CopyrightINTERCOHARVARD BUSINESS SCHOOLCase
Software2-296-720Copyright 1991 by the President and Fellows of
Harvard College.Research Associate Susan L. Rother prepared this
case under the supervision of Professor Scott P. Masonas the basis
for class discussion rather than to illustrate either effective or
ineffective handling of anadministrative situation.
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Exhibit 1Exhibit 1 Board of Directors as of May 16, 1988Harvey
SaligmanChairman of the Board and CEO of IntercoHarry M.
KroghPresident and COO of IntercoRonald L. AylwardVice Chairman of
the Board of IntercoR. Stuart MooreVice President of Interco;
President of The Lane Company, Inc., a subsidiary of IntercoMark H.
LiebermanVice President of Interco; President of Londontown, a
division of IntercoRichard B. LoyndVice President of Interco;
Chairman of the Board of Converse, Inc., a subsidiary of
IntercoCharles J. Rothschild, Jr.Vice President of Interco;
Chairman of the Board of Megastar Apparel Group, a division of
IntercoZane E. BarnesChairman of the Board, President, CEO and
director of Southwestern Bell Corporation, engaged in the general
telecommunications businessDonald E. LasaterChairman of the Board,
CEO and director of Mercantile Bancorporation, Inc., a bank holding
company, and Chairman of the Board and director of Mercantile Bank
National AssociationLee M. LibermanChairman of the Board,
President, CEO and director of Laclede Gas Company, a gas public
utilityRobert H. QuenonPresident, CEO and director of Peabody
Holding Company, Inc., which is engaged in coal mining and
salesWilliam E. CorneliusPresident, CEO and director of Union
Electric Company, an electric public utilityMarilyn S. LewisCivic
leader and volunteerThomas H. O'LearyVice Chairman of the Board and
director of Burlington Northern Inc., a holding company with
transportation, energy and natural resources concernsAs of April
15, 1988 all directors, nominees and officers of Interco, as a
group (24 persons) beneficially owned 1.14% of the outstanding
shares of Interco's common stock.
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Exhibit 2Exhibit 2 SubsidiariesAbe Schrader Corp.Big Yank
Corp.Bowen Shoe Co., Inc.Broyhill Furniture Industries, Inc.Campco
Holdings, S.A.Campus Pacific Ltd.Central Hardware Co.Clayton
Operations, S.A.College-Town, Inc.Converse Inc.Delmar Sportswear,
Inc.Ethan Allen Inc.Factory Outlet Co.Fine's Men's Shops,
Inc.Florsheim Inc.Florsheim Shoe Store Co. of HawaiiFlorsheim Shoe
Store Co.MidwestFlorsheim Shoe Store Co.NorthwestFlorsheim Shoe
Store Co.SouthFlorsheim Shoe Store Co.WestGolde's Department
Stores, Inc.Grand Entry Hat Corp.Highland House, Inc.Highland
Transport, Inc.Hy-Test, Inc.Interco Subsidiary, Inc.Keith O'brien
Investment Co.Lane Co., Inc.Lease Management, Inc.Julius Marlow
Holdings, Ltd.L. J. O'neill Shoe Co.ORC Financial AgPatriot
Investment Co.Queen Casuals, Inc.Senack Shoes, Inc.Sky City Stores,
Inc.Stuffed Shirt Inc.United Shirt Distributors, Inc.Walton Road
Management Co.Source: Lotus One Source
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Exhibit 3Exhibit 3 Common Stock Price History (Monthly)Month End
Prices (adjusted for stock
splits)198630-Jan-82$35.1327-Feb-823930-Mar-8239.2529-Apr-8239.62529-May-8243.529-Jun-8247.18830-Jul-8241.37528-Aug-8243.7529-Sep-824030-Oct-8243.7527-Nov-8244.12530-Dec-8236.875198729-Jan-8339.7526-Feb-8342.62530-Mar-8344.12529-Apr-8339.62528-May-8340.12529-Jun-8345.37530-Jul-8351.2530-Aug-8353.2529-Sep-8347.529-Oct-833629-Nov-833030-Dec-8332.25198828-Jan-8437.12528-Feb-844230-Mar-844228-Apr-8441.12530-May-8443.87529-Jun-8444.7528-Jul-8468.5Source:
Interactive Data Corporation
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Exhibit 4Exhibit 4 Common Stock Price History (Daily)Daily
Closing
Prices1-May-84$40.2530-Jun-8444.6252-May-8441.53-Jul-84N.A.3-May-84414-Jul-8445.3754-May-8441.6255-Jul-8444.55-May-8440.6256-Jul-8444.6258-May-8440.8757-Jul-84459-May-8441.7510-Jul-8445.2510-May-8441.62511-Jul-8445.37511-May-844212-Jul-8446.37512-May-8442.12513-Jul-844915-May-8442.2514-Jul-8454.37516-May-844217-Jul-8454.517-May-8441.518-Jul-8458.37518-May-8440.62519-Jul-8458.12519-May-8440.62520-Jul-8457.87522-May-8440.37521-Jul-8457.2523-May-8441.524-Jul-845824-May-8442.525-Jul-8458.87525-May-8442.62526-Jul-8459.37526-May-8441.2527-Jul-8467.7529-May-84N.A.28-Jul-8468.530-May-8443.87531-Jul-8468.87531-May-8443.51-Aug-8467.6251-Jun-8442.8752-Aug-84672-Jun-8444.1253-Aug-8467.3755-Jun-8443.254-Aug-8468.256-Jun-84427-Aug-8472.57-Jun-8443.8758-Jun-8443.3759-Jun-8443.37512-Jun-8443.513-Jun-8443.62514-Jun-8442.515-Jun-8442.87516-Jun-8443.62519-Jun-8443.2520-Jun-8443.12521-Jun-8443.7522-Jun-8443.62523-Jun-8443.526-Jun-8443.62527-Jun-844428-Jun-844429-Jun-8444.75Source:
Interactive Data Corporation
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Exhibit 6Exhibit 6 Historical Balance SheetsINTERCOConsolidated
Balance Sheet($000s except per share data)February
28,198619871988(a)19871988Current
Assets:Cash$16,856$16,631$20,849$29,700$19,622Marketable
securities127,34163,74711,03357,78916,366Receivable,
net402,225446,755486,657431,743460,759Inventories647,116733,907805,095786,792872,135Prepaid
expenses and othercurrent assets22,54725,61435,66525,62244,959Total
current
assets$1,216,085$1,286,654$1,359,299$1,331,646$1,413,841Property,
Plant and Equipment:Land26,77032,26632,525Buildings and
improvements437,812465,811471,787Machinery and
equipment320,256364,499380,402784,838862,576884,714868,670890,887Less
accumulated depreciation343,018377,226405,215386,762412,332Net
Property, Plant and
Equipment441,820485,350479,499481,908478,555Other
Assets99,238153,383146,788149,170146,878Total
Assets$1,756,893$1,925,387$1,985,586$1,962,724$2,039,273Current
Liabilities:Notes payable$ --$68,840$70,517$97,297$146,016Current
maturities of long-term debt and capitallease
obligations9,64711,9158,1729,2888,900Accounts payable andaccrued
expenses184,032216,365239,513278,847292,051Income
taxes12,69917,3274,40215,2945,463Total Current
Liabilities$249,587$358,226$373,343$400,726$452,430Long-term debt,
less
currentmaturities127,409135,019257,327133,403255,279Obligations
under capital leases,less current
maturities56,49550,54641,81349,27040,032Other long-term
liabilities43,24955,38161,76656,41063,484Shareholders'
Equity:Preferred stock, no par
value66,02761,79557,11361,28536,721Common stock, $3.75 stated
value163,765163,643155,088155,088155,088Capital surplus
(41,356,847shares issued)104,20598,24644,53949,14932,117Retained
earnings1,027,8951,099,0061,179,9641,111,5271,194,8841,361,8921,422,6901,436,7041,377,0491,418,810Less
5,173,811 treasury shares81,73996,475185,36754,134190,762Total
Shareholders'
Equity1,280,1531,326,2151,251,3371,322,9151,228,048Total
Liabilities and Net
Worth$1,756,893$1,925,387$1,985,586$1,962,724$2,039,273Source:
Annual report, 10Q's(a) February 29, 1988
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Exhibit 7Exhibit 7 Historical Income
StatementsINTERCOConsolidated Statement of Earnings($000s)First
Quarter Ended May 31,Year Ended February
28,198619871988(a)19871988Income:Net
sales$2,832,384$2,946,902$3,341,423$781,421$778,107Other
income36,14032,17529,2376,2936,8642,868,5242,979,0773,370,660787,714784,971Costs
and Expenses:Cost of
sales1,932,2582,000,4232,284,640522,759522,942Selling, general
andadministrative
expenses681,886712,861799,025199,145201,129Interest
expense25,52328,08233,5357,3519,1792,639,6672,741,3663,117,200729,255733,250Earnings
before income taxes228,857237,711253,46052,27651,904Income
taxes109,008111,937108,45725,27625,762Net
earnings$119,849$125,774$145,003$26,514$30,689Operating
income(b)218,240233,618257,75853,33454,219Operating cash
flow(c)267,756287,133319,275--Source: Annual report and 10Q(a) For
the year ended February 29, 1988(b) Operating income equal to the
sum of earning before income taxes and interest expense less other
income(c) Operating cash flow equal to the sum of operating income
and depreciation expense
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Exhibit 8Exhibit 8 Business Segment InformationFirst Quarter
Ended May 31,Year Ended February 28,19861987198819871988Net Sales
to Unaffiliated
Customers:Apparel$907,833$817,660$813,198$160,339$138,836General
retail461,785498,324532,251148,138149,209Footwear558,286663,521890,411209,535226,672Furniture904,480967,3971,105,563263,409263,390Total$2,832,384$2,946,902$3,341,423$781,421$778,107Operating
Earnings:Apparel$66,716$47,269$20,240($670)($247)General
retail32,08540,61039,10114,13612,498Footwear48,47552,13692,20415,77719,700Furniture105,111123,766149,09038,31932,196Total$252,387$263,781$300,635$67,562$64,147Other
income$36,140$32,175$29,237$6,293$6,864Corporate
expense(34,147)(30,163)(42,877)(14,228)(9,928)Earnings before
interestand taxes254,380265,793286,99559,62761,083Interest
expense(25,523)(28,082)(33,535)(7,351)(9,179)Earnings beforeincome
taxes$228,857$237,711$253,460$52,276$51,904Identifiable Assets at
Year End:Apparel$456,972$465,601$425,350General
retail234,004248,639252,195Footwear291,292497,706595,861Furniture618,980640,106688,853$1,601,248$1,852,052$1,962,259Corporate
Assets155,64573,33523,327Total$1,756,893$1,925,387$1,985,586Depreciation
Expense:Apparel$11,965$12,123$12,521General
retail8,2949,0799,681Footwear8,28610,63813,107Furniture20,97121,67526,208Capital
Expenditures:Apparel$13,433$8,869$9,220General
retail6,1698,16710,735Footwear8,1147,4869,236Furniture27,27824,72036,188Source:
1988 Annual reports and 10Q
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Exhibit 9Exhibit 9 Summary of the Takeover OfferCity Capital
Associates, L.P. OfferDate:7-Aug-84Price per share:$70.00Premium to
stock one-day prior(a)17.90%Premium to stock one-month
prior:59.10%Premium to 52-week low:137.30%Premium to 52-week
high:17.20%Value of equity$2,622.8MMNet debt318.5MMValue of
firm$2,941.3MMValue of FirmValue of Equityas a Multiple of:as a
Multiple of:OperatingOperatingNetBookSalesCash
FlowIncomeIncomeValueYear ending
2/29/880.9x9.2x11.4x18.1x2.2xEstimate of year ending
2/28/890.98.810.7172.2Source: Adapted with minor modifications in
terminology from Wasserstein, Perella & Co., Inc.
presentationto the Interco Board of Directors, August 8, 1988.
Civil Action No. 10111, filed in the Court of Chanceryof the State
of Delaware in and for New Castle County, Exhibit 23.(a) Premiums
based on stock prices as of July 27, 1988
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Exhibit 10Exhibit 10 Premiums Paid AnalysisAverage Premium Paid
over Stock Price# Deals(a)One Day4 Weeks52-Week Low52-Week High1Q
19881962.30%95.50%159.50%16.70%2Q 1988968.60%91.30%182.80%31.50%3Q
1988(b)1236.50%49.90%181.30%2.60%19884056.00%80.90%171.30%15.80%Rales17.90%59.10%137.30%17.20%Source:
Wasserstein, Perella & Co., Inc. presentation to the Interco
Board of Directors, August 8, 1988. Civil ActionNo. 10111, filed in
the Court of Chancery of the State of Delaware in and for New
Castle County, Exhibit 23.(a) Wasserstein, Perella & Co., Inc.
selected tender offers(b) Selected tender offers from the months of
July and August
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Exhibit 11Exhibit 11 Comparable Transaction Analysisa. Purchase
Price Multiples by Business SegmentFurniture Manufacturing
CompaniesPurchase Price
Multiples(a)AnnouncementAggregateNetBookOperatingOperatingDateAcquiror/TargetPrice
($MM)(a)IncomeValue(b)SalesIncomeCash
Flow12/13/83La-Z-Boy/Kincaid$63.5022.0x2.1x0.8x11.7x8.1x11/16/82INTERCO/Lane523.719.32.81.611.19.68/11/82Chicago
Pacific/General Mills
Furniture89.314.11.81129.96/2/82Masco/Henredon260.931.62.62.120.315.88/7/84Rales
Proposal$2,941.3018.1x2.2x0.9x11.4x9.2xSource: Wasserstein, Perella
& Co., Inc. presentation to the Interco Board of Directors,
August 8, 1988. CivilAction No. 10111, filed in the Court of
Chancery of the State of Delaware in and for New Castle County,
Exhibit 23.(a) Sales, operating income, and operating cash flow
multiples adjusted for the value of net debt outstanding(b) Book
value adjusted for intangiblesFootwear Manufacturing
CompaniesPurchase Price
Multiples(a)AnnouncementAggregateNetBookOperatingOperatingDateAcquiror/TargetPrice
($MM)(a)IncomeValue(b)SalesIncomeCash Flow4/24/84NIKE/Cole
Haan$95.0036.2xN.M.1.5x14.112.26/2/83Moacq/Morse
Shoe312.52.51.80.5139.23/9/83Reebok/AVIA19140.66.72.124.623.39/17/82Reebok/Rockport146.130.7N.M.1.72623.97/30/82INTERCO/Converse202.737.11.80.924.718.28/7/84Rales
Proposal$2,941.3018.1x2.2x0.9x11.4x9.2xSource: Wasserstein, Perella
& Co., Inc. presentation to the Interco Board of Directors,
August 8, 1988. CivilAction No. 10111, filed in the Court of
Chancery of the State of Delaware in and for New Castle County,
Exhibit 23.(a) Sales, operating income, and operating cash flow
multiples adjusted for the value of net debt outstanding(b) Book
value adjusted for intangiblesExhibit 11 (continued) Comparable
Transaction AnalysisApparel CompaniesPurchase Price
Multiples(a)AnnouncementAggregateNetBookOperatingOperatingDateAcquiror/TargetPrice
($MM)(a)IncomeValue(b)SalesIncomeCash Flow4/27/84Wesray/William
Carter$157.40N.M.1.6x0.8x24.0x13.7x2/1/84Salant/Manhattan
Indus.129.7N.M.1.40.4N.M.N.M.3/16/82W
Acquisition/Warnco504.7212.50.910.69.211/3/81West Point
Pepperall/Cluett, Peabody551.919.61.50.610.69.28/7/84Rales
Proposal$2,941.3018.1x2.2x0.9x11.4x9.2xSource: Wasserstein, Perella
& Co., Inc. presentation to the Interco Board of Directors,
August 8, 1988. CivilAction No. 10111, filed in the Court of
Chancery of the State of Delaware in and for New Castle County,
Exhibit 23.(a) Sales, operating income, and operating cash flow
multiples adjusted for the value of net debt outstanding(b) Book
value adjusted for intangiblesCentral Hardware DivisionPurchase
Price
Multiples(a)AnnouncementAggregateNetBookOperatingOperatingDateAcquiror/TargetPrice
($MM)(a)IncomeValue(b)SalesIncomeCash Flow6/23/84Management
Group/Payless Cashways$1,189.4022.0x2.3x0.6x13.1x9.2x8/7/84Rales
Proposal$2,941.3018.1x2.2x0.9x11.4x9.2xSource: Wasserstein, Perella
& Co., Inc. presentation to the Interco Board of Directors,
August 8, 1988. CivilAction No. 10111, filed in the Court of
Chancery of the State of Delaware in and for New Castle County,
Exhibit 23.(a) Sales, operating income, and operating cash flow
multiples adjusted for the value of net debt outstanding(b) Book
value adjusted for intangiblesExhibit 11 (continued) Comparable
Transaction Analysisb. Value Ranges by Business
SegmentBusiness1988MultipleValueMedianSegmentSalesRangeRangeValueApparel$813.20.4
- .9$ 325.3 - $ 731.9$569.20General retail532.3.6 - .6319.4 -
319.4319.4Footwear890.4.5 - 2.1445.2 -
1,869.81,335.60Furniture1,105.60.8 - 2.1884.5 -
2,321.81,437.30$1,974.4 -
$5,242.93,661.501988BusinessOperatingMultipleValueMedianSegmentIncomeRangeRangeValueApparel$20.2010.6
- 24.0$ 214.1 - $ 484.8$214.10General retail39.113.1 - 13.1512.2 -
512.2512.2Footwear92.213.0 - 26.01,198.6 -
2,397.22,268.10Furniture149.111.1 - 20.3$1,655.0 -
$3,026.71,766.80$3,579.9 -
$6,420.9$4,761.201988BusinessOperatingMultipleValueMedianSegmentCash
FlowRangeRangeValueApparel$32.709.2 - 13.7$ 300.8 - $
448.0$300.80General retail48.89.2 - 9.2448.9 -
448.9448.9Footwear105.39.2 - 23.9968.8 -
2,516.7970.7Furniture175.38.1 - 15.8$1,419.9 -
$2,769.71,709.20$3,138.4 - $6,183.3$3,429.60
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Exhibit 12Exhibit 12 Discounted Cash Flow
AnalysisAssumptionsFurniture GroupFootwear GroupApparel GroupRetail
GroupTotalSales growth(a)7.70%6.30%7.10%7.60%7.20%Operating margin
range(b)13.1%-14.1%9.1%-10.4%6.4%-7.0%6.5%-7.5%9.2%-10.1%Capital
expenditures(c)1x1x1x1x1xIncrease in working
investment(d)12.50%12.50%12.50%7.50%11.60%Tax rate41.00%Multiple of
Cash Flow in Year 1014.0x15.0x16.0xTerminal value ($
millions)4,746.005,085.005,424.00Implied stock priceDiscount
rate10.00%$80.00$84.00$88.0011.00%74778112.00%68727513.00%636669Source:
Adapted with minor modifications in terminology from Wasserstein,
Perella & Co., Inc. presentation to the IntercoBoard of
Directors, August 8, 1988. Civil Action No. 1011, filed in the
Court of Chancery of the State of Delaware in andfor New Castle
County, Exhibit 23.(a) Ten-year annual compound growth rate(b)
Projected operating margin in 1989 and in 1998(c) As a multiple of
depreciation(d) As a percent of the change in sales in 1994
forward
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Exhibit 13Exhibit 13 Reference Range; Retain Core Companies Case
($ millions Except Per Share)SegmentRangeFurniture Group$1,525 -
$1,750Footwear Group775 - 900Total$2,300 - $2,650After-tax
Divestiture Proceeds$ 588 - $ 639Net Corporate Adjustments(a)(335)
- (273)Range$2,553 - $3,016Per Share Range(b)$68.00 -
$80.00+Source: Wasserstein, Perella & Co., Inc. presentation to
the Interco Board of Directors, August 8, 1988. Civil Action No.
1011, filed in the Court of Chancery of the State of Delaware in
and for New Castle County, Exhibit 23.Action No. 1011, filed in the
Court of Chancery of the State of Delaware in and for New Castle
County, Exhibit 23.(a) Accounts for net debt, overfunded pension
and miscellaneous other assets that include real estate which could
be understated(b) Based on 37.5 million fully-diluted shares
outstanding
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Exhibit 14Exhibit 14 Market Interest RatesYield Curve at August
4, 1988:1-year Tresury bills7.83%7-year Tresury bonds8.8710-year
Tresury bonds9.0130-year Tresury bonds9.10Corporate Bond Rates at
August 5, 1988,(industrial companies)10-year AAA9.50%10-year
AA9.6510-year A9.8010-year BBB10.10Source: Salomon Brothers,
Inc.
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Sheet15
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Sheet16
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