<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------------------------
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED October 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 incorporation or (I.R.S. Employer
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
Not Applicable
---------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
8,413,651 Shares as of November 2, 1998
---------------------------------------
================================================================================
<PAGE> 2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Financial Statements for the quarter ended October 3, 1998.
Consolidated Balance Sheet:
October 3, 1998
September 27, 1997
Consolidated Statement of Operations:
Three Months Ended October 3, 1998
Three Months Ended September 27, 1997
Nine Months Ended October 3, 1998
Nine Months Ended September 27, 1997
Consolidated Statement of Cash Flows:
Nine Months Ended October 3, 1998
Nine Months Ended September 27, 1997
Notes to Consolidated Financial Statements
The financial statements are unaudited, but include all adjustments (consisting
of normal recurring adjustments) which the management of the Company considers
necessary for a fair presentation of the period. The results for the three
months and the nine months ended October 3, 1998 are not necessarily indicative
of the results to be expected for the full year.
2
<PAGE> 3
FLORSHEIM GROUP INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Unaudited
---------
January 3, October 3,
ASSETS 1998 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,195 $ 3,485
Receivables, less allowances of $1,084 at
January 3, 1998 and $1,007 at October 3, 1998 26,594 36,497
Inventories 80,989 78,016
Deferred tax assets, net 3,541 3,517
Prepaid expenses and other current assets 4,254 7,944
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 122,573 129,459
Property, plant and equipment 48,417 53,819
Less accumulated depreciation 21,172 23,509
- ---------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 27,245 30,310
Deferred tax assets, net 12,976 12,277
Other assets 20,852 22,678
- ---------------------------------------------------------------------------------------------------------------------------
$ 183,646 $ 194,724
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 10,398 $ 13,926
Accrued expenses 11,690 6,663
Accrued interest expense 1,075 453
Accrued income taxes payable 743 78
Revolving credit facility - short term 4,500 18,387
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 28,406 39,507
Long-term debt 18,412 18,412
Revolving credit facility - long term 58,500 58,500
Other long-term liabilities 23,846 23,531
- ---------------------------------------------------------------------------------------------------------------------------
129,164 139,950
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, 8,412,901 shares issued
and outstanding at January 3, 1998 and 8,413,651
shares issued and outstanding at October 3,1998 8,413 8,414
Paid-in capital 50,483 50,488
Accumulated translation adjustment (1,621) (3,025)
Accumulated deficit (2,793) (1,103)
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 54,482 54,774
- ---------------------------------------------------------------------------------------------------------------------------
$ 183,646 $ 194,724
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 4
FLORSHEIM GROUP INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Three months Three months
ended ended
September 27, October 3,
1997 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 60,177 $ 60,258
Cost of sales 31,941 32,786
- ---------------------------------------------------------------------------------------------------------------------
Gross profit 28,236 27,472
Selling, general
and administrative expenses 25,778 24,235
Non-recurring selling, general
and administrative expenses 537 -
- ---------------------------------------------------------------------------------------------------------------------
Earnings from operations 1,921 3,237
Interest expense, net 2,116 2,294
Other expense, net (123) (40)
- ---------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income tax (318) 903
Income tax expense (benefit) (107) 340
- ---------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (211) $ 563
- ---------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Net Earnings (loss) $ (0.03) $ 0.07
- ---------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share:
Net Earnings (loss) $ (0.03) $ 0.07
- ---------------------------------------------------------------------------------------------------------------------
Basic weighted average number of shares outstanding 8,346,051 8,413,151
Diluted weighted average number of shares outstanding 8,374,751 8,612,384
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 5
FLORSHEIM GROUP INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Nine months Nine months
ended ended
September 27, October 3,
1997 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 183,575 $ 180,740
Cost of sales 95,289 96,834
- -------------------------------------------------------------------------------------------------------------
Gross profit 88,286 83,906
Selling, general and administrative expenses 79,710 74,589
Non-recurring selling, general and administrative expenses (4,133) -
- -------------------------------------------------------------------------------------------------------------
Earnings from operations 12,709 9,317
Interest expense, net 6,844 6,610
Other expense, net (125) (47)
- -------------------------------------------------------------------------------------------------------------
Earnings before income tax and extraordinary item 5,740 2,660
Income tax expense 2,062 973
- -------------------------------------------------------------------------------------------------------------
Earnings before extraordinary item 3,678 1,687
Extraordinary item (less applicable income taxes of $2,812) (5,042) -
- -------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (1,364) $ 1,687
- -------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Earnings before extraordinary item 0.44 0.20
Extraordinary item: (0.60) -
----------- -----------
Net Earnings (Loss) $ (0.16) $ 0.20
- -------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share:
Earnings before extraordinary item 0.44 0.20
Extraordinary item: (0.60) -
----------- -----------
Net Earnings (Loss) $ (0.16) $ 0.20
- -------------------------------------------------------------------------------------------------------------
Basic weighted average number of shares outstanding: 8,346,051 8,412,984
Weighted average common shares outstanding 8,374,751 8,639,353
- -------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 6
FLORSHEIM GROUP INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Nine months Nine months
ended ended
September 27, October 3,
1997 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (1,364) $ 1,687
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Gain on disposal of assets (4,796) (20)
Depreciation and amortization 3,708 3,525
Deferred taxes (1,242) 723
Extraordinary item 5,042 -
Noncash interest expense 439 323
Increase in receivables (3,419) (9,903)
Decrease (increase) in inventories (8,431) 2,973
Increase in prepaid expenses and other assets (2,957) (6,783)
Decrease in accounts payable, accrued
interest expense and other accrued expenses (14,634) (2,787)
Increase (decrease) in other long-term liabilities 1,888 (315)
- --------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (25,766) (10,577)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of assets of 130 S. Canal
in 3/97, net of transaction costs 6,277 -
Proceeds from the disposal of assets 37 785
Additions to property, plant and equipment (6,349) (7,810)
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (35) (7,025)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in notes and loans payable 142 -
Net borrowings under revolving credit facility 65,300 13,887
Repurchase of 12-3/4% Senior Notes, including
tender premium and refinancing costs, net of tax (56,080) -
Stock/Option exercise - 5
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 9,362 13,892
- --------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (16,439) (3,710)
Cash and cash equivalents at beginning of period 21,691 7,195
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 5,252 $ 3,485
- --------------------------------------------------------------------------------------------------------------------
Supplemental disclosure:
Cash payments for income taxes, net $ 860 $ 915
Cash payments for interest $ 8,081 $ 6,909
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended October 3, 1998
(Dollars in thousands)
(Unaudited)
(1) DISTRIBUTION
Effective November 17, 1994, Florsheim Group Inc. (Florsheim or the
Company) became an independent public company. Furniture Brands
International, Inc., formerly known as INTERCO INCORPORATED, 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 outstanding joint and several indebtedness issued in
connection with the 1992 plan of reorganization of INTERCO and its
principal subsidiaries.
(2) 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. The net
gain on sale of $4,300 is included in non-recurring selling, general,
and administrative expenses.
(3) 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 $51,000
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 has executed a new $110,000
(now reduced to $91,600), five-year secured revolving credit facility
(credit facility) that replaces the $75,000 old credit facility
described above. An extraordinary loss of approximately $5,042, 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.
(4) NET EARNINGS (LOSS) PER COMMON SHARE
For the three and the nine months ended October 3, 1998, net earnings
per share data was computed using the average weighted basic and
diluted shares outstanding. For the three and nine months ended
September 27, 1997, net loss per share data was computed using the
average weighted basic shares outstanding. Common stock equivalents
were not used due to the antidilutive effect on the computation.
7
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended October 3, 1998
(Dollars in thousands)
(Unaudited)
(5) COMPREHENSIVE INCOME (LOSS)
Comprehensive Income (Loss) is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Three months Three months
Ended Ended
September 27, October 3,
1997 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net earnings (loss) $ (211) $ 563
Other Comprehensive Loss:
Foreign currency adjustments (89) (1,243)
-------- ---------
Comprehensive Loss $ (300) $ (680)
========= =========
- ----------------------------------------------------------------------------------------------------
<CAPTION>
Nine months Nine months
Ended Ended
September 27, October 3,
1997 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net earnings (loss) $ (1,364) $ 1,687
Other Comprehensive Loss:
Foreign currency adjustments (874) (1,404)
--------- ---------
Comprehensive Income (Loss) $ (2,238) $ 283
========= =========
- ----------------------------------------------------------------------------------------------------
</TABLE>
(6) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
January 3, October 3,
1998 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Retail merchandise $ 40,531 $ 44,075
Finished products 30,028 25,577
Work-in-process 997 1,624
Raw materials 9,433 6,740
-------- --------
$ 80,989 $ 78,016
======== ========
- ------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended October 3, 1998
(Dollars in thousands)
(Unaudited)
(7) ACCOUNTING CHANGE
During the three months ended October 3, 1998, the Company adopted the
Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". The after-tax effect
of the accounting change on year-to-date earnings, $420, or $0.05 per
share, was recorded during the quarter.
(8) SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
In connection with the Distribution, Florsheim issued $85,000, of which
$18,412 are outstanding at October 3, 1998, of 12-3/4% Senior Notes due
2002. 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 balance sheets as of January 3, 1998 and
October 3, 1998, condensed consolidating statements of operations
for the three months ended September 27, 1997 and the three months
ended October 3, 1998, condensed consolidating statements of
operations and statements of cash flows for the nine months ended
September 27, 1997 and the nine months ended October 3, 1998, of (a)
Florsheim, the parent, (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.
9
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For nine months ended October 3, 1998
(Continued)
(Dollars in thousands)
(Unaudited)
<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 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
Other long-term liabilities 23,846 - 1,455 (1,455) 23,846
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>
10
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For nine months ended October 3, 1998
(Continued)
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Condensed Consolidating Balance Sheet
October 3, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Guarantor Nonguarantor
Parent subsidiaries subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Current assets:
Cash and cash
equivalents $ 1,463 $ 500 $ 1,522 $ - $ 3,485
Receivables 35,757 302 8,399 (7,961) 36,497
Inventories 46,293 19,936 11,787 - 78,016
Prepaid expenses and
other current assets 9,097 1,097 1,267 - 11,461
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets 92,610 21,835 22,975 (7,961) 129,459
Net property, plant and
equipment 23,163 4,760 2,387 - 30,310
Other assets 40,132 (4,591) (72) (514) 34,955
Investments in subsidiaries 33,908 - - (33,908) -
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 189,813 $ 22,004 $ 25,290 $42,383) $ 194,724
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable 15,561 3,478 2,848 (7,961) 13,926
Revolving credit facility 18,000 - 387 - 18,387
Accrued expenses
and other current
liabilities 1,035 258 5,901 - 7,194
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 34,596 3,736 9,136 (7,961) 39,507
Long-term debt, less
current maturities 76,912 - - - 76,912
Other long-term liabilities 23,531 - 514 (514) 23,531
Shareholders' equity 54,774 18,268 15,640 (33,908) 54,774
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 189,813 $ 22,004 $ 25,290 $42,383) $ 194,724
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For nine months ended October 3, 1998
(Continued)
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Condensed Consolidating Statements of Operations
For three months ended September 27, 1997
- --------------------------------------------------------------------------------------------------------------------------------
Guarantor Nonguarantor
Parent subsidiaries subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 41,625 $ 11,493 $ 11,675 $ (4,686) 60,107
Cost of sales 24,193 5,944 6,514 (4,686) 31,965
- --------------------------------------------------------------------------------------------------------------------------------
Gross profit 17,432 5,549 5,161 - 28,142
Selling, general and
administrative expenses 16,168 5,270 4,212 - 25,650
- --------------------------------------------------------------------------------------------------------------------------------
Earnings from operations 1,264 279 949 - 2,492
Interest expense 2,361 - - - 2,361
Equity in earnings of subsidiaries,
net of tax 1,411 - - (1,411) -
Other income (expense), net 3 - 10 - 13
- --------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before
income taxes 317 279 959 (1,411) 144
Income tax expense (benefit) 225 (408) 235 - 52
- --------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 92 $ 687 $ 724 $ (1,411) $ 92
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
For three months ended October 3, 1998
- --------------------------------------------------------------------------------------------------------------------------------
Guarantor Nonguarantor
Parent subsidiaries subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 71,337 $ 10,692 $ 10,029 $ (31,800) $ 60,258
Cost of sales 52,603 6,377 6,081 (32,275) 32,786
- --------------------------------------------------------------------------------------------------------------------------------
Gross profit 18,734 4,315 3,948 475 27,472
Selling, general and
administrative expenses 15,571 5,539 3,125 - 24,235
Non-recurring selling, general,
and administrative expenses - - - - -
- --------------------------------------------------------------------------------------------------------------------------------
Earnings from operations 3,163 (1,224) 823 475 3,237
Interest expense 2,296 - (2) - 2,294
Equity in earnings of subsidiaries,
net of tax 377 - - (377) -
Other income (expense), net (96) - 56 - (40)
- --------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before
income taxes 1,148 (1,224) 881 98 903
Income tax expense (benefit) 467 (453) 326 - 340
- --------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 681 $ (771) $ 555 $ 98 $ 563
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For nine months ended October 3, 1998
(Continued
(Dollars in thousands
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Condensed Consolidating Statements of Operations
For nine months ended September 27, 1997
- --------------------------------------------------------------------------------------------------------------------------------
Guarantor Nonguarantor
Parent subsidiaries subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 135,135 $ 35,324 $ 33,689 $ (20,573) $ 183,575
Cost of sales 77,171 19,203 19,488 (20,573) 95,289
- --------------------------------------------------------------------------------------------------------------------------------
Gross profit 57,964 16,121 14,201 - 88,286
Selling, general and
administrative expenses 50,755 16,749 12,206 - 79,710
Non-recurring selling, general,
and administrative expenses (4,133) - - - (4,133)
- --------------------------------------------------------------------------------------------------------------------------------
Earnings from operations 11,342 (628) 1,995 - 12,709
Interest expense 6,844 - - - 6,844
Equity in earnings of subsidiaries,
net of tax 735 - - (735) -
Other income (expense), net (39) - (86) - (125)
- --------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before
income taxes 5,194 (628) 1,909 (735) 5,740
Income tax expense (benefit) 1,516 14 532 - 2,062
- --------------------------------------------------------------------------------------------------------------------------------
Earnings before extraordinary item 3,678 (642) 1,377 (735) 3,678
Extraordinary item (less applicable
income taxes of $2,812) (5,042) - - - (5,042)
- --------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (1,364) $ (642) $ 1,377 $ (735) $ (1,364)
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
For nine months ended October 3, 1998
- --------------------------------------------------------------------------------------------------------------------------------
Guarantor Nonguarantor
Parent subsidiaries subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 159,880 $ 32,042 $ 29,780 $ (40,962) $ 180,740
Cost of sales 101,981 18,373 17,917 (41,437) 96,834
- --------------------------------------------------------------------------------------------------------------------------------
Gross profit 57,899 13,669 11,863 475 83,906
Selling, general and
administrative expenses 47,800 16,693 10,096 - 74,589
- --------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from operations 10,099 (3,024) 1,767 475 9,317
Interest (income) expense 6,612 - (2) - 6,610
Equity in earnings of subsidiaries,
net of tax - - - - -
Other income (expense), net (126) - 79 - (47)
- --------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before
income taxes 3,361 (3,024) 1,848 475 2,660
Income tax expense (benefit) 719 - 254 - 973
- --------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 2,642 $ (3,024) $ 1,594 $ 475 $ 1,687
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For nine months ended October 3, 1998
(Continued)
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Condensed Consolidating Statements of Cash Flows
For nine months ended September 27, 1997
- -----------------------------------------------------------------------------------------------------------------------------
Guarantor Nonguarantor
Parent subsidiaries subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities $ (25,246) $ 440 $ 2,742 $ (3,702) $ (25,766)
- -----------------------------------------------------------------------------------------------------------------------------
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 37 - - - 37
Additions to property,
plant and equipment (4,941) (1,065) (343) - $ (6,349)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) -
investing activities 1,373 (1,065) (343) - (35)
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in notes and loans payable 142 - - - 142
Net capital contribution
from (to) Parent (755) (66) (2,881) 3,702 -
Receipts from new revolving credit facility 65,300 - - - 65,300
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 8,607 (66) (2,881) 3,702 9,362
- -----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (15,266) (691) (482) - (16,439)
Cash and cash equivalents
at beginning of period 18,427 397 2,867 - 21,691
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ 3,161 $ (294) $ 2,385 $ - 5,252
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For nine months ended October 3, 1998
(Continued)
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Condensed Consolidating Statements of Cash Flows
For nine months ended October 3, 1998
- --------------------------------------------------------------------------------------------------------------------------
Guarantor Nonguarantor
Parent subsidiaries subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities $ (7,984) $ 3,776 $ 679 $ (7,048) $ (10,577)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from the
disposal of assets 785 - - - 785
Additions to property,
plant and equipment (7,260) (350) (200) - (7,810)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing -
activities (6,475) (350) (200) - (7,025)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing
activities:
Net capital contribution
from (to) Parent (2,359) (3,300) (1,389) 7,048 -
Net borrowings under
credit facility 13,887 - - - 13,887
Stock/Option exercise 5 - - - 5
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 11,533 (3,300) (1,389) 7,048 13,892
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (2,926) 126 (910) - (3,710)
Cash and cash equivalents
at beginning of period 4,389 374 2,432 - 7,195
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ 1,463 $ 500 $ 1,522 $ - $ 3,485
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands)
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 in more than 6,000 department and specialty store
locations worldwide and through 313 Company-operated specialty stores and outlet
stores as of October 3, 1998.
Effective November 17, 1994, Florsheim became an independent public company when
Furniture Brands International, Inc., formerly known as INTERCO INCORPORATED,
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.
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 (now reduced to $91,600), five-year secured
revolving credit facility (credit facility) that replaces the $75,000 old credit
facility described above.
16
<PAGE> 17
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 3, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 27,
1997.
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>
- ------------------------------------------------------------------------------------------------------
Three months ended
-----------------------------------------------------------------
(Dollars in thousands) September 27, 1997 October 3, 1998
- ------------------------------------------------------------------------------------------------------
Amount % Amount %
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales:
U.S. Wholesale $ 19,990 33.2% $ 22,741 37.7%
U.S. Retail 27,082 45.0 25,900 43.0
International (including
exports from U.S.) 13,105 21.8 11,617 19.3
- ------------------------------------------------------------------------------------------------------
Total net sales $ 60,177 100.0% $ 60,258 100.0%
- ------------------------------------------------------------------------------------------------------
Percent change in same store
sales (1) 3.1% 5.2%
EBITDA (2) $ 3,578 5.9% $ 4,328 7.2%
- ------------------------------------------------------------------------------------------------------
Number of retail stores:
U.S. specialty 199 175
U.S. outlets 95 84
International 54 54
-------- --------
Total 348 313
======== ========
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) 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 period of comparable length.
(2) Earnings before interest expense, income taxes, depreciation and
amortization, and other income (expense), net and extraordinary items.
17
<PAGE> 18
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Three months ended
-----------------------------------------------------
September 27, October 3,
Operations data (as a percent of net sales) 1997 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales 100.0% 100.0%
Gross profit 46.9 45.6
Selling, general, and administrative expenses, excluding
non-recurring selling, general and administrative expenses 42.8 40.2
Earnings from operations, excluding non-recurring selling,
general and administrative expenses 4.1 5.4
Interest expense 3.5 3.8
Net earnings (loss) (0.4) 0.9
- -------------------------------------------------------------------------------------------------------
</TABLE>
Net sales for the three months ended October 3, 1998 (Third Quarter 1998) were
$60,258 and were approximately even compared to the net sales for three months
ended September 27, 1997 (Third Quarter 1997). U.S. wholesale net sales
increased $2,751, or 13.8%, compared to Third Quarter 1997 primarily due to the
incremental sales from the new product divisions (Florsheim Golf, Joseph Abboud
and John Deere), increased volume in the Fall 1998 line, and the continued
expansion of department store doors and big box retailers. U.S. retail net sales
decreased $1,182, or 4.4%, primarily due to planned store closings partially
offset by a positive same store sales increase of 5.2 % as compared to last
year. International sales decreased $1,488, or 11.4%, primarily due to the
current financial crisis in the Southeast Asia and its related currency
devaluation, which has also significantly impacted Australia.
Gross profit margin for Third Quarter 1998 was 45.6% of net sales, as compared
to 46.9% of net sales for Third Quarter 1997. The gross profit margin decreased
due to price promotion activity and a mix shift to a higher percentage of
wholesale sales.
Selling, general and administrative expenses for Third Quarter 1998 were
$24,235, a decrease of $1,543, or 6.0%, from Third Quarter 1997, excluding the
non-recurring items discussed below. Selling, general and administrative
expenses for Third Quarter 1998 were 40.2% of net sales, as compared to 42.8% of
net sales for Third Quarter 1997. The decrease was due to the Company's cost
reduction programs and planned store closings.
Earnings from operations for Third Quarter 1998 were $3,237, an increase of
$779, or 31.7%, from Third Quarter 1997, excluding the non-recurring selling,
general, and administrative expense, and EBITDA for Third Quarter 1998 was
$4,328, an increase of $750, or 21.0%, from Third Quarter 1997. Earnings from
operations for Third Quarter 1998 were 5.4% of net sales, compared to 4.1% of
net sales from Third Quarter 1997, and EBITDA from Third Quarter 1998 was 7.2%
of net sales, as compared to 5.9% of net sales from Third Quarter 1997. EBITDA
is presented as a supplemental disclosure and not as an alternative to earnings
from operations or cash flows from operating activities computed in accordance
with generally accepted accounting principles as an indicator of operating
performance. EBITDA is frequently used to analyze companies on the basis of
operating performance, leverage, and liquidity. Earnings from operations and
EBITDA in Third Quarter 1998 increased compared to Third Quarter 1997 primarily
due to the effect of wholesale sales increases and the expense reduction
programs, partially offset the applicable Southeast Asia currency devaluation.
Non-recurring selling, general, and administrative expenses of $537 in the Third
Quarter 1997 were related to the sale of the corporate headquarters building
located in downtown Chicago.
Interest expense for Third Quarter 1998 was $2,294 as compared to the Third
Quarter 1997 amount of $2,116. This increase is due to the greater average
balance of outstanding debt during the Third Quarter 1998 as compared to the
average balance of outstanding debt during the Third Quarter 1997.
The diluted earnings per share for Third Quarter 1998, were $0.07 per share, an
improvement from the diluted earnings per share, excluding the non-recurring
item mentioned above, in Third Quarter 1997, of $0.02, primarily due to the
items mentioned above.
18
<PAGE> 19
NINE MONTHS ENDED OCTOBER 3, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 27,
1997.
The following tables set forth, for the periods indicated, certain historical
data, expressed in thousands of dollars and as a certain percentage of net
sales, and retail stores information.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Nine months ended
--------------------------------------------------------------------
(Dollars in thousands) September 27, 1997 October 3, 1998
- -----------------------------------------------------------------------------------------------
Amount % Amount %
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales:
U.S. Wholesale $ 61,804 33.7% $ 66,828 37.0%
U.S. Retail 84,777 46.2 79,936 44.2
International (including
exports from U.S.) 36,994 20.2 33,976 18.8
- -----------------------------------------------------------------------------------------------
Total net sales $183,575 100% $180,740 100%
- -----------------------------------------------------------------------------------------------
Percent change in same store
sales (1) 5.1% 0.1%
EBITDA (2) $ 12,356 6.7% $ 12,839 7.1%
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) 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 period of comparable length.
(2) Earnings before interest expense, income taxes, depreciation and
amortization, and other income (expense), net, and the non-recurring
selling, general, and administrative expense and extraordinary item
recorded in 1997.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Nine months ended
--------------------------------------
September 27, October 3,
Operations data (as a percent of net sales) 1997 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales 100.0% 100.0%
Gross profit 48.1 46.4
Selling, general, and administrative expenses, excluding
non-recurring selling, general and administrative expenses 43.4 41.3
Earnings from operations, excluding non-recurring
selling, general and administrative expenses 4.7 5.2
Interest expense 3.7 3.7
Extraordinary item, net of tax (2.7) -
Net earnings (loss) (0.7) 0.9
Earnings before extraordinary item - pro forma 0.6 (1) 0.9
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Pro forma excludes gain on sale of 130 S. Canal corporate headquarters
building.
19
<PAGE> 20
Net sales for the nine months ended October 3, 1998 (Nine Months 1998) were
$180,740, a decrease of $2,835, or 1.5%, as compared with the Nine Months ended
September 27, 1997 (Nine Months 1997). U.S. wholesale net sales increased
$5,024, or 8.1%, due to volume increases from the three new product divisions,
rollout and reorders of JCPenney and expansion in department and big box stores.
U.S. retail net sales decreased $4,841, as the same store sales increase and
additional sales from stores opened during or after the Third Quarter 1997 were
more than offset by store closings. International sales decreased $3,018, or
8.2%, due to applicable currency devaluation primarily in the Southeast Asia and
Australia region.
Gross profit margin for Nine Months 1998 was 46.4% of net sales, as compared to
48.1% of net sales for Nine Months 1997. The decrease was due to increased price
promotion activity and closeout shipments for the new product divisions through
out this year and a mix shift to more wholesale sales.
Selling, general and administrative expenses for Nine Months 1998 were $74,589,
a decrease of $5,121, or 6.4%, from Nine Months 1997, excluding the
non-recurring selling, general, and administrative expenses. Selling, general
and administrative expenses for Nine Months 1998 were 41.3% of net sales, a
decrease from 43.4% of net sales for Nine Months 1997. This decrease was due to
the Company's cost reduction programs and planned store closings.
Earnings from operations for Nine Months 1998 were $9,317, an increase of $741,
or 8.6%, from Nine Months 1997, excluding the non-recurring selling, general and
administrative expenses. EBITDA for Nine Months 1998 was $12,839, an increase of
$483, or 3.9%, from Nine Months 1997. Earnings from operations for Nine Months
1998 was 5.2% of net sales, as compared to 4.7% of net sales for Nine Months
1997, and EBITDA for Nine Months 1998 was 7.1% of net sales, as compared to 6.7%
of net sales for Nine Months 1997. Earnings from operations and EBITDA in Nine
Months 1998 have improved from Nine Months 1997 primarily due to expense
reduction programs and improved wholesale margins. A gain of $4,133 in
non-recurring selling, general, and administrative expense for Nine Months 1997
related to the sale of corporate headquarters building located in downtown
Chicago that was recorded in Nine Months 1997.
Interest expense for Nine Months 1998 was $6,610, as compared to the Nine Months
1997 amount of $6,844. This decrease is due to the lower amount of Senior Notes
outstanding and lower cost of average outstanding borrowings under the credit
facility during the Nine Months 1998 as compared to the average cost of
outstanding borrowings during Nine Months 1997.
An extraordinary loss associated with the tender premium and expenses related to
the repurchase of the Senior Notes and the execution of the new revolving credit
facility was $5,042, net of tax, for Nine Months 1997.
The diluted earnings per share for Nine Months 1998, were $0.20 per share, a
decrease from the earnings before extraordinary item per share amount of $ 0.43
in Nine Months 1997. Included in the Nine Months 1997 amount was the
non-recurring pre-tax gain of $4,670 generated by the sale of the Company's
former corporate headquarters building.
ACCOUNTING CHANGES
During the three months ended October 3, 1998, the Company adopted the Statement
of Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". The after-tax effect of the accounting change on
year-to-date earnings, $420, or $0.05 per share, was recorded during the
quarter.
20
<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital excluding borrowings classified as short term credit facility at
October 3, 1998 was $108,339, as compared to $98,667 at January 3, 1998. The
increase during the Nine Months 1998 is primarily due to the seasonal timing of
wholesale shipments offset partially by planned inventory reductions. Cash
interest payments totaled $6,909 during Nine Months 1998, and cash income tax
payments were $915 during Nine Months 1998.
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 has
executed a new $110,000 (now reduced to $91,600), five-year secured revolving
credit facility that replaces the $75,000 old credit facility described in
"Overview". In August 1998, the amount that may be borrowed by the Company was
reduced to $91,600 by execution of an amendment between the Company and its
lenders. Borrowings under the new credit facility were used to finance the
tender offer for the Senior Notes. The $110,000 limit has been revised downward
to $91,600 based on the Second Amendment to the credit facility. At October 3,
1998, outstanding borrowings under the credit facility totaled $18,387 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 (now reduced to $91,600) 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.
SEASONALITY OF BUSINESS
In total, the Company's net sales are generally 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.
INFORMATION TECHNOLOGY UPGRADE AND YEAR 2000
General, The Company is currently working to resolve the potential
impact of the Year 2000 Issue on the processing of time-sensitive information by
its computerized information systems. Year 2000 issues may arise as the result
of computer programs being written using two digits rather than four to define
the applicable year. Any of the Company's computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This situation could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business related activities.
The Company named a task force in April 1998 to assess and develop
action plans to address and assess the potential impact of the Year 2000 Issue.
The task force is also responsible to evaluate the exposures from third party
(e.g. suppliers and customers) failures to correct their systems for Year 2000.
Commencing in May 1998, questionnaires were sent to the third parties identified
by various areas of the Company's operating units and the task force is in the
process of receiving and will review all responses to identify potential Year
2000 risks.
21
<PAGE> 22
Internal Systems, The Company completed an assessment of the impact of
the Year 2000 issues on its internal systems and determined that it has to
modify or replace portions of its computer hardware and software to enable these
systems to function properly with respect to dates in the Year 2000 and
thereafter. These issues are being addressed as part of the overall information
technology upgrade described in the following paragraph. The Company believes
that the Year 2000 issue will not pose significant operational problems for its
internal computer systems.
The Company is in process of a significant information technology
upgrade, costing approximately $12,000, which is being capitalized during 1997,
1998 and 1999. The Year 2000 issue is being addressed within this upgrade. The
Company will utilize both internal and external resources to reprogram or
replace, and test equipment and software to resolve the Year 2000 Issue. The
Company anticipates completing the system upgrade and the Year 2000 project no
later than October, 1999, which is prior to any anticipated impact on its
operating systems. At this time, the Company has not developed a formal
contingency plan since all key milestones have been met. Total costs to date are
approximately $7,000.
The costs of the systems project and the date on which the Company
believes it will complete the Year 2000 modifications are based upon
management's best estimates, which were derived by utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and the actual results
could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and the impact of third party
information system failures.
Suppliers. The Company utilizes numerous suppliers to supply materials
and components for its various products. As noted above, the Company has
surveyed all of its major suppliers regarding their Year 2000 status. A number
of suppliers have returned completed questionaires to the Company, some of which
state that they are either Year 2000 compliant or that they anticipate that they
will be Year 2000 compliant by a date early enough to avoid any disruption.
However, the Company, is unable to verify this information, and it is possible
that the advice received from suppliers may be erroneous. Moreover, certain
suppliers have not yet responded to the Company's request for information and
may not be Year 2000 compliant. The Company does not currently anticipate that
suppliers' Year 2000 issues would have a material adverse effect on the Company
but is still evaluating the issue.
Service Providers. The Company has submitted questionnaires to, but is
not currently aware of the Year 2000 readiness of, certain outside service
companies such as freight, telecommunications are utility providers. Failure of
certain of these providers to be Year 2000 compliant could have a material
adverse effect on the Company which is not currently quantifiable, and it is
possible that the Company's operations could be seriously disrupted.
Customers. The Company's major customers have been surveyed by the
Company for Year 2000 compliance, and the Company is in the process of
evaluating responses. A customer's Year 2000 issues could cause a delay in
receipt of purchase orders or in payment. If Year 2000 issues are widespread
among the Company's customers, the Company's sales and cash flows could be
materially adversely affected.
FORWARD LOOKING STATEMENTS
The statements contained above concerning the Company's information
technology upgrade and the costs associated therewith and other Year
2000-related matters are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The factors described herein
and other possible factors could cause actual results to differ materially from
those contained in the forward-looking statements.
22
<PAGE> 23
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
4.1 Second Amendment, dated as of August 19, 1998, to the
Credit Agreement, as of May 9, 1997, among the Company,
the Banks party thereto from time to time, and Bankers
Trust Company, as Agent.
27 Financial Data Schedule
(b) A Form 8-K was not required to be filed during the quarter ended
October 3, 1998.
.
23
<PAGE> 24
SIGNATURE
Pursuant to the requirements 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 /s/ Richard J. Anglin
----------------------------------
Richard J. Anglin
Vice-President, Chief Financial Officer
Date: November 13, 1998
24
<PAGE> 1
EXHIBIT 4.1
SECOND AMENDMENT TO CREDIT AGREEMENT
SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of
August 19, 1998, 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.
W I T N E S S E T H :
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 parties hereto wish to amend the Credit Agreement as
herein provided, subject to and on the terms and conditions set forth herein;
NOW THEREFORE, it is agreed:
1. Notwithstanding anything to the contrary contained in the credit
Agreement, the parties hereto hereby agree that, on the Second Amendment
Effective Date, to the extent the Total Revolving Loan Commitment at such time
is otherwise in excess of $91.6 million, then the Total Revolving Loan
Commitment shall be reduced on such date to $91.6 million. Such reduction to the
Total Revolving Loan Commitment shall be applied to reduce the Revolving Loan
Commitments of the Banks and to reduce the then remaining Scheduled Commitment
Reductions, on the same basis as is provided for reductions to the Total
Unutilized Revolving Loan Commitment pursuant to Section 3.02(a) of the Credit
Agreement. Also on the Second Amendment Effective Date, the Blocked Commitments
(and each of the General Blocked Commitment and the Senior Notes Blocked
Commitment) shall be reduced to $0. In connection with the reduction to the
Total Revolving Loan Commitment specified above in Section 1, the Borrower shall
make such payments, if any, as may be required pursuant to Section 4.02 of the
Credit Agreement immediately after giving effect to such reduction.
2. Section 9.09 of the Credit Agreement is hereby amended by (i)
deleting the ratio "5.20:1.00" appearing opposite the date June 30, 1998 in the
table therein and by inserting in lieu thereof the ratio "5.75:1.00", (ii)
deleting the ratio "4.90:1.00" appearing opposite the date September 30, 1998,
in the table therein and by inserting in lieu thereof the ratio "5.50:1.10"" and
(z) deleting the ratio "4.50:1.00" appearing opposite the date December 31, 1998
in the table therein ad by inserting in lieu thereof the ratio "5.00:1.00".
3. Section 9.10 of the Credit Agreement is hereby amended by deleting
the ratio "2.20:1.00" appearing opposite the date December 31, 1998 in the table
therein and by inserting in lieu thereof the ratio "2.05:1.00".
4. In order to induce the undersigned Banks to enter into this
Amendment, the Borrower hereby represents and warrants (i) the representations
and warranties contained in the Credit Agreement are true and correct in all
material respects on and as of the Second Amendment Effective Date (as defined
in Section 8 of this Amendment) (it being understood and agreed that any
representation or warranty which by its terms is made as of a specified date
shall be required to be true and correct in all material respects only as of
such specified date) and (ii) there exists no Default or Event Default on the
Second Amendment Effective Date, in each case after giving effect to this
Amendment.
5. This Amendment is 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.
6. This Amendment 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 at the Notice
Office.
25
<PAGE> 2
7. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE
STATE OF NEW YORK.
8. This Amendment shall become effective on the date (the "Second
Amendment Effective Date") when the Borrower and the Required Banks (i) shall
have signed a counterpart hereof (whether the same or different counterparts)
and (ii) shall have delivered (including by way of facsimile transmission) the
same to the Agent at the Notice Office.
9. From and after the Second Amendment Effective Date, all references
in the Credit Agreement and each of the Credit Documents to the Credit Agreement
shall be deemed to be references to the Credit Agreement as amended hereby.
10. The Borrower hereby covenants and agrees that, so long as the
Second Amendment Effective Date occurs, it shall pay each Bank with executes and
delivers to the Agent a counterpart hereof by the later to occur of (x) the
close of business on the Second Amendment Effective Date or (y) 5:00 p.m. (New
York time) on Friday, August 21, 1998, a cash fee in an amount equal to 5 basis
points (.05%) of an amount equal to the Revolving Loan Commitment of such Bank,
in each case as same is in effect on the Second Amendment Effective Date. All
fees payable pursuant to this Section 10 shall be paid by the Borrower to the
Agent for distribution to the Banks not later than the first Business Day
following the Second Amendment Effective Date.
26
<PAGE> 3
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart
of this Amendment to be duly executed and delivered as of the date first above
written.
FLORSHEIM GROUP INC.
By: Richard J. Anglin
-----------------
Name: Richard J. Anglin
Title: Vice President, Chief Financial Officer
BANKERS TRUST COMPANY,
Individually, and as Agent
By: G. Andrew Keith
---------------
Name: G. Andrew Keith
Title: Vice President
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: Christine M. Tierney
--------------------
Name: Christine M. Tierney
Title: Senior Vice President
CREDIT AGRICOLE INDOSUEZ
By: W. Leroy Startz
---------------
Name: W. Leroy Startz
Title: First Vice President
By: Dean Balice
-----------
Name: Dean Balice
Title: Senior Vice President
CREDIT LYONNAIS NEW YORK BRANCH
By: Attila Koc
----------
Name: Attila Koc
Title: First Vice President
HARRIS TRUST AND SAVINGS BANK
By:
------------------------------------------
Name:
Title:
HELLER FINANCIAL, INC.
By: Linda W. Wolf
-------------
Name: Linda W. Wolf
Title: Senior Vice President
27
<PAGE> 4
LA SALLE NATIONAL BANK
By: Steven M. Marks
---------------
Name: Steven M. Marks
Title: First Vice President
SOCIETE GENERALE, CHICAGO BRANCH
By:__________________________________________
Name:
Title:
THE SUMITOMO BANK, LIMITED
By: J.H. Broadley
-------------
Name: J.H. Broadley
Title: Vice President
By: Brian M. Smith
--------------
Name: Brian M. Smith
Title: Senior Vice President &
Regional Manager (East)
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: Perry Vavoules
--------------
Name: Perry Vavoules
Title: Senior Vice President
28
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JUL-05-1998
<PERIOD-END> OCT-03-1998
<CASH> 3,485
<SECURITIES> 0
<RECEIVABLES> 36,497
<ALLOWANCES> 1,007
<INVENTORY> 78,016
<CURRENT-ASSETS> 129,459
<PP&E> 53,819
<DEPRECIATION> 23,509
<TOTAL-ASSETS> 194,724
<CURRENT-LIABILITIES> 39,507
<BONDS> 76,912
0
0
<COMMON> 8,414
<OTHER-SE> 54,774
<TOTAL-LIABILITY-AND-EQUITY> 194,724
<SALES> 60,258
<TOTAL-REVENUES> 60,258
<CGS> 32,786
<TOTAL-COSTS> 24,235
<OTHER-EXPENSES> (40)
<LOSS-PROVISION> 0
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</TABLE>
