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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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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 2, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 1, 1999, was approximately $16,099,566 based on the
closing price of the registrant's common stock as reported on The NASDAQ Stock
Market on March 1, 1999.
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.
8,453,651 shares as of March 15, 1999
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on May 25, 1999, are incorporated by reference into
Part III of this report.
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PART I
ITEM 1. BUSINESS
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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 311 Company-operated specialty stores and
outlet stores as of January 2, 1999. 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 to $125 price range in
the U.S. market, with approximately an 11% market share, nearly 20% greater than
the market share of the Company's nearest competitor.
The Company's worldwide wholesale distribution accounted for approximately
43% of fiscal 1998 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 2, 1999, Florsheim had a retail network of 173 Company-operated
specialty stores and 84 Company-operated outlet stores in the U.S. As of January
2, 1999, the Company also operated 45 specialty retail stores and 9 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.
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 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 $6.3 billion. 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
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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 the 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 and
international. The SBU's 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 $2.1
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 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 40% 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.
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. During 1999, the Company intends to continue the remodeling efforts
started in 1997. 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 and 1998. 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
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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: In 1996 and 1997, the Company has launched three new product
lines through its wholesale business unit. 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 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.
The total domestic advertising expenditures for fiscal 1998 were
approximately 1.3% of Florsheim's total domestic sales, versus 2.0% in fiscal
1997 and 1.3% in fiscal 1996. 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
distribution, strengthen its position with its existing customers and capitalize
on 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.
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RETAIL OPERATIONS
As of January 2, 1999, Florsheim had 311 Company-operated stores worldwide,
represented by 218 Florsheim specialty shoe shops and 93 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. 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 maintains 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 1998. 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. The Company
has opened two new @ease retail locations which it believes appeal to a younger
consumer with a casual product mix offering of Florsheim and non-Florsheim
brands.
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 2,
1999, the Company operated 54 specialty and outlet stores in international
markets and licensed an additional 42 specialty shops to selected partners.
International sales, including exports, were $44.4 million in fiscal 1998, and
were distributed as shown below:
INTERNATIONAL DISTRIBUTION
PERCENTAGE OF TOTAL FISCAL 1998 INTERNATIONAL SALES
Australia ......................... 48 %
Canada ............................ 23
Pacific Rim........................ 10
Europe ............................ 8
Other Exports ..................... 11
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100 %
===
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 2, 1999, the Company operated 38 stores in Australia and New Zealand and
15 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
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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
agreements in markets such as China. During fiscal 1998 Southeast Asian
currencies were devalued relative to the U.S. dollar which had an impact on the
results in fiscal 1998.
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 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 in France and other
large department stores in Europe.
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 International Division also includes licensees and distributors in
India, Japan, Qatar, the Philippines, Saudi Arabia, Venezuela and the United
Arab Emirates.
Note 15 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 are identified 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.
DRESS DRESS CASUAL CASUAL OTHER
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Florsheim Florsheim Florsheim MagneForce
Florsheim Comfortech Florsheim Comfortech Florsheim Comfortech John Deere**
Florsheim Imperial @ease @ease
FLS FLS
Joseph Abboud* Joseph Abboud*
* This is the registered trademark of Joseph Abboud
** This is the registered trademark of Deere and Company
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.
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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.
Joseph 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: This sub-brand was developed in order to offer a quality product at a
value price and to maintain the moderate to high-end brand image associated with
the name Florsheim. This is a traditionally stylled offering that ranges from
dress to dress-casual at price points from $50-$80.
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 $80 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.
Florsheim recently introduced a new golf shoe with magnets called MagneForce.
Retail price points are around $120.
@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 $60
to $80.
Florsheim has entered into non-footwear licensing agreements which include
hosiery, shoe care products and belts and small leather goods. These products
are sold under the Florsheim name through the wholesale distributor network and
at Florsheim stores.
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. In 1998, the production at Cape Girardeau, was 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 1998,
approximately 80% of Florsheim's finished shoe sourcing requirements were
fulfilled outside of the United States. Approximately 54% 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 is 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
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or otherwise, USTR is authorized to take retaliatory action, including the
imposition of restrictions on imports from the particular country into the
United States.
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 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.
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 the process of a significant information technology
upgrade, costing approximately $12.9 million, 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 has completed two of three phases of the upgrade, which include the
financial systems and wholesale systems. The Company anticipates completing the
retail system, which is the third phase of the system upgrade and the Year 2000
project no later than October 1999, The Company is currently developing a
contingency plan for the retail system. Total costs for the system upgrade to
date are approximately $7.9 million.
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 questionnaires 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
7
<PAGE> 9
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 and 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.
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 2, 1999, the Company's U.S. wholesale operations had a backlog
of customer orders amounting to approximately $13.8 million, compared to
approximately $8.2 million, at January 3, 1998, an increase of 68.3%. The
increase was primarily due to the addition of JCPenney, as a major customer, as
well as an increase in dealer channels. The majority of incoming orders are for
"at once" shipments; therefore, the backlog is not necessarily indicative of a
corresponding change in annual sales.
EMPLOYEES
As of January 2, 1999, Florsheim had 2,037 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 include: Florsheim, Florsheim Comfortech, Florsheim Imperial, Florsheim
Comfortech Maintenance Free, MagneForce, 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 14 years.
8
<PAGE> 10
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.
Reliance on Foreign Production
During 1998, approximately 80% of Florsheim's finished shoe sourcing
requirements were fulfilled outside of the United States. Approximately 54% of
total products are 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 66.4% 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
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<PAGE> 11
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. 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.
ITEM 2. PROPERTIES
- ------------------
Florsheim owns or leases the following principal plants, offices and
warehouses:
Floor Owned
Space or
Location Type of Facility (Sq. Ft.) Leased
- -------- ---------------- --------- ------
Chicago, IL.............. Headquarters 98,000 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
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.
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 1998 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.
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<PAGE> 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of March 6, 1999, there were approximately 1,600 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 16 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 January 3, 1998 and January 2, 1999.
A discussion of restrictions on the Company's ability to pay cash
dividends is included in Note 6 to the consolidated financial statements of the
Company included under Item 8 of this Report.
ITEM 6. SELECTED FINANCIAL INFORMATION
(Dollars in thousands, except for per share data)
The following financial data should be read with the consolidated financial
statements and notes thereto included.
<TABLE>
<CAPTION>
=======================================================================================================================
FISCAL YEAR ENDED (1) (2)
------------------------------------------------------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, JANUARY 3, JANUARY 2,
1994 1995 1996 1998 1999
=======================================================================================================================
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATING RESULTS:
Net sales (3) $ 302,001 $ 285,307 $ 244,855 $ 253,056 $ 244,895
Earnings from operations 20,132 6,920 11,408 12,221 7,069
Earnings (loss) before extraordinary item (4) 6,482 (4,846) 1,964 3,607 (559)
Net earnings (loss) (5) 6,482 (4,846) 1,964 (1,435) (559)
=======================================================================================================================
BASIC EARNINGS (LOSS) PER SHARE (6):
Earnings (loss) before extraordinary item N/A $ (0.58) $ 0.24 $ 0.43 $ (0.07)
Net earnings (loss) N/A (0.58) 0.24 (0.17) (0.07)
DILUTED EARNINGS (LOSS) PER SHARE (6):
Earnings(loss) before extraordinary item N/A (0.58) 0.23 0.42 (0.07)
Net earnings (loss) N/A (0.58) 0.23 (0.17) (0.07)
=======================================================================================================================
OTHER INFORMATION:
Dividends paid per share $ - $ - $ - $ - $ -
EBITDA (7) 23,974 11,459 16,283 17,646 15,264
Net cash provided by (used in):
Operating activities 21,662 31,010 13,221 (17,783) (5,092)
Investing activities (8,731) (5,320) 13,991 (3,633) (9,172)
Financing activities (15,185) (25,313) (10,770) 6,920 14,000
Depreciation and amortization 3,842 4,539 4,875 5,425 4,937
Capital expenditures 9,498 5,479 9,424 9,922 10,308
BALANCE SHEET DATA AT PERIOD END:
Working capital $ 141,300 $ 111,922 $ 95,116 $ 94,167 $ 83,452
Property, plant, and equipment, net 21,687 21,742 24,974 27,245 30,981
Total assets 215,270 186,321 185,238 183,646 199,566
Long-term debt, less current maturities 105,533 80,126 69,450 76,912 76,912
Shareholders' equity 60,148 55,068 57,655 54,482 53,347
=======================================================================================================================
NUMBER OF RETAIL STORES AT PERIOD END (8):
U.S. Specialty 233 220 205 200 173
U.S. Outlet 78 90 93 99 84
International 57 53 53 54 54
---------- ---------- ---------- ---------- ------------
Total Stores 368 363 351 353 311
=======================================================================================================================
</TABLE>
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6. SELECTED FINANCIAL INFORMATION (Continued)
Notes to Selected Financial Information:
(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 1994, 1995, and 1996 each represented a 52 week
fiscal year, fiscal 1997 represented a 53 week fiscal year and fiscal
1998 represented a 52 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) Includes sales of the Company's Hy-Test Inc. safety shoe business, which
was sold in March 1996. Net sales of Hy-Test was $36,101, $38,659, and
$6,943 in fiscal 1994, 1995, and 1996, respectively.
(4) Includes $4.1 million gain associated with the sale of the Company's
former corporate headquarters, which was sold in March 1997.
(5) Includes an extraordinary loss of $5.0 million 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.
(6) Earnings (loss) per share data are presented for the full years that the
Company operated during the period as an independent public company.
(7) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, other income and expense, and
non-recurring items. EBITDA is not intended to represent cash flows for
the period nor has it been prescribed as an alternative to earnings from
operations as an indicator of operating performance and it should not be
considered in isolation or as a substitute for measures of performance in
accordance with GAAP. EBITDA is presented solely as supplemental
disclosure because it is frequently used to analyze companies on the
basis of operating performance, leverage, and liquidity. EBITDA as used
by Florsheim may not be comparable to similarly titled measures of other
companies.
(8) Includes 30 U.S. locations to be closed in 1999 as discussed in Note 3 to
the Consolidated Financial Statements
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following commentary should be read in conjunction with the consolidated
financial statements and notes thereto included under Item 8 of this report. All
dollar amounts are presented in thousands.
RESULTS OF OPERATIONS
The Company's fiscal year end is the Saturday closest to December 31. Throughout
this analysis fiscal 1996 refers to the twelve-month period ended December 28,
1996, fiscal 1997 refers to the twelve-month period ended January 3, 1998, and
fiscal 1998 refers to the twelve-month period ended January 2, 1999.
The following tables set forth, for the periods indicated, certain historical
operating data, expressed in thousands of dollars and retail store information:
<TABLE>
<CAPTION>
=================================================================================================================
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, JANUARY 3, JANUARY 2,
(Dollars in thousands) 1996 1998 1999
=================================================================================================================
<S> <C> <C> <C>
Net sales:
U.S. Wholesale $ 72,467 $ 82,413 $ 88,140
U.S. Retail 118,507 120,022 112,355
International (Including exports from U.S.) 46,938 50,621 44,400
=================================================================================================================
Sub-Total $ 237,912 $ 253,056 $ 244,895
Hy-Test (1) 6,943 - -
=================================================================================================================
Total Net Sales $ 244,855 $ 253,056 $ 244,895
=================================================================================================================
Percent change in same store sales (2) 0.3% 3.1% 2.0%
=================================================================================================================
</TABLE>
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<PAGE> 14
(1) Hy- Test, Inc. safety shoe business was sold on March 22, 1996.
(2) 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.
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales for fiscal 1998 were $244,895, a decrease of $8,161, or 3.2%, as
compared to fiscal 1997. The decrease in net sales was primarily the result of
the net effect of store closures in 1998, the fact that fiscal 1998 included 52
weeks compared to 53 weeks in fiscal 1997, and the effect of currency
devaluation's in Australia and Southeast Asia. U.S. Wholesale net sales
increased $5,727, or 6.9%, due to gains from new products, the rollout and
reorders of JC Penney and expansion in department and big box stores. U.S.
Retail net sales decreased $7,667 or 6.4%, as a result of store closings and the
52 week year in fiscal 1998 included one less week compared to 53 weeks in
fiscal 1997. International net sales decreased $6,221 or 12.3%, due to currency
devaluations.
Gross profit for fiscal 1998 was $109,576, a decrease of $11,281 as compared to
fiscal 1997. Fiscal 1998 included charges of $2,132 for costs associated with
the closing of unprofitable retail stores. Excluding the effect of the store
closings, gross profit as a percent of net sales was 45.6% in fiscal 1998,
compared to 47.8% in fiscal 1987. The reduction resulted from the shift in mix
to more wholesale sales, the effects of the lower sales volume and currency
devaluation's.
Selling, general, and administrative expenses, excluding the costs associated
with store closings were $101,378 for fiscal 1998, a decrease of $7,258, or
6.7%, from fiscal 1997. Selling, general, and administrative expenses for fiscal
1998 were 41.4% of net sales, a decrease from 42.9% of net sales for fiscal
1997. The decrease was due to the effects of store closings and cost reduction
programs. The Company has provided for valuation reserves in selling general
and administrative expense against the carrying value of the long lived assets
of certain retail stores of $256 and $400 in fiscal 1998 and fiscal 1997,
respectively. See Note 2 to the Notes to Consolidated Financial Statements.
Earnings from operations for fiscal 1998, were $7,069 compared to $12,221 in
fiscal 1997. Excluding the effects of the costs associated with store closings,
earnings from operations were $10,330 in fiscal 1998, which is compared to
$12,221 in fiscal 1997, a decrease of $1,891. Interest expense for fiscal 1998
was $8,699 as compared to fiscal 1997 amount of $9,130. This decrease is due to
the lower average cost of outstanding debt as a result of the repurchase of the
Senior Notes in May 1997, compared to the cost of borrowings under the Company's
bank credit facility. Other income was $677 in fiscal 1998 compared to $3,742 in
fiscal 1997. Significant items in other income included a gain of $775 related
to the sale of a foreign trademark in fiscal 1998 and the sale of the Company's
former headquarters building in fiscal 1997 which resulted in a gain of $4,133.
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 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. The Company has
provided for valuation reserves in selling, general and administrative expense
against the carrying value of the long lived assets of certain retail stores of
$400 and $500 in fiscal 1997 and fiscal 1996, respectively. See Note 2 to
Notes to Consolidated Financial Statements.
Earnings from operations for fiscal 1997, were $12,221, an increase of $813, or
7.1%, from fiscal 1996. 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 in May
1997, compared to the cost of borrowings under the Company's bank credit
facility. Other income in fiscal 1997 was $3,742
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<PAGE> 15
compared to $1,366 in fiscal 1996. Fiscal 1997 included a gain of $4,133 related
to the sale of the Company's former headquarters building.
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 benefits of $2,813 in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital at January 2, 1999 was $83,452 compared to $94,167 at January 3,
1998, a decrease of $10,715. The decrease in working capital resulted from an
increase in accounts payable and current borrowing under the bank credit
facility, partially offset by a increase in accounts receivable. Capital
expenditures of $10,308 were funded by working capital.
CAPITAL EXPENDITURES
During fiscal 1998, fiscal 1997 and fiscal 1996, capital expenditures totaled
$10,308, $9,922, and $9,424, respectively. During fiscal 1998, approximately 72%
was for management information systems. During fiscal 1997, approximately 62% of
the expenditures were used to open or remodel retail stores and outlets,
Approximately 60% of the 1996 expenditures were related to prepare the Company's
new headquarters office space for occupancy.
FINANCING ARRANGEMENTS
In May 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. Concurrently with the
tender offer, the Company also executed a $110,000, five-year secured revolving
credit facility that replaced its previous $75,000 credit facility. Borrowings
under the new credit facility were used to finance the tender offer for the
Senior Notes. In August 1998, the credit facility was amended, resulting in a
reduction of the credit facility to $91,600. At January 2, 1999, outstanding
borrowings under the credit facility totaled $77,000, of which $18,500 was
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, as amended, provides for borrowings
of up to $91,600 and other extensions of credit based on certain debt-to-EBITDA
ratios and other covenants. The cash borrowings under the credit facility bear
interest at the prime rate plus a factor, currently 1.5 %, or at an adjusted
LIBOR rate plus a factor, currently 2.5 % depending on the type of loan the
Company executes and various covenant ratios.
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.
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 the process of a significant information technology upgrade,
costing approximately $12,900, 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
14
<PAGE> 16
software to resolve the Year 2000 Issue. The Company has competed two of the
three phases of the upgrade, which include the financial systems and the
wholesale and warehouse systems. The Company anticipates completing the retail
system which is the third phase of system upgrade and the Year 2000 project no
later than October, 1999. The Company is currently developing a contingency plan
for the retail system. Total costs for the system upgrade to date are
approximately $7,900.
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 questionnaires 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which is effective for fiscal years beginning after
June 15, 1999. The Company is currently evaluating the prospective impact of
this standard on its operating results and financial condition, and anticipates
it will not have a significant impact on the results and financial conditions of
a company.
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 effects of foreign currency devaluation's relative to the dollar in
both South East Asia and Australia negatively impacted operating results in
fiscal 1998. 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.
EURO CONVERSION
In January 1999, eleven of the member countries of the European Monetary Union
converted from their sovereign currencies to a common currency, the Euro. At
that time, fixed conversion rates between the legacy currencies and the Euro
were set. The legacy currencies will remain legal tender from January 1, 1999,
through July
15
<PAGE> 17
1, 2002. Beginning July 1, 2002, Euro denominated currency will be issued. No
later than July 1, 2002, the participating countries will withdraw bills and
coins so that the legacy currencies will no longer be considered legal tender.
The Company does not expect the conversion to have a material impact on its
operating results or financial condition.
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.
FORWARD LOOKING STATEMENTS
When used in this discussion, the words "believes" and "expects" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, over which the Company has no
control, which could cause actual results to differ materially from those
projected. Readers are cautioned not to place reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligations to republish revised forward-looking statements to reflect events or
circumstances after the date thereof or to reflect the occurrence of
unanticipated events. Readers are also urged to carefully review and consider
the various disclosures made by the Company in this report, as well as the
Company's periodic reports with the Securities Exchange Commission.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to certain market risks, including foreign currency and
interest rates. The Company uses a variety of practices to manage these market
risks. The Company is exposed to potential gains or losses from currency
fluctuations affecting net investments and earnings denominated in foreign
currencies. The Company's primary exposures are to changes in exchange rates for
the U.S. dollar versus the Canadian dollar and the Australian dollar.
The Company's various currency exposures often offset each other, providing a
hedge against currency risk. The Company has not historically entered into
forward contracts to hedge currency risks.
Interest rate risk is managed through a combination of fixed rate and variable
rate debt with varying maturities. All material components of debt are
denominated in U.S. dollars. At January 2, 1999, variable rate long-term debt
was $77 million.
The Company is exposed to credit risk on certain assets, primarily accounts
receivable. The Company provides credit to customers in the ordinary course of
business and performs ongoing credit evaluations. Concentrations of credit risk
with respect to trade receivables are limited due to the large number of
customers comprising the Company customers' base. The Company currently believes
its allowance for doubtful accounts is sufficient to cover customer credit
risks.
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.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
CONSOLIDATED FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets, January 3, 1998 and January 2, 1999. 17
Consolidated Statements of Operations and Comprehensive Earnings for the Fiscal
Year ended December 28, 1996, for the Fiscal Year Ended January 3, 1998, and
for the Fiscal Year Ended January 2, 1999. 18
Consolidated Statements of Cash Flows for the Fiscal Year ended December 28, 1996,
for the Fiscal Year Ended January 3, 1998, and for the Fiscal Year Ended January 2, 1999. 19
Consolidated Statements of Shareholders' Equity for the Fiscal Year Ended December 28,
1996, for the Fiscal Year Ended January 3, 1998, and for the Fiscal Year Ended January 2, 1999. 20
Notes to Consolidated Financial Statements. 21
Independent Auditors' Report 52
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and qualifying accounts 51
</TABLE>
16
<PAGE> 18
FLORSHEIM GROUP INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 3, 1998 AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
===============================================================================================================
JANUARY 3, JANUARY 2,
ASSETS 1998 1999
===============================================================================================================
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,195 $ 6,931
Receivables, less allowances of $1,084 at January 3, 1998
and $1,207 at January 2, 1999 26,594 33,370
Inventories 80,989 79,855
Deferred tax assets, net 3,541 4,719
Prepaid expenses and other current assets 4,254 5,451
===============================================================================================================
Total current assets 122,573 130,326
Property, plant and equipment:
Buildings and improvements 24,859 23,363
Machinery and equipment 23,558 31,848
===============================================================================================================
48,417 55,211
Less: accumulated depreciation (21,172) (24,230)
===============================================================================================================
Net property, plant and equipment 27,245 30,981
Deferred tax assets, net 12,976 12,852
Other assets 20,852 25,407
===============================================================================================================
TOTAL ASSETS $183,646 $ 199,566
===============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
===============================================================================================================
Current liabilities:
Bank credit facility $ 4,500 $ 18,500
Accounts payable 10,398 16,183
Accrued employee compensation 3,471 3,958
Accrued interest expense 1,075 981
Other accrued expenses 8,219 7,120
Income taxes payable 743 132
===============================================================================================================
Total current liabilities 28,406 46,874
Bank credit facility 58,500 58,500
Long-term debt 18,412 18,412
Deferred postretirement benefits other than pension 20,124 19,122
Other long-term liabilities 3,722 3,311
===============================================================================================================
Total liabilities 129,164 146,219
Shareholder's Equity:
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 8,453,651 shares issued and outstanding at
January 2, 1999. 8,413 8,454
Paid-in capital 50,483 50,580
Accumulated other comprehensive income -
translation adjustment (1,621) (2,335)
Accumulated deficit (2,793) (3,352)
===============================================================================================================
Total shareholders' equity 54,482 53,347
===============================================================================================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $183,646 $ 199,566
===============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 19
FLORSHEIM GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998 AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
================================================================================================================
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, JANUARY 3, JANUARY 2,
1996 1998 1999
================================================================================================================
<S> <C> <C> <C>
Net sales $ 244,855 $ 253,056 $ 244,895
Cost of sales 128,082 132,199 133,187
Costs associated with store closings -- -- 2,132
================================================================================================================
Gross profit 116,773 120,857 109,576
Selling, general, and administrative expenses 105,365 108,636 101,378
Selling, general, and administrative expenses
associated with store closings -- -- 1,129
================================================================================================================
Earnings from operations 11,408 12,221 7,069
Interest expense, net 9,989 9,130 8,699
Other income, net 1,366 3,742 677
================================================================================================================
Earnings (loss) before income taxes and extraordinary item 2,785 6,833 (953)
Income tax expense (benefit) 821 3,226 (394)
================================================================================================================
Earnings (loss) before extraordinary item 1,964 3,607 (559)
Extraordinary item (less income tax benefit of $2,813) -- (5,042) --
================================================================================================================
Net earnings (loss) $ 1,964 $ (1,435) $ (559)
Other comprehensive earnings (loss), net of tax:
Foreign currency translation adjustment 623 (1,993) (714)
================================================================================================================
Comprehensive earnings (loss) $ 2,587 $ (3,428) $ (1,273)
================================================================================================================
Basic earnings (loss) per share:
Earnings (loss) before extraordinary item $ 0.24 $ 0.43 $ (0.07)
Extraordinary item -- (0.60) --
Net earnings (loss) 0.24 (0.17) (0.07)
Diluted earnings (loss) per share:
Earnings (loss) before extraordinary item 0.23 0.42 (0.07)
Extraordinary item -- (0.59) --
Net earnings (loss) 0.23 (0.17) (0.07)
Weighted average number of shares outstanding:
Basic 8,346 8,361 8,454
Diluted 8,379 8,567 8,454
================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 20
FLORSHEIM GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998 AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
=========================================================================================================
FISCAL YEAR ENDED
----------------------------------------
DECEMBER 28, JANUARY 3, JANUARY 2,
1996 1998 1999
=========================================================================================================
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 1,964 $ (1,435) $ (559)
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating activities
(excluding assets/liabilities related to the sale of
sale of assets of Hy-Test, Inc.):
Gain on disposal of assets (2,112) (4,682) (102)
Depreciation and amortization 4,875 5,425 4,937
Deferred taxes 144 (490) (1,054)
Extraordinary loss - 5,042 -
Noncash interest and other expense 885 547 431
Decrease (increase) in receivables (284) (163) (6,776)
Decrease (increase) in inventories 348 (7,165) 1,134
Increase in prepaid expenses and other assets (308) (4,481) (6,158)
Increase (decrease) in accounts payable, accrued
interest expense and other accrued expenses 8,072 (11,962) 5,079
Increase (decrease) in income taxes payable (8) 265 (611)
Increase (decrease) in other long-term liabilities (355) 1,316 (1,413)
=========================================================================================================
Net cash provided by (used in) operating activities 13,221 (17,783) (5,092)
=========================================================================================================
Cash flows from investing activities:
Proceeds from sale of assets of Hy-Test. Inc. 23,025 - -
Proceeds from sale of Corporate headquarters building - 6,277 -
Proceeds from disposal of assets 390 12 1,136
Additions to property. plant and equipment (9,424) (9,922) (10,308)
=========================================================================================================
Net cash provided by (used in) investing activities 13,991 (3,633) (9,172)
=========================================================================================================
Cash flows from financing activities:
Proceeds from initial borrowing under bank credit facility - 58,500 -
Borrowings under bank credit facility - 33,700 33,700
Repayments on bank credit facility - (29,200) (19,700)
Repurchase of 1-2-1/4% Senior Notes, including tender
premium and refinancing costs. net of tax - (56,080) -
Net reduction in revolving credit facility (10,676) - -
Net decrease in notes and loans payable (94) - -
=========================================================================================================
Net cash provided by (used in)- financing activities (10,770) 6,920 14,000
=========================================================================================================
Net increase (decrease) in cash and cash equivalents 16,442 (14,496) (264)
Cash and cash equivalents at beginning or period 5,249 21,691 7,195
=========================================================================================================
Cash and cash equivalents at end of period $ 21,691 $ 7,195 $ 6,931
=========================================================================================================
Supplemental disclosure:
Cash payments for income taxes. net $ 693 $ 1,000 $ 1,272
Cash payments for interest 9,328 10,366 8,362
=========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 21
FLORSHEIM GROUP INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998 AND JANUARY 2, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
===========================================================================================================
ACCUMULATED
OTHER
COMMON STOCK COMPREHENSIVE
----------------------- PAID - INCOME -
NUMBER OF IN TRANSLATION ACCUMULATED
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT
===========================================================================================================
<S> <C> <C> <C> <C> <C>
Balance at December 30, 1995 8,346 $ 8,346 $50,295 $ (251) $(3,322)
Net earnings -- -- -- -- 1,964
Foreign currency translation -- -- -- 623 --
===========================================================================================================
Balance at December 28, 1996 8,346 8,346 50,295 372 (1,358)
Net loss -- -- -- -- (1,435)
Foreign currency translation -- -- -- (1,993) --
Exercise of stock options 67 67 188 -- --
===========================================================================================================
Balance at January 3, 1998 8,413 8,413 50,483 (1,621) (2,793)
Net loss -- -- -- -- (559)
Foreign currency translation -- -- -- (714) --
Exercise of stock options 41 41 97 -- --
===========================================================================================================
Balance at January 2, 1999 8,454 $ 8,454 $50,580 $(2,335) $(3,352)
===========================================================================================================
</TABLE>
20
<PAGE> 22
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
(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 DISTRIBUTION
In November 1994, 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. In
connection with the Distribution, Florsheim issued $85,000 in 12-3/4% Senior
Notes due 2002 (Senior Notes) and entered into a bank credit facility.
Florsheim used the proceeds from the Senior Notes and $25,000 from the bank
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, INC.
On March 22, 1996, the Company completed the sale of the assets of its
Hy-Test, Inc., the Company's safety shoe division, including its Kirksville,
Missouri factory, to Wolverine World Wide, Inc., for cash proceeds of
approximately $23,200. A portion of this cash was used to retire the $17,600
of outstanding borrowings under the Company's credit facility. Net sales of
Hy-Test 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.
SALE OF ASSETS OF CORPORATE HEADQUARTERS BUILDING
On March 20, 1997, the Company completed the sale of the corporate
headquarters building located in Chicago, Illinois, for an all cash sale
price of approximately $8,050. Net cash proceeds were approximately $6,000
before income taxes. The net gain on sale of $4,300 is included in other
income.
TENDER OFFER FOR SENIOR NOTES-EXTRAORDINARY ITEM
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 executed a new $110 million,
five-year secured revolving credit facility (bank credit facility) that
replaced the $75 million 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.
RECLASSIFICATIONS
Certain amounts in the Company's historical financial statements have been
reclassified to be consistent with the presentation in the current period.
(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:
21
<PAGE> 23
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
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.
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 1996 and 1998 each represented a 52 week fiscal year.
Fiscal 1997 represented a 53 week fiscal year. For purposes of these
financial statements, fiscal 1996 refers to the 12 month period ended
December 28, 1996, fiscal 1997 refers to the 12 month period ended January
3, 1998, and fiscal 1998 refers to the twelve month period ended January 2,
1999.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent cash and short term, liquid investments
with an original maturity of three months or less.
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. 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.
REVENUE RECOGNITION
The Company recognizes revenue as products are shipped to customers.
ADVERTISING
Advertising costs are expensed as incurred. These expenses were $6,293,
$6,412 and $7,027 in fiscal 1996, 1997 and 1998, respectively.
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 that 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.
22
<PAGE> 24
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
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 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
The Company accounts for its stock options plans in accordance with
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), which 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.
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 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 stockholders' equity.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Standards No. 130, Reporting
Comprehensive Income (SFAS No. 130). This statement establishes standards
for reporting and display of comprehensive income, which includes foreign
currency translation adjustments. SFAS No. 130 requires that an enterprise
classify items of other comprehensive income by their nature in a financial
statement for the period on which they are recognized. Florsheim has chosen
to disclose other comprehensive income in the Consolidated Statements of
Operations. Accumulated other comprehensive income at December 28, 1996,
January 3, 1998 and January 2, 1999 is comprised of only foreign currency
translation adjustments. Prior years have been restated to conform to the
SFAS No. 130 requirements.
EARNINGS PER SHARE
The Company presents basic and diluted earnings per share. Basic earnings
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 earnings 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. Basic and diluted earnings
per share do not include securities in instances where they would be
antidilutive.
The following table provides a reconciliation of the weighted average
shares outstanding used in calculating basic and diluted earnings per
share:
<TABLE>
<CAPTION>
============================================================================
FISCAL YEAR ENDED
------------------------------------
DECEMBER 28, JANUARY 3, JANUARY 2,
1996 1998 1999
============================================================================
<S> <C> <C> <C>
Weighted average shares
outstanding - basic 8,346 8,361 8,454
Assumed exercise of stock options 33 206 -
----------- --------- ---------
Weighted average shares
outstanding - diluted 8,379 8,567 8,454
=========== ========= =========
============================================================================
</TABLE>
23
<PAGE> 25
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
There are no adjustments to earnings before extraordinary item,
extraordinary item, or net earnings.
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
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. The Company
considers stores with operating losses in a consecutive two year period as
potentially impaired. A review is conducted on a store by store basis,
grouped by year of lease expiration, comparing future undiscounted net cash
flows to the carrying value of fixtures and leasehold improvements to test
for impairment. Impairment, when present, is calculated as the difference
between the asset carrying value and the future discounted net cash
flows(fair value).
Pursuant to its review of the retail store operations, the Company has
provided valuation reserves against the carrying value of the long lived
assets of certain retail stores in selling, general and administrative
expenses of $500 in fiscal 1996, $400 in fiscal 1997 and $256 in fiscal
1998.
NON-CASH TRANSACTIONS
During fiscal 1997 and 1998, the Company entered into non-cash transactions
with a third party whereby Florsheim would exchange excess inventory for
advertising and media credits. At January 2, 1999, barter credits of $2,624
are recorded in prepaid expenses and other current assets at a cost that is
consistent with the value of the inventory surrendered. Any differences
between cost and the actual value of the credits is recognized
proportionally as the credits are utilized.
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED/OBTAINED FOR
INTERNAL USE
During 1998, the company adopted the provisions of Statement of Position
98-1 which provides guidance on the capitalization of certain internal
costs as they relate to implementing software being developed or
implemented for internal use. At January 2, 1999, Florsheim capitalized
approximately $1.0 million of internal costs in association with its SAP
software implementation.
(3) STORE CLOSINGS
In the fourth quarter of 1998, the Company recognized restructuring charges
of $3,261 related to the closing of 46 retail locations in 1998, and the
planned closings of 30 locations in 1999. These charges were taken in
connection with the Company's plan to aggressively shut down
non-contributing locations and to liquidate the inventory in place. The
plan for the 1999 stores closings involves a "going-out-of-business"
pricing policy and merchandise presentation in a specified period preceding
the shut down (GOB).
The following table summarizes the costs reflected in the 1998 Consolidated
Statement of Operations. $2,132 is reflected as "cost associated with store
closings" which is principally related to the liquidation of inventory and
$1,129 as non-recurring selling, general, and administrative expenses,
which consist of fixed asset write downs and incremental operating
expenses. A summary of the charges is as follows:
24
<PAGE> 26
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
================================================================================
STORES STORES TO BE
CLOSED IN CLOSED IN
1998 1999 TOTAL
================================================================================
<S> <C> <C> <C>
Fixed asset write downs $ 140 $ 99 $ 239
Store closing expenses 205 685 890
Provision for inventory write down
to net realizable value 94 2,038 2,132
--------- --------- ------
Total effect of restructuring charges $ 439 $ 2,822 $3,261
========= ========= =======
================================================================================
</TABLE>
The fixed asset write-downs are for store fixturing and leasehold
improvements, which will be disposed of or abandoned upon exiting the
locations. Store closing expenses are primarily incremental administrative
and store salaries incurred in connection with the wind-down of store
operations. The inventory writedown is for the adjustment of the carrying
value of store merchandise to the expected net realizable value during the
sale.
(4) INVENTORIES
Inventories are as follows:
<TABLE>
<CAPTION>
================================================================================
JANUARY 3, JANUARY 2,
1998 1999
================================================================================
<S> <C> <C>
Retail merchandise $ 40,531 $39,375
Finished products 30,028 32,621
Work-in-process 997 1,172
Raw materials 9,433 6,687
================================================================================
$ 80,989 $79,855
================================================================================
</TABLE>
(5) LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
================================================================================
JANUARY 3, JANUARY 2,
1998 1999
================================================================================
<S> <C> <C>
12-3/4% Senior Notes due 2002 $ 18,412 $18,412
Credit facility - Long term portion 58,500 58,500
================================================================================
$ 76,912 $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. 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.
See Note 1 for a description of the fiscal 1997 tender offer.
25
<PAGE> 27
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
BANK CREDIT FACILITY
The Company maintains a bank 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 2, 1999,
the outstanding borrowings under the credit facility were $77,000, of which
$18,500 were classified as short term and $58,500 were classified as long
term. Further credit facility borrowings may be made from time to time to
finance future liquidity requirements. At January 3, 1998, the outstanding
borrowings under the credit facility were $63,000, of which $4,500 were
classified as short term and $58,000 were classified as long term. The
credit facility, as amended, provides for borrowings of up to $91,600 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. The company was
in compliance with the covenants as amended. The cash borrowings under the
credit facility bear interest at the prime rate plus a factor, currently 1.
5%, or at an adjusted LIBOR rate plus a factor, currently 2. 5%, depending
on the type of loan the Company executes and various covenant ratios.
The bank credit facility allows for issuance of letters of credit, foreign
currency hedging obligations, and cash borrowing. The bank credit facility
is secured by a first priority lien on 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 2, 1999, there
were $7,004 in letters of credit outstanding.
OTHER DEBT
The Company's Australian subsidiary utilizes a credit facility for working
capital borrowings and issuance of letters of credit. 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. There were no
borrowings or letters of credit outstanding under this facility at January
3, 1998 and January 2, 1999.
(6) CAPITAL STOCK
PREFERRED STOCK
The Company's restated certificate of incorporation includes authorization
to issue up to two million shares of no par value, preferred stock. No
preferred stock has been issued.
COMMON STOCK
The Company's restated certificate of incorporation includes authorization
to issue up to 20 million shares of common stock. As of January 3, 1998,
8,412,901 shares of common stock had been issued and were outstanding. As of
January 2, 1999, 8,453,561 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 2, 1999), 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. At January 2, 1999, the Company was prohibited from
paying dividends under the terms of its bank credit facility. All of the
outstanding shares of common stock are fully paid and nonassessable.
26
<PAGE> 28
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
(7) 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 1996,
1997, and 1998 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 28, 1996, January 3, 1998 and January 2, 1999
would not have been significant.
At January 2 1999, options to purchase 415,000 shares of common stock were
outstanding and 170,250 options were exercisable. Options to purchase 5,000
shares were granted in 1998 and were cancelled prior to January 2, 1999. At
January 3, 1998, options to purchase 555,750 shares of common stock were
outstanding and 54,900 options were exercisable. The per share
weighted-average fair value of stock options granted during 1997, 213,000
options, 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.
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.
Options to purchase 250,00 shares were granted in 1995. 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.
At January 2, 1999, options to purchase 250,000 shares of common stock were
outstanding and 149,998 options were exercisable. At January 3, 1998,
options to purchase 250,000 shares of common stock were outstanding and
100,000 shares were exercisable. No options were granted during 1998, 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") is
intended to encourage and provide opportunities for ownership of Florsheim
Common Stock by those certain outside consultants and advisors (including
endorsers of Company products) of the Company. To date, only selected
endorsers of Company products have been granted options. The Consultants
Plan authorizes grants of options to purchase an aggregate of 100,000
shares of common stock.
27
<PAGE> 29
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
At January 2, 1999, options to purchase 10,000 shares of common stock were
outstanding, and 2,000 were exercisable. No options were granted in 1998
under the Consultants Plan. At January 3, 1998, options to purchase 30,000
shares of common stock were outstanding, and none were 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.
Stock option activity during the following periods is indicated as follows:
<TABLE>
<CAPTION>
================================================================================
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
================================================================================
<S> <C> <C>
Balance at December 30, 1995 435,500 $3.62
Granted 552,000 6.13
Exercised - -
Forfeited (266,500) 3.78
================================================================================
Balance at December 28, 1996 721,000 $5.49
Granted 245,000 7.93
Exercised (73,650) 3.92
Forfeited (56,600) 4.84
================================================================================
Balance at January 3, 1998 835,750 $6.38
Granted 5,000 9.25
Exercised (40,750) 3.31
Forfeited (125,000) 6.60
================================================================================
Balance at January 2, 1999 675,000 $6.54
================================================================================
</TABLE>
The following tables summarize information about fixed price stock
options outstanding and exercisable at January 2, 1999:
<TABLE>
<CAPTION>
=======================================================================================================================
WEIGHTED-
RANGE OF NUMBER AVERAGE REMAINING WEIGHTED- NUMBER WEIGHTED-
EXERCISE OUTSTANDING AT CONTRACTUAL LIFE AVERAGE EXERCISE EXERCISABLE AT AVERAGE EXERCISE
PRICES JANUARY 2, 1999 (IN YEARS) PRICE JANUARY 2, 1999 PRICE
=======================================================================================================================
<S> <C> <C> <C> <C> <C>
$ 2.98 - 4.46 75,000 3.7 3.23 75,000 3.23
$ 4.46 - 5.95 281,083 6.8 5.06 124,549 5.14
$ 5.95 - 7.44 35,000 8.6 6.18 5,250 6.18
$ 7.44 - 8.93 183,583 7.6 7.88 64,899 7.66
$ 8.93 - 10.41 83,334 6.7 10.00 50,000 10.00
$13.39 - 14.88 17,000 8.6 14.88 2,550 14.88
=======================================================================================================================
675,000 322,248
=======================================================================================================================
</TABLE>
28
<PAGE> 30
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
(8) INCOME TAXES
Income tax expense (benefit) was comprised of the following:
<TABLE>
<CAPTION>
================================================================================
FISCAL YEAR ENDED
--------------------------------------
DECEMBER 28, JANUARY 3, JANUARY 2,
1996 1998 1999
================================================================================
<S> <C> <C> <C>
Current:
Federal $ (659) $ (40) $ -
State and local 111 23 47
Foreign 1,225 920 613
================================================================================
677 903 660
Deferred 144 (490) (1,054)
================================================================================
$ 821 $ 413 $ (394)
- --------------------------------------------------------------------------------
</TABLE>
The following table reconciles the difference between the Federal corporate
statutory rate and Florsheim's effective tax rate:
<TABLE>
<CAPTION>
================================================================================
FISCAL YEAR ENDED
-------------------------------------
DECEMBER 28, JANUARY 3, JANUARY 2,
1996 1998 1999
================================================================================
<S> <C> <C> <C>
Federal corporate statutory rate 35.0% 35.0% 35.0%
State and local income taxes, net of
Federal tax benefit 2.6 (1.5) (5.0)
Foreign taxes, including foreign
currency translation effects (11.8) 21.5 10.5
Adjustments for foreign tax credits
and foreign dividend income (14.2) 40.5 13.9
Nontaxable foreign income 17.8 (136.0) (15.0)
Other 0.1 0.1 1.9
================================================================================
Effective income tax rate 29.5% (40.4)% 41.3%
- --------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 31
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
The sources of the tax effects for temporary differences that give rise to
the deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
=====================================================================================================================
JANUARY 3, JANUARY 2,
1998 1999
=====================================================================================================================
<S> <C> <C>
Deferred tax assets:
Fair value adjustment $ 3,354 $ 3,059
Employee postretirement benefits
other than pension 7,446 7,025
Expense accruals 2,518 1,850
Rent abatement 674 625
Intangibles 326 480
Valuation reserves 244 653
Depreciation 1,733 1,777
Inventory costs capitalized 772 632
NOL carry forwards 3,069 3,923
Foreign tax credits 3,848 4,647
Barter credits - 272
Restructuring reserves - 988
=====================================================================================================================
Total gross deferred tax assets 23,984 25,931
=====================================================================================================================
Deferred tax liabilities:
Employee benefit plans (7,467) (8,406)
Other - 46
=====================================================================================================================
Total deferred tax liabilities (7,467) (8,360)
=====================================================================================================================
Net deferred tax assets $ 16,517 $ 17,571
=====================================================================================================================
</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 from future operations
to realize the benefits of the deferred tax assets. At January 2, 1999, the
Company had net operating loss carryforwards for federal income tax
purposes through 2012, and foreign tax credit carryforwards through 2002.
(9) EMPLOYEE BENEFIT PLANS
Florsheim maintains non-contributory defined benefit pension plans covering
the majority of its employees and retirees. 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. It is Florsheim's practice to fund pension
costs to the extent that such costs are tax deductible and in accordance
with ERISA. The assets of the various plans include corporate equities,
government securities, corporate debt securities and insurance contracts.
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 third-party administrators and
insurance companies.
30
<PAGE> 32
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
Information for the Company's pension plans and postretirement plans is
shown in the following schedule:
<TABLE>
<CAPTION>
=============================================================================================================================
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------------- ---------------------------
1997 1998 1997 1998
=============================================================================================================================
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 79,621 $ 78,154 $ 16,241 $ 15,507
Service cost 887 946 211 117
Interest cost 5,617 5,647 1,105 905
Actuarial (gain)/loss (1,435) 7,155 (836) (1,553)
Benefits paid (6,536) (6,641) (1,214) (1,741)
-------- --------- -------- ---------
Benefit obligation at end of year $ 78,154 $ 85,261 $ 15,507 $13,235
======== ========= ======== =========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 98,953 $ 108,161 $ 3,926 $ 3,957
Actual return on plan assets 15,683 15,915 277 117
Company contributions 62 144 968 1,262
Benefits paid from plan assets (6,537) (6,641) (1,214) (1,740)
-------- --------- -------- ---------
Fair value of plan assets at end of year $108,161 $ 117,579 $ 3,957 $ 3,596
======== ========= ======== =========
Funded status of plan $ 30,007 $ 32,317 $(11,549) $ (9,639)
Unrecognized net gain (13,434) (12,783) (8,746) (9,560)
Unrecognized prior service cost 4,861 4,483 (978) (873)
-------- --------- -------- ---------
Prepaid (accrued) benefit cost $ 21,434 $ 24,017 $(21,273) $ (20,072)
======== ========= ======== =========
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET
Prepaid benefit cost $ 21,448 $ 24,029 $(21,273) $ (20,072)
Accrued benefit liability (199) (171) - -
Accumulated other comprehensive income 185 158 - -
Fresh start adjustment (9,802) (9,131) - -
-------- --------- -------- ---------
Net amount recognized $ 11,632 $ 14,885 $(21,273) $ (20,072)
======== ========= ======== =========
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 33
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
=======================================================================================================================
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------------------------- --------------------------------------
FISCAL YEAR ENDED FISCAL YEAR ENDED
-------------------------------------- --------------------------------------
DECEMBER 28, JANUARY 3, JANUARY 2, DECEMBER 28, JANUARY 3, JANUARY 2,
COMPONENTS OF NET PERIODIC EXPENSE 1996 1998 1999 1996 1998 1999
=======================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 1,305 $ 887 $ 946 $ 343 $ 210 $ 117
Interest cost 5,793 5,617 5,647 1,176 1,105 905
Expected return on assets (10,491) (8,610) (9,441) (309) (300) (302)
Amortization of prior service cost 2,672 378 378 (105) (105) (105)
Amortization of actuarial loss - 38 30 (320) (432) (555)
Fresh start amortization (672) (672) (672) - - -
-------- ------- -------- ------- ------- -------
Net periodic benefit expense/(income) $ (1,393) $(2,362) $ (3,112) $ 785 $ 478 $ 60
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate for obligations 7.25% 7.25% 6.75% 7.25% 7.25% 6.75%
Discount rate for expense 7.75 7.75 7.25 7.75 7.75 7.25
Expected return rate on plan assets 9.00 9.00 9.00 8.00 8.00 8.00
Rate of compensation increase 4.50 4.00 4.00 - - -
Health care cost trend rate - - - 10.00 9.00 8.00
=======================================================================================================================
</TABLE>
For postretirement benefit plans, Florsheim assumed 7.0% annual rate of
increase in the per capita costs of covered health care benefits (the
health care cost trend rate) for 1999, and 6.0% in 2000 and thereafter. A
one percent increase in the health care cost trend rate would result in an
increase in Florsheim's accumulated postretirement benefit obligation as of
January 2, 1999 by $22 and the interest and services cost by $140 for the
year then ended. A decrease of 1% would result in decreases of $20 and
$131, respectively.
Florsheim has Supplemental Pension Plans in place with an accumulated
obligation in excess of plan assets, which are reflected in the prepaid
pension cost above on a net basis. In the Consolidated Balance Sheet they
are reported in the Other Liabilities section. These plans cover certain
executives of the Company and employees covered under pre-ERISA
regulations. For the years ended January 3, 1998 and January 2, 1999, the
Projected Benefit Obligation is $1,239 and $1,362; the Accumulated Benefit
Obligation is $1,154 and $1,205, there are no assets in the plan.
The Company maintains a 401(K) account that allows employees to contribute
a portion of their pre-tax and/or after tax income in accordance with
specified guidelines. Florsheim matches a percentage of employee
contributions up to certain limits. Florsheim participated during fiscal
years 1996 through 1998. Florsheim's cost for this plan for fiscal 1996,
1997, and 1998 was $164, $143, and $109 respectively.
(10) 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:
32
<PAGE> 34
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
<TABLE>
<CAPTION>
================================================================================
FISCAL YEAR ENDED
------------------------------------
DECEMBER 28, JANUARY 3, JANUARY 2,
1996 1998 1999
================================================================================
<S> <C> <C> <C>
Basic rentals $ 15,852 $ 16,604 $ 21,087
Contingent rentals 6,469 6,540 191
================================================================================
22,321 23,144 21,278
Less: sublease rentals 24 - -
================================================================================
22,297 23,144 21,278
================================================================================
</TABLE>
Minimum future annual rental commitments under non-cancelable operating
leases in each of the five fiscal years 1999 through 2003 are $17,250,
$14,760, $12,803, $11,247 and $9,736 and in aggregate for all lease
agreements, $95,812 through the end of the lease terms. At January 2, 1999,
Furniture Brands International, Inc. guaranteed future base operating lease
payments on behalf of Florsheim of approximately $13,300, exclusive of
related operating expenses.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
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>
================================================================================
JANUARY 3, 1998 JANUARY 2, 1999
--------------------- --------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
================================================================================
<S> <C> <C> <C> <C>
12-3/4% Senior Notes due 2002 $18,412 $19,885 $18,412 $19,448
Bank Credit Facility 58,500 58,500 58,500 58,500
================================================================================
</TABLE>
(12) TRANSACTIONS WITH AFFILIATES
In 1994, 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 1996, 1997, and 1998.
(13) 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.
(14) OTHER FINANCIAL DATA
Items included in other assets are as follows:
<TABLE>
<CAPTION>
================================================================================
JANUARY 3, JANUARY 2,
1998 1999
================================================================================
<S> <C> <C>
Prepaid pension $12,785 $16,091
Investment in unconsolidated subsidiaries 4,271 4,389
Unamortized debt 1,519 1,058
Other 2,277 3,869
================================================================================
Total other assets $20,852 $25,407
================================================================================
</TABLE>
33
<PAGE> 35
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
Items included in other accrued expenses are as follows:
<TABLE>
<CAPTION>
================================================================================
JANUARY 3, JANUARY 2,
1998 1999
================================================================================
<S> <C> <C>
Taxes-general $ 244 $ 295
Postretirement benefits other than pensions 1,150 950
Group insurance 1,229 711
Legal/other contingencies 2,203 2,722
Miscellaneous 3,393 2,442
================================================================================
Total other accrued expenses $ 8,219 $ 7,120
================================================================================
</TABLE>
(15) BUSINESS SEGMENTS
Effective for 1998 reporting the company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information (SFAS No. 131).
SFAS No. 131 establishes standards for reporting information about
operating segments, products and services, geographic areas and major
customers. The presentation of segments information reflects the manner in
which management organizes segments for making operating decisions and
assessing performance. Prior year amounts have been restated to conform to
the current presentation format. Under the provisions of the new standard,
Florsheim has three current reportable segments: U.S. Wholesale, U.S.
Retail and International. In 1996, the Company also had Hytest as a
reportable segment. U. S. Wholesale distributes footwear to large national
retailers, department stores, independent shoe stores and to Company
operated specialty and outlet stores. U.S. Wholesale also includes certain
corporate expenses and assets which are not charged to other reportable
segments. U. S. Retail consists of specialty retail shoe shops and outlet
stores. International consists of wholesale and retail operations in
Australia, Canada, the Pacific Rim, Europe and export business.
The Company's reportable segments are organized according to the markets,
which they serve. The segment disclosures are on a basis consistent with
internal management reporting. Sales of product from U.S. Wholesale to U.S.
Retail and International include a standard mark-up, which is eliminated
in consolidation. The cost of certain corporate functions are charged to
the segments, however no allocation of debt or income taxes is made to the
individual segments. The accounting policies of the segments are the same
as those described in the summary of significant accounting policies.
34
<PAGE> 36
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
Operating segment information is as follows:
================================================================================
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED
---------------------------------------- ---------------------------------------
DECEMBER 28, JANUARY 3, JANUARY 2, DECEMBER 28, JANUARY 3, JANUARY 2,
1996 1998 1999 1996 1998 1999
----------- ----------- ----------- ---------- ---------- ----------
NET SALES EARNINGS FROM OPERATIONS
---------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Wholesale $ 72,467 $ 82,413 $ 88,140 $ 7,859 $ 13,676 $ 13,829
U.S. Retail 118,507 120,022 112,355 1,507 (4,594) (8,703)(1)
International 46,938 50,621 44,400 2,540 3,139 1,943
Hytest 6,943 - - (498) - -
----------- ----------- ----------- ---------- ---------- ----------
$ 244,855 $ 253,056 $ 244,895 $ 11,408 $ 12,221 $ 7,069
=========== =========== =========== ========== ========== ==========
DEPRECIATION AND AMORTIZATION ADDITIONS TO PROPERTY, PLANT & EQUIPMENT
---------------------------------------- ----------------------------------------
U.S. Wholesale $ 670 $ 1,310 $ 1,109 $ 6,703 $ 3,476 $ 7,805
U.S. Retail 3,306 3,359 3,079 1,691 5,851 1,825
International 861 756 749 977 595 678
Hytest 38 - - 53 - -
----------- ----------- ----------- ---------- ---------- ----------
$ 4,875 $ 5,425 $ 4,937 $ 9,424 $ 9,922 $ 10,308
=========== =========== =========== ========== ========== ==========
TOTAL ASSETS
----------------------------------------
U.S. Wholesale $ 71,221 $ 77,111 $ 105,459
U.S. Retail 88,152 82,720 71,544
International 25,865 23,815 22,563
----------- ----------- -----------
$ 185,238 $ 183,646 $ 199,566
=========== =========== ===========
================================================================================
</TABLE>
(1) Includes charge of $3,261 for retail store closings
Summary geographic information is as follows:
<TABLE>
<CAPTION>
=================================================================================================
FISCAL YEAR ENDED FISCAL YEAR ENDED
-------------------------------------- ------------------------------------
DECEMBER 28, JANUARY 3, JANUARY 2, DECEMBER 28, JANUARY 3, JANUARY 2,
1996 1998 1999 1996 1998 1999
=================================================================================================
NET SALES TOTAL ASSETS
-------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 197,917 $ 202,435 $ 200,495 $ 159,373 $ 159,831 $ 177,003
Other 46,938 50,621 44,400 25,865 23,815 22,563
--------- --------- --------- ---------- ---------- ---------
Total $ 244,855 $ 253,056 $ 244,895 $ 185,238 $ 183,646 $ 199,566
========= ========= ========= ========== ========== =========
=================================================================================================
</TABLE>
35
<PAGE> 37
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
==============================================================================
(16) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
======================================================================================================================
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
======================================================================================================================
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED JANUARY 3, 1998
Net sales $ 59,183 $ 64,215 $ 60,177 $ 69,470
Gross profit 29,740 30,310 28,236 32,571
Earnings from operations 7,918 2,870 1,921 (488)
Earnings (loss) before extraordinary item 3,465 424 (211) (71)
Extraordinary item -- (5,042) -- --
Net earnings (loss) 3,465 (4,618) (211) (71)
Common stock price
range (high-low) $ 8.50-5.63 $13.38-7.75 $17.75-9.44 $12.50-6.00
Common stock price
at end of quarter $ 8.50 $ 12.75 $ 12.13 $ 6.44
Basic Earnings per share:
Earnings (loss) before extraordinary item $ 0.42 $ 0.05 $ (0.03) $ (0.01)
Extraordinary item -- (0.60) -- --
Net earnings (loss) 0.42 (0.55) (0.03) (0.01)
Weighted average number of
common shares outstanding 8,346 8,346 8,346 8,570
Diluted Earnings per share:
Earnings (loss) before extraordinary item $ 0.41 $ 0.05 $ (0.03) $ (0.01)
Extraordinary item -- (0.59) -- --
Net earnings (loss) 0.41 (0.54) (0.03) (0.01)
Weighted average number of
common shares outstanding 8,482 8,588 8,375 8,570
======================================================================================================================
FISCAL YEAR ENDED JANUARY 2, 1999
Net sales $ 58,670 $ 61,812 $ 60,258 $ 64,155
Gross profit 27,784 28,650 27,472 25,670
Earnings from operations 2,886 3,194 3,237 (2,248)
Net earnings (loss) 526 598 563 (2,246)
Common stock price
range (high-low) $10.75-6.31 $11.00-7.88 $ 9.75-6.00 $ 8.00-4.38
8.00 - 4.318
Common stock price
at end of quarter $ 8.75 $ 9.00 $ 6.50 $ 4.75
Basic Earnings per share:
Net earnings(loss) 0.06 0.07 0.07 (0.27)
Weighted average number of
common shares outstanding 8,413 8,413 8,413 8,428
Diluted Earnings per share:
Net earnings (loss) 0.06 0.07 0.07 (0.27)
Weighted average number of
common shares outstanding 8,573 8,588 8,612 8,428
======================================================================================================================
</TABLE>
36
<PAGE> 38
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
(17) 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. Included in this process are
assessments of the preparedness of suppliers, service providers and
customers. In addition, the Company is investing in technology to
significantly improve its management information systems, costing
approximately $12,900, which is being capitalized during 1997, 1998 and
1999. The Year 2000 issue is being addressed within this upgrade. Total
costs to date are approximately $7,900. The Company believes that the Year
2000 issue will not pose significant operational problems for its internal
computer systems.
(18) 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 fulling and
unconditionally guaranteed (subject only to limitations imposed by laws
relating to fraudulent transfer and conveyance), 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 January 3, 1998 and
January 2, 1999 and for the fiscal years ended December 28, 1996,
January 3, 1998, and January2, 1999 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.
37
<PAGE> 39
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<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
Investment in subsidiaries 40,027 - - (40,027) -
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $178,406 $ 25,624 $23,797 $(44,181) $183,646
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Bank 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
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>
38
<PAGE> 40
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
==============================================================================================================================
CONDENSED CONSOLIDATING BALANCE SHEET
JANUARY 2, 1999
- ------------------------------------------------------------------------------------------------------------------------------
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Current Assets
Cash and cash
equivalents $ 3,030 $ 1,047 $ 2,854 $ - $ 6,931
Receivables 30,280 169 5,372 (2,451) 33,370
Inventories 52,483 16,848 10,524 79,855
Prepaid expenses and
other current assets 7,811 746 2,225 (612) 10,170
- ----------------------------------------------------------------------------------------------------------------------------
Total current assets 93,604 18,810 20,975 (3,063) 130,326
Net property, plant and
equipment 24,524 4,101 2,356 - 30,981
Other assets 39,550 (1,343) 52 - 38,259
Investment in subsidiaries 37,210 - (37,210)
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $194,888 $21,568 $23,383 $(40,273) $199,566
- ----------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Bank credit facility $ 18,500 $ - $ - $ - $ 18,500
Accounts payable 17,970 194 3,008 (2,451) 18,721
Accrued expenses
and other current
liabilities 5,726 1,244 2,683 - 9,653
- ----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 42,196 1,438 5,691 (2,451) 46,874
Lon-term debt, less
current maturities 76,912 - - - 76,912
Deferred postretirement
benefits 19,122 - - - 19,122
Other long-term liabilities 3,311 - 612 (612) 3,311
Shareholders' equity 53,347 20,130 17,080 (37,210) 53,347
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $194,888 $21,568 $23,383 $(40,273) $199,566
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 41
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<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>
40
<PAGE> 42
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
==============================================================================================================================
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
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
- ----------------------------------------------------------------------------------------------------------------------------
Earnings from operations 10,412 (1,318) 3,127 - 12,221
Interest expense 9,130 - - - 9,130
Equity earnings of subsidiaries,
net of tax 1,309 - - (1,309) -
Other income (expense), net 3,884 - (142) - 3,742
- ----------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income
tax expense 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 ($5,812) (5,042) (5,042)
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (1,435) $ (851) $ 2,160 $(1,309) $ (1,435)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 43
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
===================================================================================================================
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED JANUARY 2, 1999
===================================================================================================================
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
===================================================================================================================
<S> <C> <C> <C> <C> <C>
Net sales $183,167 $45,780 $39,975 $(24,027) $244,895
Cost of sales 108,554 26,613 24,179 (24,027) 135,319
==================================================================================================================
Gross profit 74,613 19,167 15,796 - 109,576
Selling, general, and
administrative expenses 65,030 23,620 13,857 - 102,507
==================================================================================================================
Earnings from operations 9,583 (4,453) 1,939 - 7,069
Interest expense 8,674 (1) 26 - 8,699
Equity earnings of subsidiaries, -
net of tax (2,817) - - 2,817 -
Other income (expense), net 562 - 115 - 677
==================================================================================================================
Earnings (loss) before income -
tax expense (1,346) (4,452) 2,028 2,817 (953)
Income tax expense (benefit) (787) 9 384 - (394)
==================================================================================================================
Net earnings (loss) $ (559) $(4,461) $ 1,644 $ 2,817 $ (559)
==================================================================================================================
</TABLE>
42
<PAGE> 44
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
==================================================================================================================
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
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 asserts/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 (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 changes in notes
and loans payable - - (94) - (94)
Payment of long-term debt (10,676) - - - (10,676)
=================================================================================================================
Net cash provide 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>
43
<PAGE> 45
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
=====================================================================================================================
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
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 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
re financing costs, net of tax (56,080) - - - (56,080)
===================================================================================================================
Net cash provide by (used in)
financing activities: 4,927 (522) (2,877) 5,392 6,920
===================================================================================================================
Net increase (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>
44
<PAGE> 46
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 1996, JANUARY 3, 1998, AND JANUARY 2, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
=====================================================================================================================
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
FOR THE FISCAL YEAR ENDED JANUARY 2, 1999
=====================================================================================================================
GUARANTOR NONGUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
=====================================================================================================================
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities: $ (6,768) $ 1,291 $ 385 $ -0- $ (5,092)
=====================================================================================================================
Cash flows from investing
activities:
Proceeds from the
disposal of assets 1,136 - - - 1,136
Additions to property,
plant, and equipment (9,013) (617) (678) - (10,308)
=====================================================================================================================
Net used in
investing activities: (7,877) (617) (678) - (9,172)
=====================================================================================================================
Net cash from financing
activities:
Net capital contribution
from (to) Parent (714) (1) 715 -0- -
Net borrowings under revolving
credit facility 14,000 - - - 14,000
=====================================================================================================================
Net cash provided by (used in)
financing activities: 13,286 (1) 715 -0- 14,000
=====================================================================================================================
Net increase (decrease) in cash
and cash equivalents (1,359) 673 422 - (264)
Cash and cash equivalents
at beginning of period 4,389 374 2,432 - 7,195
=====================================================================================================================
Cash and cash equivalents
at end of period $ 3,030 $ 1,047 $ 2,854 $ - $ 6,931
=====================================================================================================================
</TABLE>
Item 9. Changes in and Disagreements with Independent Accountants on Accounting
and Financial Disclosure.
None
45
<PAGE> 47
Part III
Item 10. Directors and Executive Officers of the Registrant
The sections entitled "Election of Directors-Nominees" and "Section 16(a)
Beneficial Ownership Reporting Compliance" to be included in the Company's
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 25, 1999 are incorporated herein by reference.
The names, ages, and positions of the Executive Officers of the Company
are:
NAME AGE POSITION
- ---- --- --------
Charles J. Campbell 54 Chairman of the Board of Directors, President
and Chief Executive Officer
Richard J. Anglin 43 Vice President, Chief Financial Officer
Thomas W. Joseph 48 Vice President, President, International Division
L. David Sanguinetti 55 Executive Vice President, Chief Operating Officer
and President, Retail Division
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 and women's clothing. In November 1995, Mark Shale filed a
petition for relief under Chapter 11 of the Federal Bankruptcy Code. 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 and 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), and 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.
46
<PAGE> 48
Item 11. Executive Compensation
The sections entitled "Election of Directors - Compensation and Organization of
Board of Directors," "Executive Compensation," and "Comparative Stock and
Performance Graph" to be included in the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held on May 25, 1999, are
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The section entitled "Security Ownership" to be included in the Company's
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 25, 1999, is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The sections entitled "Executive Compensation - Compensation Committee
Interlocks and Insider Participation," and "Certain Transactions" to be
included in the Company's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 25, 1999, are incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) List of documents filed as part of this report:
1. Consolidated Balance Sheets as of January 3, 1998 and January 2, 1999.
Consolidated Statements of Operations and Comprehensive Earnings for
the Fiscal Years Ended December 28, 1996, January 3, 1998, and January
2, 1999.
Consolidated Statements of Cash Flows for the Fiscal Years Ended
December 28, 1996, January 3, 1998, and January 2, 1999.
Consolidated Statements of Shareholders' Equity for the Fiscal Years
Ended December 28, 1996, January 3, 1998, and January 2, 1999.
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.
47
<PAGE> 49
3. Exhibits:
Exhibit
Number Description
------ -----------
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 (now named First Union National
Bank), 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).
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.
(Incorporated by reference to Exhibit 4.7 as filed with
the Florsheim Group Inc. Annual report on Form 10-K the
year ended January 3, 1998.
4.8 First Amendment, dated April 22, 1998, to the Credit
Agreement, dated as of May 9, 1997, among the Company, the
Banks party thereto from time to time, and Bankers Trust,
as agent. (Incorporated by reference to Exhibit 4.1 as
filed with the Florsheim Group Inc. Quarterly Report for
the Quarterly Period Ended April 4, 1998).
4.9 Second Amendment, dated as of August 19, 1998, to the
Credit Agreement dated as of May 9, 1997, among the
Company, the Banks party thereto from time to time and
Bankers Trust Company as agent. (Incorporated by reference
to Exhibit 4.1 as filed with the Florsheim Group Inc.
Quarterly Report for the Quarterly Period Ended October 3,
1998.
4.10 Third Amendment, dated as of February 4, 1999 to the
Credit Agreement, dated as of May 9, 1999, among the
Company, the Banks party thereto from time to time, 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).
48
<PAGE> 50
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).
10.15 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).
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 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).
10.18 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).
10.19 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).
49
<PAGE> 51
10.20 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).
10.21 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).
21 Subsidiaries of the Company.
23 Consent of KPMG LLP.
27 Financial Data Schedule
(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 2, 1999.
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.
50
<PAGE> 52
SCHEDULE II
-----------
FLORSHEIM GROUP INC.
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
=====================================================================================================
CHARGED OTHER
BALANCE AT TO COSTS CHARGED CHARGES
FISCAL BEGINNING AND TO OTHER ADD(DEDUCT) BALANCE AT
YEAR DESCRIPTION OF YEAR EXPENSES ACCOUNT (1) END OF YEAR
=====================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1996 Allowance for doubtful accounts
and cash discounts $2,284 $2,383 $ - $(2,962) $1,705
1997 Allowance for doubtful accounts
and cash discounts 1,705 1,734 - (2,355) 1,084
1998 Allowance for doubtful accounts
and cash discounts 1,084 1,288 - (1,165) 1,207
=====================================================================================================
</TABLE>
(1) Includes write-offs of bad debts and cash discounts allowed.
51
<PAGE> 53
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 2, 1999 and January 3, 1998 and the
consolidated statements of operations and comprehensive earnings, cash flows,
and shareholders' equity for the years ended January 2, 1999, January 3, 1998,
and December 28, 1996. 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 2, 1999 and January 3, 1998 and the results of
their operations and their cash flows for the years ended January 2, 1999,
January 3, 1998, and December 29, 1996 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 respects, the
information set forth therein.
KPMG LLP
Chicago, Illinois
February 15, 1999
52
<PAGE> 54
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 30, 1999
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 30, 1999.
Signature Title
--------- -----
/s/ Charles J. Campbell Chairman of the Board of Directors,
- -------------------------------- President, Chief Executive Officer
(Charles J. Campbell)
/s/ Adam M. Aron Director
- --------------------------------
(Adam M. Aron)
Director
- --------------------------------
(Bernard Attal)
Director
- --------------------------------
(Robert H. Falk)
/s/ Michael S. Gross Director
- --------------------------------
(Michael S. Gross)
Director
- --------------------------------
(John J. Hannan)
/s/ Joshua J. Harris Director
- --------------------------------
(Joshua J. Harris)
/s/ John H. Kissick Director
- --------------------------------
(John H. Kissick)
Director
- --------------------------------
(Ronald J. Mueller)
/s/ Michael D. Weiner Director
- --------------------------------
(Michael D. Weiner)
/s/ Richard J. Anglin Vice President,
- -------------------------------- Chief Financial Officer
(Richard J. Anglin) (Principal Financial Officer)
/s/ F. Terrence Blanchard Vice President, Controller
- -------------------------------- (Principal Accounting Officer)
(F. Terrence Blanchard)
53
<PAGE> 1
Ex. 4.10
THIRD AMENDMENT TO CREDIT AGREEMENT
THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of
February 4, 1999, 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 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. Section 9.08 of the Credit Agreement is hereby amended by (i) deleting
the amount "$17,750,000" appearing opposite the date December 31, 1998 in the
table therein and by inserting in lieu thereof the amount "$114,600,000" and
(ii) deleting the amount "$19,000,000" appearing opposite the date March 31,
1999 in the table therein and by inserting in lieu thereof the amount
$115,000,000".
2. Section 9.09 of the Credit Agreement is hereby amended by (1) deleting
the ratio "5.00:1.00" appearing opposite the date December 31, 1998 in the
table therein and by inserting in lieu thereof the ratio "6.92:1.00" and (ii)
deleting the ratio "4.25:1.00" appearing opposite the date March 31, 1999 in the
table therein and by inserting in lieu thereof the ratio "6.77:1.00".
3. Section 9.10 of the Credit Agreement is hereby amended by (i) deleting
the ratio "2.05:1.00" appearing opposite the date December 31, 1998 in the table
therein and by inserting in lieu thereof the ratio "1.70:1.00" and (ii) deleting
the ratio "2.30:1.00" appearing opposite the date March 31, 1999 in the table
therein and by inserting in lieu thereof the ratio 1.62:1.00".
4. The definition of "Applicable Commitment Commission Percentage" in
Section 11.01 of the Credit Agreement is hereby amended by:
(i) inserting the text "but less than or equal to 4.50:1.00" immediately
following the text "Greater than 4.25:1.00" appearing in the second table
therein;
54
<PAGE> 2
(ii) inserting the following text under each of the five columns in the
second table appearing therein immediately before the provisio:
"8 Greater than 4.50:1.00.50% 1.50% 3.00%"; and
(iii) deleting, the text "Level 7" in the proviso and inserting in lieu
thereof the text "Level 8".
5. In order to induce the undersigned Banks to enter into this
Amendment, the Borrower hereby represents and warrants that (i) the
representations and warranties contained in the Credit Agreement are true and
correct in all material respects on and as of the Third Amendment Effective Date
(as defined in Section 9 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 of Default on
the Third Amendment Effective Date, in each case after giving effect to this
Amendment.
6. 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.
7. 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.
8. 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.
9. This Amendment shall become effective on the date (the "Third
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.
10. From and after the Third 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.
11. The Borrower hereby covenants and agrees that, so long as the Third
Amendment Effective Date occurs, it shall pay each Bank which executes and
delivers to the Agent a counterpart hereof by the later to occur of (x) the
close of business on the Third Amendment Effective Date or (y) 5:00 p.m. (New
York time) on Friday, February 5, 1999, a cash fee in an amount equal to 25
basis points (.25%) of an amount equal to the Revolving Loan Commitment of such
Bank,' in each case as same is in effect on the Third Amendment Effective
55
<PAGE> 3
Date. All fees payable pursuant to this Section 11 shall be paid by the
Borrower to the Agent for distribution to the Banks not later than the first
Business Day following the Third Amendment Effective Date.
* * *
56
<PAGE> 4
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: ANTHONY LOGRIPPO
--------------------------
Name: Anthony LoGrippo
Title: Vice President
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: STEVEN KESSLER
--------------------------
Name: Steven K. Kessler
Title: Senior Vice President
CREDIT AGRICOLE INDOSUEZ
By:
--------------------------
Name:
Title:
By:
--------------------------
Name:
Title:
57
<PAGE> 5
CREDIT LYONNAIS NEW YORK BRANCH
By: ATTILA KOC
-------------------------
Name: Attila Koc
Title: Senior Vice President
HARRIS TRUST AND SAVINGS BANK
By: SCOTT F. GEIK
-------------------------
Name: Scott F. Geik
Title: Managing Director
HELLER FINANCIAL, INC.
By: LINDA W. WOLF
-------------------------
Name: Linda W. Wolf
Title: Senior Vice President
LA SALLE NATIONAL BANK
By: STEVEN M. MARKS
-------------------------
Name: Steven M. Marks
Title: First Vice President
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
58
<PAGE> 6
TRANSAMERICA BUSINESS CREDIT
CORPORATION
By: PERRY VAVOULES
-----------------------
Name: Perry Vavoules
Title: Senior Vice President
59
<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 Co., 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
60
<PAGE> 1
Exhibit 23
CONSENT OF KPMG LLP
The Board of Directors
Florsheim Group Inc.:
We consent to the use of our report dated February 15, 1999, on the consolidated
balance sheets of Florsheim Group Inc. and subsidiaries as of January 2, 1999
and January 3, 1998, the related consolidated statements of operations and
comprehensive income, cash flows, and shareholders' equity for the years ended
January 2, 1999, January 3, 1998, and December 28, 1996 and related financial
statement schedule, in the January 2, 1999 annual report on Form 10-K of
Florsheim Group Inc.
KPMG LLP
Chicago, Illinois
March 30, 1999
61
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JAN-02-1999
<EXCHANGE-RATE> 1
<CASH> 6,931
<SECURITIES> 0
<RECEIVABLES> 33,370
<ALLOWANCES> 1,046
<INVENTORY> 79,855
<CURRENT-ASSETS> 130,326
<PP&E> 55,211
<DEPRECIATION> 24,230
<TOTAL-ASSETS> 199,566
<CURRENT-LIABILITIES> 46,874
<BONDS> 76,912
0
0
<COMMON> 8,454
<OTHER-SE> 44,893
<TOTAL-LIABILITY-AND-EQUITY> 199,566
<SALES> 244,895
<TOTAL-REVENUES> 244,895
<CGS> 135,319
<TOTAL-COSTS> 102,507
<OTHER-EXPENSES> (677)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,699
<INCOME-PRETAX> (953)
<INCOME-TAX> (394)
<INCOME-CONTINUING> (559)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (559)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
