as well as in other portions of this
report generally. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including without limitation those discussed under the caption "Risk Factors"
included in Item 1. and other matters included in this report.
GENERAL
Florsheim Group Inc. (Florsheim or the Company) founded in 1892, markets,
designs, manufactures, and sources a diverse and extensive range of products in
the middle to upper price range of the men's quality footwear market.
Florsheim became a publicly held and publicly traded corporation on November
17, 1994 when Furniture Brands International, Inc., formerly known as INTERCO
INCORPORATED, distributed the common stock of Florsheim to its stockholders.
References herein to Florsheim or the Company include the consolidated
subsidiaries of Florsheim unless the context indicates otherwise.
Florsheim markets products to more than 6,000 specialty and department
store locations worldwide and through 354 Company-operated specialty stores and
outlet stores as of January 3, 1998. The Company believes that the Florsheim
brand name is widely recognized both in the U.S. and in international markets
for quality and value and that consumers' unaided brand awareness of
Florsheim's products in the U.S. in the men's dress shoe category is over four
times greater than that of its nearest competitor (according to Footwear Market
Insights (FMI)).
Florsheim primarily competes in the $60 and above retail price point
segment of the men's non-athletic footwear market. The below $60 price point
segment is dominated by private label offerings. According to FMI, the Company
is the leading provider of men's dress shoes in the $60 and above U.S. market,
with approximately a 13% market share, nearly 36% greater than the market share
of the Company's nearest competitor.
The Company's worldwide wholesale distribution accounted for approximately
43% of fiscal 1997 sales. The Company has a global wholesale customer base
which includes department stores and national accounts, such as Sears, J.C.
Penney, and Nordstrom, Inc., independent dealers located worldwide and
licensee locations in Mexico, India, the Pacific Rim and the Middle East. In
addition, as of January 3, 1998, Florsheim had a retail network of 201
Company-operated specialty stores and 99 Company-operated outlet stores in the
U.S. As of January 3, 1998, the Company also operated 46 specialty retail
stores and eight outlet stores in Australia, Canada, England, Italy, and New
Zealand. The Company's retail operations allow the Company to: achieve
broader distribution of its products; provide a showcase for a variety of
Florsheim branded products marketed by the Company; test market acceptance of
newly introduced products; further develop consumer recognition of the
Florsheim brand; and maintain direct contact with changes in consumer
preferences and buying practices. The Company continues to develop store
formats which provide updated, contemporary looks to its specialty stores.
On March 22, 1996, the Company completed the sale of the assets of its
Hy-Test safety shoe division, including its Kirksville, Missouri factory, to
Wolverine World Wide, Inc., for an all cash sale price settled at $23,200. Net
sales of Hy-Test were approximately $6,900 in fiscal 1996 and $38,700 in fiscal
1995.
INDUSTRY OVERVIEW
The U.S. footwear industry has undergone substantial change since the
early 1980s, which has resulted in significant challenges for U.S.-based
footwear manufacturers and retailers. Three major influences of this change
have been the increase in footwear imports into the U.S., the growth of
consumer demand for athletic and casual footwear, and a shift away from
traditional shoe stores. Management believes these influences have
contributed to the following
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trends: (i) the reduction in the domestic manufacturing base and an increase in
foreign sourcing of footwear products, (ii) the decline in annual sales (in
units) for the traditional dress shoe market, (iii) the increase in sales of
athletic and casual footwear and footwear products targeted for specific
athletic and leisure activities, and (iv) the shift in the primary channels of
distribution for footwear from independent dealers to department stores,
regional retailers and mass merchandisers. In response, the Company has
developed reliable, cost-effective foreign sourcing capabilities, developed
new product lines, developed lines of dress casual and casual shoes and
expanded its wholesale distribution capabilities.
According to FMI, 1997 U.S. retail sales of men's footwear (excluding
athletic footwear and work boots) were approximately $8.9 billion, or 173
million pairs. Within this market, declines in the traditional dress shoe
segment have been primarily driven by the lifestyle trend toward more casual
clothing and emphasis on leisure time and the increased popularity of casual
dress or "dress down" days within the business community. The men's footwear
industry merchandise mix has mirrored these changes, as consumer preferences
have shifted from dress toward casual. A dress casual category within the men's
footwear segment, which combines features of dress shoes with the comfort
enhancing aspects of casual footwear, has also developed in response to this
lifestyle and fashion shift. Over this period, consumers' perceptions of the
distinctions between product offerings within the dress, dress casual and
casual categories have diminished as a result of "crossover" products that are
not limited to a particular use or occasion but are suitable for a variety of
styles, fashions and end uses. Florsheim's marketing efforts are designed to
respond to these market developments and capture a larger percentage of the
footwear market consisting of younger and more casual-dress oriented consumers.
Remodeled specialty store locations also provide an updated, contemporary, and
more casual feel.
Department stores, regional retailers and mass merchandisers continue to
play a larger role in the retailing of footwear, and the significance of small
independent footwear dealers, which once dominated retail distribution,
continue to decline dramatically. To compensate for these shifts in channels
of distribution, the Company has expanded its distribution to department stores
and regional and national retail stores and through Company-operated stores in
response to the shifts in consumer shopping patterns. In recent years, the
Company has also developed a closer working relationship with its key
independent dealers in order to assist them with the expansion of their
Florsheim business.
MARKETING AND DISTRIBUTION GROWTH STRATEGY
Management of the Company emphasizes two principal growth objectives: to
strengthen the Company's position as the leading manufacturer and distributor
of men's dress shoes at retail prices of $60 and above and to improve its
market share in the growing dress casual and casual footwear categories. To
further these objectives, the Company has adopted growth strategies to: (i)
strengthen its leading position in the traditional dress shoe market, (ii)
extend its dress and dress casual product lines and enhance marketing
initiatives to improve its appeal to younger and casual-dress target audiences,
(iii) broaden wholesale distribution, (iv) increase sales at the
Company-operated retail stores through the remodeling of stores in a
contemporary format and selectively opening new specialty and outlet stores,
(v) offer additional products in its retail stores, using a multi-brand
approach, (vi) expand international sales and (vii) increase sales through new
product introductions.
In order to execute the growth plans, the Company, in early 1996,
organized strategic business units (SBUs) within the Company: wholesale,
retail, international, and new products. The SBUs focus specifically on
achieving the growth objectives of the individual units and provide the
accountability necessary to allow management to control the units in a manner
consistent with the Company's overall goals.
Strengthen Leading Position in the Traditional Dress Shoe Market: FMI
estimates that the $60 and above dress shoe segment of the men's footwear
market, Florsheim's strongest historical product segment, accounted for $2.8
billion in annual retail sales in 1997. To expand market share in dress shoes,
the Company has positioned the Florsheim brand at retail price points above $80
and created a sub-label, FLS, to represent product under $80 at retail. This
strategy will allow Florsheim to market its products to broader channels of
distribution and appeal to a larger consumer base.
Extension of Dress Casual and Casual Product Offerings: The Company
intends to increase its market share in the growing dress casual and casual
categories through new product introductions, enhanced marketing initiatives
that are intended to appeal to younger and casual dress target audiences and
the promotion of product at Company-operated stores through a more contemporary
format. The Company originally developed Comfortech technology to improve the
comfort and durability features of its products without sacrificing style or
quality. Florsheim has continued to
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enhance the Comfortech design each year and has added new products and features
to encourage the acceptance of Comfortech line extensions, including Comfortech
Maintenance Free and its recently introduced Comfortech Softreds. According to
FMI data, the Company maintains the sixth largest market share, approximately
3%, in the casual segment of the $60 and above men's footwear market. With
approximately 46% of this market comprised of manufacturers that account for
less than a 1% market share according to FMI data, management believes the
casual market represents a key area of opportunity for the Company and intends
to concentrate on growth in this category.
Broaden Wholesale Distribution: The Company is aggressively seeking to
expand its sales to wholesale accounts by adding new customers, such as
national and regional retailers, including expansion of department store
distribution, as well as increasing penetration of existing accounts with its
extended product line and aggressive merchandising and advertising programs.
The Company's success in distributing its branded merchandise through Sears
locations is being used as a model in marketing similar arrangements to other
department stores and national and regional retailers. An important component
of the Sears/Florsheim success is the use of an interactive video kiosk that
allows the consumer to electronically seek product information, learn about
store promotions, and special order footwear directly from the Florsheim
distribution center. The video kiosk concept is adaptable to most retailers'
needs and will be expanded beyond Sears.
Remodeling of Company-Operated Stores: The Company is currently
remodeling its chain of Company-operated specialty stores with a new
contemporary and more casual format which includes new interiors with better
utilization of selling space. The Company intends to continue the remodeling
efforts started in 1997 during 1998. The Company believes that the remodeled
stores' contemporary look combined with expanded product offerings was
primarily responsible for the increased shopper traffic, attracting younger
consumers, and the improved sales and productivity at the stores remodeled in
1997. In addition, the Company anticipates that its remodeling efforts can
potentially have the further beneficial effect of enhancing the Company's
relationships with mall developers and providing increased access to prime
retail locations. Through its Company-operated outlet stores Florsheim has been
able to participate in the growing U.S. outlet mall segment of the retailing
industry. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Capital Expenditures."
Multi-Brand Concept: In order to meet consumers' needs for a complete
range of men's footwear in its retail stores, the Company has added additional
branded products that do not conflict with the current Florsheim line. By
selling additional brands in its store, the Company expects, based on
successful results to date, that this strategy will introduce the Florsheim
brand to additional consumers by attracting new customers into the stores.
Based on these results, the multi-brand concept results in improved Florsheim
product sales and higher overall sales per square foot for the store.
Expanding International Distribution: The Florsheim name is recognized in
many international markets around the world, especially Australia, Canada and
Mexico. The Company has initiated efforts to establish a stronger presence in
Europe, Central and South America, and the Pacific Rim. In addition, the
Company has launched an international strategy, through licensing of stores,
selective openings of Company-operated specialty stores, and increased sales to
wholesale accounts, to increase its penetration of established markets and to
introduce the Florsheim brand in selected new markets.
New Product Introductions: The Company, in early 1996, established a New
Products Division. Through this division, the Company reviews and develops
opportunities to expand sales beyond the product areas in which Florsheim has
focused its efforts in the past, and take advantage of the Company's expertise
in footwear. 1997 was the first full year for the New Products Division. The
new products are: Florsheim Golf Shoes, John Deere Footwear, and Joseph Abboud
Footwear.
ADVERTISING
The Company's advertising objective is to build upon the strength of the
Florsheim brand name and expand its market share and sales in the growing dress
casual and casual categories with particular attention on targeting a younger,
more affluent customer. According to a FMI survey, unaided brand awareness of
the Florsheim name is approximately 50% in the United States in the men's dress
shoe category. Management believes this unaided brand awareness is over four
times greater than that of its nearest competitor in the dress category of the
footwear industry and is third overall, behind Nike and Reebok, in the entire
footwear industry. Management believes the consumer's image of Florsheim is
typically associated with a high quality product that offers good value.
Management has implemented
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advertising and marketing programs to successfully carry that well-established
quality image through to offerings in the dress casual and casual categories.
The Company is also using advertising to reach a younger market segment. In
Fall 1996, the Company began its "SOLE OF SUCCESS" campaign using celebrities
from various walks of life. Celebrities are seen wearing Florsheim product in
leading magazines and in point of sale materials at retail. A new group of
celebrities is rotated in each season to keep the campaign fresh. The campaign
has thus far included Pat O'Brien, Jim Harbaugh, Corbin Bernsen, Luke and
Murphy Jensen, Oscar De La Hoya, Nick Faldo and Derek Jeter. Television
advertising during golf events using Nick Faldo was used to introduce Florsheim
Golf Shoes (Frogs) into the market.
The total domestic advertising expenditures for fiscal 1997 were
approximately 2.0% of Florsheim's total domestic sales, versus 1.3% in fiscal
1996 and 2.2% in fiscal 1995 (excluding Hy-Test). These expenditures were
divided among television, national print ads and print advertising placed on
behalf of the Company-operated specialty stores and independent dealers.
WHOLESALE OPERATIONS
The Company distributes its product at wholesale to more than 6,000 retail
locations worldwide ranging from independent shoe stores to large national
retailers and department stores to Company-operated specialty and outlet
stores. The Company is continually developing new distribution programs to add
new distribution, strengthen its position with its existing customers and
capitalize on new distribution opportunities in response to the shifts in
consumer shopping patterns. The Company's broadened product line has helped
strengthen its position with dealers because each dealer can select the items
from the product line which will appeal to its particular customer base.
Management believes that new product introductions such as Florsheim Golf
Shoes, John Deere work boots and Joseph Abboud dress and casual shoes
strengthen the Company's position with its distribution by providing innovative
merchandise.
Due to the changing profile of the retailing shoe industry with the
reduced importance of the traditional shoe store, Florsheim has expanded its
distribution strategy to include a broader range of retailers. While remaining
selective in its choice of dealers and focusing on those that will best serve
the Company for the long-term, the Company believes that a broader distribution
base that includes department stores, national and regional retailers and mass
merchandisers is essential for continued success.
RETAIL OPERATIONS
As of January 3, 1998, Florsheim had 354 Company-operated stores
worldwide, represented by 247 traditional Florsheim specialty shoe shops and
107 outlet stores. According to industry data, management believes that
Florsheim's Company-operated chain of stores is the largest U.S. specialty
retailer of men's quality dress footwear. As of January 3, 1998, the Company
operated 201 U.S. specialty retail locations. The Company evaluates each of
these locations as leases expire and makes the decision to renew, relocate, or
close. In addition, the Company intends to continue the selective opening of
new stores and aggressively closing unprofitable stores.
The Company-operated stores provide a strategic distribution channel which
gives the Company a key competitive advantage. Management believes that as the
footwear retailing industry continues to consolidate, it is critical that the
Company maintain its own controlled distribution channel. Company-operated
stores are the largest distributor of Company products and, in the U.S.,
represented approximately 37% of the wholesale sales value of total domestic
wholesale shipments during fiscal 1997. The Company realizes both a wholesale
gross profit margin and a retail gross profit margin on product distributed
through its Company-operated stores. The combined gross profit margin on such
sales is larger than the gross profit margin earned on product distributed
exclusively through wholesale channels. Florsheim maintains a consistent
pricing policy for the wholesale division such that prices for shoes purchased
by Company-operated retail stores are typically the same as those paid by
independent dealers.
During 1996, a number of Company-operated specialty stores began to offer
a limited selection of non-Florsheim products in order to attract new consumers
into the stores. Management believes that this strategy will continue to
improve overall sales per square foot and will enable the Company to introduce
the Florsheim brand to a new group of younger consumers. Company-operated
stores will continue to carry predominantly Florsheim product which will help
reinforce the Company's quality footwear image by displaying the complete
Florsheim product line in an attractive, Company-controlled display format.
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The traditional Florsheim specialty shoe stores carry a full selection of
the Company's brands, while the outlet stores carry discontinued merchandise,
close out inventory and specially manufactured products. The Company does not
concurrently offer any identical products through these separate and distinct
distribution channels. Both the traditional specialty shoe stores and the
outlet stores have been, and will continue to be, key elements of the Company's
distribution efforts.
INTERNATIONAL
Florsheim has been a participant in international markets since the 1960s
and has a strong, established presence in Australia and Canada through
Company-operated businesses, and Mexico, a licensee operation. The Company is
establishing a stronger presence in selected regions of Europe, Central and
South America, India, the Middle East, and the Pacific Rim. The international
division markets the Company's products through a global network of wholesale
dealers, distributors, licensees and Company-operated stores. At January 3,
1998, the Company operated 54 specialty and outlet stores in international
markets and licensed an additional 37 specialty shops to selected partners.
International sales, including exports, were $50.6 million in fiscal 1997, and
were distributed as shown below:
International Distribution
Percentage of Total Fiscal 1997 International Sales
<TABLE>
<S> <C>
Australia ...... 48 %
Canada ......... 22
Pacific Rim .... 14
Europe ......... 7
Other Exports .. 9
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100%
</TABLE> ======
Management believes American brand names, in general, have well recognized
marketing appeal in many countries throughout the world and anticipates that
the Company's classic, high quality products will be especially well received
in the European, Central and South American and Pacific Rim markets. The
Company believes that the Florsheim brand name is recognized throughout the
world and that the trend toward the growth of international brand names offers
tremendous opportunity for Florsheim.
Australia and Canada are important and well established markets for
Florsheim. The Australian and Canadian operations both include wholesale
distribution and a chain of Company-operated specialty and outlet stores. As of
January 3, 1998, the Company operated 36 stores in Australia and New Zealand
and 16 stores in Canada. Management believes that its Australian stores are
the only chain of dedicated quality men's dress shoes in Australia and provide
a key competitive advantage in this market. Both the Australian and Canadian
retailing industries are dominated by large department stores; therefore, the
Company is concentrating on building wholesale sales to these key department
store accounts while maintaining its commitment to a profitable network of
Company-operated stores and independent dealers. Currently, there is one
Company-operated manufacturing facility in Australia and none in Canada.
Management believes that the Pacific Rim, and Japan in particular, offers
opportunities for Florsheim and has targeted this region as part of the
Company's international growth strategy. Distribution to this market is
primarily effected by its Hong Kong sales subsidiary through wholesale sales to
independent retailers in the Pacific Rim and licensees and distributors in Hong
Kong, Indonesia, Taiwan, Singapore, Japan, and the Philippines. The Company's
primary strategy for increasing its presence in this area is to increase the
number of independent dealers and licensees while establishing Company-operated
specialty stores in a few select locations. In addition, the Company will
explore other formats for distribution opportunities, such as licensing, in
markets such as China. During fiscal 1997, Southeast Asian currencies were
devalued relative to the U.S. dollar. The impact was not material to the
results in fiscal 1997.
Management believes there is a significant opportunity to increase sales
in Europe by capitalizing on the appeal of American brand name products. While
it is expected that the Company will encounter greater competition in Europe
than in the Pacific Rim, the Company intends to draw upon its long-standing
relationships with Italian and Spanish
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suppliers to establish a presence and generate demand for its products in
Europe. The Company has developed a sales presence in several European
countries, opened its first Company-operated store in Europe, located in Milan,
Italy, in 1994, and has an arrangement for corner stores within Printemps, a
large department store chain throughout France.
The network of Company-operated stores in Mexico was sold in fiscal 1991
to a company located in Mexico which management believed was better positioned
to expand distribution in the Mexican market. This sale included an ongoing
royalty and licensing agreement.
The division also includes licensees and distributors in India, Japan,
Qatar, the Philippines, and the United Arab Emirates.
Note 16 to the Company's consolidated financial statements included under
item 8 of this Report contains certain foreign, geographical segment
information regarding the Company's domestic and international revenue,
operating income and assets.
PRODUCT
Management's primary product strategy is to strengthen its leading
position in the dress category while further penetrating the growing dress
casual and casual categories. Florsheim offers a diverse line of men's quality
dress, dress-casual and casual shoes in the $60 and above price range. All
products, (except those that are sold under license), are currently sold under
the Florsheim brand, but segmented with the following sub-labels to
differentiate product by lifestyle or construction. In addition, the Company
has entered into licensing agreements to manufacture and sell John Deere work
boots and Joseph Abboud footwear.
<TABLE>
<CAPTION>
DRESS DRESS CASUAL CASUAL OTHER
- ----- ------------ ------ -----
<S> <C> <C> <C>
Florsheim Florsheim Florsheim John Deere**
Florsheim Comfortech Florsheim Comfortech Florsheim Comfortech Florsheim Frogs
Florsheim Imperial @ease @ease
FLS FLS
Joseph Abboud* Joseph Abboud*
</TABLE>
* This is the registered trademark of Joseph Abboud
** This is the registered trademark of John Deere
Florsheim: Florsheim is the signature of quality and value. This is the
foundation of Florsheim heritage - dress and casual styles a person can wear
with confidence. Tradition woven with fashion - the intrinsic marriage of
style, quality and value. Retail price points for this line range from $80 to
$120.
Florsheim Comfortech: Florsheim Comfortech is the signature of comfort.
Using the most advanced comfort technology and most sophisticated comfort
construction methods, Florsheim Comfortech provides a comfortable alternative
to ordinary dress and casual shoes. Retail price points range from $90 to
$120.
Florsheim Imperial: Florsheim Imperial is the definition of American
style. The glamour of our past with the function and versatility of the
present and the comfort and streamlined shapes of the future. Superior quality
paired with comfort. A classic look laced with style. A shoe built with the
exacting standards worth of the Imperial name. These fashionable styles range
from dress to dress/casual styles. Retail price points range from $120 to
$170.
Joseph Abboud Footwear: Complete line of high-end fashion footwear
designed and manufactured to the specifications of men's fashion designer
Joseph Abboud. Abboud fashions are available only at high-end retail outlets
and appeal to the needs and desires of an upscale clientele. Retail price
points range from $150 to $300.
FLS: To maintain the equity position of the Florsheim name but still
offer quality product at entry price-points, this new line of value priced
product has been developed. FLS offers quality product at $50 to $70.
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John Deere: A complete line of authentic work boots designed specifically
to the needs of industrial, agricultural and other blue collar workers. The
line is marketed under the John Deere name through a licensing agreement with
one of the world's best known industrial/agricultural equipment manufacturers.
The boots are specifically designed to be the most comfortable and durable
product in the market. Retail price points range from $110 to $175.
Florsheim Golf: Florsheim has entered the golf shoe arena with product
designed to be technologically superior. This is achieved by combining the
Florsheim Comfortech advantages into a well-built, waterproof, leather shoe to
create Florsheim Frogs and FrogLites. Florsheim also offers high-end styles in
sturdy leather soled golf shoes. Retail price points range from $70 to $100.
@ease: Out of the strategy to appeal to a younger consumer in the
wardrobe building phase of his life, Florsheim has developed a line of young
contemporary, dress casual and casual styles. Retail price points range from
$70 to $100.
During 1997, Florsheim entered into its first non-footwear licensing
agreement with an ongoing royalty stream.
SOURCING AND MANUFACTURING; TRADE REGULATIONS
Florsheim's sourcing strategy is to manufacture products where they can be
produced most efficiently while still meeting management's quality and service
specifications. Toward this goal, Florsheim shoes are manufactured both
domestically and overseas. The Company owns a manufacturing plant in Cape
Girardeau, Missouri as well as a warehouse distribution center in Jefferson
City, Missouri. Based on 1997 results, the production at Cape Girardeau, is
approximately 18% of the total worldwide production. Approximately 85% of its
total production involved finishing imported uppers. The remaining 15% is the
complete manufacturing process from cut through pack. Florsheim has
consolidated its domestic manufacturing in recent years to improve production
capabilities and concentrate on products which can be produced domestically
more cost efficiently. 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 limited manufacturing base close to its
end-market. During 1997, approximately 80% of Florsheim's finished shoe
sourcing requirements were fulfilled outside of the United States.
Approximately 80% of Florsheim's non-domestic products are manufactured in
India, where Florsheim is the minority partner (26% ownership) in a joint
venture arrangement with a local operator. Under this arrangement, the venture
manufactures exclusively for Florsheim and without minimum quantity
restrictions for the production output. Also under this arrangement, the
Company is actively involved in training and production techniques, and
management believes that production quality is comparable to what could
otherwise be produced using domestic production facilities. The remainder of
the Company's non-domestic products are sourced from a variety of suppliers in
a number of other countries, including Spain, Italy, Dominican Republic, China,
and Mexico.
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 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.
The Company's operations are subject to the customary risks of doing
business abroad, including currency fluctuations, labor unrest, political
instability, restrictions on transfer of funds, export duties and quotas and
U.S. customs and tariffs. The Omnibus Trade and Competitiveness Act of 1988
added a new provision to the Trade Act of 1974 dealing with intellectual
property rights. This provision, which is commonly referred to as "Special
301," directed the United States Trade Representative (USTR) to designate those
countries with poor records for protecting intellectual property rights as
"priority foreign countries" and to initiate investigations with respect to the
allegedly unfair practices in such countries. Where such an investigation does
not lead to a satisfactory resolution of such practices, through consultations
or otherwise, USTR is authorized to take retaliatory action, including the
imposition of restrictions on imports from the particular country into the
United States.
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In the past, the USTR has reviewed the trade practices of various
countries, including India, Taiwan and China under Special 301, but such
reviews have not had any material affect on the Company's sourcing
arrangements. No assurance can be given, however, that the USTR's efforts will
not, in the future, have an adverse effect on the Company's sourcing
arrangements.
The Company's imported finished footwear products are subject to U.S.
customs duties of 8.5%. The Company's imported leather uppers may be imported
from India duty-free under the Generalized System of Preferences. The Company's
imports of leather are subject to a range of duty rates from 0-5.0%. The
Company is unable to predict whether additional U.S. customs duties, quotas or
other restrictions may be imposed upon the importation of its products in the
future or whether duty-free privileges may be suspended or terminated in the
future.
INFORMATION TECHNOLOGY
The Company maintains information systems to process information from its
Company-operated retail stores and to track its inventories. At the retail
stores, electronic point of sale cash registers capture sales transactions and
transmit daily activity each night to a central computer system in Chicago. An
automated reordering system is used to track retail store inventories and
automatically generate warehouse orders to keep the stores supplied with model
stock inventories. The Express Shops, interactive video kiosks, are utilized at
many of the Sears stores to view an electronic catalog and accept customers'
orders for items that are not in stock at the store.
For the U.S. wholesale division, a forecasting and material requirements
planning system is utilized to order and track finished shoes, leather, and
components. A perpetual inventory system is used to track finished shoes on
order and at the warehouse and to provide customer service information
regarding delivery dates. Electronic Data Interchange (EDI) is used with a
number of large customers to process orders, invoices, and payments.
During 1997, the Company reviewed its information systems in order to
assess how to improve the systems based on new technology. New systems,
primarily based on enterprise resource planning systems, will begin being
implemented in 1998. The new systems implementation is intended to address most
problems associated with the Year 2000 issue. A team comprised of management
and systems personnel has been developed to address all other Year 2000 issues.
COMPETITION
Florsheim competes with a number of domestic marketers of men's dress,
dress casual and casual footwear, including Rockport, Cole Haan, Johnston &
Murphy, Dexter, Bostonian and Bass, with respect to fashion, quality and price.
In addition to direct competition with the dress, dress casual and casual
footwear product markets, Florsheim indirectly competes against manufacturers
and retailers of athletic footwear. Florsheim's retail stores also compete with
a variety of retailers, including regional specialty retailers, department
stores, national retailers and mass merchandisers, with respect to men's dress,
dress casual and casual footwear. The additions of John Deere work boots,
Joseph Abboud footwear and Florsheim Golf Shoes increase the number and types
of marketers with which the Company competes. Florsheim also experiences
significant competition from imports.
SEASONALITY OF BUSINESS
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Seasonality of Business."
BACKLOG
At January 3, 1998, the Company's U.S. wholesale operations had a backlog
of customer orders amounting to approximately $8.2 million, compared to
approximately $14.5 million, at December 28, 1996, a decrease of 43.1%. The
decrease was primarily due to changes in ordering habits of the North American
dealers. The majority of incoming orders are for "at once" shipments;
therefore, the backlog is not necessarily indicative of a corresponding change
in annual sales.
8
<PAGE> 10
EMPLOYEES
As of January 3, 1998, Florsheim had 2,226 employees in the United States
and overseas. Approximately 20% of Florsheim's work force is represented by
unions. Management believes Florsheim has maintained satisfactory overall
relations with its unionized and non-unionized workforce.
INTELLECTUAL PROPERTY
The major trademarks and trade names under which Florsheim's men's
footwear are sold are: Florsheim, Florsheim Comfortech, Florsheim Imperial,
Florsheim Comfortech Maintenance Free, Florsheim Frogs, FLS and @ease. Other
footwear is sold through licensing agreements as: Joseph Abboud footwear and
John Deere boots. The Company considers Florsheim and the names and marks
traditionally used with it to be material to its business. The Company also
owns several patents which relate to footwear construction and are material to
the operations of the business and expire over the next 12 years.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local laws,
regulations and ordinances relating to the operation and removal of underground
storage tanks and the storage, handling, generation, treatment, emission,
release, discharge and disposal of certain materials, substances and wastes
pursuant to which the Company has in the past been required to incur compliance
and clean-up costs. The nature of the Company's operations expose it to the
risk of claims with respect to environmental matters, and there can be no
assurance that material costs or liabilities will not be incurred in connection
with such claims.
Based on the Company's experience to date, the Company believes that its
future cost of compliance with environmental laws, regulations and ordinances,
or exposure to liability for environmental claims, will not have a material
adverse effect on the Company's business or financial position. However, future
events, such as changes in existing laws and regulations, or unknown
contamination of sites owned or operated by the Company (including
contamination caused by prior owners and operators of such sites) may give rise
to additional compliance costs which could have a material adverse effect on
the Company's financial position.
RISK FACTORS
Impact of General Economic Conditions on Footwear Industry and the Company's
Operations
Florsheim and the footwear industry in general are dependent on the
economic environments, both domestic and foreign, and levels of consumer
spending which affect not only the ultimate consumer, but also retailers,
Florsheim's primary direct customers. As a result, Florsheim's results may be
adversely affected by downward trends in the economy or the occurrence of
events that adversely affect the economy in general. There can be no assurance
that any prolonged economic downturn would not have a material adverse effect
on Florsheim.
Competition
Florsheim directly competes, with respect to fashion, quality and price,
with a number of domestic manufacturers and retailers of men's dress, dress
casual and casual footwear. In addition, Florsheim indirectly competes with
manufacturers and retailers of athletic footwear. Florsheim's retail stores
also compete with a variety of retailers, including regional specialty
retailers, department stores, national; retailers and mass merchandisers, with
respect to men's dress, dress casual and casual footwear. The additions of
John Deere work boots, Joseph Abboud footwear and Florsheim golf shoes increase
the number and types of marketers with which Florsheim competes. Florsheim
also experiences significant competition from imports. Highly competitive
conditions existing within both the wholesale and retail segments of the men's
footwear market may result in increased price promotions and promotional
expenses that limit the Company's ability to grow its sales and enhance its
gross profit margins.
9
<PAGE> 11
Reliance on Foreign Production
During 1997, approximately 80% of Florsheim's finished shoe sourcing
requirements were fulfilled outside of the United States, with approximately
80% of such non-domestic product manufactured in India, where Florsheim is a
participant in a joint venture arrangement with a local operation. The
remainder of such non-domestic product sourced from a variety of suppliers in a
number of other countries, including Portugal, Spain, Italy, Dominican
Republic, China and Mexico. The Company's operations are subject to the
customary risks of doing business abroad, including currency fluctuations,
labor unrest, political instability, restrictions on transfer of funds, import
and export duties and trade barriers (including quotas) and U.S. customs and
tariffs. In addition, trade regulations and potential U.S. government
sanctions could be imposed against some of the countries from which the Company
sources product and result in restrictions on imports from such countries. To
date, these factors have not had an adverse impact on the Company's operations.
Control of Florsheim
Apollo Investment Fund, L.P. ("Apollo") and its affiliate Lion Advisors,
L.P., on behalf of an investment account under management ("Lion"; Apollo and
Lion together being referred to herein as the "Apollo Stockholders"), together
beneficially own approximately 66.7% of the outstanding shares of Florsheim
Common Stock. By reason of their ownership of shares of Florsheim Common
Stock, the Apollo Stockholders have the power effectively to control or
influence control of the Company, including in elections of the Board of
Directors and other matters submitted to a vote of the Company's stockholders,
including extraordinary corporate transactions such as mergers. The Apollo
Stockholders may exercise such control from time to time. A majority of the
Board of Directors consists of individuals associated with affiliates of Apollo
and Lion.
Shares Eligible for Future Sale
The Apollo Stockholders beneficially own approximately 5,615,160 shares of
Florsheim Common Stock. The Apollo Stockholders have advised Florsheim that at
this time they do not have any present plan or intention to dispose of any such
shares of Florsheim Common Stock. However, the Apollo Stockholders continually
review decisions to buy, sell or hold investments and based on market
conditions or other considerations, their intentions may change. Sales of
shares of Florsheim Common Stock by the Apollo Stockholders would be subject to
restrictions imposed by the Securities Act of 1933, as amended (the "Securities
Act"), including Rule 144 promulgated thereunder, unless the Apollo
Stockholders exercise certain rights for the registration of their shares of
Florsheim Common Stock under the Securities Act. The sale of a substantial
number of shares of Florsheim Common Stock by the Apollo Stockholders could
adversely affect the market price of the Florsheim Common Stock.
10
<PAGE> 12
Item 2. Properties
Florsheim owns or leases the following principal plants, offices and
warehouses:
<TABLE>
<CAPTION>
Floor Owned
Space or
Location Type of Facility (Sq. Ft. ) Leased
- -------- ---------------- ---------- ------
<S> <C> <C> <C>
Chicago, IL.......................... Headquarters 129,000 Leased
Jefferson City, MO............... Warehouse 562,000 Owned
Cape Girardeau, MO............ Plant 90,000 Owned
Preston, Australia................. Plant/Warehouse 59,000 Leased
Hong Kong........................... Office/Warehouse 12,000 Leased
Florence, Italy....................... Office/Warehouse 5,000 Leased
New York, NY...................... Office/Showroom 3,000 Leased
</TABLE>
The owned properties listed above are encumbered by a first priority lien
and mortgage pursuant to the Credit Agreement, dated May 9, 1997, among the
Company and certain of its subsidiaries, certain financial institutions and
Bankers Trust Company, as Agent.
On March 20, 1997, the Company completed the sale of its former
headquarters located in Chicago, Illinois.
The Company's properties listed above are generally well maintained,
suitable for present operations and adequate for current production
requirements. Productive capacity and extent of utilization of Florsheim's
manufacturing facilities are difficult to quantify with certainty because
maximum capacity and utilization in a facility 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, Florsheim
estimates that overall its production facilities were effectively utilized
during fiscal 1997 at moderate to high levels of productive capacity and
believes that its facilities in combination with other facilities available
through the Company's sourcing network have the capacity, if necessary, to
expand production to meet anticipated product requirements.
Item 3. Legal Proceedings
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.
11
<PAGE> 13
PART II
Item 5. Market for The Registrant's Common Equity and Related Stockholder
Matters
As of March 6, 1998, there were approximately 1,700 holders of record of
Common Stock.
Shares of the Company's Common Stock trade on The NASDAQ Stock Market
under the symbol: FLSC. The reported high and low sale prices for Florsheim's
Common Stock on The NASDAQ Stock Market for each quarterly period within the
two most recent fiscal years are included in Note 17 to the consolidated
financial statements of the Company included under Item 8 of this Report.
The Company did not pay dividends on its Common Stock during the fiscal
years ended December 28, 1996 and January 3, 1998.
A discussion of restrictions on the Company's ability to pay cash
dividends is included in Note 7 to the consolidated financial statements of the
Company included under Item 8 of this Report.
12
<PAGE> 14
Item 6. Selected Consolidated Financial and Operating Data
(Dollars in thousands, except per share data)
The following financial data should be read in conjunction with the
consolidated financial statements and notes thereto included.
<TABLE>
<CAPTION>
===================================================================================================================================
Fiscal year ended (1)(2)
----------- ------------ ------------ ------------ -----------
Jan 1, 1994 Dec 31, 1994 Dec 30, 1995 Dec 28, 1996 Jan 3, 1998
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATING RESULTS:
Net sales:
U.S. wholesale (3) $ 88,556 $ 91,089 $ 78,882 $ 72,467 $ 82,413
U.S. retail 132,163 130,960 122,588 118,507 120,022
International
(including exports from the U.S.) (3) 42,715 43,851 45,178 46,938 50,621
===================================================================================================================================
Subtotal 263,434 265,900 246,648 237,912 253,056
Hy-Test (4) 36,191 36,101 38,659 6,943 -
===================================================================================================================================
Total net sales 299,625 302,001 285,307 244,855 253,056
===================================================================================================================================
Gross profit 140,892 134,898 124,376 116,773 120,857
Selling, general, and administrative expenses 110,974 114,766 117,456 105,365 108,636
Non-recurring selling, general, and administrative expenses (5) - - - - (4,133)
===================================================================================================================================
Earnings from operations 29,918 20,132 6,920 11,408 16,354
Other income (expense), net 63 (194) 67 1,366 (391)
Interest expense 10,350 10,408 13,274 9,989 9,130
===================================================================================================================================
Earnings (loss) before income taxes and extraordinary item 19,631 9,530 (6,287) 2,785 6,833
Income tax expense (benefit) 7,351 3,048 (1,441) 821 3,226
===================================================================================================================================
Earnings (loss) before extraordinary item 12,280 6,482 (4,846) 1,964 3,607
Extraordinary item (less income tax benefit of $2,813)(6) - - - - (5,042)
===================================================================================================================================
Net earnings (loss) $ 12,280 $ 6,482 $ (4,846) $ 1,964 $ (1,435)
===================================================================================================================================
Basic Earnings (loss) per share (7):
Earnings (loss) before extraordinary item $ - $ - $ (0.58) $ 0.24 $ 0.43
Net Earnings (loss) $ - $ - $ (0.58) $ 0.24 $ (0.17)
===================================================================================================================================
Diluted Earnings (loss) per share (7):
Earnings (loss) before extraordinary item $ - $ - $ (0.58) $ 0.23 $ 0.42
Net Earnings (loss) $ - $ - $ (0.58) $ 0.23 $ (0.17)
===================================================================================================================================
OTHER INFORMATION:
Ratio of earnings to fixed charges (8) 2.15x 1.54x - 1.16x 1.16x
Pro forma ratio of earnings to fixed charges (9) 1.54x 1.07x - - -
EBITDA (10) $ 33,138 $ 23,974 $ 11,459 $ 16,283 $ 17,646
Pro Forma EBITDA (9)(10) 29,465 20,538 - - -
Depreciation and amortization 3,220 3,842 4,539 4,875 5,425
Capital expenditures 8,142 9,498 5,479 9,424 9,922
BALANCE SHEET DATA AT PERIOD END:
Working capital 152,035 141,300 111,922 95,116 94,167
Property, plant, and equipment, net 17,817 21,687 21,742 24,974 27,245
Total assets 221,404 215,270 186,321 185,238 183,646
Long-term debt, less current maturities 104,287 105,533 80,126 69,450 76,912
Stockholder's investment 65,587 - - - -
Shareholders' equity - 60,148 55,068 57,655 54,482
===================================================================================================================================
NUMBER OF RETAIL STORES: (11)
U.S. specialty 248 233 220 205 201
U.S. outlet 58 78 90 93 99
International 51 57 53 53 54
===================================================================================================================================
Total stores 357 368 363 351 354
===================================================================================================================================
</TABLE>
(Continued)
13
<PAGE> 15
(1) Florsheim's fiscal year end is the Saturday closest to December 31.
Therefore, the results of operations will periodically include a 53 week
fiscal year. Fiscal 1993, 1994, 1995, and 1996 each represented a 52 week
fiscal year. Fiscal 1997 represented a 53 week fiscal year.
(2) As of November 17, 1994, Florsheim became an independent public company.
Prior to that date, Florsheim operated as a division and/or subsidiary of
Furniture Brands International, Inc., formerly known as INTERCO
INCORPORATED (see Note 1 to consolidated financial statements).
(3) For periods prior to December 28, 1996, certain sales were reclassified
as export sales.
(4) Represents sales of the Company's Hy-Test safety shoe business, which was
sold in March, 1996.
(5) Represents gain and costs associated with the sale of 130 S. Canal, which
was sold in March, 1997.
(6) Represents an extraordinary loss associated with the tender premium and
expenses related to the repurchase of Senior Notes and the execution of
the new revolving credit facility, which took place in May, 1997.
(7) Earnings (loss) per share data are presented for the full years that the
Company operated during the period as an independent public company.
(8) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings (loss) before income taxes and
non-recurring expenses, plus fixed charges. Fixed charges consist of
interest expense on all indebtedness (including amortization of deferred
debt issuance costs) and the portion of operating lease rental expenses
that is representative of the interest factor. For the twelve months
ended December 30, 1995, earnings were inadequate to cover fixed charges
by $6,300.
(9) Calculated on a pro forma basis to reflect the distribution. See note 1
to consolidated financial statements.
(10) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, other income and expense, and
non-recurring items. See the Company's consolidated statements of cash
flows in the Company's consolidated financial statements contained
elsewhere in this report. EBITDA is presented solely as supplemental
disclosure; EBITDA is frequently used to analyze companies on the basis of
operating performance, leverage, and liquidity. EBITDA is not intended to
provide a measure of profitability and is being presented solely for
informational purposes as one of several measures of financial
performance.
(11) Figures include only Company-operated stores at period end.
14
<PAGE> 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Dollars in thousands, except per share data)
The following commentary should be read in conjunction with the consolidated
financial statements and notes thereto included under Item 8 of this report.
OVERVIEW
Florsheim Group Inc. (Florsheim or the Company), founded in 1892, designs,
markets, manufactures, and sources a diverse and extensive range of products in
the middle to upper price range of the men's quality footwear market.
Florsheim distributes its products to more than 6,000 specialty and department
store locations worldwide and through 354 Company-operated specialty stores and
outlet stores as of January 3, 1998.
Effective November 17, 1994, Florsheim became an independent public company
when Furniture Brands International, Inc., formerly known as INTERCO
INCORPORATED ("INTERCO"), its former parent company and sole stockholder,
distributed all of the Company's common stock to existing INTERCO shareholders
at a rate of one share of Florsheim common stock for every six shares of
INTERCO common stock (the Distribution). In connection with the Distribution,
Florsheim issued $85,000 in 12-3/4% Senior Notes due 2002 (Senior Notes) and
entered into a $75,000 secured credit facility (old credit facility).
Florsheim used the proceeds from the Senior Notes and $25,000 borrowed under
the credit facility to pay financing expenses and repay its share of the
outstanding joint and several indebtedness issued in connection with the 1992
plan of reorganization of INTERCO and its principal subsidiaries.
On March 22, 1996, the Company completed the sale of the assets of its Hy-Test
safety shoe division, including its Kirksville, Missouri factory, to Wolverine
World Wide, Inc., for an all cash sale price settled at approximately $23,200.
Annual net sales of the sold business were $38,659 for the twelve months ended
December 30, 1995 and $6,943 for the period through the March 22, 1996 sale
date.
On March 20, 1997, the Company completed the sale of the corporate headquarters
building located in downtown Chicago, Illinois for an all cash sale price of
approximately $8,050. Net cash proceeds were approximately $6,000 before
income taxes. The pretax gain on sale of $4,300 and other costs related to the
sale are included in non-recurring selling, general, and administrative
expenses.
On May 9, 1997, the Company completed a cash tender offer and consent
solicitation relating to the Senior Notes. Approximately $51,000 aggregate
principal amount of Senior Notes were tendered, representing approximately 73%
of the $69,450 aggregate principal amount of outstanding Senior Notes. The
Company also executed a new $110,000, five-year secured revolving credit
facility (credit facility) that replaces the $75,000 old credit facility
described above.
15
<PAGE> 17
RESULTS OF OPERATIONS
The Company's fiscal year end is the Saturday closest to December 31.
Throughout this analysis, fiscal 1995 refers to the twelve-month period ended
December 30, 1995, fiscal 1996 refers to the twelve-month period ended December
28, 1996, and fiscal 1997 refers to the twelve-month period ended January 3,
1998.
The following tables set forth, for the periods indicated, certain historical
operating data, expressed in thousands of dollars and as a percentage of net
sales, and retail store information.
<TABLE>
<CAPTION>
====================================================================================================================================
Twelve months ended
===================================================================================
(Dollars in thousands) December 30, 1995 December 28, 1996 January 3, 1998
====================================================================================================================================
Amount % Amount % Amount %
====================================================================================================================================
Net sales:
<S> <C> <C> <C> <C> <C> <C>
U.S. Wholesale(1) $ 78,882 27.6 % $ 72,467 29.6 % $ 82,413 32.6 %
U.S. Retail 122,588 43.0 118,507 48.4 120,022 47.4
International (including
exports from U.S.) (1) 45,178 15.8 46,938 19.2 50,621 20.0
====================================================================================================================================
Subtotal 246,648 86.5 237,912 97.2 253,056 100.0
HyTest (2) 38,659 13.5 6,943 2.8 - 0.0
====================================================================================================================================
Total net sales $285,307 100.0 % $244,855 100.0 % $253,056 100.0 %
====================================================================================================================================
Percent change in same store
sales (3) (6.3) % (0.3) % 3.1 %
EBITDA (4) $ 11,459 4.0 % $ 16,283 6.7 % $ 17,646 7.2 %
====================================================================================================================================
</TABLE>
(1) For periods prior to December 28, 1996, certain sales were reclassified
as export sales.
(2) The Hy-Test safety shoe business was sold on March 22, 1996.
(3) Includes only those sales figures for U.S. specialty stores that have
been in operation for at least twelve full months. Percentage change
reflects figures for period depicted as compared to the figures from the
prior year.
(4) Earnings before interest expense, income taxes, depreciation and
amortization, other income (expense), net, and non-recurring items.
EBITDA is not intended to represent cash flows for the period, nor has it
been presented as an alternative to earnings from operations as an
indicator of operating performance and should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with GAAP.
<TABLE>
<CAPTION>
====================================================================================================================================
Twelve months ended
=========================================
Dec. 30, Dec. 28, Jan. 3,
Operations data (as a percent of net sales) 1995 1996 1998
====================================================================================================================================
<S> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 %
Gross profit 43.6 47.7 47.8
Selling, general, and administrative expenses, excluding
non-recurring selling, general and administrative expenses 41.2 43.0 42.9
Earnings from operations, excluding non-recurring selling,
general and administrative expenses 2.4 4.7 4.8
Interest expense 4.7 4.1 3.6
Net earnings (loss) (1.7) 0.8 (0.6)
====================================================================================================================================
</TABLE>
16
<PAGE> 18
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales for fiscal 1997 were $253,056, an increase of $8,201, or 3.3%, as
compared to fiscal 1996. Excluding sales in Fiscal 1996 of $6,943 related to
Hy-Test, which was sold in March 1996, net sales increased $15,144, or 6.4%.
U.S. wholesale net sales increased $9,946, or 13.7%, due to gains from
increased unit volume combined with an increase in average selling price per
unit attributable primarily to the new product introductions. U.S. retail net
sales increased $1,515, or 1.3%, as a result of same store sales increase of
3.1% at U.S. specialty stores offset by the net effect of stores opened and
closed. International sales increased $3,683 or 7.8%, with the increase due to
expanded wholesale distribution and improved sales at Company-operated stores
partially offset by the exchange rate fluctuations.
Gross profit margin for fiscal 1997 was 47.8% of net sales, as compared to
47.7% of net sales for fiscal 1996. The gross profit margin remained
essentially unchanged due to the benefit of costs reductions and sourcing
efficiencies that were partially offset by a promotional retail environment and
a mix shift to a higher percentage of wholesale sales.
Selling, general, and administrative expenses, excluding the non-recurring item
discussed below for fiscal 1997 were $108,636, an increase of $3,271, or 3.1%,
from fiscal 1996. Selling, general, and administrative expenses for fiscal
1997 were 42.9% of net sales, a decrease from 43.0% of net sales for fiscal
1996. Increased expenses related to the launch and rollout of the Company's
new products (Florsheim Golf Shoes, John Deere work shoes, and Joseph Abboud
shoes) and other business development opportunities were partially offset by
expense reduction programs and expenses related to Hy-Test. A gain of $4,133
in non-recurring selling, general, and administrative expenses for fiscal 1997
related to the sale of the corporate headquarters building located in downtown
Chicago was recorded in fiscal 1997.
Earnings from operations for fiscal 1997, excluding the non-recurring selling,
general, and administrative expenses in 1997 were $12,221, an increase of
$813, or 7.1%, from fiscal 1996, and EBITDA for fiscal 1997 was $17,646, an
increase of $1,363, or 8.4% from fiscal 1996. Earnings from operations for
fiscal 1997 were 4.8% of net sales, as compared to 4.7% of net sales for fiscal
1996, and EBITDA for fiscal 1997 was 7.0% of net sales, as compared to 6.7% of
net sales for fiscal 1996. EBITDA is presented as a supplemental disclosure;
EBITDA is frequently used to analyze companies on the basis of operating
performance, leverage, and liquidity. Earnings from operations and EBITDA in
fiscal 1997 are improved from fiscal 1996 primarily due to sales volume
increases and slight margin improvements, partially offset by expenses related
to the launch and rollout of new products.
Interest expense for fiscal 1997 was $9,130 as compared to fiscal 1996 amount
of $9,989. This decrease is due to the lower average cost of outstanding debt
as a result of the repurchase of the Senior Notes from borrowings under the
Company's new credit facility.
An extraordinary loss associated with the tender premium and expenses related
to the purchase of the Senior Notes and the execution of the new revolving
credit facility was $5,042, net of tax, for fiscal 1997.
The earnings per share (EPS) before extraordinary item for fiscal 1997 were
$0.42 per share, an improvement from an earnings per share of $0.23 in fiscal
1996. Included in the fiscal 1997 amount was the non-recurring gain of $2,600
generated by the sale of the Company's former corporate headquarters building.
The EPS for fiscal 1997 without the non-recurring gain would have been $0.20.
The fiscal 1996 amount includes a gain of $1,200, net of tax, from the sale of
the Hy-Test safety shoe business, which was sold by the company in late March
1996. The EPS for fiscal 1996 without the effect of the Hy-Test gain or
operation would have been $0.13.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales for fiscal 1996 were $244,855, a decrease of $40,452, or 14.2%, as
compared to fiscal 1995. Of the decrease, $31,716, or 11.1% is attributed to
the Hy-Test division, which was sold on March 22, 1996. U.S. wholesale net
sales decreased $6,415, or 8.1%, due to decreases in unit volume reflecting
difficult market conditions and product availability. U.S. retail net sales
decreased $4,081, or 3.3%, as additional sales from stores opened during or
after fiscal 1995 were more than offset by store closings, a net store
reduction during fiscal 1996 of twelve stores, and fiscal 1996 same store sales
decreases at U.S. specialty stores of 0.3%. International sales increased
$1,760, or 3.9%, with the increase due to increased sales at Company-operated
stores and expanded wholesale distribution.
17
<PAGE> 19
Gross profit margin for fiscal 1996 was 47.7% of net sales, as compared to
43.6% of net sales for fiscal 1995. The increase was due to a mix change
(reflecting the sale of Hy-Test) to a higher percentage of retail sales and
cost decreases due to the Company's expense reduction programs and was
partially offset by increased price promotion activity.
Selling, general, and administrative expenses for fiscal 1996 were $105,365, a
decrease of $12,091, or 10.3%, from fiscal 1995. Selling, general, and
administrative expenses for fiscal 1996 were 43.0% of net sales, an increase
from 41.2% of net sales for fiscal 1995 due to lower sales volume and a mix
change reflecting the sale of Hy-Test. Expense decreases due to the Company's
expense reduction programs were partially offset by increased selling costs and
spending on sales growth opportunities.
Earnings from operations for fiscal 1996 were $11,408, an increase of $4,488,
or 64.9%, from fiscal 1995, and EBITDA for fiscal 1996 was $16,283, an
increase of $4,824, or 42.1% from fiscal 1995. Earnings from operations for
fiscal 1996 were 4.7% of net sales, as compared to 2.4% of net sales for fiscal
1995, and EBITDA for fiscal 1996 was 6.7% of net sales, as compared to 4.0% of
net sales for fiscal 1995. EBITDA is presented as a supplemental disclosure;
EBITDA is frequently used to analyze companies on the basis of operating
performance, leverage, and liquidity. Earnings from operations and EBITDA in
fiscal 1996 are improved from fiscal 1995 primarily due to the expense
reduction programs, partially offset by the reduction in earnings from
operations due to sales volume decreases.
Interest expense for fiscal 1996 was $9,989 as compared to fiscal 1995 amount
of $13,274. This decrease is due to the lower average amount of Senior Notes
outstanding and lower average outstanding borrowings under the credit facility,
primarily due to the use of the proceeds from the sale of the assets of Hy-Test
during fiscal 1996 as compared to the average outstanding during fiscal 1995.
The net earnings per share for fiscal 1996 were $0.23 per share, an improvement
from a loss per share of $0.58 in fiscal 1995. The improvement is primarily
due to the reduction in interest expense, expense reduction program, and the
gain on sale of Hy-Test, partially offset by the reduction in earnings from
operations due to sales volume decreases.
ACCOUNTING POLICIES ADOPTIONS
The Company adopted the provisions of SFAS No. 128, Earnings Per Share (EPS),
which is effective for annual periods ending after December 15, 1997. All
prior period EPS data presented has been restated to conform with SFAS No. 128.
It replaces the presentation of primary EPS with a presentation of basic EPS
and fully diluted EPS with diluted EPS. Basic EPS, unlike primary EPS,
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the equity.
The provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, which is effective for financial statements for periods
beginning after December 15, 1997, were adopted by the Company. Statement 131
replaces the "industry segment" concept of SFAS No. 14, Financial Reporting for
Segments of a Business Enterprise, with a "management approach" concept as the
basis for identifying reportable segments.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital at December 28, 1996 was $95,116 compared to $94,167 at January
3, 1998, a decrease of $949. The decreases in accounts payable, accrued
interest expense, and other accrued expenses and an increase in inventory due
to decreased sales in the U.S. Specialty Shops and a slow down in dealer orders
offsets the reduction in cash. Cash interest payments totaled $9,328 during
fiscal 1996 and $10,366 during fiscal 1997, and cash income tax payments were
$693 during fiscal 1996 and $1,000 during fiscal 1997.
18
<PAGE> 20
CAPITAL EXPENDITURES
During fiscal 1996 and fiscal 1997, capital expenditures totaled $9,424 and
$9,922, respectively. Approximately 60% of these expenditures in 1996 were
used to prepare the leased property in downtown Chicago for the occupancy as
the new corporate headquarters; during 1997, approximately 62% of the capital
expenditures were used to open or remodel retail specialty stores or outlet
stores.
FINANCING ARRANGEMENTS
On May 9, 1997, the Company completed its cash tender offer and consent
solicitation relating to its Senior Notes. Approximately $51,000 aggregate
principal amount of Senior Notes were tendered, representing approximately 73%
of the $69,450 aggregate principal amount of outstanding Senior Notes.
Approximately $18,400 of Senior Notes remain outstanding. The Company also
executed a new $110,000, five-year secured revolving credit facility that
replaced the $75,000 old credit facility described in "Overview." Borrowings
under the new credit facility were used to finance the tender offer for the
Senior Notes. At January 3, 1998, outstanding borrowings under the credit
facility totaled $4,500 which were classified as short term and $58,500 which
were classified as long term. Further credit facility borrowings will be made
from time to time to finance future liquidity requirements, including the
month-to-month working capital requirements. The revolving credit facility
provides for borrowings of up to $110,000 and other extensions of credit based
on a debt-to-EBITDA ratio and other covenants. The cash borrowings under the
credit facility bear interest at the prime rate plus a factor, currently 1.25 %
or at an adjusted LIBOR rate plus a factor, currently 2.25 % depending on the
type of loan the Company executes and various covenant ratios.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among others, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities. Florsheim has initiated a worldwide program to prepare
the Company's information systems and applications for the Year 2000 issue, as
well as a review of all material aspects of the business that could be affected
thereby. In addition, the Company is investing in technology to significantly
improve its management information systems. The project implementation was
initiated in the fourth quarter of 1997 and is expected to be completed early
in 1999 at a cost of approximately $10,000. As of January 3, 1998, the total
spent on these programs was approximately $1,500.
SEASONALITY OF BUSINESS
In total, the Company's net sales are primarily not seasonal; however earnings
from operations and EBITDA tend to be higher in the fourth quarter due to the
proportionately higher retail sales which include both a wholesale and a retail
margin.
FOREIGN CURRENCY
The Company's export sales are denominated in United States dollars, and its
international sales other than export sales are denominated in the local
currency of each jurisdiction in which Florsheim's foreign operations are
located. The majority of purchases by the Company from foreign sources are
denominated in United States dollars. To the extent that import transactions
are denominated in other currencies, it is the Company's practice, based on a
review of market conditions, to hedge its risks, where appropriate, through the
purchase of forward exchange contracts to cover firm purchase orders. Any
gains or losses from such transactions are reported in income and have not been
material to the Company's operating results. During fiscal 1997, Southeast
Asian currencies were devalued relative to the U.S. dollar. The impact was not
material to the results in fiscal 1997.
19
<PAGE> 21
INFLATION
The Company does not believe that inflation has had a material impact on sales
or operating results during the periods covered in this discussion.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Data and Supplementary Data
The following pages contain the Financial Statements and Supplementary Data as
specified by Item 8 of Part II of Form 10-K.
20
<PAGE> 22
FLORSHEIM GROUP INC.
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
December 28, 1996 and January 3, 1998
<TABLE>
<CAPTION>
=======================================================================================================================
December 28, January 3,
ASSETS 1996 1998
=======================================================================================================================
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 21,691 $ 7,195
Receivables, less allowances of $1,705 at December 28, 1996
and $1,084 at January 3, 1998 26,431 26,594
Inventories 73,824 80,989
Deferred tax assets, net 4,552 3,541
Prepaid expenses and other current assets 4,221 4,254
=======================================================================================================================
Total current assets 130,719 122,573
Property, plant and equipment
Buildings and improvements 22,539 24,859
Machinery and equipment 19,381 23,558
=======================================================================================================================
41,920 48,417
Less: accumulated depreciation (16,946) (21,172)
=======================================================================================================================
Net property, plant and equipment 24,974 27,245
Deferred tax assets, net 11,475 12,976
Other assets 18,070 20,852
=======================================================================================================================
$185,238 $183,646
=======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
=======================================================================================================================
Current liabilities:
Accounts payable $ 17,900 $ 10,398
Accrued employee compensation 4,160 3,471
Accrued interest expense 2,858 1,075
Other accrued expenses 10,207 8,219
Income taxes payable 478 743
Revolving facility - short term - 4,500
=======================================================================================================================
Total current liabilities 35,603 28,406
Long-term debt 69,450 18,412
Deferred postretirement benefits other than pensions 20,614 20,124
Revolving facility - long term - 58,500
Other long-term liabilities 1,916 3,722
=======================================================================================================================
127,583 129,164
Shareholders' equity:
Preferred stock, without par value, 2,000,000 shares authorized and no
shares issued and outstanding - -
Common stock, 20,000,000 shares authorized, without par value, $1.00 stated
value, 8,346,051 shares issued and outstanding at December 28, 1996
and 8,412,901 shares issued and outstanding at January 3, 1998 8,346 8,413
Paid-in capital 50,295 50,483
Accumulated translation adjustment 372 (1,621)
Accumulated deficit (1,358) (2,793)
=======================================================================================================================
Total shareholders' equity 57,655 54,482
=======================================================================================================================
$185,238 $183,646
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 23
FLORSHEIM GROUP INC.
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
Fiscal years ended December 30, 1995, December 28, 1996 and January 3, 1998
<TABLE>
<CAPTION>
=================================================================================================================================
Fiscal year Fiscal year Fiscal year
ended ended ended
December 30, December 28, January 3,
1995 1996 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 285,307 $ 244,855 $ 253,056
Cost of sales 160,931 128,082 132,199
- ---------------------------------------------------------------------------------------------------------------------------------
Gross profit 124,376 116,773 120,857
Selling, general, and administrative expenses 117,456 105,365 108,636
Non-recurring selling, general, and administrative expenses - - (4,133)
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings from operations 6,920 11,408 16,354
Interest expense, net 13,274 9,989 9,130
Other income (expense), net 67 1,366 (391)
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes and extraordinary item (6,287) 2,785 6,833
Income tax expense (benefit) (1,441) 821 3,226
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before extraordinary item (4,846) 1,964 3,607
Extraordinary item (less income tax benefit of $2,813) - - (5,042)
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (4,846) $ 1,964 $ (1,435)
- ---------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Earnings (Loss) before extraordinary item $ (0.58) $ 0.24 $ 0.43
Net Earnings (Loss) $ (0.58) $ 0.24 $ (0.17)
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share:
Earnings (Loss) before extraordinary item $ (0.58) $ 0.23 $ 0.42
Net Earnings (Loss) $ (0.58) $ 0.23 $ (0.17)
- ---------------------------------------------------------------------------------------------------------------------------------
Basic weighted average number of shares outstanding 8,346,051 8,346,051 8,361,351
Diluted weighted average number of shares outstanding 8,401,462 8,379,287 8,567,430
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 24
FLORSHEIM GROUP INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Fiscal years ended December 30, 1995, December 28, 1996, and January 3, 1998
<TABLE>
<CAPTION>
=====================================================================================================================
Fiscal year Fiscal year Fiscal year
ended ended ended
December 30, December 28, January 3,
1995 1996 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (4,846) $ 1,964 $ (1,435)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities
(excluding assets/liabilities related to the sale
of assets of Hy-Test):
Loss (gain) on disposal of assets 55 (2,112) (4,682)
Depreciation and amortization 4,539 4,875 5,425
Deferred taxes (2,622) 144 (490)
Extraordinary loss - - 5,042
Noncash interest and other expense 914 885 547
Decrease (increase) in receivables 3,880 (284) (163)
Decrease (increase) in inventories 27,357 348 (7,165)
Decrease (increase) in prepaid expenses and other assets 289 (308) (4,481)
Increase (decrease) in accounts payable, accrued interest
expense and other accrued expenses 1,177 8,072 (11,962)
Increase (decrease) in income taxes payable (671) (8) 265
Increase (decrease) in other long-term
liabilities 938 (355) 1,316
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 31,010 13,221 (17,783)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of assets of Hy-Test in 3/96, 130 S. Canal
in 3/97, net of transaction costs - 23,025 6,277
Proceeds from the disposal of assets 159 390 12
Additions to property, plant and equipment (5,479) (9,424) (9,922)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (5,320) 13,991 (3,633)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in notes and loans payable 94 (94) -
Net borrowings under revolving credit facility - - 63,000
Repurchase of 12-3/4% Senior Notes, including
tender premium and refinancing costs, net of tax (15,550) - (56,080)
Net reduction in bank credit facility (9,857) (10,676) -
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (25,313) (10,770) 6,920
- ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 377 16,442 (14,496)
Cash and cash equivalents at beginning of period 4,872 5,249 21,691
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 5,249 $ 21,691 $ 7,195
- ---------------------------------------------------------------------------------------------------------------------
Supplemental disclosure:
Cash payments for income taxes, net $ 1,635 $ 693 $ 1,000
Cash payments for interest $ 10,820 $ 9,328 $ 10,366
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 25
FLORSHEIM GROUP INC.
Consolidated Statements of Shareholders' Equity
(Dollars and number of shares in thousands)
Fiscal years ended December 30, 1995, December 28, 1996, and January 3, 1998
<TABLE>
<CAPTION>
===============================================================================================================
Common stock Retained
------------------- Paid Accumulated earnings/ Share-
Number of in translation (accumulated holders'
shares Amount capital adjustment deficit) equity
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1994 8,346 $ 8,346 $50,295 $ (17) $ 1,524 $ 60,148
Net loss - - - - (4,846) (4,846)
Foreign currency
translations - - - (234) - (234)
- ---------------------------------------------------------------------------------------------------------------
Balance at
December 30, 1995 8,346 8,346 50,295 (251) (3,322) 55,068
Net earnings - - - - 1,964 1,964
Foreign currency
translations - - - 623 - 623
- ---------------------------------------------------------------------------------------------------------------
Balance at
December 28, 1996 8,346 8,346 50,295 372 (1,358) 57,655
Net loss - - - - (1,435) (1,435)
Foreign currency
translations - - - (1,993) - (1,993)
Exercise of
stock options 67 67 188 - - 255
- ---------------------------------------------------------------------------------------------------------------
Balance at
January 3, 1998 8,413 $ 8,413 $50,483 $ (1,621) $ (2,793) $ 54,482
===============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 26
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
DECEMBER 28, 1996 AND JANUARY 3, 1998
================================================================================
(1) BASIS OF PRESENTATION
NATURE OF BUSINESS
Florsheim Group Inc. and its subsidiaries (Florsheim or the Company) design,
market, manufacture and source a diverse and extensive range of products in
the middle to upper price range of the men's quality footwear market. The
majority of revenues are derived from operations in the United States. On
December 26, 1996, Florsheim changed to its present corporate name from The
Florsheim Shoe Company.
THE DISTRIBUTION
Effective November 17, 1994 (the effective date) Florsheim became an
independent public company. Furniture Brands International, Inc., formerly
known as INTERCO INCORPORATED (INTERCO), its former parent company and sole
stockholder, distributed all of the Company's common stock to existing
INTERCO shareholders at a rate of one share of Florsheim common stock for
every six shares of INTERCO common stock (the Distribution). In connection
with the Distribution, Florsheim issued $85,000 in 12-3/4% Senior Notes due
2002 (Senior Notes) and entered into a $75,000 secured credit facility (old
credit facility). Florsheim used the proceeds from the Senior Notes and
$25,000 borrowed under the old credit facility to pay financing expenses and
repay its share of the outstanding joint and several indebtedness issued in
connection with the 1992 plan of reorganization of INTERCO and its principal
subsidiaries.
REORGANIZATION AND EMERGENCE FROM CHAPTER 11
On January 24, 1991, INTERCO 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). INTERCO emerged from Chapter 11 effective with the beginning of
business on August 3, 1992.
SALE OF ASSETS OF HY-TEST SAFETY SHOE DIVISION
On March 22, 1996, the Company completed the sale of the assets of its
Hy-Test safety shoe division, including its Kirksville, Missouri factory, to
Wolverine World Wide, Inc., for an all cash sale price settled at
approximately $23,200. A portion of this cash was used to reduce to zero the
$17,600 of outstanding borrowings under the Company's old credit facility as
of the sale date. Net sales of the sold business were $38,659 for the twelve
months ended December 30, 1995 and $6,943 for the twelve months ended
December 28, 1996. The net gain on sale of $1,850 is included in other
income (expense), net in the results for the twelve months ended December 28,
1996.
SALE OF ASSETS OF CORPORATE HEADQUARTERS BUILDING
On March 20, 1997, the Company completed the sale of the corporate
headquarters building located in downtown Chicago, Illinois, for an all cash
sale price of approximately $8,050. Net cash proceeds were approximately
$6,000 before income taxes. The pretax gain on sale of $4,300 and other
costs related to the sale are included in non-recurring selling, general, and
administrative expenses.
(continued)
25
<PAGE> 27
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
================================================================================
TENDER OFFER FOR SENIOR NOTES
On May 9, 1997, the Company completed its cash tender offer and consent
solicitation relating to the Senior Notes. Approximately $51 million
aggregate principal amount of Senior Notes were tendered, representing
approximately 73% of the $69.45 million aggregate principal amount of
outstanding Senior Notes. The Company also has executed a new $110 million,
five-year secured revolving credit facility (credit facility) that replaces
the $75 million old credit facility described above. An extraordinary loss
of approximately $5.0 million, net of tax, is associated with the tender
premium and expenses related to the repurchase of the Senior Notes and the
execution of the new revolving credit facility.
(2) SIGNIFICANT ACCOUNTING POLICIES
Florsheim 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 Florsheim are set as
follows:
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of the Company and its
subsidiaries on a consolidated basis. All significant intercompany
transactions and balances have been eliminated. The results of Hy-Test are
included through the sale date, March 22, 1996.
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), INTERCO and its domestic subsidiaries were required to
adopt "fresh start" reporting. The ongoing impact of the adoption of "fresh
start" reporting is reflected in Florsheim's financial statements for the
fiscal years ended December 30, 1995, December 28, 1996, and January 3,
1998.
FISCAL YEAR
Florsheim's fiscal year end is the Saturday closest to December 31.
Therefore, the results of operations will periodically include a 53 week
fiscal year. Fiscal 1995 and 1996 each represented a 52 week fiscal year.
Fiscal 1997 represented a 53 week fiscal year. For purposes of these
financial statements, fiscal 1995 refers to the 12 month period ended
December 30, 1995, fiscal 1996 refers to the 12 month period ended December
28, 1996, and fiscal 1997 refers to the twelve month period ended January 3,
1998.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent cash and short term, liquid investments
with an original maturity of three months or less.
(continued)
26
<PAGE> 28
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
================================================================================
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or net
realizable value.
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, Florsheim 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 34 to 50 years for
buildings, 2 to 18 years for leasehold improvements, 10 years for machinery
and equipment, 2 to 18 years for furniture and fixtures, and 3 to 5 years
for computer equipment and software.
TRADEMARKS
Trademarks are recorded at fair value and are amortized on a straight-line
basis over a forty year period.
ADVERTISING
All advertising costs are expensed as incurred.
INCOME TAX EXPENSE
As of the Distribution date, Florsheim and INTERCO entered into a formal tax
agreement to provide for the payment of taxes, and the entitlement to tax
refunds, for periods ended on and prior to the November 17, 1994
Distribution date, and to provide for various related matters. The tax
agreement generally provides that any Federal and state tax, interest, or
penalty attributable to Florsheim for periods ending on or prior to the date
of the Distribution will be indemnified by INTERCO, subject to any tax
liabilities which have been transferred to Florsheim.
The tax agreement also provides that INTERCO will pay Florsheim a portion of
the tax benefits received by INTERCO from any tax operating losses
generated by Florsheim (which Florsheim elects to carryback) for periods
after the Distribution that are eligible for carryback to periods when
Florsheim was owned by INTERCO. Florsheim has not elected any carrybacks to
date.
Deferred tax assets and liabilities are recognized for the expected future
tax consequences of temporary differences between the carrying amounts and
the tax bases of other assets and liabilities. Deferred tax assets
(continued)
27
<PAGE> 29
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
================================================================================
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.
STOCK OPTION PLANS
Prior to January 1, 1996, the Company accounted for its stock option plans
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On December 31, 1995, the Company adopted SFAS
No. 123, Accounting for Stock-Based Compensation, which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB opinion No. 25
and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years
as if the fair-valued based method defined in SFAS No. 123 had been applied.
The Company has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Florsheim complies with Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits other than Pensions (SFAS
No. 106). SFAS No. 106, which was adopted by the Company as of August 2,
1992, requires the cost of these benefits to be recognized in the financial
statements over an employee's service period with the company.
FOREIGN CURRENCY TRANSLATION
The accounts of the foreign subsidiaries have been translated from their
functional currency to the U.S. dollar. Such translation adjustments are not
included in income, but are accumulated directly in a separate component
of shareholders' equity subsequent to the Distribution and as a part of
stockholder's investment prior to the Distribution.
EARNINGS PER SHARE
The Company adopted the provisions of SFAS No. 128, Earnings Per Share
(EPS), which is effective for annual periods ending after December 15,
1997. All prior period EPS data presented has been restated to conform with
SFAS No. 128. It replaces the presentation of primary EPS with a
presentation of basic EPS and fully diluted EPS with diluted EPS. Basic
EPS, unlike primary EPS, excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted
in the issuance of common stock that then shared in the earnings of the
equity.
(continued)
28
<PAGE> 30
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
================================================================================
AMORTIZATION OF PREPAID EXPENSES
Certain expenses related to obtaining financing have been capitalized and are
being amortized over the life of the financing to which they relate.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
on January 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value
of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. Adoption of this
statement resulted in a $500 and $400 write-down of assets, for fiscal 1996
and fiscal 1997, respectively, which is included in selling, general and
administrative expenses on the income statement.
(3) INVENTORIES
Inventories are categorized as follows:
<TABLE>
<CAPTION>
================================================================================
December 28, January 3,
1996 1998
================================================================================
<S> <C> <C>
Retail merchandise $ 44,474 $ 40,531
Finished products 19,588 30,028
Work-in-process 1,363 997
Raw materials 8,399 9,433
================================================================================
$ 73,824 $ 80,989
================================================================================
(continued)
</TABLE>
29
<PAGE> 31
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
================================================================================
(4) LONG-LIVED ASSETS
Management determined that the assets of the U.S. and Canada Retail divisions
might have been impaired because of operating losses sustained by these
divisions over the last two years. Accordingly, management estimated the
undiscounted future cash flows to be generated by the U.S. and Canada Retail
divisions, which was less than the carrying amount of the divisions'
long-lived assets. Management then estimated the fair value of those assets
using discounted future cash flows as a measure of fair value. As stated
above, this resulted in a $500 write-down of the assets in fiscal 1996 and a
$400 write-down of the assets in fiscal 1997 which are included in selling,
general and administrative expenses on the income statement.
(5) LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
================================================================================
December 28, January 3,
1996 1998
================================================================================
<S> <C> <C>
12-3/4% Senior Notes due 2002 $69,450 $18,412
Credit facility - 58,500
================================================================================
$69,450 $76,912
================================================================================
</TABLE>
12-3/4% SENIOR NOTES DUE 2002
The Senior Notes are senior unsecured obligations of Florsheim. The Senior
Notes are jointly and severally guaranteed on a senior unsecured basis by all
existing domestic subsidiaries of Florsheim and may be guaranteed by future
domestic subsidiaries.
Interest on the Senior Notes is payable semiannually on March 1 and September
1. The Senior Notes mature on September 1, 2002 and will not be redeemable,
in whole or part, prior to September 1, 1998. On or after September 1, 1998,
the Senior Notes are redeemable, at Florsheim's option, in whole or in part,
at various prices plus accrued and unpaid interest, if any, to the
redemption date. In the event of a change of control, Florsheim is
required to offer to repurchase all of the Senior Notes at a price equal to
101% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the purchase date.
Financing fees of $2,550 related to the Senior Notes have been capitalized
and are being amortized over an eight year period to the maturity of the
Senior Notes. When Senior Notes were purchased and retired in fiscal 1995
and fiscal 1997, the capitalized financing fees were adjusted proportionately
to the remaining outstanding balance of the Senior Notes. See note 1 for
description of fiscal 1997 tender offer.
CREDIT FACILITY
The Company maintains the credit facility, which matures on May 9, 2002. The
common stock of Florsheim's principal subsidiaries and substantially all of
Florsheim's cash, working capital, and property, plant and equipment have
been pledged as security for the credit facility. At January 3, 1998, the
outstanding borrowings under the credit facility were $63,000, of which
$4,500 were classified as short term and $58,500 were classified as long
term. Further credit facility borrowings will be made from time to time to
finance future liquidity
(continued)
30
<PAGE> 32
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
================================================================================
requirements, including the month-to-month working capital requirements.
The credit facility provides for borrowings of up to $110,000 and other
extensions of credit and contains financial and other covenants, including
covenants requiring minimum EBITDA (earnings before interest expense, income
taxes, depreciation and amortization, other non-cash items, and
non-recurring items not related to operations), a minimum EBITDA to interest
expense ratio, and a maximum debt to EBITDA ratio. On December 16, 1997,
compliance with the financial covenants for the period ending January 3,
1998 was waived by the lenders. The cash borrowings under the credit
facility bear interest at the prime rate plus a factor, currently 1.25%, or
at an adjusted LIBOR rate plus a factor, currently 2.25%, depending on the
type of loan the Company executes and various covenant ratios.
The credit facility allows for issuance of letters of credit, foreign
currency hedging obligations, and cash borrowing. The credit facility is
secured by a first priority lienon and security interest in substantially
all property of the Company. Under the provisions for letters of credit, a
fee of 1.25% per annum in the case of commercial (trade) letters of credit
and 1.75% per annum in the case of stand-by letters of credit is assessed
for the account of the lenders ratably. A further fee of one-half of one
percent 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
monthly in arrears. At January 3, 1998, there were $7,739 in letters of
credit outstanding.
The facility fee of $1,810 has been capitalized and is being amortized over
a five year period to May 9, 2002.
The Company's Australian subsidiary utilizes a credit facility for working
capital borrowings issuance of letters of credit. The outstanding letters of
credit at January 3, 1998 were $101. This facility is subject to annual
review and secured by a debenture mortgage over the company's inventory to a
limit of approximately $1,400. As of December 28, 1996 and January 3, 1998,
Florsheim Australia's borrowing was zero.
(6) PREFERRED STOCK
The Company's restated certificate of incorporation includes authorization
to issue up to 2.0 million shares of no par value, preferred stock. As of
December 28, 1996, and January 3, 1998, no preferred stock had been issued.
(7) COMMON STOCK
The Company's restated certificate of incorporation includes authorization
to issue up to 20 million shares of common stock. As of December 30, 1995,
and December 28, 1996, 8,346,051 shares of common stock had been issued and
were outstanding. As of January 3, 1998, 8,412,901 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 had been issued as of January 3, 1998), 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 therefore. However, it is not
presently anticipated that dividends will be paid on common stock in the
foreseeable future and the Company's credit facility restricts the payment
of dividends. All of the outstanding shares of common stock are fully paid
and nonassessable.
(continued)
31
<PAGE> 33
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
================================================================================
(8) STOCK OPTION PLANS
THE FLORSHEIM SHOE COMPANY 1994 STOCK OPTION PLAN
In 1994, prior to the Distribution, the Company adopted The Florsheim Shoe
Company 1994 Stock Option Plan (the "Option Plan") pursuant to which the
Executive Compensation and Stock Option Committee (the "Compensation
Committee") of the Board may grant stock options to officers and key
employees. The Option Plan was amended and approved by the stockholders
during the Company's annual 1996 Stockholder Meeting.
The Option Plan authorizes grants of options to purchase up to 800,000
shares of common stock. Stock options may be granted with an exercise price
below the stock's fair market value at the grant date. All outstanding
stock options have ten year terms and vest and become fully exercisable
after five to six years from the date of grant.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Accordingly, no compensation cost
has been recognized for the Option Plan as options issued to date were at
prices equal to or in excess of the stock's fair market value at the date of
grant. Had compensation cost for the company's Option Plan been determined
based on the fair value at the grant date for awards in 1995, 1996, and 1997
consistent with the provisions of SFAS No. 123, the resulting reduction in
the company's net income and earnings per share for the years ended December
30, 1995 December 28, 1996, and January 3, 1998 would not have been
significant.
At January 3, 1998, options to purchase 555,750 shares of common stock were
outstanding and 54,900 shares were exercisable. The per share
weighted-average fair value of stock options granted during 1997, 213,000
shares, was $4.80 on the date of grant using the Black Scholes option
pricing model with the following weighted-average assumptions: dividend
yield rate of 0.0%, risk free interest rate of 5.5%, stock volatility rate
of 65.0%, expected turnover rate of 50.0% and an expected life of five
years. At December 28, 1996, options to purchase 471,000 shares of common
stock were outstanding and options to purchase 52,250 shares were
exercisable. The per share weighted-average fair value of stock options
granted during 1996, 272,000 shares, was $2.13 on the date of grant using
the Black Scholes option pricing model with the following weighted-average
assumptions: dividend yield rate of 0.0%, risk free interest rate of 6.1%,
stock volatility rate of 50.0%, expected turnover rate of 25.0% and an
expected life of five years.
THE CHARLES J. CAMPBELL STOCK OPTION PLAN
In 1995, the Company adopted the second stock option plan, the Charles J.
Campbell Stock Option Plan (the "Campbell Plan"). The Campbell Plan was
adopted as a means to encourage and provide opportunities for ownership of
Florsheim Common Stock by the Chairman of the Board, Charles J. Campbell.
The Campbell Plan was also approved by the public stockholders during the
Company's annual 1996 Stockholder Meeting.
The Campbell Plan authorizes grants of options to purchase up to a total of
250,000 shares of common stock. The Campbell Plan consists of three
separate grants of non-qualified stock options as follows: (i) options to
purchase 83,333 shares of Common Stock with an option price per share of
$5.00; (ii) options to purchase 83,333 shares of Common Stock with an
option price per share of $7.50; (iii) option to purchase 83,334 shares of
Common Stock with an option price per share of $10.00. All stock options
have ten year terms, vest, and 20% become fully exercisable on the first
five anniversaries of the date of grant.
(continued)
32
<PAGE> 34
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
================================================================================
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Accordingly, no compensation cost
has been recognized for the Campbell Plan as options issued to date were at
prices equal to or in excess of the stock's fair market value at the date of
grant. Had compensation cost for the Company's Campbell Plan been
determined based on the fair value at the grant date for awards in 1995 and
1996 consistent with the provisions of SFAS No.123, the resulting reduction
in the company's net income and earnings per share for the year ended
December 30, 1995 would not have been significant.
At January 3, 1998, options to purchase 250,000 shares of common stock were
outstanding and 100,000 shares exercisable. At December 28, 1996, options
to purchase 250,000 shares of common stock were outstanding and 50,000
shares were exercisable. No options were granted during 1997 or 1996 under
the Campbell Plan.
THE FLORSHEIM GROUP INC. CONSULTANTS STOCK OPTION PLAN
In 1997, the Company adopted its third stock option plan, The Florsheim
Group Inc. Consultants Stock Option Plan (the "Consultants Plan") to
encourage and provide opportunities for ownership of Florsheim Common Stock
by those certain outside consultants and advisors (including endorsers) of
the Company.
The Consultants Plan authorizes grants of options to purchase up to 100,000
shares of common stock.
At January 3, 1998, options to purchase 30,000 shares of common stock were
outstanding, and to date, none are exercisable. The per share
weighted-average fair value of stock options granted during 1997, 30,000
shares, was $4.84 on the date of grant using the Black Scholes option
pricing model with the following weighted-average assumptions: dividend
yield rate of 0.0%, risk free interest rate of 5.5%, stock volatility rate
of 65.0%, expected turnover rate of 50.0% and an expected life of five
years.
(continued)
33
<PAGE> 35
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
================================================================================
Stock option activity during the following periods indicated as follows:
================================================================================
<TABLE>
<CAPTION>
<S> <C> <C> <C>
================================================================================
Number of Weighted-Average
Shares Exercise Price
================================================================================
Balance at December 31, 1994 454,500 $3.63
Granted
Exercised ----- -----
Forfeited (19,000) $3.76
Expired ----- -----
================================================================================
Balance at December 30, 1995 435,500 $3.62
Granted 552,000 $6.13
Exercised ----- -----
Forfeited (266,500) $3.78
Expired ----- -----
================================================================================
Balance at December 28, 1996 721,000 $5.49
Granted 245,000 $7.93
Exercised (73,650) $3.92
Forfeited (56,600) $4.84
Expired ----- -----
================================================================================
Balance at January 3, 1998 835,750 $6.38
================================================================================
</TABLE>
(continued)
34
<PAGE> 36
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
================================================================================
The following tables summarize information about fixed price stock options
outstanding and exercisable at January 3, 1998:
================================================================================
OPTIONS OUTSTANDING
-------------------
<TABLE>
<CAPTION>
================================================================================
Range of Number Weighted- Weighted-
Exercise Outstanding at Average Remaining Average Exercise
Prices January 3, 1998 Contractual Life (in years) Price
================================================================================
<S> <C> <C> <C>
$3.01-$4.00 115,000 4.7 $3.23
$4.01-$5.00 287,833 8.1 $5.00
$5.01-$6.00 68,250 7.5 $5.75
$6.01-$8.00 201,333 8.7 $7.40
$8.01-$10.00 143,334 8.5 $9.32
$14.01-$16.00 20,000 9.6 $14.88
================================================================================
TOTAL 835,750 7.8 $6.37
================================================================================
</TABLE>
OPTIONS EXERCISABLE
-------------------
<TABLE>
<CAPTION>
Range of Number Weighted-
Exercise Exercisable at Average Exercise
Prices January 3, 1998 Price
================================================================================
<S> <C> <C>
$3.01-$4.00 10,000 $3.23
$4.01-$5.00 62,733 $5.00
$5.01-$6.00 15,500 $5.76
$6.01-$8.00 33,333 $7.50
$8.01-$10.00 33,334 $10.00
================================================================================
TOTAL 154,900 $6.58
(Continued)
</TABLE>
35
<PAGE> 37
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
<TABLE>
<CAPTION>
==================================================================================================
(9) INCOME TAXES
Income tax expense (benefit) was comprised of
the following:
==================================================================================================
Fiscal year Fiscal year Fiscal year
ended ended ended
December 30, December 28, January 3,
1995 1996 1998
==================================================================================================
<S> <C> <C> <C>
Current:
Federal $ - $ (659) $ (40)
State and local 163 111 23
Foreign 1,018 1,225 920
==================================================================================================
1,181 677 903
Deferred (2,622) 144 (490)
==================================================================================================
$(1,441) $ 821 $ 413
==================================================================================================
</TABLE>
The following table reconciles the differences between the
Federal corporate statutory rate and Florsheim's effective income tax
rate:
<TABLE>
<CAPTION>
=================================================================================================
Fiscal year Fiscal year Fiscal year
ended ended ended
December 30, December 28, January 3,
1995 1996 1998
=================================================================================================
<S> <C> <C> <C>
Federal corporate statutory rate 35.0 % 35.0 % 35.0 %
State and local income taxes,
net of Federal tax benefit (1.7) 2.6 (1.5)
Foreign taxes, including foreign
currency translation effects (3.6) (11.8) 21.5
Adjustments-
foreign tax credit and foreign (5.3) 3.0 (111.1)
dividend income
Other (1.5) 0.7 15.6
============================================================================================
Effective income tax rate 22.9 % 29.5 % (40.5) %
============================================================================================
</TABLE>
The operating result for fiscal 1995 is a loss before tax. For this reason,
1995 shows a net tax benefit rather than a tax charge. This is in contrast to
fiscal 1996 which shows a profit before tax and a tax charge and fiscal 1997
which shows a loss before tax and a tax charge.
(Continued)
36
<PAGE> 38
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
<TABLE>
<CAPTION>
================================================================================
The sources of the tax effects for temporary differences that give rise
to the deferred tax assets and liabilities were as follows:
================================================================================
December 30, December 28, January 3,
1995 1996 1998
=============================================================================================
<S> <C> <C> <C>
Deferred tax assets:
Fair value adjustments $ 4,355 $ 3,798 $ 3,354
Employee postretirement
benefits other than pensions 7,739 7,617 7,446
Expense accruals 2,529 2,881 2,518
Rent abatement - - 674
Intangibles - 102 326
Valuation reserves 2,976 425 244
Depreciation 873 1,319 1,733
Inventory costs capitalized 553 869 772
NOL carry forwards 3,273 4,179 3,069
Foreign tax credit 259 1,648 3,848
==========================================================================================
Total gross deferred tax assets 22,557 22,838 23,984
==========================================================================================
Deferred tax liabilities:
Employee pension plans (6,340) (6,811) (7,467)
Other (46) - -
=========================================================================================
Total deferred tax liabilities (6,386) (6,811) (7,467)
==========================================================================================
Net deferred tax assets $ 16,171 $ 16,027 $16,517
==========================================================================================
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Management believes
sufficient taxable income will be generated to realize the benefits of the
deferred tax assets. At January 3, 1998, the Company had net operating loss
carryforwards for federal income tax purposes through 2012, and foreign tax
credit carryforwards through 2002.
(10) EMPLOYEE BENEFITS
Florsheim sponsors or contributes to retirement plans covering substantially
all employees. The total cost (benefit) of all plans for fiscal 1995, 1996,
and 1997 (excluding "fresh start" adjustment) were $1,432, $(222), and
$(1,348) respectively.
COMPANY-SPONSORED DEFINED BENEFIT PLANS
Annual cost for company-sponsored 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.
(continued)
37
<PAGE> 39
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
<TABLE>
<CAPTION>
===============================================================================
It is Florsheim's practice to fund pension costs to the extent that such costs
are tax deductible and in accordance with ERISA. Funding decisions made in
fiscal 1996 and 1997 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 Florsheim-sponsored defined benefit plans.
========================================================================================================
December 28, January 3,
1996 1998
========================================================================================================
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $71,090 $ 72,594
========================================================================================================
Accumulated benefit obligation 73,201 73,415
========================================================================================================
Projected benefit obligation 79,621 78,154
Plan assets at fair value 98,761 108,161
========================================================================================================
Plan assets in excess of projected benefit obligation 19,140 30,007
Unrecognized net (gain) loss (4,698) (13,434)
Unrecognized prior service cost 5,239 4,861
Additional minimum liability (220) (185)
Fresh start adjustment (10,475) (9,803)
========================================================================================================
Net prepaid pension assets (included in other assets) $8,986 $11,446
========================================================================================================
<CAPTION>
Net periodic pension expense for fiscal 1995, 1996 and 1997 include
the following components:
========================================================================================================
Fiscal year Fiscal year Fiscal year
ended ended ended
December 30, December 28, January 3,
1995 1996 1998
Service cost-benefits earned
during the period $ 1,131 $ 1,305 $ 887
Interest cost on the projected benefit 5,948 5,793 5,617
Actual return on plan assets (19,234) (10,491) (15,683)
Net amortization and deferral 12,830 2,672 7,487
Fresh start amortization (672) (672) (672)
========================================================================================================
Net periodic pension expense $ 3 $ (1,393) $ (2,364)
========================================================================================================
</TABLE>
(continued)
38
<PAGE> 40
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
================================================================================
Employees are covered primarily by noncontributory plans, funded by
Florsheim 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 9.0%, 9.0%, and 9.0% in fiscal 1995, 1996, and 1997 respectively.
Measurement of the projected benefit obligation was based upon a weighted
average discount rate of 7.25% , 7.75%, and 7.25% and a long-term rate of
compensation increase of 4.5%, 4.5%, and 4.0% for fiscal 1995, 1996, and
1997 respectively.
OTHER RETIREMENT PLANS AND BENEFITS
In addition to the Company-sponsored defined benefit plans, Florsheim 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.
Florsheim also participated in an employee savings plan during fiscal years
1995 through 1997. Florsheim's cost for this plan for fiscal 1995, 1996,
and 1997 was $209, $164, and $143 respectively.
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 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. Florsheim 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.
(continued)
39
<PAGE> 41
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
================================================================================
The following table sets forth the consolidated financial status of
postretirement benefits other than pensions:
================================================================================
<TABLE>
<CAPTION>
================================================================================================
December 28, January 3,
1996 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 10,563 $ 11,236
Fully eligible active plan 2,660 1,678
participants
Other active plan participants 3,018 2,593
- ------------------------------------------------------------------------------------------------
Total 16,241 15,507
Plan assets at fair value 3,926 3,957
- ------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation in
excess of plan assets 12,315 11,550
Unrecognized net gain 8,366 8,746
Unrecognized prior service gain 1,083 978
- ------------------------------------------------------------------------------------------------
Accrued postretirement benefit obligation $ 21,764 $ 21,274
================================================================================================
</TABLE>
As of December 28, 1996 and January 3, 1998, the Company has recorded $1,150
of the accrued postretirement benefit expense in accrued expenses as shown
in note 15.
Net periodic postretirement benefit expense include the following components:
<TABLE>
<CAPTION>
================================================================================================
Fiscal year Fiscal year Fiscal year
ended ended ended
December 30, December 28, January 3,
1995 1996 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned
during the period $ 267 $ 342 $ 211
Interest cost on the postretirement benefit 1,336 1,176 1,105
obligation
Estimated return on plan assets (305) (309) (300)
Net amortization and deferral (438) (424) (538)
- ------------------------------------------------------------------------------------------------
Net periodic postretirement benefit expense $ 860 $ 785 $ 478
================================================================================================
</TABLE>
For measurement purposes, annual rates of increase in the expense of health
care benefits of 11.0% , 10.0%, and 9.0% were assumed for fiscal 1995 ,
1996 and 1997 respectively. The rates are assumed to decrease gradually to
6.0% in fiscal 2000 and remain at those levels thereafter. The health care
expense trend rate assumption has an effect on amounts reported. For
example, increasing the health care expense trend rate by one percentage
point in each year would increase the accumulated postretirement benefit
obligation as of January 3, 1998 by approximately $615 and the net periodic
expense by $79 for the year.
(continued)
40
<PAGE> 42
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
================================================================================
The weighted average discount rate used in determining the accumulated
postretirement obligation was 7.25%, 7.75%, and 7.25% for fiscal 1995 ,
1996 and 1997 respectively. The expected long-term rate of return on plan
assets was 8.0% for fiscal 1997.
(11) LEASE COMMITMENTS
Substantially all of Florsheim's retail outlets and certain other real
properties and equipment are operated under lease agreements expiring at
various dates through the year 2016. Leases covering retail outlets and
equipment generally require, in addition to stated minimums, contingent
rentals based on retail sales and equipment usage. Certain of the leases
provide for renewal for various periods at stipulated rates. Rental
expenses under operating leases were as follows:
================================================================================
<TABLE>
<CAPTION>
Fiscal year Fiscal year Fiscal year
ended ended ended
December 30, December 28, January 3,
1995 1996 1998
================================================================================
<S> <C> <C> <C>
Basic rentals $15,611 $15,852 $16,604
Contingent rentals 6,790 6,469 6,540
================================================================================
22,401 22,321 23,144
Less: sublease rentals 63 24 0
================================================================================
$22,338 $22,297 $23,144
================================================================================
</TABLE>
Amount of minimum future annual rental commitments under non-cancellable
operating leases in each of the five fiscal years 1998 through 2002 are
$16,461, $14,638, $12,855, $11,391 and $10,175 and in aggregate for all
lease agreements, $71,049 through the end of the lease terms. At January 3,
1998, INTERCO guaranteed future base operating lease payments on behalf of
Florsheim of approximately $16 million, exclusive of related operating
expenses.
(continued)
41
<PAGE> 43
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
================================================================================
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
LONG-TERM DEBT
The fair values of the following long-term debt are based on closing market
prices at year end for the Senior Notes and on the outstanding balance for
the credit facility.
<TABLE>
<CAPTION>
=================================================================================================
December 28, 1996 January 3, 1998
----------------- ---------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
12-3/4% Senior Notes due 2002 $69,450 $75,180 $ 18,412 $19,885
Credit facility - - $ 58,500 $58,500
=================================================================================================
</TABLE>
(13) TRANSACTIONS WITH AFFILIATES
At the effective date of the Distribution, a consulting agreement was
established with Apollo Advisors, L.P., an affiliate of Florsheim's
controlling shareholders. Charges totaled $400 per year for fiscal years
1995, 1996, and 1997.
(14) LITIGATION
Florsheim is involved 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 Florsheim from all such
proceedings will not have a material adverse effect upon the consolidated
financial position or results of operations of Florsheim.
(continued)
42
<PAGE> 44
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
(15) OTHER FINANCIAL DATA
Items charged to earnings during fiscal 1995, 1996 and 1997 include the
following:
<TABLE>
<CAPTION>
===============================================================================
Fiscal year Fiscal year Fiscal year
ended ended ended
December 30, December 28, January 3,
1995 1996 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Advertising and promotion $ 7,659 $ 6,293 $ 6,412
Repairs and maintenance 1,718 1,472 2,270
===============================================================================
</TABLE>
Items included in other accrued expenses include:
<TABLE>
<CAPTION>
===============================================================================
December 28, January 3,
1996 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Taxes - general $ 1,189 $ 244
Postretirement benefits 1,150 1,150
other than pensions
Group insurance 1,706 1,229
Legal/other contingencies 2,626 2,203
Miscellaneous 3,536 3,393
- -------------------------------------------------------------------------------
Total other accrued expenses $ 10,207 $ 8,219
===============================================================================
</TABLE>
Items included in other assets are as follows:
<TABLE>
<CAPTION>
===============================================================================
December 28, January 3,
1996 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Prepaid pension $ 10,244 $ 12,785
Investment in unconsolidated subsidiaries 4,024 4,271
Trademarks 1,820 1,768
Unamortized debt 1,347 1,519
Other 635 509
- -------------------------------------------------------------------------------
Total other assets $ 18,070 $ 20,852
===============================================================================
</TABLE>
(continued)
43
<PAGE> 45
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
================================================================================
(16) BUSINESS SEGMENT INFORMATION
Florsheim operates in one industry segment - the design, sourcing and
marketing of quality footwear. Florsheim's products are marketed in the
United States and internationally with no one customer or foreign
geographical region accounting for 10% or more of consolidated sales.
Florsheim operates subsidiaries in Australia, Canada, Europe and the Pacific
Rim. Information about Florsheim's operations in the United States and
internationally are presented in the table below:
<TABLE>
<CAPTION>
===============================================================================================
Fiscal year Fiscal year Fiscal year
ended ended ended
December 30, December 28, January 3,
1995 1996 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales to unrelated entities:
United States (includes exports) $243,329 $201,829 $207,241
Other 41,978 43,026 45,815
- -----------------------------------------------------------------------------------------------
$285,307 $244,855 $253,056
===============================================================================================
Operating income:
United States $ 5,906 $ 8,782 $ 9,081
Other 1,014 2,626 3,140
- -----------------------------------------------------------------------------------------------
$ 6,920 $11,408 $ 12,221
===============================================================================================
<CAPTION>
===============================================================================================
December 30, December 28, January 3,
1995 1996 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets:
United States $163,660 $159,799 $160,141
Other 22,661 25,439 23,505
- -----------------------------------------------------------------------------------------------
$186,321 $185,238 $183,646
===============================================================================================
</TABLE>
(continued)
44
<PAGE> 46
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
=================================================================================================================================
(17) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Following is a summary of unaudited quarterly information:
=================================================================================================================================
First Second Third Fourth
quarter quarter quarter quarter
=================================================================================================================================
<S> <C> <C> <C> <C>
Fiscal year ended December 28, 1996:
Net sales $ 61,927 $ 58,958 $ 60,107 $ 63,863
Gross profit 27,884 27,899 28,142 32,848
Earnings from operations $ 1,001 $ 1,894 $ 2,492 $ 6,021
Earnings (loss) before extraordinary item $ (160) $ (284) $ 92 $ 2,316
Net earnings (loss) $ (160) $ (284) $ 92 $ 2,316
Common stock price
range (high-low) $ 5 - 3 1/2 $ 5 1/4 - 3 7/8 $ 5 - 4 1/4 $ 6 - 4 1/4
Common stock price
at quarter end $ 4 1/2 $ 5 $ 4 3/8 $ 5 5/8
Basic Earnings per share:
Earnings (loss) before extraordinary item $ (0.02) $ (0.03) $ 0.01 $ 0.28
Net earnings (loss) $ (0.02) $ (0.03) $ 0.01 $ 0.28
Weighted average number of
common shares outstanding 8,346,051 8,346,051 8,346,051 8,346,051
Diluted Earnings per share:
Earnings (loss) before extraordinary item $ (0.02) $ (0.03) $ 0.01 $ 0.28
Net earnings (loss) $ (0.02) $ (0.03) $ 0.01 $ 0.28
Weighted average number of
common shares outstanding 8,391,359 8,401,896 8,390,211 8,382,594
=================================================================================================================================
Fiscal year ended January 3, 1998:
Net sales $ 59,183 $ 64,215 $ 60,177 $ 69,481
Gross profit 29,740 30,310 28,236 32,571
Earnings from operations $ 7,918 $ 2,870 $ 1,921 $ 3,645
Earnings (loss) before extraordinary item $ 3,465 $ 424 $ (211) $ (71)
Net earnings (loss) $ 3,465 $ (4,618) $ (211) $ (71)
Common stock price
range (high-low) $ 8 1/2 - 5 5/8 $ 13 3/8 - 7 3/4 $ 17 3/4 - 9 7/16 $ 12 1/2 - 6
Common stock price
at quarter end $ 8 1/2 $ 12 3/4 $ 12 1/8 $ 6 7/16
Basic Earnings per share:
Earnings (loss) before extraordinary item $ 0.42 $ 0.05 $ (0.03) $ (0.01)
Net earnings (loss) $ 0.42 $ (0.55) $ (0.03) $ (0.01)
Weighted average number of
common shares outstanding 8,346,051 8,346,051 8,361,784 8,391,518
Diluted Earnings per share:
Earnings (loss) before extraordinary item $ 0.41 $ 0.05 $ (0.02) $ (0.01)
Net earnings (loss) $ 0.41 $ (0.54) $ (0.02) $ (0.01)
Weighted average number of
common shares outstanding 8,481,540 8,556,992 8,668,686 8,569,616
=================================================================================================================================
</TABLE>
(continued)
45
<PAGE> 47
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
================================================================================
(18) PRO FORMA FINANCIAL DATA - HY-TEST (UNAUDITED)
The following pro forma financial data reflects the sale of the assets of
Hy-Test as if the sale had occurred as of January 1, 1995 for pro forma
statement of operations purposes and as of December 30, 1995 for pro forma
balance sheet purposes. The pro forma data excludes the net sales and direct
costs of the Hy-Test division and the Hy-Test operating profit contribution to
central overhead costs. Management believes that the assumptions used provide a
reasonable basis on which to present the pro forma condensed financial data.
The pro forma data are presented for informational purposes only and are not
necessarily indicative of the results that would have been achieved had the
transaction actually been consummated as of such dates. The selling, general,
and administrative expense for fiscal 1997 excludes the non-recurring gain of
$4,133 related to the sale of the corporate headquarters building located in
downtown Chicago.
<TABLE>
<CAPTION>
===========================================================================================================
Twelve months ended
===========================================================
Pro forma (Unaudited) Pro forma (Unaudited)
========================= =========================
December 28, January 3,
1996 1998
===========================================================================================================
Amount % Amount %
===========================================================================================================
<S> <C> <C> <C> <C>
Net sales $ 237,912 100% $ 253,056 100%
Gross profit 115,173 48.4 120,857 47.8
Selling, general, and
administrative expenses 103,265 43.4 108,636 42.9
Earnings from operations 11,908 5.0 12,221 4.8
Net earnings (loss) 1,099 0.5 1,719 0.7
Basic Earnings per share:
Net earnings $ 0.13 $ 0.21
Diluted Earnings per share:
Net earnings $ 0.13 $ 0.20
EBITDA 16,783 7.1 17,646 7.0
===========================================================================================================
</TABLE>
(continued)
46
<PAGE> 48
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
================================================================================
(19) YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. In other
words, date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations, including, among others,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities. Florsheim has initiated a worldwide
program to prepare the Company's information systems and applications for
the Year 2000 issue, as well as a review of all material aspects of the
business that could be affected thereby. In addition, the Company is
investing in technology to significantly improve its management information
systems. The project implementation was initiated in the fourth quarter of
1997 and is expected to be completed early in 1999. As of January 3, 1998,
the total spent on these programs was approximately $1,500.
(20) SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
In connection with the Distribution, Florsheim issued The Senior Notes, of
which $18,412 are outstanding, and the Senior Notes are guaranteed, on a
joint and several basis, by all domestic subsidiaries of Florsheim.
The following condensed consolidating information presents:
(1) Condensed consolidating financial statements as of December 28, 1996 and
January 3, 1998 and for the fiscal years ended December 30, 1995, December
28, 1996, and January 3, 1998 of (a) Florsheim, theparent, (b) the
guarantor subsidiaries, (c) the nonguarantor subsidiaries and (d)
Florsheim on a consolidated basis.
(2) Florsheim, the parent, with the investments in the guarantor and
nonguarantor subsidiaries accounted for on the equity method, and
(3) Elimination entries necessary to consolidate Florsheim, the parent, with
the guarantor and nonguarantor subsidiaries.
There are no restrictions on the parent or guarantor subsidiaries to obtain
funds from the subsidiaries by dividend or loan.
(continued)
47
<PAGE> 49
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
<TABLE>
<CAPTION>
===============================================================================================================================
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 28, 1996
===============================================================================================================================
Guarantor Nonguarantor
Parent subsidiaries subsidiaries Eliminations Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Current assets:
Cash and cash
equivalents $ 18,427 $ 397 $ 2,867 $ - $ 21,691
Receivables 22,724 135 5,692 (2,120) 26,431
Inventories 41,086 20,216 12,522 - 73,824
Prepaid expenses and
other current assets 6,522 820 1,431 - 8,773
- -------------------------------------------------------------------------------------------------------------------------------
Total current assets 88,759 21,568 22,512 (2,120) 130,719
Net property, plant and
equipment 18,182 3,953 2,839 - 24,974
Other assets 29,068 1,369 514 (1,406) 29,545
Investments in subsidiaries 44,110 - - (44,110) -
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $ 180,119 $ 26,890 $ 25,865 $ (47,636) $ 185,238
===============================================================================================================================
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $ 15,916 $ 377 $ 3,727 $ (2,120) $ 17,900
Accrued expenses
and other current
liabilities 14,568 548 2,587 - 17,703
- -------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 30,484 925 6,314 (2,120) 35,603
Long-term debt, less
current maturities 69,450 - - - 69,450
Deferred postretirement
benefits 20,614 - - - 20,614
Other long-term liabilities 1,916 - 1,406 (1,406) 1,916
Shareholders' equity 57,655 25,965 18,145 (44,110) 57,655
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 180,119 $ 26,890 $ 25,865 $ (47,636) $ 185,238
===============================================================================================================================
</TABLE>
48
<PAGE> 50
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
<TABLE>
<CAPTION>
================================================================================================================================
CONDENSED CONSOLIDATING BALANCE SHEET
JANUARY 3, 1998
================================================================================================================================
Guarantor Nonguarantor
Parent subsidiaries subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Current assets:
Cash and cash
equivalents $ 4,389 $ 374 $ 2,432 $ - $ 7,195
Receivables 23,554 104 5,635 (2,699) 26,594
Inventories 48,949 20,415 11,625 - 80,989
Prepaid expenses and
other current assets 5,773 940 1,082 - 7,795
- --------------------------------------------------------------------------------------------------------------------------------
Total current assets 82,665 21,833 20,774 (2,699) 122,573
Net property, plant and
equipment 19,917 4,724 2,604 - 27,245
Other assets 35,797 (933) 419 (1,455) 33,828
Investments in subsidiaries 40,027 - - (40,027) -
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $ 178,406 $ 25,624 $ 23,797 $ (44,181) $ 183,646
================================================================================================================================
Liabilities and Shareholders' Equity:
Current liabilities:
Revolving credit facility,
short-term $ 4,500 $ - $ - $ - $ 4,500
Accounts payable 8,295 418 4,384 (2,699) 10,398
Accrued expenses
and other current
liabilities 10,371 614 2,523 - 13,508
- --------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 23,166 1,032 6,907 (2,699) 28,406
Long-term debt, less
current maturities 76,912 - - - 76,912
Deferred postretirement
benefits 20,124 - - - 20,124
Other long-term liabilities 3,722 - 1,455 (1,455) 3,722
Shareholders' equity 54,482 24,592 15,435 (40,027) 54,482
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 178,406 $ 25,624 $ 23,797 $ (44,181) $ 183,646
================================================================================================================================
</TABLE>
49
<PAGE> 51
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
================================================================================
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 30, 1995
================================================================================
<TABLE>
<CAPTION>
Guarantor Nonguarantor
Parent subsidiaries subsidiaries Eliminations Consolidated
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $182,042 $86,607 $41,978 $(25,320) $285,307
Cost of sales 109,403 51,961 24,887 (25,320) 160,931
- -------------------------------------------------------------------------------------------------------------
Gross profit 72,639 34,646 17,091 - 124,376
Selling, general, and administrative
expenses 70,772 30,607 16,077 - 117,456
- -------------------------------------------------------------------------------------------------------------
Earnings from operations 1,867 4,039 1,014 - 6,920
Interest expense 13,273 1 - - 13,274
Equity earnings of subsidiaries,
net of tax 2,730 - - (2,730) -
Other income (expense), net 385 30 (348) - 67
- -------------------------------------------------------------------------------------------------------------
Earnings (loss) before income
tax expense (8,291) 4,068 666 (2,730) (6,287)
Income tax expense (benefit) (3,445) 1,548 456 - (1,441)
- -------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (4,846) $ 2,520 $ 210 $ (2,730) $ (4,846)
=============================================================================================================
</TABLE>
50
<PAGE> 52
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
<TABLE>
<CAPTION>
===================================================================================================================================
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
===================================================================================================================================
Guarantor Nonguarantor
Parent subsidiaries subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $172,683 $ 53,414 $ 43,026 $ (24,268) $ 244,855
Cost of sales 99,291 29,101 23,958 (24,268) 128,082
- -----------------------------------------------------------------------------------------------------------------------------------
Gross profit 73,392 24,313 19,068 - 116,773
Selling, general, and administrative
expenses 65,532 23,391 16,442 - 105,365
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings from operations 7,860 922 2,626 - 11,408
Interest expense 9,989 - - - 9,989
Equity earnings of subsidiaries,
net of tax 2,614 - - (2,614) -
Other income (expense), net 1,307 (29) 88 - 1,366
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income
tax expense 1,792 893 2,714 (2,614) 2,785
Income tax expense (benefit) (172) 371 622 - 821
- -----------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 1,964 $ 522 $ 2,092 $ (2,614) $ 1,964
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED JANUARY 3, 1998
===================================================================================================================================
Guarantor Nonguarantor
Parent subsidiaries subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $185,504 $ 49,422 $ 45,812 $ (27,682) $ 253,056
Cost of sales 106,157 27,061 26,663 (27,682) 132,199
- -----------------------------------------------------------------------------------------------------------------------------------
Gross profit 79,347 22,361 19,149 - 120,857
Selling, general, and administrative
expenses 68,935 23,679 16,022 - 108,636
Non-recurring selling, general,
and administrative expenses (4,133) - - - (4,133)
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings from operations 14,545 (1,318) 3,127 - 16,354
Interest expense 9,130 - - - 9,130
Equity earnings of subsidiaries,
net of tax 1,309 - - (1,309) -
Other income (expense), net (249) - (142) - (391)
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income
taxes and extraordinary item 6,475 (1,318) 2,985 (1,309) 6,833
Income tax expense (benefit) 2,868 (467) 825 - 3,226
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings before extraordinary item 3,607 (851) 2,160 (1,309) 3,607
Extraordinary item (less applicable
income taxes of ($2,812) (5,042) (5,042)
- -----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (1,435) $ (851) $ 2,160 $ (1,309) $ (1,435)
===================================================================================================================================
</TABLE>
51
<PAGE> 53
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
<TABLE>
<CAPTION>
=================================================================================================================================
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEAR ENDED DECEMBER 30, 1995
=================================================================================================================================
Guarantor Nonguarantor
Parent subsidiaries subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash provided by
operating activities $ 29,769 $ (368) $ 1,360 $ 249 $ 31,010
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing
activities:
Proceeds from the
disposal of assets 159 - - - 159
Additions to property,
plant, and equipment (3,786) (918) (775) - (5,479)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing
activities: (3,627) (918) (775) - (5,320)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash from financing
activities:
Net capital contribution
from (to) Parent (234) 1,356 (873) (249) -
Net change in notes
and loans payable - - 94 - 94
Repurchase of Senior Notes (15,550) - - - (15,550)
Net reduction in bank
credit facility (9,857) - - - (9,857)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities: (25,641) 1,356 (779) (249) (25,313)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 501 70 (194) - 377
Cash and cash equivalents
at beginning of period 2,157 1,061 1,654 - 4,872
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at
end of period $ 2,658 $ 1,131 $ 1,460 $ - $ 5,249
=================================================================================================================================
</TABLE>
52
<PAGE> 54
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
<TABLE>
<CAPTION>
===============================================================================================================================
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
===============================================================================================================================
Guarantor Nonguarantor
Parent subsidiaries subsidiaries Eliminations Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities:
(excluding assets/liabilities related
to the sale of assets of Hy-Test) $ 9,993 $ (116) $ 7,143 $ (3,799) $ 13,221
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing
activities:
Proceeds from the sale of assets of
Hy-Test, net of transaction costs 23,025 - - - 23,025
Proceeds from the
disposal of assets 390 - - - 390
Additions to property,
plant, and equipment (7,586) (898) (940) - (9,424)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in )
investing activities: 15,829 (898) (940) - 13,991
- -------------------------------------------------------------------------------------------------------------------------------
Net cash from financing
activities:
Net capital contribution
from (to) Parent 623 280 (4,702) 3,799 -
Net change in notes
and loans payable - - (94) - (94)
Payment of long-term debt (10,676) - - - (10,676)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities: (10,053) 280 (4,796) 3,799 (10,770)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 15,769 (734) 1,407 - 16,442
Cash and cash equivalents
at beginning of period 2,658 1,131 1,460 - 5,249
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ 18,427 $ 397 $ 2,867 $ - $ 21,691
===============================================================================================================================
</TABLE>
53
<PAGE> 55
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
<TABLE>
<CAPTION>
===================================================================================================================================
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEAR ENDED JANUARY 3, 1998
===================================================================================================================================
Guarantor Nonguarantor
Parent subsidiaries subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities: $ (17,812) $ 2,384 $ 3,037 $ (5,392) $ (17,783)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing
activities:
Proceeds from the sale of assets of
130 S. Canal, net of transaction costs 6,277 - - - 6,277
Proceeds from the
disposal of assets 12 - - - 12
Additions to property,
plant, and equipment (7,442) (1,885) (595) - (9,922)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in
investing activities: (1,153) (1,885) (595) - (3,633)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash from financing
activities:
Net capital contribution
from (to) Parent (1,993) (522) (2,877) 5,392 -
Net borrowings under revolving
credit facility 63,000 - - - 63,000
Repurchase of 12-3/4% Senior Notes,
including tender premium and refinancing
costs, net of tax (56,080) - - - (56,080)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities: 4,927 (522) (2,877) 5,392 6,920
- -----------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash
and cash equivalents (14,038) (23) (435) - (14,496)
Cash and cash equivalents
at beginning of period 18,427 397 2,867 - 21,691
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ 4,389 $ 374 $ 2,432 $ - $ 7,195
===================================================================================================================================
</TABLE>
Item 9. Changes in and Disagreements with Independent Accountants on Accounting
and Financial Disclosure.
None
54
<PAGE> 56
Part III
Item 10. Directors and Executive Officers of the Registrant
The section entitled "Election of Directors-Nominees" and "Section 16(g)
Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders on May 20, 1998 is
incorporated herein by reference.
The names, ages, and positions of the Executive Officers of the Company
are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Charles J. Campbell 53 Chairman of the Board of Directors,
President and Chief Executive Officer
Richard J. Anglin 42 Vice President, Chief Financial Officer
Thomas W. Joseph 47 Vice President, President, International Division
L. David Sanguinetti 54 Executive Vice President, Chief Operating Officer and
President, Retail Division
Gregory J. Van Gasse 47 Senior Vice President, Marketing/Sales
</TABLE>
MR. CAMPBELL was elected Chairman of the Board of Directors and was
appointed to the Executive Committee of the Board of Directors in September
1995, and was elected to the additional office of President and Chief Executive
Officer in October 1995. From August 1993 to February 1995, Mr. Campbell was
chairman, president and chief executive officer of Crystal Brands Inc., a
multi-division apparel company. From 1989 to August 1993, Mr. Campbell was
president and chief executive officer of Munsingwear Inc., a manufacturer and
marketer of branded men's sportswear.
MR. ANGLIN was elected Vice President, Chief Financial Officer in December
1997. From August 1996 to November 1997, Mr. Anglin served as Vice President of
Store Operations at Service Merchandise where he was responsible for the
operations of 400 stores. From 1990 through July 1996, Mr. Anglin was Vice
President of Operations and Chief Financial Officer for Mark Shale, a specialty
retailer of men's and women's clothing. Mr. Anglin has also held various
financial positions with Marshall Fields department stores and was a member of
the tax department of Arthur Andersen & Company.
MR. JOSEPH was elected Vice President, President, International Division
in January 1996 and served as Vice President-Retail Shops Division (Florsheim
Shoe Shops and Florsheim Thayer McNeil stores - 1991 to April 1996). Mr.
Joseph was previously Vice President, Marketing of Florsheim Australia Limited
(1988-1991) and Vice President, Florsheim Thayer McNeil Stores (1986-1988).
Prior to that time, Mr. Joseph also held the positions of General Manager,
International Retail Stores (Florsheim Shoe Shops), Regional Supervisor of
Retail Stores and Retail Stores Area Manager.
MR. SANGUINETTI was appointed Executive Vice President, Chief Operating
Officer in February 1997 and elected President, Retail Division in April 1996.
From August 1995 through April 1996, Mr. Sanguinetti served as President and
Chief Operating Officer for Chernin's Shoes, a retail family shoe company. From
August 1994 to July 1995, Mr. Sanguinetti served as President of Crystal Brands
Inc., a multi-division apparel company. From May 1987 to July 1994 he was
employed by Yonkers Department Store and previously held several senior officer
positions at other department stores in multi-store management and
merchandising.
MR. VAN GASSE was appointed Senior Vice President, Marketing and Sales in
October 1997, and previously served as Director, New Products Division and Vice
President, Marketing since joining the Company in June 1990. Previously Mr.
Van Gasse was employed by Chesebrough Ponds/Unilever as Director of Marketing
for cosmetics and personal care products (1986 to 1990) and performed in
various domestic and international marketing roles at Colgate Palmolive, also a
personal care company (1974 to 1986).
55
<PAGE> 57
Item 11. Executive Compensation
The sections entitled "Election of Directors - Compensation and Organization of
Board of Directors," "Executive Compensation," "Compensation Committee
Interlocks and Insider Participation," "Stock Options," "Retirement Plans,"
"Certain Agreements," "Executive Compensation and Stock Option Committee Report
on Executive Compensation," "Comparative Stock and Performance Graph" of the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders on
May 20, 1998, are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The section entitled "Security Ownership" of the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders on May 20, 1998, is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The sections entitled "Compensation Committee Interlocks," "Certain
Agreements" and "Certain Transactions" of the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders on May 20, 1998, are
incorporated herein by reference.
56
<PAGE> 58
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 10-K
(a) List of documents filed as part of this report:
1. Consolidated balance sheets, December 28, 1996 and January 3, 1998.
Consolidated statements of operations for the fiscal year ended
December 30, 1995, for the fiscal year ended December 28, 1996, and for
the fiscal year ended January 3, 1998.
Consolidated statements of cash flows for the fiscal year ended
December 30, 1995, for the fiscal year ended December 28, 1996, and for
the fiscal year ended January 3, 1998.
Consolidated statements of shareholders' equity for the fiscal year
ended December 30, 1995, for the fiscal year ended December 28, 1996,
and for the fiscal year ended January 3, 1998.
Notes to consolidated Financial statements.
Independent Auditors' Report
2. Financial Statement Schedules:
Valuation and qualifying accounts (Schedule II)
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:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 as filed with the
Company's Annual Report on Form 10-K for the year ended December 28,
1996).
3.2 Restated by-laws of the Company (incorporated by reference to
Exhibit 3.2 as filed with the Company's Annual Report on Form 10-K
for the year ended December 28, 1996)
4.1 Indenture, dated as of November 17, 1994, among the Company,
certain of its subsidiaries and First Fidelity Bank, National
Association, as Trustee, including form of Senior Note (incorporated
by reference to Exhibit 4.1 by The Florsheim Shoe Company
Registration Statement on Form 10/A, Amendment No. 3).
4.2 First Supplemental Indenture, dated as of April 19, 1997,
amending and supplementing the Indenture dated as of November 17,
1994, among the Company, certain of its subsidiaries and First Union
National Bank, as trustee (incorporated by reference to Exhibit 4.1
as filed with the Company's Quarterly Report on Form 10-Q for the
Quarterly Period Ended March 29, 1997).
4.6 Credit Agreement, dated as of May 9, 1997, among the Company,
the Banks party and hereto from time to time, and Bankers Trust
Company, as Agent (incorporated by reference to Exhibit 4.6 as filed
with the Company's Quarterly Report on Form 10-Q, for the Quarterly
Period Ended June 28, 1997).
</TABLE>
57
<PAGE> 59
<TABLE>
<S> <C>
4.7 Waiver #1, dated as of December 16, 1997 to the Credit Agreement,
dated May 9, 1997, among the Company, the Banks party and hereto,
and Bankers Trust Company, as Agent.
10.1 INTERCO/Florsheim Tax Sharing Agreement, dated as of November
17, 1994, among INTERCO INCORPORATED, the Company and certain of
its subsidiaries (incorporated by reference to Exhibit 10.1 by The
Florsheim Shoe Company Registration Statement on Form 10/A,
Amendment No. 3).
10.2 Registration Rights Agreement, dated as of November 17, 1994,
between the Company and Apollo Interco Partners, L.P. (incorporated
by reference to Exhibit 10.2 by The Florsheim Shoe Company
Registration Statement on Form 10/A, Amendment No. 3).
10.3 License and Technical Assistance Agreement, dated February 4,
1994, between Florind Shoes Limited and INTERCO INCORPORATED, acting
by and through its Florsheim Shoe Company Division (incorporated by
reference to Exhibit 10.3 filed by The Florsheim Shoe Company
Registration Statement on Form S-1, and all amendments thereto,
File No. 33-83204).
10.4 License and Technical Assistance Agreement, dated February 4,
1994, between Floram Shoes India, Ltd. and INTERCO INCORPORATED,
acting by and through its Florsheim Shoe Company Division
(incorporated by reference to Exhibit 10.4 filed by The Florsheim
Shoe Company Registration Statement on Form S-1, and all amendments
thereto, File No. 33-83204).
10.5 Export Sales Agreement, dated February 4, 1994, between
Floram Shoes India, Ltd. and INTERCO INCORPORATED, acting by and
through its Florsheim Shoe Company Division (incorporated by
reference to Exhibit 10.5 by filed The Florsheim Shoe Company
Registration Statement on Form S-1, and all amendments thereto,
File No. 33-83204).
10.6 Export Sales Agreement, dated as of February 4, 1994, between
Florind Shoes Limited and INTERCO INCORPORATED, acting by and
through its Florsheim Shoe Company Division (incorporated by
reference to Exhibit 10.6 filed by The Florsheim Shoe Company
Registration Statement on Form S-1, and all amendments thereto,
File No. 33-83204).
10.7 Renewed Joint Venture Agreement, dated February 4, 1994, among
Shri K. Ameenur Rahman, Floram Shoes India, Ltd., Florind Shoes
Limited and INTERCO INCORPORATED, acting by and through its Florsheim
Shoe Company Division (incorporated by reference to Exhibit 10.7
filed by The Florsheim Shoe Company Registration Statement on Form
S-1, and all amendments thereto, File No. 33-83204).
10.10 Florsheim Supplemental Employee Retirement Plan (incorporated by
reference to Exhibit 10.10 filed by The Florsheim Shoe Company
Registration Statement on Form S-1, and all amendments thereto, File
No. 33-83204).
10.11 Consulting Agreement, dated as of November 17, 1994, between Apollo
Advisors, L.P. and the Company (incorporated by reference to
Exhibit 10.11 by The Florsheim Shoe Company Registration Statement
on Form 10/A, Amendment No. 3).
10.14 Employment Agreement, dated September 15, 1995, between the Company
and Ronald J. Mueller, amending and superseding the employment
agreement dated October 1, 1994, between the Company and Ronald J.
Mueller (incorporated by reference to Exhibit 10.14 filed with the
Company's Quarterly Report on Form 10-Q for the Quarterly Period
ended September 30, 1995).
10.15 Employment Agreement, dated September 7, 1995, between the Company
and Charles J. Campbell (incorporated by reference to Exhibit
10.15 as filed with the Company's Quarterly Report on Form 10-Q for
the Quarterly Period ended September 30, 1995).
</TABLE>
58
<PAGE> 60
<TABLE>
<S> <C>
10.16 Amendment #1, dated December 29, 1995, to Employment Agreement
between the Company and Charles J. Campbell (incorporated by
reference to Exhibit 10.16 as filed with the Company's Annual Report
on form 10-K, for the year ended December 30, 1995).
10.17 Amendment, dated December 29, 1995, to Employment Agreement between
the Company and Ronald J. Mueller (incorporated by reference to
Exhibit 10.17 as filed with the Company's Annual Report on form
10-K, for the period ended December 30, 1995).
10.19 1994 Stock Option Plan, as amended and restated as of March 15, 1996
(incorporated by reference to Exhibit 10.1, as filed with the
Company's Registration Statement on Form S-8 no. 333-06353).
10.20 Charles J. Campbell Stock Option Plan, as amended and restated as of
March 15, 1996 (incorporated by reference to Exhibit 10.2, as filed
with the Company's Registration Statement on Form S-8 no.
333-06353).
10.21 Lease Agreement dated September 6, 1996 between Teachers Insurance
and Annuity Association of America, a New York corporation, (the
"Landlord") and The Florsheim Shoe Company (incorporated by
reference to Exhibit 10.1 as filed with the Company's Quarterly
Report on form 10-Q, for the Quarterly Period ended September 28,
1996).
10.22 Real Estate Sale Contract, as amended and restated, for the sale of
property located at 130 South Canal Street, Chicago, Illinois, dated
February 21, 1997, between The Florsheim Shoe Company and Everest
Partners L.L.C (incorporated by reference to Exhibit 10.22 as filed
with the Company's Annual Report on Form 10-K for the year ended
December 28, 1996).
10.23 Consultants Stock Option Plan, as amended and restated as of
December 17, 1997 (incorporated by reference to Exhibit 10, as filed
with the Company's Registration Statement on Form S-8 no. 333-42495)
10.24 Agreement, dated January 23, 1998, between the Company and Karen
Nyman Latham.
12.1 Computation of ratio of earnings to fixed charges.
21 Subsidiaries of the Company.
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
A Form 8-K was not required to be filed during the last quarter of the
fiscal year ended January 3, 1998
UPON WRITTEN REQUEST TO THE COMPANY'S CHIEF FINANCIAL OFFICER, THE
COMPANY WILL FURNISH SHAREHOLDERS WITH A COPY OF ANY OR ALL SUCH EXHIBITS
REQUESTED AT A CHARGE OF TEN CENTS PER PAGE, WHICH REPRESENTS THE COMPANY'S
REASONABLE EXPENSES IN FURNISHING SUCH EXHIBITS.
59
<PAGE> 61
FLORSHEIM GROUP INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedule
Consolidated Financial Statements:
Consolidated balance sheets, December 28, 1996 and January 3, 1998.
Consolidated statements of operations for the fiscal year ended December
30, 1995, for the fiscal year ended December 28, 1996, and for the fiscal
year ended January 3, 1998.
Consolidated statements of cash flows for the fiscal year ended December
30, 1995, for the fiscal year ended December 28, 1996, and for the fiscal
year ended January 3, 1998.
Consolidated statements of shareholders' equity for the fiscal year ended
December 30, 1995, for the fiscal year ended December 28, 1996, and for
the fiscal year ended January 3, 1998
Notes to consolidated financial statements.
Independent Auditors' Report
Consolidated Financial Statement Schedules:
Schedule
--------
Valuation and qualifying accounts II
60
<PAGE> 62
FLORSHEIM GROUP INC. Schedule II
-----------
Valuation and Qualifying Accounts
(Dollars in thousands)
<TABLE>
<CAPTION>
============================================================================================================================
Charged Charged Other
Balance at to costs to other charges
Fiscal beginning and account add (deduct) Balance at
Year Description of year expenses(1) describe describe(2) end of year
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 Allowance for doubtful accounts
and cash discounts 1,693 4,506 (3) - (3,914) (3) 2,284
1996 Allowance for doubtful accounts
and cash discounts 2,284 2,383 (3) - (2,961) (3) 1,705
1997 Allowance for doubtful accounts
and cash discounts 1,705 1,734 - (2,397) 1,042
============================================================================================================================
</TABLE>
(1) Includes provisions for bad debt expense of $1,296, $754, and $(2) and
provisions for cash discount expense of $3,210, $1,629, and $1,735 for
1995, 1996, and 1997, respectively.
(2) Includes write-offs for bad debts of $825, $1,002, and $612 and cash
discounts allowed of $3,090, $1,959, and $1,785 for 1995, 1996, and 1997,
respectively.
(3) 1995 and 1996 were adjusted to exclude certain retail point of sale
discounts.
61
<PAGE> 63
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of Florsheim Group Inc.:
We have audited the consolidated balance sheets of Florsheim Group Inc. and
subsidiaries (the Company) as of January 3, 1998 and December 28, 1996 and the
consolidated statements of operations, cash flows, and shareholders' equity for
the years ended January 3, 1998, December 28, 1996 and December 30, 1995. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement
schedule are the responsibility of management of Florsheim Group Inc. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule 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 Florsheim Group
Inc. and subsidiaries as of January 3, 1998 and December 28, 1996 and the
results of their operations and their cash flows for the years ended January 3,
1998, December 28, 1996 and December 30, 1995 in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material aspects,
the information set forth therein.
KPMG Peat Marwick LLP
Chicago, Illinois
February 6, 1998
62
<PAGE> 64
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.
FLORSHEIM GROUP INC.
--------------------
(Registrant)
By Richard J. Anglin
---------------------------------------
Richard J. Anglin
Vice President, Chief Financial Officer
Date: March 31, 1998
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 31, 1998.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
Charles J. Campbell Chairman of the Board of Directors,
- ----------------------
(Charles J. Campbell) President, Chief Executive Officer
Adam M. Aron Director
- ----------------------
(Adam M. Aron)
Bernard Attal Director
- ----------------------
(Bernard Attal)
Robert H. Falk Director
- ----------------------
(Robert H. Falk)
Michael S. Gross Director
- ----------------------
(Michael S. Gross)
John J. Hannan Director
- ----------------------
(John J. Hannan)
Joshua J. Harris Director
- ----------------------
(Joshua J. Harris)
John H. Kissick Director
- ----------------------
(John H. Kissick)
Ronald J. Mueller Director
- ----------------------
(Ronald J. Mueller)
Michael D. Weiner Director
- ----------------------
(Michael D. Weiner)
Richard J. Anglin Vice President,
- ---------------------- Chief Financial Officer
(Richard J. Anglin)
Thomas E. Poggensee Treasurer, Secretary, Controller
- ---------------------- and Chief Accounting Officer
(Thomas E. Poggensee)
</TABLE>
63
<PAGE> 1
Exhibit 4.7
WAIVER TO CREDIT AGREEMENT
--------------------------
WAIVER TO CREDIT AGREEMENT (this "Waiver") dated as of December 16,
1997, among FLORSHEIM GROUP INC., a Delaware corporation (the "Borrower"), the
lending institutions from time to time party to the Credit Agreement referred
to below (the "Banks"), and BANKERS TRUST COMPANY, as Agent (the "Agent"). All
capitalized terms used herein and not otherwise defined shall have the
respective meanings provided such terms in the Credit Agreement referred to
below.
WITNESSETH:
-----------
WHEREAS, the Borrower, the Banks and the Agent are parties to a Credit
Agreement, dated as of May 9, 1997 (as amended, modified or supplemented to the
date hereof, the "Credit Agreement"); and
WHEREAS, the Borrower has requested, and the Banks hereby agree, for
the Banks to waive certain provisions of the Credit Agreement as herein
provided;
NOW, THEREFORE, it is agreed:
1. For the period from and after the date hereof through the last day
of the fiscal quarter of the Borrower ended closest to March 31, 1998, the Banks
hereby waive any requirement that the Borrower comply with the financial
covenants set forth in Sections 9.08 through 9.10, inclusive, of the Credit
Agreement. It is hereby understood and agreed that the Borrower shall be in
compliance with such Sections on and after the last day of the fiscal quarter
of the Borrower ended closest to March 31, 1998.
2. In order to induce the undersigned Banks to enter into this
Waiver, the Borrower hereby represents and warrants that (x) no Default or Event
of Default exists on the Waiver Effective Date after giving effect to this
Waiver and (y) all of the representations and warranties contained in the
Credit Agreement shall be true and correct in all material respects as of the
Waiver Effective Date after giving effect to this Waiver, with the same effect
as though such representations and warranties had been made on and as of the
Waiver Effective Date (it being understood that any representation or warranty
made as of a specified date shall be required to be true and correct in all
material respects only as of such specific date).
3. This Waiver if limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
<PAGE> 2
4. This Waiver may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with the Borrower and the Agent.
5. THIS WAIVER AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF
THE STATE OF NEW YORK.
6 This Waiver shall become effective on the date (the "Waiver
Effective Date") when (x) the Borrower and the Required Banks (i) shall have
signed a counterpart hereof (whether the same or difference counterparts) and
(ii) shall have delivered (including by way of telecopier) the same to the
Agent at the Notice Office.
7. From and after the Waiver Effective Date all references in the
Credit Agreement and the other Credit Documents to the Credit Agreement shall
be deemed to be references to the Credit Agreement as modified hereby.
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart
of this Waiver to be duly executed and delivered as of the date first above
written.
FLORSHEIM GROUP INC.
By: Richard J. Anglin
---------------------------------
Title: Vice President, Chief Financial Officer
BANKERS TRUST COMPANY
Individually, and as Agent
By: Anthony LoGrippo
---------------------------------
Title: Vice President
BANK OF AMERICA ILLINOIS
By:
---------------------------------
Title:
---------------------------------
<PAGE> 3
CREDIT AGRICOLE INDOSUEZ
By: Dean Balice
--------------------------
Title: Senior Vice President
CREDIT LYONNAIS CHICAGO BRANCH
By:
--------------------------
Title:
--------------------------
HARRIS TRUST AND SAVINGS BANK
By: Scott F. Geik
--------------------------
Title: Vice President
HELLER FINANCIAL, INC.
By: Kathi J. Inorio
--------------------------
Title: Vice President
LASALLE NATIONAL BANK
By: Steven M. Marks
--------------------------
Title: Vice President
SOCIETE GENERALE, CHICAGO BRANCH
By:
--------------------------
Title:
--------------------------
THE SUMITOMO BANK, LIMITED
By:
--------------------------
Title:
--------------------------
<PAGE> 4
TRANSAMERICA BUSINESS CREDIT
CORPORATION
By: Perry Vavoules
-----------------------------
Title: Senior Vice President
<PAGE> 1
Exhibit 10.24
AGREEMENT
This is an agreement between You, Karen Nyman Latham, (on behalf of
Yourself, Your spouse, Your family, and anyone acting for You including
attorneys, agents, representatives, heirs, executors, and assigns) ("You") and
Florsheim Group Inc. (on behalf of its present or former parents, subsidiaries,
affiliates, companies, insurers, predecessors, successors, assigns, agents,
employees, officers and directors) ("The Company"). For all purposes under
this Agreement, The Company shall include Apollo Advisers, L.P. and its
officers, affiliates, employees, directors, successors, predecessors and
assigns.
1. PAYMENTS AND OTHER CONSIDERATION. If You sign this Agreement, The
Company will:
- continue Your regular rate of pay through January 23, 1998, less
standard deductions; this payment will be made weekly by direct
deposit;
- continue Your Health Insurance at the level currently provided to
You, through January 23, 1998, including dependant coverage for Your
husband and child;
- the parties agree that You waive any right You may have under The
Company Stock Option Program; in exchange, The Company agrees to
pay You $78,750, which is an amount equal to the difference between
the market price of The Company's stock as of the close of business
on November 25, 1997, and the price of the 30,000 options previously
granted to You including those options which, under The Company
Stock Option Plan, were not vested;
- provide to You three months of pay, less deductions for withholding
taxes required by law, payable in a lump sum within ten days of the
execution of this Agreement;
- pay for the cost of benefits continuation, including dependant
coverage for Your husband and child, under COBRA, after Your
separation date from The Company for a period of eighteen months;
- on or before March 1, 1998, The Company will provide You with a
management bonus calculated pursuant to the terms of the Florsheim
Group, Inc. Executive Incentive Plan (Plan) for the full calendar
year of 1997, a copy of which is attached hereto as Exhibit A;
payments made under the Plan will be based on the same factors set
forth in the written document applicable to You as of October 24,
1997. You will receive 100% of the discretionary portion of the
Plan;
- allow You to retain the personal computer, fax and port replicator
previously provided to You by The Company for Your home use, valued
at $1,000;
<PAGE> 2
-2-
- on or before January 30, 1998, pay to You $9,807.70, which is three
weeks of pay for accrued vacation;
- provide a mutually agreed-upon letter as a reference, a copy of
which is attached hereto as Exhibit B, if requested to do so and
route all unsolicited requests for a reference to Charles Campbell;
- the proxy statement for 1997 will contain language regarding You as
set forth in Exhibit C;
- you and The Company agree that The Company is under certain legal
obligations to disclose certain terms of Your employment. You and
The Company agree that the information provided in those statements
shall be limited to information required by law to be disclosed, and
that the language of such statements is subject to Your prior
agreement.
The foregoing benefits are in addition to and exceed that to which You would be
entitled to receive without signing this Agreement.
2. COVENANT NOT TO SUE/RELEASE AND WAIVER. In exchange for the benefits
listed in paragraph 1, You agree not to bring any lawsuit against The Company
and release and waive The Company from all claims or liability arising out of
Your employment and/or Your separation from employment with The Company. This
includes claims that The Company:
- has violated its personnel policies, handbooks, contracts of
employment, or covenants of good faith and fair dealing between You
and The Company;
- has discriminated against You on the basis of age, race, color, sex
(including sexual harassment), pregnancy, national origin, ancestry,
disability, handicap, religion, sexual orientation, marital status,
parental status, source of income, entitlement to benefits,
retaliation for any protected activity, or any union activities in
violation of any local, state or federal law, constitution,
ordinance, or regulation, including but not limited to: Title VII
of the Civil Rights Act of 1964, as amended; 42 U.S.C. Section
1981, as amended; the Pregnancy Discrimination Act; the Equal Pay
Act; the Americans With Disabilities Act; the Family Medical Leave
Act; the Employee Retirement Income Security Act, Section 510; and
the National Labor Relations Act.
- has violated public policy or common law (including but not limited
to claims for retaliatory discharge; negligent hiring, retention or
supervision; defamation; intentional or negligent infliction of
emotional distress and/or mental anguish; intentional interference
with contract; negligence; detrimental
<PAGE> 3
-3-
reliance; loss of consortium to You or any member of Your family
and/or promissory estoppel).
- excluded from this release are any claims which cannot be waived by
law, including but not limited to the right to file a charge with or
participate in an investigation conducted by certain government
agencies, including the Equal Employment Opportunity Commission.
You are waiving, however, Your right to any monetary recovery should
any agency (such as the Equal Employment Opportunity Commission)
pursue any claims on Your behalf. You are not releasing any claim
to be entitled to unemployment compensation or to expense
reimbursements otherwise owed you by The Company. Likewise, you are
not releasing any claim to be entitled to indemnification or
coverage by The Company or The Company's directors and officers
insurance should claims be asserted against you arising out of your
employment with The Company.
In addition, The Company agrees to release and waive any claims it may have
against You for actions relating to Your employment with The Company up to and
including the date of this Agreement.
3. OTHER AGREEMENTS BY YOU. In addition to the agreements made in
paragraph 2, by executing this Agreement You are also agreeing that:
- You are entering into this Agreement knowingly, voluntarily, and
with full knowledge of its significance. You have not been coerced,
threatened, or intimidated into signing this Agreement, and no
promises have been made to You other than as stated in this
Agreement;
- You have been paid for all hours worked, that You have not suffered
any on-the-job injury for which You have not already filed a claim,
and that You have received all sick and vacation pay and other
compensation and benefits to which You are entitled.
- You and The Company agree not to disparage or otherwise attempt to
interfere with the other's business or reputation and agree that,
should You engage in such action, The Company may immediately cease
any payments remaining under this agreement. If The Company engages
in such action, all payments pursuant to this Agreement will be due
and payable to You immediately.
- You agree that the terms of this Agreement, including but not
limited to the payments pursuant to this Agreement, shall be kept
strictly confidential and shall not be disclosed except to Your
immediate family, attorneys and/or tax advisers or as you may be
otherwise legally required to do so. The Company agrees to maintain
the confidentiality of this Agreement and will not disclose the
terms of such Agreement unless legally required to do so.
<PAGE> 4
-4-
- You are agreeing to waive any right or claim to employment with
Florsheim, and You further agree not to seek future employment with
Florsheim.
- You have had a reasonable period of time in which to consider this
Agreement;
- You have been advised to and have consulted an attorney in
connection with this Agreement.
4. INFORMATION CONCERNING YOUR SEPARATION FROM EMPLOYMENT. You and The
Company agree that the sole reason for Your separation from employment is Your
resignation. The Company agrees that it will not make any untrue, defamatory,
disparaging or unflattering statements about You, and that no information about
Your employment or Your separation from employment, will be provided to anyone,
including The Company's auditors and lenders, without Your prior approval. You
acknowledge that You were relieved of all duties and responsibilities as of
October 24, 1997, and are no longer authorized or permitted to perform any
further duties for Florsheim. You are acknowledging by signing this Agreement
that You understand that You are eligible for the benefits which You will
receive contingent upon Your signing this Agreement.
5. TIME FOR CONSIDERATION OF AGREEMENT AND FOR REVOCATION. You agree that
You have had a reasonable period in which to decide whether to enter into this
Agreement, sign it, and return it to Charles Campbell, Chief Executive Officer,
200 North LaSalle Street, Chicago, Illinois, 60601. This Agreement shall be
null and void if not signed by January 23, 1998.
6. ENTIRE AGREEMENT/SEVERABILITY. This Agreement sets forth the entire
agreement between You and The Company and supersedes any other written or oral
understandings. You and The Company agree that if any provision of this
Agreement or application thereof is held to be invalid, the invalidity shall
not affect other provisions or applications of this Agreement.
7. CONSULTATION WITH AN ATTORNEY. THIS AGREEMENT IS A LEGAL DOCUMENT.
YOU ARE ADVISED TO CONSULT WITH AN ATTORNEY BEFORE SIGNING IT.
ACKNOWLEDGMENT: By signing this Agreement I acknowledge that the benefits
that I will receive as stated in this Agreement are in exchange for a release
of all claims that I have against The Company and an agreement not to sue The
Company. I understand that if I sign this Agreement and then choose to sue The
Company on any ground covered by the Agreement, I will be required to return
the amount of the consideration set forth in Paragraph 1 above. I further
understand that if I sue The Company and do not return the entire amount, I
will be deemed to have ratified this Agreement, regardless of any alleged or
actual invalidities in this Agreement, and The Company will be entitled to
judgment in its
<PAGE> 5
-5-
favor. If The Company materially breaches this Agreement, then the Agreement
will become null and void and you will not be required to return the
consideration received thereunder.
_________________________ ________________________________
Karen Nyman Latham Florsheim Group Inc.
Date_____________________ Date____________________________
<PAGE> 1
FLORSHEIM GROUP INC.
Exhibit 12.1
Earnings to Fixed Charges ------------
(Dollars in thousands, except ratio data)
<TABLE>
<CAPTION>
===================================================================================================================================
Five months Twelve months Twelve months Twelve months Twelve months Twelve months
ended ended ended ended ended ended
Jan. 2, 1993 Jan. 1, 1994 Dec. 31, 1994 Dec. 30, 1995 Dec. 28, 1996 Jan. 3, 1998
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Earnings (loss) before
income taxes and extraordinary item $ 13,406 $ 19,631 $ 9,530 $ (6,287) $ 2,785 2,700
Fixed charges 7,313 17,027 17,522 20,720 17,429 $ 16,845
===================================================================================================================================
Earnings as adjusted 20,719 36,658 27,052 14,433 20,214 19,545
===================================================================================================================================
Fixed charges:
Interest expense 4,457 10,350 10,408 13,274 9,989 9,130
Interest factor of rents:
(1/3 of rent expense) 2,856 6,677 7,114 7,446 7,440 7,715
===================================================================================================================================
Total fixed charges $ 7,313 $ 17,027 $ 17,522 $ 20,720 $ 17,429 $ 16,845
===================================================================================================================================
Earnings as adjusted/
Total fixed charges 2.83 2.15 1.54 - 1.16 1.16
===================================================================================================================================
Deficiency $ (6,287)
===================================================================================================================================
</TABLE>
(Continued)
65
<PAGE> 2
FLORSHEIM GROUP INC. Exhibit 12.1 Cont.
------------------
Earnings to Fixed Charges
(Dollars in thousands, except ratio data)
<TABLE>
<CAPTION>
==============================================================================================================
Proforma (1) Proforma (1)
Twelve months Twelve months
ended ended
Jan. 1, 1994 Dec. 31, 1994
==============================================================================================================
<S> <C> <C>
Earnings (loss) before
income taxes $ 11,438 $ 1,581
Fixed charges 21,127 21,614
==============================================================================================================
Earnings as adjusted $ 32,565 $ 23,195
==============================================================================================================
Fixed charges:
Interest expense 14,150 14,500
(1/3 of rent expense) 6,677 7,114
==============================================================================================================
Total fixed charges $ 20,827 $ 21,614
==============================================================================================================
Earnings as adjusted / total fixed charges 1.54 1.07
==============================================================================================================
</TABLE>
(1) See Note 16 to Selected Consolidated Financial and Operating Data. Pro
forma information adjustments for the spin off and debt transactions as
if they occurred January 2, 1993.
66
<PAGE> 1
Exhibit 21
Florsheim Group Inc.
Subsidiaries of the Company
---------------------------
The Florsheim Shoe Store Company - Northeast, a Delaware corporation
The Florsheim Shoe Store Company - West, a Delaware corporation
L.J. O'Neill Shoe Company, a Missouri corporation
Florsheim Occupational Footwear, Inc., a Missouri corporation
Florsheim Australia Limited, an Australian corporation
Florsheim Canada Inc., a Canadian corporation
Florsheim Europe S.R.L., an Italian corporation
Florsheim Pacific, Limited, a Hong Kong corporation
Florsheim S.A. de C.V., a Mexican corporation
Florsheim B.V., a Netherlands corporation
Florsheim Limited, a U.K. corporation
67
<PAGE> 1
Exhibit 23
CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors
Florsheim Group Inc.:
We consent to the use of our report dated February 6, 1998, on the consolidated
balance sheets of Florsheim Group Inc. and subsidiaries as of January 3, 1998
and December 28, 1996, the related consolidated statements of operations, cash
flows, and shareholders' equity for the years ended January 3, 1998, December
28, 1996, and December 30, 1995 and related financial statement schedule, in
the January 3, 1998 annual report on Form 10-K of Florsheim Group Inc.
KPMG Peat Marwick LLP
Chicago, Illinois
March 31, 1998
68
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