FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994 or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number I-91
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INTERCO INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 43-0337683
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 South Hanley Road, St. Louis, Missouri 63105
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (314) 863-1100
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Former name, former address and former fiscal year, if changed
since last report
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 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 X No
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the close of the period covered by
this report.
50,061,885 Shares
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PART I FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Financial Statements for the quarter ended September
30, 1994.
Consolidated Balance Sheet
Consolidated Statement of Operations:
Three Months Ended September 30, 1994
Three Months Ended September 30, 1993
Nine Months Ended September 30, 1994
Nine Months Ended September 30, 1993
Consolidated Statement of Cash Flows:
Nine Months Ended September 30, 1994
Nine Months Ended September 30, 1993
Notes to Consolidated Financial Statements
Separate financial statements and other disclosures with respect
to the Company's subsidiaries are omitted as such separate
financial statements and other disclosures are not deemed
material to investors.
The financial statements are unaudited, but include all
adjustments (consisting of normal recurring adjustments) which
the management of the Company considers necessary for a fair
presentation of the results of the period. The results for the
three months and nine months ended September 30, 1994 are not
necessarily indicative of the results to be expected for the full
year.
INTERCO INCORPORATED
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
September 30, December 31,
1994 1993
ASSETS ------------ -----------
Current assets:
Cash and cash equivalents...................... $ 33,129 $ 45,286
Receivables, less allowances of $10,700
($7,208 at December 31, 1993)................ 329,043 277,691
Inventories...........................(Note 1). 378,120 341,808
Prepaid expenses and other current assets...... 37,626 36,159
------------ -----------
Total current assets......................... 777,918 700,944
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Property, plant and equipment.................... 286,857 254,998
Less accumulated depreciation.................. 62,966 38,697
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Net property, plant and equipment............ 223,891 216,301
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Reorganization value in excess of amounts
allocable to identifiable assets, net.......... 93,188 97,107
Trademarks and trade names, net.................. 150,268 153,248
Other assets..................................... 37,210 38,079
------------ -----------
$ 1,282,475 $ 1,205,679
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes and loans payable........................ $ 25,004 $ -
Current maturities of long-term debt........... 10,328 9,305
Accrued interest expense....................... 11,094 4,731
Accounts payable and other accrued expenses.... 162,008 139,910
Income taxes payable........................... 3,650 13,083
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Total current liabilities.................... 212,084 167,029
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Long-term debt, less current maturities.(Note 2). 566,965 576,804
Other long-term liabilities...................... 122,601 123,289
Shareholders' Equity:
Preferred stock, authorized 10,000,000
shares, no par value - issued none........... - -
Common stock, authorized 100,000,000 shares,
$1.00 stated value - issued 50,061,885
shares at September 30, 1994 and 50,004,282
shares at December 31, 1993.................. 50,062 50,004
Paid-in capital................................ 226,891 226,391
Retained earnings.............................. 103,872 62,162
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Total shareholders' equity................... 380,825 338,557
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$ 1,282,475 $ 1,205,679
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INTERCO INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands except per share data)
(Unaudited)
Three Months Three Months
Ended Ended
September 30, September 30,
1994 1993
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Net sales..................................... $ 457,586 $ 423,852
Cost of sales................................. 309,811 287,591
------------ ------------
Gross profit.................................. 147,775 136,261
Selling, general and administrative expenses.. 115,649 109,017
Royalty income................................ 3,116 2,461
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Earnings from operations...................... 35,242 29,705
Interest expense.............................. 14,048 13,987
Other income (expense), net................... (250) 593
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Earnings before income tax expense............ 20,944 16,311
Income tax expense............................ 8,536 7,117
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Net earnings.................................. $ 12,408 $ 9,194
============ ============
Net earnings per common share:
Primary..................................... $ 0.24 $ 0.18
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Fully diluted............................... $ 0.24 $ 0.18
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Weighted average common and common equivalent
shares outstanding:
Primary..................................... 51,619,706 51,225,207
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Fully diluted............................... 51,665,149 51,731,532
========== ==========
INTERCO INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands except per share data)
(Unaudited)
Nine Months Nine Months
Ended Ended
September 30, September 30,
1994 1993
------------ ------------
Net sales..................................... $ 1,371,629 $ 1,245,067
Cost of sales................................. 923,646 839,780
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Gross profit.................................. 447,983 405,287
Selling, general and administrative expenses.. 348,187 318,779
Royalty income................................ 8,989 8,209
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Earnings from operations...................... 108,785 94,717
Interest expense.............................. 41,564 41,760
Other income (expense), net................... (132) 1,028
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Earnings before income tax expense............ 67,089 53,985
Income tax expense............................ 27,661 21,492
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Net earnings.................................. $ 39,428 $ 32,493
============ ============
Net earnings per common share:
Primary..................................... $ 0.76 $ 0.63
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Fully diluted............................... $ 0.76 $ 0.63
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Weighted average common and common equivalent
shares outstanding:
Primary..................................... 51,619,706 51,225,207
========== ==========
Fully diluted............................... 51,665,149 51,731,532
========== ==========
INTERCO INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Nine Months
Ended Ended
September 30, September 30,
1994 1993
------------ ------------
Cash Flows from Operating Activities:
Net earnings............................... $ 39,428 $ 32,493
Adjustments to reconcile net earnings to net
cash provided (used) by operating activities:
Depreciation of property, plant and equipmemt 25,064 22,496
Amortization of intangible assets...... 5,275 5,275
Increase in receivables................ (51,352) (32,037)
Increase in inventories................ (36,312) (26,306)
Increase in prepaid expenses and other assets (2,367) (3,139)
Increase in accounts payable, accrued interest
expense and other accrued expenses... 28,461 16,823
Increase (decrease) in income taxes payable (9,433) 1,660
Increase (decrease) in net deferred tax
liabilities.......................... (1,415) 264
Increase in other long-term liabilities 78 1,016
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Net cash provided (used) by operating
activities............................... (2,573) 18,545
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Cash Flows from Investing Activities:
Proceeds from the disposal of assets....... 569 244
Additions to property, plant and equipment. (26,899) (26,489)
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Net cash used by investing activities...... (26,330) (26,245)
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Cash Flows from Financing Activities:
Net change in notes and loans payable...... 25,004 5,000
Addition to long-term debt................. 8,000 -
Payments of long-term debt................. (16,816) (28,895)
Proceeds from the issuance of common stock. 558 2
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Net cash provided (used) by financing
activities............................... 16,746 (23,893)
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Net decrease in cash and cash equivalents.... (12,157) (31,593)
Cash and cash equivalents at beginning of
period..................................... 45,286 68,055
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Cash and cash equivalents at end of period... $ 33,129 $ 36,462
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Supplemental Disclosure:
Cash payments for income taxes, net........ $ 37,294 $ 18,970
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Cash payments for interest expense......... $ 35,201 $ 35,342
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Inventories are summarized as follows, in thousands:
September 30, December 31,
1994 1993
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Retail merchandise $ 67,351 $ 67,690
Finished products 188,437 164,958
Work-in-process 45,832 41,419
Raw materials 76,500 67,741
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$ 378,120 $ 341,808
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(2) On January 21, 1994, the Company entered into a secured
obligation with the Mississippi Business Finance Corporation
to finance the construction of a new furniture manufacturing
facility in Tupelo, Mississippi. The industrial revenue
bonds totaled $8.0 million and bear interest at 8.82% per
annum. The bonds mature in annual installments of $0.8
million beginning January 15, 1995 and are secured by the
facility and equipment included therein.
On February 11, 1994 and March 11, 1994, the Company made
optional prepayments on the Secured Term Loan and 8.5%
Secured Notes totaling $10.0 million. The optional
prepayments were made on a pro rata basis among these debt
instruments and were applied to the forward order of
maturity of each such instrument in accordance with the
provisions of the credit agreement and indenture.
(3) The Company is in the process of executing several
transactions which will result in the restructuring of its
operations. By the end of November, 1994, the Company
intends to contemporaneously: a) refinance its debt,
including establishment of separate term debt and working
capital facilities for Converse and Florsheim, and b)
distribute 100% of the common stock of each of Converse and
Florsheim to the current shareholders of the Company. Upon
completion of this restructuring, the Company will retain no
ownership interest or control over the footwear businesses
and will remain in only one segment - furniture.
Accordingly, the distribution of the footwear businesses
will be reflected in the 1994 fiscal year financial
statements as discontinued operations. This restructuring
is conditional upon receipt of regulatory approvals, a
successful public note offering by Florsheim, the debt
refinancing, and other factors.
The following selected financial information is presented
for the Company had the footwear businesses been reflected
as discontinued operations as of September 30, 1994 and for
the nine months ended September 30, 1994 and 1993.
September 30,
1994 1993
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Sales $795,452 $728,761
Gross Profit 221,775 205,560
Selling, General, and Administrative Expenses 161,786 150,915
Operating Earnings 59,989 54,645
Income from Discontinued Operations 22,291 17,221
Net Earnings 39,428 32,493
Earnings per Share 0.76 0.63
Working Capital 288,163 262,202
Long Term Debt $398,035 $403,560
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
RESULTS OF OPERATIONS
INTERCO INCORPORATED (the "Company") is a major manufacturer of
residential furniture and one of the leading manufacturers and
retailers of footwear through two operating segments. The
furniture segment consists of Broyhill Furniture Industries, Inc.
and The Lane Company, Incorporated and the footwear segment
consists of The Florsheim Shoe Company and Converse Inc.
Comparison of Three Months and Nine Months Ended September 30,
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1994 and 1993
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Net sales of the operating companies, by segment, were as
follows, in millions:
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
-------- -------- -------- --------
Furniture segment $ 254.5 $ 240.3 $ 795.5 $ 728.8
Footwear segment 203.1 183.6 576.1 516.3
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$ 457.6 $ 423.9 $1,371.6 $ 1,245.1
======== ======== ======== =========
For the three months ended September 30, 1994, sales by the
furniture segment increased $14.2 million, or 5.9%, compared to
an increase for the three months ended September 30, 1993 of
8.2%. For the nine months ended September 30, 1994, sales by the
furniture segment increased $66.7 million, or 9.2%, compared to
an increase of 12.4% for the nine months ended September 30,
1993. The improved sales performance occurred at both Broyhill
and Lane and reflects favorable industry conditions and customer
acceptance of the furniture companies' products and marketing
programs.
In the footwear segment, sales for the three months and nine
months ended September 30, 1994 were up $19.5 million, or 10.7%,
and $59.8 million, or 11.6%, respectively, from the same periods
in the prior year which realized an increase of 9.5% and 5.9% for
the three months and nine months ended September 30, 1993,
respectively. The sales increase was led by Converse whose
shipments of performance basketball, athleisure (canvas), sports
training and children's footwear continue to show improvement.
Florsheim's sales performance, which was up moderately for the
three months ended June 30, 1994, continued to improve for the
three months ended September 30, 1994 versus the prior year as a
result of new product introductions and marketing programs.
Earnings from operations were as follows, in millions:
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
-------- -------- -------- -------
Earnings before
interest expense,
income taxes,
depreciation and
amortization, and
other income and
expense (EBITDA):
Furniture segment $ 31.5 $ 29.8 $ 96.8 $ 89.4
Footwear segment 16.4 12.3 52.3 42.7
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47.9 42.1 149.1 132.1
Corporate administration (2.5) (2.4) (7.5) (7.1)
Miscellaneous expenses (0.7) (0.9) (2.5) (2.5)
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44.7 38.8 139.1 122.5
Depreciation and
amortization (9.4) (9.1) (30.3) (27.8)
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Earnings from operations $ 35.3 $ 29.7 $108.8 $ 94.7
====== ====== ====== ======
EBITDA of the combined operating segments for the three months
and nine months ended September 30, 1994 was 10.5% and 10.9%,
respectively, of net sales, compared to 9.9% and 10.6%,
respectively, for the three months and nine months ended
September 30, 1993. Furniture segment EBITDA for the three
months ended September 30, 1994 and September 30, 1993 was 12.4%
of net sales. For the nine months ended September 30, 1994,
furniture segment EBITDA was 12.2% of net sales, versus 12.3% for
the comparable prior year period. The EBITDA performance of the
furniture segment for both periods was the result of increased
shipments and cost control efforts, offset by continued start-up
costs at Lane's new Tupelo, Mississippi furniture factory and
Altavista, Virginia finishing facility.
As a percent of net sales, footwear segment EBITDA for the three
months and nine months ended September 30, 1994 was 8.1% and
9.1%, respectively, compared to 6.7% and 8.3% for the same
periods in the prior year. The improved EBITDA performance of
the footwear segment for the three months ended September 30,
1994 reflects increases at both Florsheim and Converse. For nine
months, the improved EBITDA performance occurred primarily at
Converse due to sales volume increases coupled with improved
gross profit margins.
Interest expense totaled $14.1 million and $41.6 million for the
three months and nine months ended September 30, 1994,
respectively, compared to $13.9 million and $41.7 million in the
prior year comparable periods. The decrease in interest expense
for the nine months ended September 30, 1994 resulted from a
reduction of long-term debt outstanding versus the prior year,
partially offset by an increase in loans attributable to seasonal
borrowings from the Company's working capital facility. Interest
rates on substantially all of the long-term debt are fixed and,
therefore, do not materially impact year-to-year comparisons of
interest expense.
For the three months and nine months ended September 30, 1994,
the effective income tax rate was 40.8% and 41.2%, respectively,
compared to the effective income tax rate in the prior year
periods of 43.6% and 39.8%, respectively. The effective tax
rates for each period were adversely impacted by certain
nondeductible expenses incurred and provisions for state, local
and foreign taxes. The effective tax rate for the three months
and nine months ended September 30, 1993 included an increase in
the Federal income tax rate, partially offset by certain
deductible expenses which were provided for in the prior year.
Net earnings per common share on both a primary and fully diluted
basis were $0.24 and $0.76, respectively, for the three months
and nine months ended September 30, 1994, compared to $0.18 and
$0.63 for the same periods last year, respectively. Average
common and common equivalent shares outstanding used in the
calculation of net earnings per common share on a primary and
fully diluted basis were 51,619,706 and 51,665,149, respectively,
for the three months and nine months ended September 30, 1994 and
51,225,207 and 51,731,532, respectively, for the three months and
nine months ended September 30, 1993.
FINANCIAL CONDITION
Working Capital
---------------
Cash and cash equivalents at September 30, 1994 amounted to $33.1
million, compared to $45.3 million at December 31, 1993. During
the nine months ended September 30, 1994, net cash used by
operating activities totaled $2.6 million, net cash used by
investing activities totaled $26.3 million and net cash provided
by financing activities totaled $16.7 million.
Working capital was $565.8 million at September 30, 1994,
compared to $533.9 million at December 31, 1993. The current
ratio was 3.7 to 1 at September 30, 1994, compared to 4.2 to 1 at
December 31, 1993. The increase in working capital is primarily
due to an increase in accounts receivable and inventories
resulting from seasonal fluctuations and the general improvement
of the Company's operations.
Financing Arrangements
----------------------
As of September 30, 1994, long-term debt, including current
maturities, consisted of the following, in millions:
Principal
Amount
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10.0% Secured Notes Due 2001 $ 104.7
9.0% Secured Notes Due 2004 149.2
8.5% Secured Notes Due 1997 7.3
Secured Term Loan 279.9
ILGWU Fund Note 13.9
Industrial Revenue Bonds 18.9
Federal Tax Obligation 3.4
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$ 577.3
=========
On January 21, 1994, the Company entered into a secured
obligation with the Mississippi Business Finance Corporation to
finance the construction of a new furniture manufacturing
facility in Tupelo, Mississippi. The industrial revenue bonds
totaled $8.0 million and bear interest at 8.82% per annum. The
bonds mature in annual installments of $0.8 million beginning on
January 15, 1995 and are secured by the facility and equipment
included therein.
On February 11, 1994 and March 11, 1994, the Company made
optional prepayments on the Secured Term Loan and 8.5% Secured
Notes totaling $10.0 million. The optional prepayments were made
on a pro rata basis among these debt instruments and were applied
to the forward order of maturity of each such instrument in
accordance with the provisions of the credit agreement and
indenture.
To meet short-term working capital and other financial
requirements, the Company maintains a $148 million working
capital facility with a group of banks. The working capital
facility, which was increased during the nine months ended
September 30, 1994 from its previous level of $135 million,
allows for both issuance of letters of credit and cash
borrowings. Letter of credit issuances are limited to no more
than $100 million; cash borrowings are limited only by the
facility's maximum availability less letters of credit
outstanding. Maximum availability under the facility is
determined by the amount of eligible accounts receivable and
inventory at each month end (referred to in aggregate as a
"borrowing base"). As of September 30, 1994, the Company's
borrowing base pertaining to the facility totaled $307.4 million.
At September 30, 1994, $25.0 million in cash borrowings and $40.4
million in letters of credit were outstanding under the working
capital facility.
The Company believes its working capital facility, together with
cash generated from operations, will be adequate to meet
liquidity requirements for the foreseeable future.
PART II OTHER INFORMATION
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Item 5. Other Information
The Company has announced that it intends to separate into
three publicly traded entities: INTERCO INCORPORATED, Converse
Inc. and The Florsheim Shoe Company. The Company would continue
to own and operate Broyhill Furniture Industries, Inc. and The
Lane Company, Incorporated. All of the stock of Converse and
Florsheim would be distributed as a dividend to existing Company
shareholders in what is expected to be a tax free distribution to
shareholders.
Concurrently with the distributions, Converse, Florsheim and
the Company will refinance their existing debt. Converse has
obtained a commitment from BT Commercial Corporation for a $200
million secured credit facility, of which $75 million is expected
to be funded at closing to repay Converse's share of outstanding
indebtedness issued in 1992 in connection with the reorganization
of the Company and its principal subsidiaries and to pay
financing fees. Florsheim expects to issue $85 million of senior
notes in a public offering, underwritten by Smith Barney Inc. and
BT Securities Corporation, and Florsheim has a commitment from BT
Commercial Corporation for a $75 million revolving credit
facility. Net proceeds from Florsheim's public debt offering and
from an initial funding of $25 million from the revolving credit
facility will repay Florsheim's share of the outstanding
indebtedness from 1992. As previously announced, the Company has
commitments from Bankers Trust Company and Credit Lyonnais for a
$285 million term loan and a $75 million revolving credit
facility, and from Credit Lyonnais for a $150 million receivables
securitization facility, and the proceeds of these borrowings
will be used to repay the balance of the outstanding indebtedness
from 1992 and to fund working capital needs of the Company. It
is anticipated that, at closing, the Company's debt including the
receivables securitization facility will be approximately $435
million, Converse's debt will be approximately $75 million and
Florsheim's debt will be approximately $110 million.
It is presently anticipated that the refinancings and the
Converse and Florsheim spin-off distributions will be completed
on November 17, 1994.
Item 6. Exhibits and Reports on Form 8-K
(a) 11. Statement re Computation of Net Earnings Per Common
Share.
27. Financial Data Schedule
(b) A form 8-K was not required to be filed during the
quarter ended September 30, 1994.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
INTERCO INCORPORATED
(Registrant)
By Steven W. Alstadt
------------------------
Steven W. Alstadt
Controller and Chief
Accounting Officer
Date: November 11, 1994
EXHIBIT 11
INTERCO INCORPORATED
STATEMENT RE COMPUTATION OF NET EARNINGS PER COMMON SHARE
---------------------------------------------------------
Nine Months Nine Months
Ended Ended
September 30, September 30,
1994 1993
------------ ------------
Primary:
Weighted average common shares outstanding during the period............... 50,027,681 50,000,140
Common shares issuable on exercise of stock options (1).................... 840,021 818,938
Common shares issuable on exercise of warrants (2)......................... 752,004 406,129
---------- ----------
Weighted average common and common equivalent shares outstanding for
primary calculation...................................................... 51,619,706 51,225,207
========== ==========
Fully diluted:
Weighted average common and common equivalent shares outstanding for
primary calculation...................................................... 51,619,706 51,225,207
Common shares issuable on exercise of stock options (3).................... 8,193 86,455
Common shares issuable on exercise of warrants (4)......................... 37,250 419,870
---------- ----------
Weighted average common and common equivalent shares outstanding for
fully diluted calculation................................................ 51,665,149 51,731,532
========== ==========
INTERCO INCORPORATED
NOTES TO STATEMENT RE COMPUTATION OF NET EARNINGS PER COMMON SHARE
(1) Includes common stock options, the exercise of which would result in
dilution of net earnings per common share. Such common stock options
have been considered as exercised and the proceeds therefrom were used
to purchase common stock at the average common stock market price, if
the average common stock market price was higher than the common stock
option exercise price during the period.
(2) Includes common stock warrants, the exercise of which would result in
dilution of net earnings per common share. Such common stock warrants
have been considered as exercised and the proceeds therefrom were used
to purchase common stock at the average common stock market price, if
the average common stock market price was higher than the common stock
warrant exercise price during the period.
(3) Additional common shares issuable resulting from the application of the
same principles described in Note (1), except that the proceeds from
assumed common stock options exercised were used to purchase common
stock at the month end common stock market price, if the month end
common stock market price was higher than the average common stock
market price during the period.
(4) Additional common shares issuable resulting from the application of the
same principles described in Note (2), except that the proceeds from
assumed common stock warrants exercised were used to purchase common
stock at the month end common stock market price, if the month end
common stock market price was higher than the average common stock
market price during the period.