Item 1. Business
This report contains forward-looking statements that address, among other things, distribution efforts, sourcing arrangements, projected capital expenditures, future cost of compliance with environmental laws and the adequacy of financing arrangements to meet debt service, capital expenditures, and other liquidity requirements. These statements may be found under Item 1. "Business" and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as in other portions of this report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including without limitation those discussed under the caption "Risk Factors" included in Item 1. and other matters included in this report.
GENERAL
Florsheim Group Inc., formerly known as The Florsheim Shoe 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 Group Inc. (Florsheim or the Company) 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 351 Company-operated specialty stores and outlet stores as of December 28, 1996. The Company believes that the Florsheim brand name is widely recognized both in the U.S. and in international markets for quality and value and that consumers' unaided brand awareness of Florsheim's products in the U.S. in the men's dress shoe category is over four times greater than that of its nearest competitor (according to Footwear Market Insights [FMI]).
Florsheim primarily competes in the $60 and above retail price point segment of the men's non-athletic footwear market. The below $60 price point segment is dominated by private label offerings. According to FMI, the Company is the leading provider of men's dress shoes in the $60 and above U.S. market, with approximately a 17% market share, nearly twice the market share of the Company's nearest competitor.
The Company's worldwide wholesale distribution accounted for approximately 41% of fiscal 1996 sales. The Company has a global wholesale customer base which includes department stores and national accounts, such as Sears and Nordstrom, Inc., independent dealers located worldwide and licensee locations in Mexico, India, the Pacific Rim and the Middle East. In addition, as of December 28, 1996, Florsheim has a retail network of 205 Company-operated specialty stores and 93 Company-operated outlet stores in the U.S. As of December 28, 1996, the Company also operated 45 specialty retail stores and eight outlet stores in Australia, Canada, England and Italy. The Company's retail operations allow the Company to: achieve broader distribution of its products; provide a showcase for a variety of Florsheim branded products marketed by the Company; test market acceptance of newly introduced products; further develop consumer recognition of the Florsheim brand; and maintain direct contact with changes in consumer preferences and buying practices. The Company continues to develop store formats which provide updated, contemporary looks to its specialty stores.
On March 22, 1996, the Company completed the sale of the assets of its Hy-Test safety shoe division, including its Kirksville, Missouri factory, to Wolverine World Wide, Inc., for a cash sale price settled at $23.2 million. Annual net sales of Hy-Test were approximately $6.9 million in fiscal 1996, $38.7 million in fiscal 1995 and $36.1 million in fiscal 1994.
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. Two major influences of this change have been the increase in footwear imports into the U.S. and the growth of consumer demand for athletic and casual
footwear. 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, 1996 U.S. retail sales of men's footwear (excluding athletic footwear and work boots) were approximately $7.6 billion, or 133 million pairs. Within this market, recent declines in the traditional dress shoe segment have been primarily driven by the lifestyle trend toward more casual clothing and emphasis on leisure time and the increased popularity of casual dress or "dress down" days within the business community. The men's footwear industry merchandise mix has mirrored these changes, as consumer preferences have shifted from dress toward casual. A dress casual category within the men's footwear segment, which combines features of dress shoes with the comfort enhancing aspects of casual footwear, has also developed in response to this lifestyle and fashion shift. Over this period, consumers' perceptions of the distinctions between product offerings within the dress, dress casual and casual categories have diminished as a result of "crossover" products that are not limited to a particular use or occasion but are suitable for a variety of styles, fashions and end uses. Florsheim has embarked upon a program to enhance its marketing efforts in order to respond to these market developments and capture a larger percentage of the footwear market consisting of younger and more casual-dress oriented consumers. Florsheim also has begun remodeling Company-operated specialty store locations to provide an updated, contemporary look to its stores.
The primary channels of distribution for footwear have shifted during the past ten to fifteen years. Department stores, regional retailers and mass merchandisers continue to play a larger role in the retailing of footwear, and the significance of small independent footwear dealers, which once dominated retail distribution, continue to decline dramatically. To compensate for these shifts in channels of distribution, the Company has expanded its distribution to department stores and regional and national retail stores and through Company-operated outlet stores in response to the shifts in consumer shopping patterns. In recent years, the Company has also developed a closer working relationship with its key independent dealers in order to assist them with the expansion of their Florsheim business.
MARKETING AND DISTRIBUTION GROWTH STRATEGY
Management of the Company emphasizes two principal growth objectives: to strengthen the Company's position as the leading manufacturer and distributor of men's dress shoes at retail prices of $60 and above and to improve its market share in the growing dress casual and casual footwear categories. To further these objectives, the Company has adopted growth strategies to: (i) strengthen its leading position in the traditional dress shoe market, (ii) extend its dress and dress casual product lines and enhance marketing initiatives to improve its appeal to younger and casual-dress target audiences, (iii) broaden wholesale distribution, (iv) increase sales at the Company-operated retail stores through the remodeling of stores in a contemporary format and selectively opening new specialty and outlet stores, (v) offer additional products in its retail stores, using a multi-brand approach, (vi) expand international sales and (vii) increase sales through new product introductions.
In order to execute the growth plans, the Company, in early 1996, organized strategic business units (SBUs) within the Company: wholesale, retail, international and new products. The SBUs will be able to 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 $2.3 billion in annual retail sales in 1996. 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. To capitalize on the success of Comfortech Maintenance Free dress shoes, the Company is extending the Maintenance Free concept into a line of dress casual and casual footwear. According to FMI data, the Company maintains the sixth largest market share, approximately 4%, in the casual segment of the $60 and above men's footwear market. With approximately 39% of this market comprised of manufacturers that account for less than a 1% market share according to FMI data, management believes the casual market represents a key area of opportunity for the Company and intends to concentrate on growth in this category.
Broaden Wholesale Distribution: The Company is aggressively seeking to expand its sales to wholesale accounts by adding new customers, such as national and regional retailers, including expansion of department store distribution, as well as increasing penetration of existing accounts with its extended product line and aggressive merchandising and advertising programs. The Company's success in distributing its branded merchandise through Sears locations is being used as a model in marketing similar arrangements to other department stores and national and regional retailers. An important component of the Sears/Florsheim success is the use of an interactive video kiosk that allows the consumer to electronically seek product information, learn about store promotions, and special order footwear directly from the Florsheim distribution center. The video kiosk concept is adaptable to most retailers' needs and will be expanded beyond Sears.
Remodeling of Company-Operated Stores: The Company is currently remodeling its chain of Company-operated specialty stores with a new contemporary and more casual format which includes new interiors with better utilization of selling space. The Company intends to continue and further enhance this remodeling effort with a more dramatic overhaul of store design during 1997. The Company anticipates that the remodeled stores' contemporary look combined with expanded product offerings will increase shopper traffic, attract a younger consumer, and improve sales and productivity, and potentially have the further beneficial effect of enhancing the Company's relationships with mall developers and providing increased access to prime retail locations. Through its Company-operated outlet stores Florsheim has been able to participate in the growing U.S. outlet mall segment of the retailing industry. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Capital Expenditures".
Multi-Brand Concept: In order to meet consumers' needs for a complete range of men's footwear in its retail stores, the Company has added additional branded products that do not conflict with the current Florsheim line. By selling additional brands in its store, the Company expects, based on successful results to date, that this strategy will introduce the Florsheim brand to additional consumers by attracting new customers into the stores. Based on these results, the multi-brand concept results in improved Florsheim product sales and higher overall sales per square foot for the store.
Expanding International Distribution: The Florsheim name is recognized in many international markets around the world, especially Australia, Canada and Mexico. The Company has initiated efforts to establish a stronger presence in Europe, Central and South America and the Pacific Rim. In addition, the Company has launched an international strategy, through licensing of stores, selective openings of Company-operated specialty stores, specifically, Milan, Italy, and, London, England, and increased sales to wholesale accounts, to increase its penetration of established markets and to introduce the Florsheim brand in selected new markets.
New Product Introductions: The Company, in early 1996, established a new products division. Through this division, the Company will review and develop opportunities to expand sales beyond the product areas in which Florsheim currently focuses its efforts. The New Products Division will pursue business building opportunities that take advantage of the Company's expertise in footwear. In 1996, four opportunities were identified; these will be in the market in 1997. The new products are: Florsheim Golf Shoes, John Deere Footwear, @ease 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. 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 will be 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 1996 were approximately 1.3% of Florsheim's total domestic sales (excluding Hy-Test), versus 2.2% in fiscal 1995 and 2.7% in fiscal 1994. These expenditures were divided among television, national print ads and print advertising placed on behalf of the Company-operated specialty stores and independent dealers.
WHOLESALE OPERATIONS
The Company distributes its product at wholesale to more than 6,000 retail locations worldwide ranging from independent shoe stores to large national retailers and department stores to Company-operated specialty and outlet stores. The Company is continually developing new distribution programs to add new distribution, strengthen its position with its existing customers and capitalize on new distribution opportunities in response to the shifts in consumer shopping patterns. The Company's broadened product line has helped strengthen its position with dealers because each dealer can select the items from the product line which will appeal to its particular customer base. Management believes that new product introductions such as Florsheim golf shoes, John Deere work boots and Joseph Abboud dress and casual shoes strengthen the Company's position with its distribution by providing innovative merchandise.
Due to the changing profile of the retailing shoe industry with the reduced importance of the traditional shoe store, Florsheim has expanded its distribution strategy to include a broader range of retailers. While remaining selective in its choice of dealers and focusing on those that will best serve the Company for the long-term, the Company believes that a broader distribution base that includes department stores, national and regional retailers and mass merchandisers is essential for continued success.
RETAIL OPERATIONS
As of December 28, 1996, Florsheim had 351 Company-operated stores worldwide, represented by 250 traditional Florsheim specialty shoe shops and 101 outlet stores. According to industry data, management believes that Florsheim's Company-operated chain of stores is the largest U.S. specialty retailer of men's quality dress footwear. As of December 28, 1996, the Company operated a core of 205 U.S. specialty retail locations. The Company evaluates each of these locations as leases expire and makes the decision to renew, relocate, or close. In addition, the Company intends to continue the selective opening of new stores.
The Company-operated stores provide a strategic distribution channel which gives the Company a key competitive advantage. Management believes that as the footwear retailing industry continues to consolidate, it is critical that the Company maintain its own controlled distribution channel. Company-operated stores are the largest distributor of company products and, in the U.S., represented approximately 39% of the wholesale sales value of total domestic wholesale shipments during fiscal 1996. The Company realizes both a wholesale profit margin and a retail profit margin on product distributed through its Company-operated stores. The combined operating profit margin on such sales is larger than the operating 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, the number of 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 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 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, a focal point 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 has recently initiated efforts to establish a stronger presence in selected regions of Europe, Central, and South America, the Middle East and the Pacific Rim. The international division markets the Company's products through a global network of wholesale dealers, licensees and Company-operated stores. At December 28, 1996, the Company operated 53 specialty and outlet stores in international markets and licensed an additional 30 specialty shops to selected partners. International sales, including exports, were $45.8 million in fiscal 1996, and were distributed as shown below:
International Distribution
Percentage of Total Fiscal 1996 International Sales
Australia ...... 49 % Canada ......... 24 Pacific Rim .... 14 Europe ......... 7 Other Exports .. 6 --- 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 December 28, 1996, the Company operated 34 stores in Australia and 16 stores in Canada. Management believes that its Australian stores are the only chain of dedicated quality men's dress shoes in Australia and provide a key competitive advantage in this market. Both the Australian and Canadian retailing industries are dominated by large department stores; therefore, the Company is concentrating on building wholesale sales to these key department store accounts while maintaining its commitment to a profitable network of Company-operated stores and independent dealers. Currently, there is one Company-operated manufacturing facility in Australia and none in Canada.
Management believes that the Pacific Rim, and Japan in particular, offers opportunities for Florsheim and has targeted this region as part of the Company's international growth strategy. Distribution to this market is primarily effected by its Hong Kong sales subsidiary through wholesale sales to independent retailers in the Pacific Rim and licensees and distributors in Hong Kong, Indonesia, Taiwan and the Philippines. The Company's primary strategy for increasing its presence in this area is to increase the number of independent dealers and licensees while establishing Company-operated specialty stores in a few select locations. In addition, the Company will explore other formats for distribution opportunities, such as licensing, in markets such as Japan.
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 opened another Company-operated store, located in London, England, in 1996.
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.
Note 16 to the Company's consolidated financial statements included under item 8 of this Report contains certain foreign, geographical segment information regarding the Company's domestic and international revenue, operating income and assets.
PRODUCT
Management's primary product strategy is to strengthen its leading position in the dress category while further penetrating the growing dress casual and casual categories. Florsheim offers a diverse line of men's quality dress, dress-casual and casual shoes in the $60 and above price range. All products, (except those that are sold under license), are currently sold under the Florsheim brand, but segmented with the following sub-labels to differentiate product by lifestyle or construction. In addition, the Company has entered into licensing agreements to manufacture and sell John Deere work boots and Joseph Abboud footwear.
* This is the registered trademark of Joseph Abboud ** This is the registered trademark of John Deere
Florsheim: Florsheim is the signature of quality and value. This is the foundation of Florsheim heritage - dress and casual styles you can wear with confidence. Tradition woven with fashion - the intrinsic marriage of style, quality and value. Retail price points for this line range from $80 to $120.
Florsheim Comfortech: Florsheim Comfortech is the signature of comfort. Using the most advanced comfort technology and most sophisticated comfort construction methods, Florsheim Comfortech provides a comfortable alternative to ordinary dress and casual shoes. Retail price points range from $90 to $120.
Florsheim Imperial: Florsheim Imperial is the definition of American style. The glamour of our past with the function and versatility of the present and the comfort and streamlined shapes of the future. Superior quality paired with comfort. A classic look laced with style. A shoe built with the exacting standards worth of the Imperial name. These fashionable styles range from dress to dress/casual styles. Retail price points range from $120 to $170.
Joseph Abboud Footwear: Complete line of high-end fashion footwear designed and manufactured to the specifications of men's fashion designer Joseph Abboud. Abboud fashions are available only at high-end retail outlets and appeal to the needs and desires of an upscale clientele. Retail price points range from $125 to $300.
Florsheim FLS: To maintain the equity position of the Florsheim name but still offer product at entry price-points, this new line of value priced product has been developed. Florsheim FLS offers quality product at $50 to $70.
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 manufacturer. The boots are specifically designed to be the most comfortable and durable product in the market. Retail price points range from $110 to $175.
Florsheim Frogs: 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 Frogs also offers some high-end styles in sturdy leather soled golf shoes. Retail price points range from $100 to $200.
Florsheim @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 $100 to $200.
SOURCING AND MANUFACTURING; TRADE REGULATIONS
Florsheim's sourcing strategy is to manufacture products where they can be produced most efficiently while still meeting management's quality and service specifications. Toward this goal, Florsheim shoes are manufactured both domestically and overseas. The Company owns a manufacturing plant in Cape Girardeau, Missouri as well as a warehouse distribution center in Jefferson City, Missouri. Based on 1996 results, the production at Cape Girardeau, is approximately 20% of the total worldwide production and is primarily involved in finishing imported uppers which is approximately two-thirds of its total production. The remaining one-third is the complete 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 1996, approximately three-quarters of Florsheim's finished shoe sourcing requirements were fulfilled outside of the United States. Approximately two-thirds of Florsheim's non-domestic products are manufactured in India, where Florsheim is the minority partner (26% ownership) in a joint venture arrangement with a local operator. Under this arrangement, the venture manufactures exclusively for Florsheim and without minimum quantity restrictions for the production output. Also under this arrangement, the Company is actively involved in training and production techniques, and management believes that production quality is comparable to what could otherwise be produced using domestic production facilities. The remainder of the Company's non-domestic products are sourced from a variety of suppliers in a number of other countries, including Portugal, Spain, Italy, Dominican Republic, China and Mexico.
Florsheim's major raw materials include leather uppers, linings and outsoles. Florsheim obtains raw materials and components from a wide variety of sources located throughout the world and has alternate sources for leathers, components and other materials. Leather pricing and availability are subject to fluctuating supply and demand cycles; however, Florsheim management believes it has adequate sourcing arrangements to ensure an uninterrupted supply of raw materials.
The Company's operations are subject to the customary risks of doing business abroad, including currency fluctuations, labor unrest, political instability, restrictions on transfer of funds, export duties and quotas and U.S. customs and tariffs. The Omnibus Trade and Competitiveness Act of 1988 added a new provision to the Trade Act of 1974 dealing with intellectual property rights. This provision, which is commonly referred to as "Special 301," directed the United States Trade Representative (USTR) to designate those countries with poor records for protecting intellectual property rights as "priority foreign countries" and to initiate investigations with respect to the allegedly unfair practices in such countries. Where such an investigation does not lead to a satisfactory resolution of such practices, through consultations or otherwise, USTR is authorized to take retaliatory action, including the imposition of restrictions on imports from the particular country into the United States.
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.
MANAGEMENT INFORMATION SYSTEMS
The Company maintains sophisticated information systems to process information from its Company-operated retail stores and to track its inventories. At the retail stores, electronic point of sale cash registers capture sales transactions and transmit daily activity each night to a central computer system in Chicago. An automated reordering system is used to track retail store inventories and automatically generate warehouse orders to keep the stores supplied with model stock inventories. The Express Shops, interactive video kiosks, are utilized at many of the Company-operated and dealer stores to view an electronic catalog and accept customers' orders for items that are not in stock at the store.
For the U.S. wholesale division, a sophisticated forecasting and material requirements planning system is utilized to order and track finished shoes, leather, and components. A perpetual inventory system is used to track finished shoes on order and at the warehouse and to provide customer service information regarding delivery dates. Electronic Data Interchange (EDI) is used with a number of large customers to process orders, invoices, and payments.
During 1997, the Company is reviewing its information systems in order to assess how to improve the systems based on new technology. An investment will be made, over the next two to three years, in updated management information systems.
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 will 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 December 28, 1996 the Company's U.S. wholesale operations had a backlog of customer orders amounting to approximately $14.5 million, compared to approximately $11.0 million, at December 30, 1995, excluding Hy-Test, an increase of 31.7%. The increase was primarily due to strong orders for future delivery of both the Company's new products and its traditional line and partially due to temporary delivery delays of certain categories of product. 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 December 28, 1996, Florsheim had 2,129 employees in the United States and overseas. Approximately 20% of Florsheim's work force is represented by unions. Management believes Florsheim has maintained satisfactory overall relations with its unionized and non-unionized workforce.
INTELLECTUAL PROPERTY
The major trademarks and trade names under which Florsheim's men's footwear are sold are: Florsheim, Florsheim Comfortech, Florsheim Imperial, Florsheim Comfortech Maintenance Free, Florsheim Frogs, Florsheim FLS and Florsheim @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 13 years.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local laws, regulations and ordinances relating to the operation and removal of underground storage tanks and the storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials, substances and wastes pursuant to which the Company has in the past been required to incur compliance and clean-up costs. The nature of the Company's operations expose it to the risk of claims with respect to environmental matters, and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims.
Based on the Company's experience to date, the Company believes that its future cost of compliance with environmental laws, regulations and ordinances, or exposure to liability for environmental claims, will not have a material adverse effect on the Company's business or financial position. However, future events, such as changes in existing laws and regulations, or unknown contamination of sites owned or operated by the Company (including contamination caused by prior owners and operators of such sites) may give rise to additional compliance costs which could have a material adverse effect on the Company's financial position.
RISK FACTORS
Impact of General Economic Conditions on Footwear Industry and the Company's Operations
Florsheim and the footwear industry in general are dependent on the economic environment 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 1996, approximately three-quarters of Florsheim's finished shoe sourcing requirements were fulfilled outside of the United States, with approximately two-thirds of such non-domestic product manufactured in India, where Florsheim is a participant in a joint venture arrangement with a local operation, and 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 67.3% of the outstanding shares of Florsheim Common Stock. By reason of their ownership of shares of Florsheim Common Stock, the Apollo Stockholders have the power effectively to control or influence control of the Company, including in elections of the Board of Directors and other matters submitted to a vote of the Company's stockholders, including extraordinary corporate transactions such as mergers. The Apollo Stockholders may exercise such control from time to time. A majority of the Board of Directors consists of individuals associated with affiliates of Apollo and Lion.
Shares Eligible for Future Sale
The Apollo Stockholders beneficially own approximately 5,615,160 shares of Florsheim Common Stock. The Apollo Stockholders have advised Florsheim that at this time they do not have any present plan or intention to dispose of any such shares of Florsheim Common Stock. However, the Apollo Stockholders continually review decisions to buy, sell or hold investments and based on market conditions or other considerations, their intentions may change. Sales of shares of Florsheim Common Stock by the Apollo Stockholders would be subject to restrictions imposed by the Securities Act of 1933, as amended (the "Securities Act"), including Rule 144 promulgated thereunder, unless the Apollo Stockholders exercise certain rights for the registration of their shares of Florsheim Common Stock under the Securities Act. The sale of a substantial number of shares of Florsheim Common Stock by the Apollo Stockholders could adversely affect the market price of the Florsheim Common Stock.
Item 2.

Item 2. Properties
Florsheim owns or leases the following principal plants, offices and warehouses:
The owned properties listed above are encumbered by a first priority lien and mortgage pursuant to the Credit Agreement, dated November 17, 1994, among the Company and certain of its subsidiaries, certain financial institutions and BT Commercial Corporation, as Agent.
On March 20, 1997, the Company completed the sale of its former headquarters located in Chicago, Illinois.
The Company's properties listed above are generally well maintained, suitable for present operations and adequate for current production requirements. Production and sourcing of Florsheim dress and dress casual product formerly accomplished at the Kirksville, Missouri facility sold in connection with the sale of Hy-Test, has been directed towards Cape Girardeau and other locations. 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 1996 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.

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.

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

Item 5. Market for The Registrant's Common Equity and Related Stockholder Matters
As of February 20, 1997, there were approximately 1,900 holders of record of Common Stock.
Shares of the Company's Common Stock trade on The NASDAQ Stock Market under the symbol: FLSC. The reported high and low sale prices for Florsheim's Common Stock on The NASDAQ Stock Market for each quarterly period within the two most recent fiscal years are included in Note 17 to the consolidated financial statements of the Company included under Item 8 of this Report.
The Company did not pay dividends on its Common Stock during the fiscal years ended December 30, 1995 and December 28, 1996.
A discussion of restrictions on the Company's ability to pay cash dividends is included in Note 7 to the consolidated financial statements of the Company included under Item 8 of this Report.
Item 6.

Item 6. Selected Consolidated Financial and Operating Data
(Dollars in thousands other than per share data)
The following financial data should be read in conjunction with the consolidated financial statements and notes thereto included.
(1) Effective January 2, 1993, Florsheim changed its fiscal year end from the last Saturday in February to the Saturday closest to December 31. This change, coupled with "fresh start" reporting, results in reporting fiscal 1992 in two 22-week periods.
(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) Represents sales of the Company's Hy-Test safety shoe business, which was sold in March, 1996.
(4) Earnings (loss) per share data are presented for the full years that the Company operated during the period as an independent public company.
(5) Calculated on a pro forma basis. See note 18 to consolidated financial statements for discussion of pro forma financial data.
(6) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization, and other income and expense. See the Company's consolidated statements of cash flows in the Company's consolidated financial statements contained elsewhere in this report. EBITDA is presented solely as supplemental disclosure because (i) the Company's gross profit and earnings from operations after August 2, 1992 are not comparable to its gross profit and earnings from operations before August 2, 1992; (ii) the Company believes EBITDA is comparable for periods before and after August 2, 1992: and (iii) EBITDA is frequently used to analyze companies on the basis of operating performance, leverage, and liquidity. EBITDA is not intended to provide a measure of profitability and is being presented solely for informational purposes as one of several measures of financial performance.
(7) Figures include only Company-operated stores at period end.
(8) For purposes of determining the ratio of earnings to fixed charges, earnings are defined as earnings (loss) before income taxes, plus fixed charges. Fixed charges consist of interest expense on all indebtedness (including amortization of deferred debt issuance costs) and the portion of operating lease rental expenses that is representative of the interest factor. For the five months ended August 2, 1992, and for the twelve months ended December 30, 1995, earnings were inadequate to cover fixed charges by $11.3 million and $6.3 million, respectively.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in thousands)
The following commentary should be read in conjunction with the consolidated financial statements and notes thereto included under Item 8

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.
FLORSHEIM GROUP INC.
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
December 30, 1995 and December 28, 1996
See accompanying notes to consolidated financial statements.
FLORSHEIM GROUP INC.
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
Fiscal years ended December 31, 1994, December 30, 1995 and December 28, 1996
See accompanying notes to consolidated financial statements.
N. A. - Not Applicable (See Note 2)
FLORSHEIM GROUP INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Fiscal years ended December 31, 1994, December 30, 1995, and December 28, 1996
See accompanying notes to consolidated financial statements.
FLORSHEIM GROUP INC.
Consolidated Statements of Shareholders' Equity
Fiscal years ended December 31, 1994, December 30, 1995, and December 28, 1996
(Dollars and number of shares in thousands)
See accompanying notes to consolidated financial statements.
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
DECEMBER 30, 1995 AND DECEMBER 28, 1996
(1) BASIS OF PRESENTATION
NATURE OF BUSINESS
Florsheim Group Inc. and its subsidiaries (Florsheim or the Company) design, market, manufacture and source a diverse and extensive range of products in the middle to upper price range of the men's quality footwear market. The majority of revenues are derived from operations in the United States. On December 26, 1996, Florsheim changed to its present corporate name from The Florsheim Shoe Company.
THE DISTRIBUTION
Effective November 17, 1994 (the effective date) Florsheim became an independent public company. Furniture Brands International, Inc., formerly known as INTERCO INCORPORATED (INTERCO), its former parent company and sole stockholder, distributed all of the Company's common stock to existing INTERCO shareholders at a rate of one share of Florsheim common stock for every six shares of INTERCO common stock (the Distribution). In connection with the Distribution, Florsheim issued $85,000 in 12-3/4% Senior Notes due 2002 (Senior Notes) and entered into a $75,000 secured credit facility (credit facility). Florsheim used the proceeds from the Senior Notes and $25,000 borrowed under the credit facility to pay financing expenses and repay its share of the outstanding joint and several indebtedness issued in connection with the 1992 plan of reorganization of INTERCO and its principal subsidiaries.
Financial information prior to the Distribution reflects the financial position and results of operations of the Company as a division and/or subsidiary of INTERCO and is not necessarily indicative of the financial position or results of operations had the Company operated as a separate, stand-alone entity during the periods covered.
Prior to November 17, 1994, Florsheim operations were conducted through a division and/or certain wholly owned subsidiaries of INTERCO.
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.
(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:
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
SALE OF ASSETS OF HY-TEST SAFETY SHOE DIVISION
On March 22, 1996, the Company completed the sale of the assets of its Hy-Test safety shoe division, including its Kirksville, Missouri factory, to Wolverine World Wide, Inc., for an all cash sale price settled at approximately $23.2 million. A portion of this cash was used to reduce to zero the $17.6 million of outstanding borrowings under the Company's bank credit facility as of the sale date. The balance of the proceeds are available for investment in the business and for further debt reduction. Annual net sales of the sold business were $38,659 for the twelve months ended December 30, 1995. The net gain on sale of $1,850 is included in other income (expense), net.
PRINCIPLES OF CONSOLIDATION
Commencing with the effective date of the Distribution, the financial statements include the accounts of the Company and its subsidiaries on a consolidated basis. Prior to the effective date, the financial statements include the accounts of the Company on a combined basis as described in the Distribution. All significant intercompany transactions and balances have been eliminated. The results of Hy-Test are included through the sale date, March 22, 1996.
FRESH START REPORTING
As of August 2, 1992, in accordance with the AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" (SOP 90-7), INTERCO and its domestic subsidiaries were required to adopt "fresh start" reporting. The ongoing impact of the adoption of "fresh start" reporting is reflected in Florsheim's financial statements for the fiscal years ended December 31, 1994, December 30, 1995, and December 28, 1996.
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 1994, 1995 and 1996 each represented a 52 week fiscal year. For purposes of these financial statements, fiscal 1994 refers to the 12 month period ended December 31, 1994, fiscal 1995 refers to the 12 month period ended December 30, 1995, and fiscal 1996 refers to the 12 month period ended December 28, 1996.
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 market.
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost when acquired. Expenditures for improvements are capitalized while normal repairs and maintenance are expensed as incurred. When properties are disposed of, the related cost and accumulated depreciation or amortization are removed from the accounts, and gains or losses on the dispositions are reflected in results of operations. For financial reporting purposes, Florsheim utilizes both accelerated and straight-line methods of computing depreciation and amortization. Such expense is computed based on the estimated useful lives of the respective assets, which generally range from 3 to 45 years for buildings and improvements and from 3 to 11 years for machinery and equipment.
TRADEMARKS
Trademarks are recorded at fair value and are amortized on a straight-line basis over a forty year period.
ADVERTISING
All advertising costs are expensed as incurred.
INCOME TAX EXPENSE
The results of Florsheim are included in the consolidated tax returns filed by Florsheim for the year ended December 28, 1996, December 30, 1995, the period November 18, 1994 to December 31, 1994, and in the consolidated tax returns filed by INTERCO for the period January 2, 1994 to November 17, 1994. The Federal income tax expense in the consolidated financial statements for period prior to the Distribution is allocated in accordance with U. S. Treasury Regulations, and approximates the expenses as if Florsheim had filed a separate return.
As of the Distribution date (as defined in Note 1), 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 distribution will be indemnified by INTERCO, subject to any tax liabilities which have been transferred to Florsheim.
The tax agreement also provides that INTERCO will pay Florsheim a portion of the tax benefits received by INTERCO from any tax operating losses generated by Florsheim (which Florsheim elects to carryback) for periods after the distribution that are eligible for carryback to periods when Florsheim was owned by INTERCO.
Florsheim complies with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). SFAS No. 109, which was adopted by the Company as of August 2, 1992, requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of other assets and liabilities. Deferred tax assets
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On December 31, 1995, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-valued-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Florsheim complies with Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits other than Pensions" (SFAS No. 106). SFAS No. 106, which was adopted by the Company as of August 2, 1992, requires the cost of these benefits to be recognized in the financial statements over an employee's service period with the company.
FOREIGN CURRENCY TRANSLATION
The accounts of the foreign subsidiaries have been translated from their functional currency to the U.S. dollar. Such translation adjustments are not included in income, but are accumulated directly in a separate component of shareholders' equity subsequent to the Distribution and as a part of stockholder's investment prior to the Distribution.
EARNINGS PER SHARE
Net earnings (loss) per common share is computed based on the weighted average number of common shares outstanding and common stock equivalents when the results are not antidulutive.
The historical capital structure of the Company during most of fiscal 1994 is not comparable to the ongoing capital structure of the Company since the Distribution date; historical per share data would not be meaningful and, accordingly, has not been presented for periods prior to fiscal 1995.
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
AMORTIZATION OF PREPAID EXPENSES
Certain expenses related to obtaining financing have been capitalized and are being amortized over the life of the financing to which they relate.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this statement resulted in a $500 write-down of assets, which is included in selling, general and administrative expense on the income statement.
(3) INVENTORIES
Inventories are categorized as follows:
- -------------------------------------------------------------------------------- December 30, December 28, 1995 1996 - -------------------------------------------------------------------------------- Retail merchandise $45,543 $44,474 Finished products 29,186 19,588 Work-in-process 1,418 1,363 Raw materials 8,537 8,399 - -------------------------------------------------------------------------------- $84,684 $73,824 - --------------------------------------------------------------------------------
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
(4) LONG-LIVED ASSETS
Management determined that the assets of the U.S. and Canada Retail divisions might have been impaired because of operating losses sustained by these divisions over the last two years. Accordingly, management estimated the undiscounted future cash flows to be generated by the U.S. and Canada Retail divisions, which was less than the carrying amount of the divisions' long-lived assets. Management then estimated the fair value of those assets using discounted future cash flows as a measure of fair value. As stated above, this resulted in a $500 write-down of the assets which is included in selling, general and administrative expense on the income statement.
(5) LONG-TERM DEBT
Long-term debt consisted of the following:
- -------------------------------------------------------------------------------- December 30, December 28, 1995 1996 - -------------------------------------------------------------------------------- 12-3/4% Senior Notes due 2002 $69,450 $69,450 Credit facility 10,676 - - --------------------------------------------------------------------------------
$80,126 $69,450 - --------------------------------------------------------------------------------
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. The debt instruments pursuant to which the Senior Notes and credit facility were issued contain a number of restrictive covenants and events of default, including covenants limiting capital expenditures and incurrence of debt and require Florsheim to achieve certain financial ratios. The Company was in compliance with the financial covenants of its debt instruments, as of December 28, 1996.
12-3/4% SENIOR NOTES DUE 2002
The Senior Notes are senior unsecured obligations of Florsheim. The Senior Notes are jointly and severally guaranteed on a senior unsecured basis by all existing domestic subsidiaries of Florsheim and may be guaranteed by future domestic subsidiaries.
Interest on the Senior Notes is payable semiannually on March 1 and September 1. The Senior Notes mature on September 1, 2002 and will not be redeemable, in whole or part, prior to September 1, 1998, except that, at any time prior to September 1, 1997, Florsheim, at its option, may redeem up to $28,050 principal amount of Senior Notes, at a price equal to 112.75% of the principal amount thereof plus accrued and unpaid interest, if any, to the redemption date, with the net cash proceeds of any equity offering; provided, however, that at least $56,950 principal amount of Senior Notes remains outstanding immediately following each such redemption. 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,
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
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.
The financing fees of $2,550 have been capitalized and are being amortized over an eight year period to the maturity of the notes. When Senior Notes were purchased and retired in fiscal 1995, the capitalized financing fees were adjusted proportionately to the remaining outstanding balance of the Senior Notes.
CREDIT FACILITY
The Company maintains a $75,000 revolving credit facility which matures November 17, 1997. Florsheim can elect to extend the term of the credit facility for an additional two years provided that the Company is in compliance with the restrictive covenants of its debt agreements at the time the term is extended. At December 28, 1996, the outstanding borrowings under the revolving credit loan facility was zero, as compared to $10,676 at December 30, 1995, none of which, in the prior fiscal year, the Company considered to be for seasonal borrowings. The weighted average outstanding balance of the credit facility during the twelve months of 1996 was approximately $2,200.
The credit facility allows for issuance of letters of credit and foreign currency hedging obligations and cash borrowing. Letters of credit issuances and hedging obligations are limited to no more than $60,000; cash borrowings are limited only by the facility's maximum availability less letters of credit and hedging obligations 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 December 28, 1996, the Company's borrowing base totaled $31,185 as compared to $49,282 at December 30, 1995.
The credit facility is secured by a first priority lien on and security interest in substantially all property of the Company. In 1994, the Company paid an origination fee of 2.5% of the commitment of $75,000 to the banks. The Company is required to pay an annual unused line (commitment) fee of one-half of one percent on the average daily unused portion of the commitment, payable monthly in arrears, until such commitments are terminated. The Company also pays an annual collateral management fee of $100. The outstanding cash borrowings under the revolving credit loan facility bear interest at prime rate plus 1.25% or at an adjusted LIBOR rate plus 2.50% depending upon which type of loan the Company executes.
Under the letter of credit facility 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 December 28, 1996, there were $8,817 in letters of credit outstanding under the working capital facility.
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
The commitment fee of $1,875 has been capitalized and is being amortized over a three year period to November 1997.
The Australian operations utilized a credit facility for revolver balances and issuance of letters of credit. The outstanding letters of credit, as of the end of December 1996, was $231. This facility is subject to annual review and secured by a debenture mortgage over the company's inventory to a limit of approximately $1,400. As of December 30, 1995, Florsheim Australia's borrowing totaled $94, as compared to zero at December 28, 1996.
(6) PREFERRED STOCK
The Company's restated certificate of incorporation includes authorization to issue up to 2.0 million shares of no par value, preferred stock. As of December 30, 1995 and December 28, 1996, no preferred stock had been issued.
(7) COMMON STOCK
The Company's restated certificate of incorporation includes authorization to issue up to 20 million shares of common stock. As of December 30, 1995, and December 28, 1996, 8,346,051 shares of common stock had been issued and were outstanding.
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 December 28, 1996), holders of common stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefore. However, it is not presently anticipated that dividends will be paid on common stock in the foreseeable future and certain of the debt instruments to which the Company is a party restrict the payment of dividends. All of the outstanding shares of common stock are fully paid and nonassessable.
(8) STOCK OPTION PLANS
THE FLORSHEIM SHOE COMPANY 1994 STOCK OPTION PLAN
In 1994, prior to the Distribution, the Company adopted The Florsheim Shoe Company 1994 Stock Option Plan (the "Option Plan") pursuant to which the Executive Committee of the Board and 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 authorized and not issued common stock. The Option Plan consists of five individual grants that are non-qualified. Stock options may be granted with an exercise price below the stock's fair market at the grant date. All stock options have ten year terms, vest, and become fully exercisable after five to six years from the date of grant.
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
The Company has adopted the disclosure-only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the Option Plan as options issued to date were at prices equal to or in excess of the stock's fair market value at the date of grant. Had compensation cost for the company's Option Plan been determined based on the fair value at the grant date for awards in 1995 and 1996 consistent with the provisions of SFAS No. 123, the resulting reduction in the company's net income and earnings per share for the years ended December 30, 1995 and December 28, 1996 would not have been significant.
At December 28, 1996, options to purchase 471,000 shares of common stock were outstanding and 52,250 shares were exercisable. The per share weighted-average fair value of stock options granted during 1996, 272,000 shares, was $2.13 (no options were granted during 1995 under the Option Plan) on the date of grant using the Black Scholes option pricing model with the following weighted-average assumptions: dividend yield rate of 0.0%, risk free interest rate of 6.1%, stock volatility rate of 50.0%, expected turnover rate of 25.0% and an expected life of five years.
THE CHARLES J. CAMPBELL STOCK OPTION PLAN
In 1995, the Company adopted the second stock option plan, the Charles J. Campbell Stock Option Plan (the "Campbell Plan"). The Campbell Plan was adopted as a means to encourage and provide opportunities for ownership of Florsheim Common Stock by the Chairman of the Board, Charles J. Campbell. The Campbell Plan was also approved by the public stockholders during the Company's annual 1996 Stockholder Meeting.
The Campbell Plan authorizes grants of options to purchase up to a total of 250,000 shares of authorized but unissued 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.
The Company has adopted the disclosure-only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the Campbell Plan as options issued to date were at prices equal to or in excess of the stock's fair market value at the date of grant. Had compensation cost for the Company's Campbell Plan been determined based on the fair value at the grant date for awards in 1995 and 1996 consistent with the provisions of SFAS No. 123, the resulting reduction in the company's net income and earnings per share for the years ended December 30, 1995 and December 28, 1996 would not have been significant.
At December 28, 1996, options to purchase 250,000 shares of common stock were outstanding and 50,000 shares exercisable. The per share weighted-average fair value of stock options granted during 1995, 250,000 shares, was $1.80 (no options were granted during 1996 under the Campbell Plan). The Black Scholes option pricing model was utilized on the date of grant with the following weighted-average assumptions used for grants in 1995: dividend yield rate of 0.0%, risk free interest rate of 6.1%, stock volatility rate of 50.0%, turnover rate of 0.0%, and an expected life of five years.
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
Stock option activity during the following periods indicated as follows:
Number of Weighted-Average Shares Exercise Price - --------------------------------------------------------------------------------
Balance at January 1, 1994 ---- ---- Granted 454,500 $3.63 Exercised ----- ----- Forfeited ----- ----- Expired ----- -----
- --------------------------------------------------------------------------------
Balance at December 31, 1994 454,500 $3.63
Granted ---- ---- Exercised ---- ---- Forfeited (19,000) $3.76 Expired ---- ----
- --------------------------------------------------------------------------------
Balance at December 30, 1995 435,500 $3.62
Granted 552,000 $6.13 Exercised ---- ---- Forfeited (266,500) $3.78 Expired ---- ----
- --------------------------------------------------------------------------------
Balance at December 28, 1996 721,000 $5.49
- --------------------------------------------------------------------------------
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
The following tables summarize information about fixed price stock options outstanding and exercisable at December 28, 1996:
OPTIONS OUTSTANDING
OPTIONS EXERCISABLE
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
The following table reconciles the differences between the Federal corporate statutory rate and Florsheim's effective income tax rate:
The operating result for fiscal 1995 is a loss before tax. For this reason, 1995 shows a net tax benefit rather than a tax charge. This is in contrast to fiscal 1994 and fiscal 1996 which show a profit before tax and a tax charge.
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Management believes sufficient taxable income will be generated to realize the benefits of the deferred tax assets.
(10) EMPLOYEE BENEFITS
Florsheim sponsors or contributes to retirement plans covering substantially all employees. The total cost (benefit) of all plans for fiscal 1994, 1995 and 1996, (excluding "fresh start" adjustment) were $(1,610), $1,432, and $(222) respectively.
COMPANY-SPONSORED DEFINED BENEFIT PLANS
Annual cost for company-sponsored defined benefit plans is determined using the projected unit credit actuarial method. Prior service cost is amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits.
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
It is Florsheim's practice to fund pension costs to the extent that such costs are tax deductible and in accordance with ERISA. Funding decisions made in fiscal 1996 and 1995 contributed towards the deferred or prepaid pension cost. The assets of the various plans include corporate equities, government securities, corporate debt securities and insurance contracts. The table below summarizes the funded status of Florsheim-sponsored defined benefit plans.
(continued)
- ----------------------------------------------------------------------------- FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands) - -----------------------------------------------------------------------------
Employees are covered primarily by noncontributory plans, funded by Florsheim contributions to trust funds, which are held for the sole benefit of employees. Monthly retirement benefits generally are based upon service, pay, or both, with employees generally becoming vested upon completion of five years of service.
The expected long-term rate of return on plan assets was 8.0%, 9.0%, and 9.0% in fiscal 1994, 1995 and 1996 respectively. Measurement of the projected benefit obligation was based upon a weighted average discount rate of 8.25%, 7.25% and 7.75% and a long-term rate of compensation increase of 4.5%, 4.5% and 4.5%, for fiscal 1994 , 1995 and 1996 respectively.
OTHER RETIREMENT PLANS AND BENEFITS
In addition to the Company-sponsored defined benefit plans, Florsheim makes contributions to various defined contribution, union-negotiated and foreign plans. The cost of these plans is included in the total cost for all plans reflected above.
Florsheim also participated in an employee savings plan during fiscal years 1994 through 1996. Florsheim's cost for this plan for fiscal 1994, 1995 and 1996 was $214, $209 and $164 respectively.
In addition to pension and other supplemental benefits, certain retired employees are currently provided with specified health care and life insurance benefits. Eligibility requirements for such benefits generally state that benefits are available to employees who retire after a certain age with specified years of service if they agree to contribute a portion of the cost. Florsheim has reserved the right to modify or terminate these benefits. Health care and life insurance benefits are provided to both retired and active employees through medical benefit trusts, third-party administrators and insurance companies.
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
As of December 30, 1995 and December 28, 1996, the Company has recorded $1,650 and $1,150 respectively, of the accrued postretirement benefit expense in accrued expenses as shown in Note 15.
Net periodic postretirement benefit expense include the following components:
For measurement purposes, annual rates of increase in the expense of health care benefits of 12.0%, 11.0% and 10% were assumed for fiscal 1994 , 1995 and 1996 respectively. The rates are assumed to decrease gradually to 6.0% in fiscal 2000 and remain at those levels thereafter. The health care expense trend rate assumption has an effect on amounts reported. For example, increasing the health care expense trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 28, 1996 by approximately $499 and the net periodic expense by $85 for the year.
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
The weighted average discount rate used in determining the accumulated postretirement obligation was 8.25%, 7.25% and 7.75% for fiscal 1994 , 1995 and 1996 respectively. The expected long-term rate of return on plan assets was 8.0% for fiscal 1996.
(11) LEASE COMMITMENTS
Substantially all of Florsheim's retail outlets and certain other real properties and equipment are operated under lease agreements expiring at various dates through the year 2008. 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:
- -------------------------------------------------------------------------------- Fiscal year Fiscal year Fiscal year ended ended ended December 31, December 30, December 28, 1994 1995 1996 - --------------------------------------------------------------------------------
Basic rentals $14,992 $15,611 $15,852 Contingent rentals 6,532 6,790 6,469
- --------------------------------------------------------------------------------
21,524 22,401 22,321 Less: sublease rentals 181 63 24 - --------------------------------------------------------------------------------
$21,343 $22,338 $22,297 - --------------------------------------------------------------------------------
Amount of minimum future annual rental commitments under non-cancellable operating leases in each of the five fiscal years 1997 through 2001 are $14,517, $12,666, $10,956, $9,230 and $7,631 and in aggregate for all lease agreements, $76,854 through the end of the lease terms. At December 28, 1996, INTERCO guaranteed future base operating lease payments on behalf of Florsheim of approximately $20 million, exclusive of related operating expenses.
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
LONG-TERM DEBT
The fair values of the following long-term debt are based on closing market prices at year end for the Senior Notes and on the outstanding balance for the credit facility.
December 30, 1995 December 28, 1996 ----------------- ----------------- Carrying Estimated Carrying Estimated amount fair value amount fair value - -------------------------------------------------------------------------------- 12-3/4% Senior Notes due 2002 $69,450 $57,296 $69,450 $75,180 Credit facility 10,676 10,676 - - - --------------------------------------------------------------------------------
(13) TRANSACTIONS WITH AFFILIATES
Prior to the Distribution date, cash collected by Florsheim in excess of operating needs was transferred to Interco and Florsheim's cash requirements were funded by INTERCO. The cumulative net impact of the cash transfers and other intercompany transactions have been included in stockholder's investment. All capital transactions and equity balances between Florsheim and INTERCO through the Distribution date were recorded in stockholder's investment. These transactions and balances include net earnings, capital contributions, dividends, income taxes, and translation adjustments.
(continued on next page)
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
Prior to the Distribution date, INTERCO provided services to Florsheim, including legal, administration of certain benefit and insurance programs, income tax management and cash management and treasury services. The financial statements include an administrative fee allocated to Florsheim totaling $440 for fiscal year 1994. The allocations are not necessarily representative of general and administrative expenses that would have been incurred had Florsheim been an unaffiliated entity.
At the effective date of the Distribution, a consulting agreement was established with Apollo Advisors, L.P., an affiliate of Florsheim's controlling shareholders. Charges totaled $50, $400, and $400 for fiscal years 1994, 1995, and 1996 respectively.
Under an employment agreement with Charles J. Campbell, the Company advanced Mr. Campbell $300 to purchase the Company's common stock. At December 30, 1995, the advance was repaid in full.
(14) LITIGATION
Florsheim is involved in a number of pending or threatened legal proceedings in the ordinary course of business. In the opinion of management, the ultimate liability, if any, of Florsheim from all such proceedings will not have a material adverse effect upon the consolidated financial position or results of operations of Florsheim.
(15) OTHER FINANCIAL DATA
Items charged to earnings during fiscal 1994, 1995 and 1996 include the following:
Items included in other accrued expenses include:
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
(16) BUSINESS SEGMENT INFORMATION
Florsheim operates in one industry segment - the design, sourcing and marketing of quality footwear. Florsheim's products are marketed in the United States and internationally with no one customer or foreign geographical region accounting for 10% or more of consolidated sales. Florsheim operates subsidiaries in Australia, Canada, Europe and the Pacific Rim. Information about Florsheim's operations in the United States and internationally are presented in the table below:
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(1) Common stock equivalents were not used in the computation of average shares outstanding in the third and fourth quarters of 1995 and in the first and second quarters of 1996 due to the antidilutive effect.
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(18) PRO FORMA FINANCIAL DATA - DISTRIBUTION (UNAUDITED)
Pro forma information reflects the November 1994 spin-off from the Company's former parent company and the related debt transactions as if they had occurred as of January 1, 1994. The pro forma information reflects the annual interest expense of the Senior Notes and the bank credit facility, the adjustment to pension expense, and a consulting agreement established at the spin-off date. The pro forma information does not necessarily reflect the operating data of Florsheim which would have resulted if Florsheim had been operated as a separate independent company during the fiscal year ended December 31, 1994.
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
(19) PRO FORMA FINANCIAL DATA - HY-TEST (UNAUDITED)
The following pro forma financial data reflects the sale of the assets of Hy-Test as if the sale had occurred as of January 1, 1995 for pro forma statement of operations purposes and as of December 30, 1995 for pro forma balance sheet purposes. The pro forma data excludes the net sales and direct costs of the Hy-Test division and the Hy-Test operating profit contribution to central overhead costs. Management believes that the assumptions used provide a reasonable basis on which to present the pro forma condensed financial data. The pro forma data are presented for informational purposes only and are not necessarily indicative of the results that would have been achieved had the transaction actually been consummated as of such dates.
The pro forma balance sheet date reflects the sale of Hy-Test receivables and inventory, the sale of the Kirksville, Missouri factory, the transfer of certain liabilities to Wolverine, the use of cash proceeds from the sale to eliminate outstanding borrowings under the bank credit facility, and the unapplied balance of the cash proceeds from the sale, net of transaction costs and taxes as a result of the transaction, as if the transaction occurred as of December 30,1995.
(continued on next page)
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
(20) SUBSEQUENT EVENT
On March 20, 1997, the Company completed the sale of the corporate headquarters building located in downtown Chicago, Illinois, for an all cash sale price of approximately $8,050. Net cash proceeds were approximately $6,000 before income taxes.
(21) SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
In connection with the Distribution, Florsheim issued $85,000 in 12-3/4% Senior Notes due 2002, of which $69,450 are outstanding, and the Senior Notes are guaranteed, on a joint and several basis, by all domestic subsidiaries of Florsheim.
The following condensed consolidating information presents:
(1) Condensed consolidating financial statements as of December 30, 1995 and December 28, 1996 and for the fiscal years ended December 31, 1994, December 30, 1995 and December 28, 1996, 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.
(continued)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
FLORSHEIM GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
FLORSHEIM GROUP INC. Notes to Consolidated Financial Statements (Dollars in thousands)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
Item 9.

Item 9. Changes in and Disagreements with Independent Accountants on Accounting and Financial Disclosure. None
Part III
Item 10.

Item 10. Directors and Executive Officers of the Registrant
The section entitled "Election of Directors-Nominees" in the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders on May 15, 1997 is incorporated herein by reference.
The names, ages, and positions of the Executive Officers of the Company are:
NAME AGE POSITION - ---- --- -------- Charles J. Campbell 52 Chairman of the Board of Directors, President and Chief Executive Officer Thomas W. Joseph 46 President, International Division Karen Nyman Latham 38 Vice President, Chief Financial Officer L. David Sanguinetti 53 Executive Vice President, Chief Operating Officer and President, Retail Division Gregory J. Van Gasse 46 Vice President, Marketing and Director, New Products 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. JOSEPH was elected President, International Division (January 1996) and served as Vice President-Retail Shops Division (Florsheim Shoe Shops and Florsheim Thayer McNeil stores - 1991 to December 1996). Mr. Joseph was previously Vice President, Marketing of Florsheim Australia Limited (1988-1991) and Vice President, Florsheim Thayer McNeil Stores (1986-1988). Mr. Joseph also held positions of General Manager, International Retail Stores (Florsheim Shoe Shops), Regional Supervisor of Retail Stores and Retail Stores Area Manager.
MS. LATHAM was elected Vice President, Chief Financial Officer, (January 1997). From November 1990 through November 1996, Ms. Latham served as Vice President and Treasurer of The Vigoro Corporation, a vertically integrated fertilizer company, which was acquired by IMC Global Inc., of Northbrook, Illinois. Prior to her employment with The Vigoro Corporation, Ms. Latham was employed by Harris Trust and Savings Bank from 1981 until November 1990.
MR. SANGUINETTI was appointed Executive Vice President, Chief Operating Officer (February 1997) and elected President, Retail Division, (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 Younkers Department Store and previously held several senior officer positions at other department stores in multi-store management and merchandising.
MR. VAN GASSE was appointed Director, New Products Division (January 1996), and previously has served as Vice President, Marketing since joining the Company in June 1990. Previously Mr. Van Gasse was employed by Chesebrough Ponds/Unilever as Director of Marketing for cosmetics and personal care products (June 1986 to June 1990) and performed in various domestic and international marketing roles at Colgate Palmolive, also a personal care company (July 1974 to May 1986).
Item 11.

Item 11. Executive Compensation
The sections entitled "Executive Compensation", "Executive Compensation and Stock Option Committee Report on Executive Compensation", "Compensation Committee Interlocks", "Stock Options", "Retirement Plans", "Certain Agreements", "Comparative Stock Performance Graph" and "Compensation and Organization of Board of Directors" of the Company's definitive Proxy Statement for the Annual Meeting of Stockholders on May 15, 1997, are incorporated herein by reference.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management
The section entitled "Security Ownership" of the Company's definitive Proxy Statement for the Annual Meeting of Stockholders on May 15, 1997, is incorporated herein by reference.
Item 13.

Item 13. Certain Relationships and Related Transactions
The sections entitled "Compensation Committee Interlocks" , "Certain Agreements" and "Certain Transactions" of the Company's definitive Proxy Statement for the Annual Meeting of Stockholders on May 15, 1997, are incorporated herein by reference.
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 10-K
(a) List of documents filed as part of this report:
1. Consolidated balance sheets, December 30, 1995 and December 28, 1996.
Consolidated statements of operations for the fiscal year ended December 31, 1994, for the fiscal year ended December 30, 1995, and for the fiscal year ended December 28, 1996.
Consolidated statements of cash flows for the fiscal year ended December 31, 1994, for the fiscal year ended December 30, 1995, and for the fiscal year ended December 28, 1996.
Consolidated statements of shareholders' equity for the fiscal year ended December 31, 1994, for the fiscal year ended December 30, 1995, and for the fiscal year ended December 28, 1996.
Notes to consolidated financial statements.
Independent Auditors' Report
2. Financial Statement Schedules:
Valuation and qualifying accounts (Schedule II)
All other schedules are omitted as the required information is presented in the consolidated financial statements or related notes or are not applicable.
3. Exhibits:
Exhibit Number Description ------- -----------
2.1 Capital Contribution Agreement, dated as of October 2, 1994, between INTERCO INCORPORATED and the Company (incorporated by reference to Exhibit 2.1 by The Florsheim Shoe Company Registration Statement on Form S-1, and all amendments thereto, File No. 33-83204).
2.2 Distribution and Services Agreement, dated as of November 17, 1994, among INTERCO INCORPORATED, the Company and certain of its subsidiaries (incorporated by reference to Exhibit 2.2 by The Florsheim Shoe Company Registration Statement on Form 10/A, Amendment No. 3).
3.1 Restated Certificate of Incorporation of the Company.
3.2 Restated by-laws of the Company.
4.1 Indenture, dated as of November 17, 1994, among the Company, certain of its subsidiaries and First Fidelity Bank, National Association, as Trustee, including form of Senior Note (incorporated by reference to Exhibit 4.1 by The Florsheim Shoe Company Registration Statement on Form 10/A, Amendment No. 3).
4.2 Credit Agreement, dated as of November 17, 1994, among the Company and its subsidiaries named therein, certain financial institutions and BT Commercial Corporation, as agent (incorporated by reference to Exhibit 4.2 by The Florsheim Shoe Company Registration Statement on Form S-1, and all amendments thereto, File No. 33-83204).
4.3 Waiver #1, dated as of March 17, 1995 (received and became effective April 3, 1995) to the Credit Agreement, dated November 17, 1994, among the Company, its subsidiaries named therein, BT Commercial Corporation, as agent, and certain lenders named therein (incorporated by reference to Exhibit 4 as filed with the Company's Quarterly Report on Form 10-Q for the Quarterly Period Ended April 1, 1995).
4.4 Amendment #1, dated as of December 29, 1995, to the Credit Agreement, dated November 17, 1994, among the Company, its subsidiaries named therein, BT Commercial Corporation, as agent, and certain lenders named therein (incorporated by reference to Exhibit 4.4 as filed with the Company's Report on Form 10-K, report date - December 30, 1995).
4.5 Amendment #2, dated as of March 22, 1996, to the Credit Agreement, dated November 17, 1994, among the Company, its subsidiaries named therein, BT Commercial Corporation, as agent, and certain lenders named therein (incorporated by reference to Exhibit 4.5 as filed with the Company's Report on Form 10-K, report date - December 30, 1995).
10.1 INTERCO/Florsheim Tax Sharing Agreement, dated as of November 17, 1994, among INTERCO INCORPORATED, the Company and certain of its subsidiaries (incorporated by reference to Exhibit 10.1 by The Florsheim Shoe Company Registration Statement on Form 10/A, Amendment No. 3).
10.2 Registration Rights Agreement, dated as of November 17, 1994, between the Company and Apollo Interco Partners, L.P. (incorporated by reference to Exhibit 10.2 by The Florsheim Shoe Company Registration Statement on Form 10/A, Amendment No. 3).
10.3 License and Technical Assistance Agreement, dated February 4, 1994, between Florind Shoes Limited and INTERCO INCORPORATED, acting by and through its Florsheim Shoe Company Division (incorporated by reference to Exhibit 10.3 filed by The Florsheim Shoe Company Registration Statement on Form S-1, and all amendments thereto, File No. 33-83204).
10.4 License and Technical Assistance Agreement, dated February 4, 1994, between Floram Shoes India, Ltd. and INTERCO INCORPORATED, acting by and through its Florsheim Shoe Company Division (incorporated by reference to Exhibit 10.4 filed by The Florsheim Shoe Company Registration Statement on Form S-1, and all amendments thereto, File No. 33-83204).
10.5 Export Sales Agreement, dated February 4, 1994, between Floram Shoes India, Ltd. and INTERCO INCORPORATED, acting by and through its Florsheim Shoe Company Division (incorporated by reference to Exhibit 10.5 by filed The Florsheim Shoe Company Registration Statement on Form S-1, and all amendments thereto, File No. 33-83204).
10.6 Export Sales Agreement, dated as of February 4, 1994, between Florind Shoes Limited and INTERCO INCORPORATED, acting by and through its Florsheim Shoe Company Division (incorporated by reference to Exhibit 10.6 filed by The Florsheim Shoe Company Registration Statement on Form S-1, and all amendments thereto, File No. 33-83204).
10.7 Renewed Joint Venture Agreement, dated February 4, 1994, among Shri K. Ameenur Rahman, Floram Shoes India, Ltd., Florind Shoes Limited and INTERCO INCORPORATED, acting by and through its Florsheim Shoe Company Division (incorporated by reference to Exhibit 10.7 filed by The Florsheim Shoe Company Registration Statement on Form S-1, and all amendments thereto, File No. 33-83204).
10.10 Florsheim Supplemental Employee Retirement Plan (incorporated by reference to Exhibit 10.10 filed by The Florsheim Shoe Company Registration Statement on Form S-1, and all amendments thereto, File No. 33-83204).
10.11 Consulting Agreement, dated as of November 17, 1994, between Apollo Advisors, L.P. and the Company (incorporated by reference to Exhibit 10.11 by The Florsheim Shoe Company Registration Statement on Form 10/A, Amendment No. 3).
10.14 Employment Agreement, dated September 15, 1995, between the Company and Ronald J. Mueller, amending and superseding the employment agreement dated October 1, 1994, between the Company and Ronald J. Mueller (incorporated by reference to Exhibit 10.14 filed with the Company's Quarterly Report on Form 10-Q for the Quarterly Period ended September 30, 1995).
10.15 Employment Agreement, dated September 7, 1995, between the Company and Charles J. Campbell (incorporated by reference to Exhibit 10.15 as filed with the Company's Quarterly Report on Form 10-Q for the Quarterly Period ended September 30, 1995).
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 Report on form 10-K, report date - December 30, 1995).
10.17 Amendment, dated December 29, 1995, to Employment Agreement between the Company and Ronald J. Mueller (incorporated by reference to Exhibit 10.17 as filed with the Company's Report on form 10-K, report date - December 30, 1995).
10.18 Asset Purchase Agreement dated as of February 13, 1996 between Wolverine World Wide, Inc., Hy-Test, Inc. and The Florsheim Shoe Company (incorporated by reference to Exhibit 10 as filed with the Company's Report on form 8-K, report date - March 22, 1996).
10.19 1994 Stock Option Plan, as amended and restated as of March 15, 1996 (incorporated by reference to Exhibit 10.1, as filed with the Company's Registration Statement on Form S-8 no. 333-6353).
10.20 Charles J. Campbell Stock Option Plan, as amended and restated as of March 15, 1996 (incorporated by reference to Exhibit 10.2, as filed with the Company's Registration Statement on Form S-8 no. 333-6353).
10.21 Lease Agreement dated September 6, 1996 between Teachers Insurance and Annuity Association of America, a New York corporation, (the "Landlord") and The Florsheim Shoe Company (incorporated by reference to Exhibit 10.1 as filed with the Company's Report on 10-Q, report date - September 28, 1996).
10.22 Real Estate Sale Contract, as amended and restated, for the sale of property located at 130 South Canal Street, Chicago, Illinois, dated February 21, 1997, between The Florsheim Shoe Company and Everest Partners L.L.C.
11 Statement re Computation of Net Earnings Per Common Share.
12.1 Computation of ratio of earnings to fixed charges.
21 Subsidiaries of the Company.
23 Consent of KPMG Peat Marwick LLP.
(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 December 28, 1996.
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.
(this section is blank)
FLORSHEIM GROUP INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedule
Consolidated Financial Statements:
Consolidated balance sheets, December 30, 1995 and December 28, 1996.
Consolidated statements of operations for the fiscal year ended December 31, 1994, for the fiscal year ended December 30, 1995, and for the fiscal year ended December 28, 1996.
Consolidated statements of cash flows for the fiscal year ended December 31, 1994, for the fiscal year ended December 30, 1995, and for the fiscal year ended December 28, 1996.
Consolidated statements of shareholders' equity for the fiscal year ended December 31, 1994, for the fiscal year ended December 30, 1995, and for the fiscal year ended December 28, 1996.
Notes to consolidated financial statements.
Independent Auditors' Report
Consolidated Financial Statement Schedules:
Schedule Valuation and qualifying accounts II
FLORSHEIM GROUP INC. Schedule II -----------
Valuation and Qualifying Accounts
(Dollars in thousands)
(1) Includes provisions for bad debt expense of $750, $1,309, and $645 and provisions for cash discount expense of $5,346, $5,358, and $6,088 for 1994,1995, and 1996, respectively.
(2) Includes write-offs for bad debts of $648, $838, and $893 and cash discounts allowed of $5,385, $5,238, and $6,419 for 1994, 1995, and 1996, respectively.
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 December 28, 1996 and December 30, 1995 and the consolidated statements of operations, cash flows, and shareholders' equity for the years ended December 28, 1996, December 30, 1995 and December 31, 1994. These consolidated financial statements are the responsibility of management of Florsheim Group Inc. Our responsibility is to express an opinion on these consolidated financial statements and the 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 December 28, 1996 and December 30, 1995 and the results of their operations and their cash flows for the years ended December 28, 1996, December 30, 1995 and December 31, 1994 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP Chicago, Illinois February 3, 1997
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 Karen Nyman Latham ----------------------------------- Karen Nyman Latham Vice President, Chief Financial Officer
Date: March 25 , 1997
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 25, 1997.
Signature Title - ---------------------- -----------------------------------
Charles J. Campbell Chairman of the Board of Directors, - ---------------------- (Charles J. Campbell) President, Chief Executive Officer
Bernard Attal Director - ---------------------- (Bernard Attal)
Robert H. Falk Director - ---------------------- (Robert H. Falk)
Michael S. Gross Director - ---------------------- (Michael S. Gross)
John J. Hannan Director - ---------------------- (John J. Hannan)
Joshua J. Harris Director - ---------------------- (Joshua J. Harris)
John H. Kissick Director - ---------------------- (John H. Kissick)
Richard B. Loynd Director - ---------------------- (Richard B. Loynd)
Ronald J. Mueller Director - ---------------------- (Ronald J. Mueller)
Michael D. Weiner Director - ---------------------- (Michael D. Weiner)
Karen Nyman Latham Vice President, - ---------------------- (Karen Nyman Latham) Chief Financial Officer
Thomas E. Poggensee Treasurer, Secretary, Controller - ---------------------- (Thomas E. Poggensee) and Chief Accounting Officer