Copyright

INTERCO HARVARD BUSINESS SCHOOL Case Software 2-296-720 Copyright 1991 by the President and Fellows of Harvard College. Research Associate Susan L. Rother prepared this case under the supervision of Professor Scott P. Mason as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

Page 1

Copyright

ssor Scott P. Mason

Page 2

Exhibit 1

Exhibit 1

Board of Directors as of May 16, 1988

Harvey Saligman Harry M. Krogh Ronald L. Aylward R. Stuart Moore Mark H. Lieberman Richard B. Loynd Charles J. Rothschild, Jr. Zane E. Barnes Donald E. Lasater Lee M. Liberman Robert H. Quenon William E. Cornelius Marilyn S. Lewis Thomas H. O'Leary

Chairman of the Board and CEO of Interco President and COO of Interco Vice Chairman of the Board of Interco Vice President of Interco; President of The Lane Company, Inc., a subsidiary of Interco Vice President of Interco; President of Londontown, a division of Interco

Vice President of Interco; Chairman of the Board of Converse, Inc., a subsidiary of Interco

Vice President of Interco; Chairman of the Board of Megastar Apparel Group, a division of

Chairman of the Board, President, CEO and director of Southwestern Bell Corporation, en

Chairman of the Board, CEO and director of Mercantile Bancorporation, Inc., a bank holdi

Chairman of the Board, President, CEO and director of Laclede Gas Company, a gas pub

President, CEO and director of Peabody Holding Company, Inc., which is engaged in coal President, CEO and director of Union Electric Company, an electric public utility Civic leader and volunteer

Vice Chairman of the Board and director of Burlington Northern Inc., a holding company w

As of April 15, 1988 all directors, nominees and officers of Interco, as a group (24 persons) beneficially owned 1.14% of the

Page 3

Exhibit 1

, Inc., a subsidiary of Interco

sion of Interco

rse, Inc., a subsidiary of Interco

tar Apparel Group, a division of Interco

uthwestern Bell Corporation, engaged in the general telecommunications business

ncorporation, Inc., a bank holding company, and Chairman of the Board and director of Mercantile Bank National Association

clede Gas Company, a gas public utility

, Inc., which is engaged in coal mining and sales

n electric public utility

hern Inc., a holding company with transportation, energy and natural resources concerns

beneficially owned 1.14% of the outstanding shares of Interco's common stock.

Page 4

Exhibit 1

ank National Association

Page 5

Exhibit 2

Exhibit 2

Subsidiaries

Abe 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 Hawaii Florsheim Shoe Store Co.Midwest Florsheim Shoe Store Co.Northwest Florsheim Shoe Store Co.South Florsheim Shoe Store Co.West Golde'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 Ag Patriot 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

Page 6

Exhibit 3

Exhibit 3

Common Stock Price History (Monthly)

Month End Prices (adjusted for stock splits) 1986 31-Jan-86 28-Feb-86 31-Mar-86 30-Apr-86 30-May-86 30-Jun-86 31-Jul-86 29-Aug-86 30-Sep-86 31-Oct-86 28-Nov-86 31-Dec-86 30-Jan-87 27-Feb-87 31-Mar-87 30-Apr-87 29-May-87 30-Jun-87 31-Jul-87 31-Aug-87 30-Sep-87 30-Oct-87 30-Nov-87 31-Dec-87 29-Jan-88 29-Feb-88 31-Mar-88 29-Apr-88 31-May-88 30-Jun-88 29-Jul-88 $35.13 39 39.25 39.625 43.5 47.188 41.375 43.75 40 43.75 44.125 36.875 39.75 42.625 44.125 39.625 40.125 45.375 51.25 53.25 47.5 36 30 32.25 37.125 42 42 41.125 43.875 44.75 68.5

1987

1988

Source: Interactive Data Corporation

Page 7

Exhibit 4

Exhibit 4

Common Stock Price History (Daily)

Daily Closing Prices 2-May-88 3-May-88 4-May-88 5-May-88 6-May-88 9-May-88 10-May-88 11-May-88 12-May-88 13-May-88 16-May-88 17-May-88 18-May-88 19-May-88 20-May-88 23-May-88 24-May-88 25-May-88 26-May-88 27-May-88 30-May-88 31-May-88 1-Jun-88 2-Jun-88 3-Jun-88 6-Jun-88 7-Jun-88 8-Jun-88 9-Jun-88 10-Jun-88 13-Jun-88 14-Jun-88 15-Jun-88 16-Jun-88 17-Jun-88 20-Jun-88 21-Jun-88 22-Jun-88 23-Jun-88 24-Jun-88 27-Jun-88 28-Jun-88 29-Jun-88 30-Jun-88 $40.25 41.5 41 41.625 40.625 40.875 41.75 41.625 42 42.125 42.25 42 41.5 40.625 40.625 40.375 41.5 42.5 42.625 41.25 N.A. 43.875 43.5 42.875 44.125 43.25 42 43.875 43.375 43.375 43.5 43.625 42.5 42.875 43.625 43.25 43.125 43.75 43.625 43.5 43.625 44 44 44.75 1-Jul-88 4-Jul-88 5-Jul-88 6-Jul-88 7-Jul-88 8-Jul-88 11-Jul-88 12-Jul-88 13-Jul-88 14-Jul-88 15-Jul-88 18-Jul-88 19-Jul-88 20-Jul-88 21-Jul-88 22-Jul-88 25-Jul-88 26-Jul-88 27-Jul-88 28-Jul-88 29-Jul-88 1-Aug-88 2-Aug-88 3-Aug-88 4-Aug-88 5-Aug-88 8-Aug-88 44.625 N.A. 45.375 44.5 44.625 45 45.25 45.375 46.375 49 54.375 54.5 58.375 58.125 57.875 57.25 58 58.875 59.375 67.75 68.5 68.875 67.625 67 67.375 68.25 72.5

Page 8

Exhibit 4

Source: Interactive Data Corporation

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Exhibit 6

Exhibit 6

Historical Balance Sheets

INTERCO Consolidated Balance Sheet ($000s except per share data) February 28, Current Assets: Cash Marketable securities Receivable, net Inventories Prepaid expenses and other current assets Total current assets Property, Plant and Equipment: Land Buildings and improvements Machinery and equipment Less accumulated depreciation Net Property, Plant and Equipment Other Assets Total Assets Current Liabilities: Notes payable Current maturities of longterm debt and capital lease obligations Accounts payable and accrued expenses Income taxes Total Current Liabilities Long-term debt, less current maturities Obligations under capital leases, less current maturities Other long-term liabilities Shareholders' Equity: Preferred stock, no par value Common stock, $3.75 stated value Capital surplus (41,356,847 shares issued) 1986 1987 1988(a) 1987

$16,856 127,341 402,225 647,116 22,547 $1,216,085

$16,631 63,747 446,755 733,907 25,614 $1,286,654

$20,849 11,033 486,657 805,095 35,665 $1,359,299

$29,700 57,789 431,743 786,792 25,622 $1,331,646

26,770 437,812 320,256 784,838 343,018 441,820 99,238 $1,756,893

32,266 465,811 364,499 862,576 377,226 485,350 153,383 $1,925,387

32,525 471,787 380,402 884,714 405,215 479,499 146,788 $1,985,586

868,670 386,762 481,908 149,170 $1,962,724

--

$68,840

$70,517

$97,297

9,647 184,032 12,699 $249,587

11,915 216,365 17,327 $358,226

8,172 239,513 4,402 $373,343

9,288 278,847 15,294 $400,726

127,409 56,495 43,249

135,019 50,546 55,381

257,327 41,813 61,766

133,403 49,270 56,410

66,027 163,765 104,205

61,795 163,643 98,246

57,113 155,088 44,539

61,285 155,088 49,149

Page 10

Exhibit 6

Retained earnings Less 5,173,811 treasury shares Total Shareholders' Equity Total Liabilities and Net Worth

1,027,895 1,361,892 81,739 1,280,153 $1,756,893

1,099,006 1,422,690 96,475 1,326,215 $1,925,387

1,179,964 1,436,704 185,367 1,251,337 $1,985,586

1,111,527 1,377,049 54,134 1,322,915 $1,962,724

Source: Annual report, 10Q's (a) February 29, 1988

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Exhibit 6

1988

$19,622 16,366 460,759 872,135 44,959 $1,413,841

890,887 412,332 478,555 146,878 $2,039,273

$146,016

8,900 292,051 5,463 $452,430

255,279 40,032 63,484

36,721 155,088 32,117

Page 12

Exhibit 6

1,194,884 1,418,810 190,762 1,228,048 $2,039,273

Page 13

Exhibit 7

Exhibit 7

Historical Income Statements

INTERCO Consolidated Statement of Earnings ($000s) Year Ended February 28, Income: Net sales Other income Costs and Expenses: Cost of sales Selling, general and administrative expenses Interest expense 1986 1987 1988(a) First Quarter Ended May 31, 1987 1988

$2,832,384 36,140 2,868,524 1,932,258 681,886 25,523 2,639,667

$2,946,902 32,175 2,979,077 2,000,423 712,861 28,082 2,741,366 237,711 111,937 $125,774

$3,341,423 29,237 3,370,660 2,284,640 799,025 33,535 3,117,200 253,460 108,457 $145,003

$781,421 6,293 787,714 522,759 199,145 7,351 729,255 52,276 25,276 $26,514

$778,107 6,864 784,971 522,942 201,129 9,179 733,250 51,904 25,762 $30,689

Earnings before income taxes228,857 Income taxes 109,008 Net earnings $119,849

Operating income(b) Operating cash flow(c)

218,240 267,756

233,618 287,133

257,758 319,275

53,334 -

54,219 -

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

Page 14

Exhibit 7

nded May 31,

ense less other income

Page 15

Exhibit 8

Exhibit 8

Business Segment Information

Year Ended February 28,

1986

1987

1988

First Quarter Ended May 31, 1987 1988

Net Sales to Unaffiliated Customers: Apparel General retail Footwear Furniture Total $907,833 461,785 558,286 904,480 $2,832,384 $817,660 498,324 663,521 967,397 $2,946,902 $813,198 532,251 890,411 1,105,563 $3,341,423 $160,339 148,138 209,535 263,409 $781,421 $138,836 149,209 226,672 263,390 $778,107

Operating Earnings: Apparel General retail Footwear Furniture Total Other income Corporate expense Earnings before interest and taxes Interest expense $66,716 32,085 48,475 105,111 $252,387 $36,140 (34,147) 254,380 (25,523) $47,269 40,610 52,136 123,766 $263,781 $32,175 (30,163) 265,793 (28,082) $20,240 39,101 92,204 149,090 $300,635 $29,237 (42,877) 286,995 (33,535) ($670) 14,136 15,777 38,319 $67,562 $6,293 (14,228) 59,627 (7,351) ($247) 12,498 19,700 32,196 $64,147 $6,864 (9,928) 61,083 (9,179)

Earnings before income taxes

$228,857

$237,711

$253,460

$52,276

$51,904

Identifiable Assets at Year End: Apparel General retail Footwear Furniture $456,972 234,004 291,292 618,980 $1,601,248 155,645 $1,756,893 $465,601 248,639 497,706 640,106 $1,852,052 73,335 $1,925,387 $425,350 252,195 595,861 688,853 $1,962,259 23,327 $1,985,586

Corporate Assets Total

Depreciation Expense: Apparel $11,965 $12,123 $12,521

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Exhibit 8

General retail Footwear Furniture

8,294 8,286 20,971

9,079 10,638 21,675

9,681 13,107 26,208

Capital Expenditures: Apparel General retail Footwear Furniture $13,433 6,169 8,114 27,278 $8,869 8,167 7,486 24,720 $9,220 10,735 9,236 36,188

Source: 1988 Annual reports and 10Q

Page 17

Exhibit 8

nded May 31,

Page 18

Exhibit 9

Exhibit 9

Summary of the Takeover Offer

City Capital Associates, L.P. Offer

Date: Price per share: Premium to stock one-day prior(a) Premium to stock one-month prior: Premium to 52-week low: Premium to 52-week high: Value of equity Net debt Value of firm

8-Aug-88 $70.00 17.90% 59.10% 137.30% 17.20% $2,622.8MM 318.5MM $2,941.3MM

Sales

Value of Firm as a Multiple of: Operating Cash Flow

Operating Income

Value of Equity as a Multiple of: Net Income

Year ending 2/29/88 Estimate of year ending 2/28/89

0.9x 0.9

9.2x 8.8

11.4x 10.7

18.1x 17

Source: Adapted with minor modifications in terminology from Wasserstein, Perella & Co., Inc. presentation to the Interco Board of Directors, August 8, 1988. Civil Action No. 10111, filed in the Court of Chancery of the State of Delaware in and for New Castle County, Exhibit 23. (a) Premiums based on stock prices as of July 27, 1988

Page 19

Exhibit 9

Value of Equity as a Multiple of: Book Value

2.2x 2.2

o., Inc. presentation urt of Chancery

Page 20

Exhibit 10

Exhibit 10

Premiums Paid Analysis

# Deals(a) 1Q 1988 2Q 1988 3Q 1988(b) 1988 Rales 19 9 12 40

Average Premium Paid over Stock Price One Day 4 Weeks 52-Week Low 52-Week High 62.30% 68.60% 36.50% 56.00% 17.90% 95.50% 91.30% 49.90% 80.90% 59.10% 159.50% 182.80% 181.30% 171.30% 137.30% 16.70% 31.50% 2.60% 15.80% 17.20%

Source: Wasserstein, Perella & Co., Inc. presentation to the Interco Board of Directors, August 8, 1988. Civil Action No. 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

Page 21

Exhibit 10

August 8, 1988. Civil Action County, Exhibit 23.

Page 22

Exhibit 11

Exhibit 11

Comparable Transaction Analysis

a. Purchase Price Multiples by Business Segment Furniture Manufacturing Companies

Announcement Date Acquiror/Target

Aggregate Price ($MM)(a)

Net Income

Purchase Price Multiples(a) Book Value(b) Sales

12/14/1987 11/17/1986 8/12/1986

La-Z-Boy/Kincaid INTERCO/Lane Chicago Pacific/ General Mills Furniture Masco/Henredon Rales Proposal

$63.50 523.7

22.0x 19.3

2.1x 2.8

0.8x 1.6

89.3 260.9 $2,941.30

14.1 31.6 18.1x

1.8 2.6 2.2x

1 2.1 0.9x

6/3/1986 8/8/1988

Source: Wasserstein, Perella & Co., Inc. presentation to the Interco Board of Directors, August 8, 1988. Civil Action 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 intangibles

Footwear Manufacturing Companies

Announcement Date Acquiror/Target

Aggregate Price ($MM)(a)

Net Income

Purchase Price Multiples(a) Book Value(b) Sales

4/25/1988 6/3/1987 3/10/1987 9/18/1986

NIKE/Cole Haan Moacq/Morse Shoe Reebok/AVIA Reebok/Rockport

$95.00 312.5 191 146.1

36.2x 2.5 40.6 30.7

N.M. 1.8 6.7 N.M.

1.5x 0.5 2.1 1.7

Page 23

Exhibit 11

7/31/1986 8/8/1988

INTERCO/Converse Rales Proposal

202.7 $2,941.30

37.1 18.1x

1.8 2.2x

0.9 0.9x

Source: Wasserstein, Perella & Co., Inc. presentation to the Interco Board of Directors, August 8, 1988. Civil Action 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 intangibles

Exhibit 11 (continued) Apparel Companies

Comparable Transaction Analysis

Announcement Date Acquiror/Target

Aggregate Price ($MM)(a)

Net Income

Purchase Price Multiples(a) Book Value(b) Sales

4/28/1988 Wesray/William Carter 2/2/1988 Salant/Manhattan Indus. 3/17/1986 W Acquisition/Warnco 11/4/1985 West Point Pepperall/ Cluett, Peabody 8/8/1988 Rales Proposal

$157.40 129.7 504.7

N.M. N.M. 21

1.6x 1.4 2.5

0.8x 0.4 0.9

551.9 $2,941.30

19.6 18.1x

1.5 2.2x

0.6 0.9x

Source: Wasserstein, Perella & Co., Inc. presentation to the Interco Board of Directors, August 8, 1988. Civil Action 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 intangibles

Central Hardware Division

Announcement

Aggregate

Net

Purchase Price Multiples(a) Book

Page 24

Exhibit 11

Date

Acquiror/Target

Price ($MM)(a)

Income

Value(b)

Sales

6/24/1988

Management Group/ Payless Cashways Rales Proposal

$1,189.40 $2,941.30

22.0x 18.1x

2.3x 2.2x

0.6x 0.9x

8/8/1988

Source: Wasserstein, Perella & Co., Inc. presentation to the Interco Board of Directors, August 8, 1988. Civil Action 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 intangibles

Exhibit 11 (continued)

Comparable Transaction Analysis

b. Value Ranges by Business Segment

Business Segment

1988 Sales

Multiple Range

Value Range

Median Value

Apparel General retail Footwear Furniture

$813.20 532.3 890.4 1,105.60

.4 - .9 .6 - .6 .5 - 2.1 .8 - 2.1

$ 325.3 - $ 731.9 319.4 - 319.4 445.2 - 1,869.8 884.5 - 2,321.8 $1,974.4 - $5,242.9

$569.20 319.4 1,335.60 1,437.30 3,661.50

Business Segment

1988 Operating Income

Multiple Range

Value Range

Median Value

Apparel General retail Footwear Furniture

$20.20 39.1 92.2 149.1

10.6 - 24.0 13.1 - 13.1 13.0 - 26.0 11.1 - 20.3

$ 214.1 - $ 484.8 512.2 - 512.2 1,198.6 - 2,397.2 $1,655.0 - $3,026.7 $3,579.9 - $6,420.9

$214.10 512.2 2,268.10 1,766.80 $4,761.20

1988

Page 25

Exhibit 11

Business Segment

Operating Cash Flow

Multiple Range

Value Range

Median Value

Apparel General retail Footwear Furniture

$32.70 48.8 105.3 175.3

9.2 - 13.7 9.2 - 9.2 9.2 - 23.9 8.1 - 15.8

$ 300.8 - $ 448.0 448.9 - 448.9 968.8 - 2,516.7 $1,419.9 - $2,769.7 $3,138.4 - $6,183.3

$300.80 448.9 970.7 1,709.20 $3,429.60

Page 26

Exhibit 11

rice Multiples(a) Operating Income

Operating Cash Flow

11.7x 11.1

8.1x 9.6

12 20.3 11.4x

9.9 15.8 9.2x

ust 8, 1988. Civil tle County, Exhibit 23.

debt outstanding

rice Multiples(a) Operating Income

Operating Cash Flow

14.1 13 24.6 26

12.2 9.2 23.3 23.9

Page 27

Exhibit 11

24.7 11.4x

18.2 9.2x

ust 8, 1988. Civil tle County, Exhibit 23.

debt outstanding

rice Multiples(a) Operating Income

Operating Cash Flow

24.0x N.M. 10.6

13.7x N.M. 9.2

10.6 11.4x

9.2 9.2x

ust 8, 1988. Civil tle County, Exhibit 23.

debt outstanding

rice Multiples(a) Operating

Operating

Page 28

Exhibit 11

Income

Cash Flow

13.1x 11.4x

9.2x 9.2x

ust 8, 1988. Civil tle County, Exhibit 23.

debt outstanding

Page 29

Exhibit 12

Exhibit 12

Discounted Cash Flow Analysis

Assumptions

Furniture Group Footwear Group Apparel Group

Retail Group

Sales growth(a) Operating margin range(b) Capital expenditures(c) Increase in working investment(d) Tax rate

7.70% 13.1%-14.1% 1x 12.50%

6.30% 9.1%-10.4% 1x 12.50%

7.10% 6.4%-7.0% 1x 12.50%

7.60% 6.5%-7.5% 1x 7.50%

Multiple of Cash Flow in Year 10 14.0x 15.0x 16.0x Terminal value ($ millions) Implied stock price Discount rate 10.00% 11.00% 12.00% 13.00% 4,746.00 5,085.00 5,424.00

$80.00 74 68 63

$84.00 77 72 66

$88.00 81 75 69

Source: Adapted with minor modifications in terminology from 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. (a) (b) (c) (d) Ten-year annual compound growth rate Projected operating margin in 1989 and in 1998 As a multiple of depreciation As a percent of the change in sales in 1994 forward

Page 30

Exhibit 12

Total

7.20% 9.2%-10.1% 1x 11.60% 41.00%

Inc. presentation to the Interco the State of Delaware in and

Page 31

Exhibit 13

Exhibit 13

Reference Range; Retain Core Companies Case ($ millions Except Per Share)

Segment

Range

Furniture Group Footwear Group Total After-tax Divestiture Proceeds Net Corporate Adjustments(a) Range Per Share Range(b)

$1,525 - $1,750 775 900

$2,300 - $2,650 $ 588 - $ 639 (335) (273)

$2,553 - $3,016 $68.00 - $80.00+

Source: Wasserstein, Perella & Co., Inc. presentation to the Interco Board of Directors, August 8, 1988. Civil Action No. 10 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 unde (b) Based on 37.5 million fully-diluted shares outstanding

Page 32

Exhibit 13

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. ounty, Exhibit 23. estate which could be understated

Page 33

Exhibit 13

Castle County, Exhibit 23.

Page 34

Exhibit 14

Exhibit 14

Market Interest Rates

Yield Curve at August 4, 1988:

1-year Tresury bills 7-year Tresury bonds 10-year Tresury bonds 30-year Tresury bonds

7.83% 8.87 9.01 9.10

Corporate Bond Rates at August 5, 1988, (industrial companies) 10-year AAA 10-year AA 10-year A 10-year BBB 9.50% 9.65 9.80 10.10

Source: Salomon Brothers, Inc.

Page 35