<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 1996
REGISTRATION NO. 333-11905
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
-------------------
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2511 56-1977928
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
-------------------
1300 NATIONAL HIGHWAY
THOMASVILLE, NORTH CAROLINA 27360
(910) 476-4777
(Address, including zip code, and telephone number, including area code,
of registrant's and co-registrants' principal executive offices)
-------------------
DOUGLAS C. BARNARD, ESQ.
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
1300 NATIONAL HIGHWAY
THOMASVILLE, NORTH CAROLINA 27360
(910) 476-4777
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------
With a copy to:
PHILIP H. WERNER, ESQ.
MORGAN, LEWIS & BOCKIUS LLP
101 PARK AVENUE
NEW YORK, N.Y. 10178-0060
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
TABLE OF ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
EXACT NAME OF GUARANTOR PRIMARY STANDARD
REGISTRANT AS SPECIFIED JURISDICTION OF I.R.S. EMPLOYEE INDUSTRIAL CLASSIFICATION
IN ITS CHARTER INCORPORATION IDENTIFICATION NO. CODE NO.
- --------------------------------- --------------- ------------------- --------------------------
<S> <C> <C> <C>
Ametex Fabrics, Inc.............. Delaware 04-2518916 5131
The Berkline Corporation......... Delaware 62-1568223 2512
Blue Mountain Trucking
Corporation...................... Mississippi 64-0625494 4211
Custom Truck Tires, Inc.......... Mississippi 64-0712217 4211
D-H Retail Space, Inc............ Mississippi 56-1726125 9998
Drexel Heritage Advertising,
Inc.............................. Delaware 56-1693295 9998
Drexel Heritage Furnishings,
Inc.............................. New York 13-6087066 2511
Drexel Heritage Home
Inspirations, Inc.............. North Carolina 38-3176528 9998
Henredon Furniture Industries,
Inc.............................. North Carolina 56-0479224 2511
Henredon Transportation Company.. North Carolina 56-1324378 4211
Interior Fabric Design, Inc...... New York 04-2593116 5131
Intro Europe, Inc................ North Carolina 58-1583028 9998
La Barge, Inc.................... Michigan 38-1683907 2514
Lifestyle Holdings Ltd........... Delaware 56-1977929 2511
Lexington Furniture Industries,
Inc.............................. North Carolina 56-0201940 2511
Maitland-Smith, Inc.............. North Carolina 31-1252988 9998
Marbro Lamp Company.............. California 95-4089891 3269
Ramm, Son & Crocker, Inc......... New York 38-3036446 5131
Robert Allen Fabrics, Inc........ Delaware 04-2928435 5131
Robert Allen Fabrics
of New York, Inc............... Delaware 04-2827352 5021
Sunbury Textile Mills, Inc....... Delaware 24-0815238 2221
Universal Furniture Industries,
Inc.............................. Delaware 95-3550559 2511
Universal Furniture Limited...... Delaware 38-2885167 2511
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 25, 1996
PROSPECTUS
OFFER FOR ALL OUTSTANDING 10 7/8% SENIOR SUBORDINATED NOTES DUE 2006
IN EXCHANGE FOR 10 7/8% SENIOR SUBORDINATED NOTES DUE 2006 OF
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME ON , 1996, UNLESS EXTENDED
LIFESTYLE FURNISHINGS INTERNATIONAL LTD, a Delaware corporation (the "Company"),
hereby offers to exchange an aggregate principal amount of up to $200,000,000 of
its 10 7/8% Senior Subordinated Notes due 2006 (the "New Notes") for a like
principal amount of its 10 7/8% Senior Subordinated Notes due 2006 (the "Old
Notes") outstanding on the date hereof upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal (which together constitute the "Exchange Offer"). The New Notes and
the Old Notes are collectively hereinafter referred to as the "Notes." The terms
of the New Notes are identical in all material respects to those of the Old
Notes, except for certain transfer restrictions and registration rights relating
to the Old Notes. The New Notes will be issued pursuant to, and entitled to the
benefits of, the Indenture (as defined) governing the Old Notes. The New Notes
will be unsecured and will be subordinated to all existing and future Senior
Indebtedness (as defined) of the Company. The New Notes will rank pari passu
with any future Senior Subordinated Indebtedness (as defined) of the Company and
will rank senior to all subordinated indebtedness of the Company. The New Notes
will be fully and unconditionally guaranteed (the "Subsidiary Guaranties") on an
unsecured, senior subordinated basis, by each Domestic Subsidiary (as defined)
(other than the Receivables Subsidiary (as defined), the Master Servicer (as
defined) and certain subsidiaries with substantially no assets or operations)
(such guarantors collectively, the "Guarantor Subsidiaries"). The Company is a
holding company that will derive substantially all of its operating income and
cash flow from its subsidiaries. Certain of the Guarantor Subsidiaries are
borrowers under, and the others guarantee, the Senior Bank Facilities (as
defined) and are jointly and severally liable on a senior basis with the Company
for all obligations thereunder. Such obligations are secured by pledges of all
the capital stock of the Guarantor Subsidiaries and 65% of the capital stock of
the Company's first-tier foreign subsidiaries, and security interests in, or
liens on, substantially all other tangible and intangible assets located in the
United States of the Guarantor Subsidiaries. See "Description of Senior Bank
Facilities" and "Description of Notes." As of June 30, 1996, on a pro forma
basis after giving effect to the Transactions (as defined), the Company would
have had no outstanding Senior Indebtedness (excluding unused commitments and
the obligations in respect of borrowings by subsidiaries under the Senior Bank
Facilities), the outstanding Senior Indebtedness of the Guarantor Subsidiaries
would have been $327.2 million (excluding unused commitments) and all
liabilities of the Company and its subsidiaries (including such Senior
Indebtedness but excluding the Notes and the Subsidiary Guaranties) would have
been approximately $758.0 million, and the Company and its subsidiaries would
have had no Senior Subordinated Indebtedness outstanding other than the Old
Notes, and no indebtedness outstanding that was subordinate or junior in right
of payment to the Old Notes. See "Description of Notes--Ranking." Interest on
the New Notes will accrue from the last interest payment date on which interest
was paid on the Old Notes surrendered in exchange therefor or, if no interest
has been paid on the Old Notes, from the date of original issue of the Old
Notes. Interest on the New Notes will be payable semi-annually on February 1 and
August 1 of each year, commencing February 1, 1997.
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company and the Guarantor Subsidiaries contained in the
Exchange and Registration Rights Agreement dated August 5, 1996 (the
"Registration Rights Agreement"), among the Company, the Guarantor Subsidiaries
and Chase Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated
(the "Initial Purchasers"), with respect to the initial sale of the Old Notes.
The Company will not receive any proceeds from the Exchange Offer. The Company
will pay all the expenses incident to the Exchange Offer. Tenders of Old Notes
pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date (as defined) for the Exchange Offer. In the event the Company
terminates the Exchange Offer and does not accept for exchange any Old Notes
with respect to the Exchange Offer, the Company will promptly return such Old
Notes to the holders thereof. See "The Exchange Offer."
Each broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivery of a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act of 1933, as amended (the "Securities Act"). This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. Each of the Company and the Guarantor
Subsidiaries has agreed that, for a period of 180 days after the Expiration
Date, it will make this Prospectus available to any broker-dealer for use in
connection with any such resale. See "Plan of Distribution."
----------------------------------------------------------------
Prior to the Exchange Offer, there has been no public market for the Old Notes.
If a market for the New Notes should develop, such New Notes could trade at a
discount from their principal amount. The Company currently does not intend to
list the New Notes on any securities exchange or to seek approval for quotation
through any automated quotation system and no active public market for the New
Notes is currently anticipated. There can be no assurance that any public market
for the New Notes will develop.
The Exchange Offer is not conditioned upon any minimum principal amount of Old
Notes being tendered for exchange pursuant to the Exchange Offer.
SEE "RISK FACTORS" COMMENCING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT HOLDERS OF OLD NOTES SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER.
----------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL NOR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
AVAILABLE INFORMATION
The Company and the Guarantor Subsidiaries have filed with the Securities
and Exchange Commission (the "Commission") a Registration Statement on Form S-4
(the "Exchange Offer Registration Statement," which term shall encompass all
amendments, exhibits, annexes and schedules thereto) pursuant to the Securities
Act, and the rules and regulations promulgated thereunder, covering the New
Notes being offered hereby. This Prospectus does not contain all the information
set forth in the Exchange Offer Registration Statement. For further information
with respect to the Company, the Guarantor Subsidiaries and the Exchange Offer,
reference is made to the Exchange Offer Registration Statement. Statements made
in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Exchange Offer
Registration Statement, reference is made to the exhibit for a more complete
description of the document or matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. The Exchange Offer
Registration Statement, including the exhibits thereto, can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional
Offices of the Commission at Seven World Trade Center, Suite 1300, New York, New
York 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, the Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of such Web site is:
http://www.sec.gov.
As a result of the Exchange Offer, the Company will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith will be required to file
periodic reports and other information with the Commission. In the event the
Company ceases to be subject to the informational requirements of the Exchange
Act, the Company will be required under the Indenture to continue to file with
the Commission the annual and quarterly reports, information, documents or other
reports, including, without limitation, reports on Forms 10-K, 10-Q and 8-K,
which would be required pursuant to the informational requirements of the
Exchange Act. The Company will also furnish such other reports as may be
required by law.
Information contained in this Prospectus contains "forward-looking
statements" which can be identified by the use of forward-looking terminology
such as "believes," "expects," "may," "will," "should," or "anticipates" or the
negative thereof or other similar terminology, or by discussions of strategy.
The Company's actual results could differ materially from those anticipated by
any such forward-looking statements as a result of certain factors, including
those set forth under the "Risk Factors" beginning on page 15 and elsewhere in
this Prospectus.
-------------------
On August 5, 1996, FURNISHINGS INTERNATIONAL INC., a Delaware corporation
("Holdings"), the parent of the Company, acquired from Masco Corporation
pursuant to the Acquisition Agreement (as defined) and contributed to the
Company as common equity all the capital stock of substantially all of the home
furnishings group of Masco Corporation. The net proceeds from the sale of the
Old Notes, together with borrowings under the Senior Bank Facilities, the
initial proceeds from the Receivables Facility (as defined) and other funds,
were used to finance the Transactions. The Company was formed to consummate the
Transactions. See "Prospectus Summary--The Transactions."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information, financial statements and notes
thereto included elsewhere in this Prospectus. As used in this Prospectus,
unless the context otherwise requires, the term the "Company" refers (i) for
periods prior to the Transactions (as defined) to the home furnishings group
(the "Home Furnishings Group") of Masco Corporation ("Masco") as constituted
prior to the Transactions, and (ii) for periods after the Transactions to
LIFESTYLE FURNISHINGS INTERNATIONAL LTD. and its consolidated subsidiaries as
constituted after giving effect to the Transactions. Certain assets constituting
part of the Home Furnishings Group (the "Holdings Business") were acquired by,
and remain the property of, FURNISHINGS INTERNATIONAL INC., the parent of the
Company ("Holdings"). The historical financial information for the Company
includes, but the pro forma financial information excludes, the Holdings
Business. See "--The Transactions" and "Unaudited Pro Forma Financial
Information."
THE COMPANY
COMPANY OVERVIEW
The Company is the largest U.S. based manufacturer and marketer of
residential furniture and the nation's largest designer, marketer and
distributor of decorative home furnishing fabrics. The Company markets a
comprehensive selection of quality products under well-known brand names through
an extensive worldwide distribution network. The Company offers products in
price categories ranging from "promotional" to "premium," with a primary
concentration on the "good," "better" and "best" categories. From 1991 to 1995,
the Company's net sales grew from $1.5 billion to $2.0 billion, a compound
annual rate of 8.1%, and its EBITDA grew from $85.2 million to $157.6 million, a
compound annual rate of 16.5%. On a pro forma basis giving effect to the
Transactions as if they had been consummated on January 1, 1995, the Company's
EBITDA for 1995 would have been $174.8 million, and its EBITDA for the six
months ended June 30, 1996 would have been $84.7 million.
Fine Furniture. The Company designs, manufactures and markets a full range
of quality wood and upholstered furniture to furnish any room of a home in
virtually any style, under such well-known brand names as Henredon(R), Drexel
Heritage(R), Lexington(R), Universal(R), Berkline(R) and BenchCraft(R), and a
wide range of furniture accessories under the Maitland-SmithTM and La Barge(R)
brand names. Net sales of fine furniture grew from $1.2 billion in 1991 to $1.7
billion in 1995, a compound annual rate of 9.0%.
Decorative Home Furnishing Fabrics. The Company designs, markets and
distributes over 25,000 decorative home furnishing fabrics, such as fabrics for
upholstery and draperies, under such well-known brand names as Robert AllenTM,
SunburyTM and Beacon Hill(R). Net sales of decorative home furnishing fabrics
grew from $238.2 million in 1991 to $271.4 million in 1995, a compound annual
rate of 3.3%.
INDUSTRY OVERVIEW
Since 1975, the domestic residential furniture industry has grown at a
compound annual rate of 5.9%, from $6.0 billion in shipments in 1975 to $19.0
billion in 1995, according to the American Furniture Manufacturers Association
(the "AFMA"), an industry trade group. While the domestic residential furniture
industry fluctuates with the general economy, periods of decline have been
relatively brief, with industry shipments declining in only two years since
1975. The Company believes that the industry will continue to grow in part due
to favorable demographic and other trends, including: (i) the maturation of the
"baby boom" generation, which will increase the portion of the U.S. population
between the ages of 35-54 by more than 8 million people by the end of the decade
(this age group has historically had the highest level of discretionary income
and consumer spending, and represents the largest number of consumers of
residential furniture, according to the United States Bureau of the Census (the
"Census Bureau")); (ii) increases in average new home
3
<PAGE>
size from approximately 1,400 square feet in 1975 to nearly 2,000 square feet in
1994, according to the Census Bureau, which generally results in increased
purchases of furniture per home and (iii) growth in the number of Americans who
work at home and who therefore require home office furniture. The Company
believes that it is well positioned to capitalize on these favorable trends as a
result of its broad range of products and well-known brands.
COMPETITIVE ADVANTAGES
The Company believes it benefits from the following competitive advantages
which have helped it to increase sales and operating profitability and to
maintain its leadership position in the home furnishings industry:
Industry Leadership. As the largest U.S. based manufacturer and marketer of
residential furniture and the nation's largest designer, marketer and
distributor of decorative home furnishing fabrics, the Company enjoys several
marketing advantages, including: (i) a strong share of retail floor space; (ii)
the ability to support its products with significant marketing and advertising
resources and (iii) the resources to introduce and support new design and
product innovations. In addition, the Company also benefits from several
operating advantages, including: (i) economies of scale in purchasing raw
materials; (ii) efficient utilization of its worldwide manufacturing base and
distribution network and (iii) complementary sales and marketing activities.
Established, Well-Known Brand Names. The Company markets its products under
some of the most established and well-known brand names in the industry,
including Henredon(R), Drexel Heritage(R), Lexington(R), Universal(R),
Berkline(R), BenchCraft(R), Maitland-SmithTM and La Barge(R) in fine furniture,
and Robert AllenTM, SunburyTM and Beacon Hill(R) in decorative home furnishing
fabrics. The Company believes that brand name recognition is an important
competitive advantage and that retailers and consumers associate its brands with
a high degree of quality, craftsmanship, style and value.
Comprehensive Product Lines. The Company believes it is the most
comprehensive resource in the home furnishings industry, providing retailers and
consumers with more product alternatives than any of its competitors. The
Company offers products across all price categories and in most major style
categories, including American Traditional, Country, Eighteenth Century,
European Country, European Traditional, Casual, Contemporary, Home Office, Youth
and Oriental. By offering such a broad product line, the Company can supply up
to 75% of the product demands of most furniture retailers, and more easily
satisfy furniture retailers who increasingly prefer to buy from a smaller number
of larger suppliers.
Extensive and Diverse Distribution Network. The Company believes it has more
active accounts than any other manufacturer in the furniture or home furnishings
industry. It distributes its fine furniture products through an extensive
worldwide distribution network that includes: (i) more than 25,000 independent
retail locations, including national and regional chains, department stores,
specialty stores and more than 570 galleries within retail stores; (ii) more
than 90 independent dedicated stores exclusively selling Company products and
(iii) 16 Company owned and operated decorator showrooms. The Company also sells
its fine furniture products to the hospitality and government markets. The
Company distributes its decorative home furnishing fabrics through numerous
distribution channels, including its own showrooms, to an extensive customer
base consisting of over 30,000 retailers, decorators and designers worldwide.
The Company also sells decorative home furnishing fabrics to furniture
manufacturers.
Design and Style Leader. Through its new product offerings and other
innovations, the Company believes it has firmly established itself as an
industry design and style leader, which it believes has been essential to its
success. The Company pioneered "Lifestyle" and designer collections, and its
collections such as The World of Bob TimberlakeTM, Ralph Lauren Furniture
CollectionTM, The Palmer Home CollectionTM and Alexander Julian Home ColoursTM
are among the
4
<PAGE>
industry's best sellers. In addition, the Company's innovative Berkline(R)
products have enabled it to acquire a significant share of the rapidly growing
market for motion furniture (sofas that incline or recline).
Modern Facilities. The Company operates 89 strategically located,
well-equipped facilities in North America, Asia and Europe with over 24 million
square feet of manufacturing and distribution space. Over the past five years
more than $275.0 million has been invested in the Company's facilities to meet
projected growth, reduce operating costs and maximize operating flexibility. The
Company believes that these facilities enable it to serve its worldwide customer
base efficiently and to allocate capacity to best meet its manufacturing
requirements.
Worldwide Presence. The Company's Asian operations include over five million
square feet of manufacturing and distribution facilities, decorator showrooms
and dedicated galleries throughout the region. As the largest U.S. furniture
manufacturer in Asia, the Company has access to a highly skilled (in such areas
as intricate veneering and hand carving), low-cost workforce, and to scarce raw
materials such as Chinese oak, wicker, rattan and certain exotic woods. Although
the large majority of the Company's Asian-made products are sold in the United
States, certain products are sold in Asia, positioning the Company to increase
the distribution of all of its products into this region. The Company also
manufactures and distributes fine furniture products in Europe. The Company's
decorative home furnishing fabrics are manufactured in the United States and in
Europe, and are distributed worldwide.
The Company's strategy for achieving continued growth in sales and cash flow
includes: (i) enhancing its strong brand names; (ii) increasing customer
satisfaction; (iii) focusing on product innovation; (iv) increasing operating
efficiencies and (v) expanding its worldwide presence. See "Business--Business
Strategy."
RECENT COST REDUCTION INITIATIVES
The Company was formed by Masco through a series of acquisitions of
individual brand name companies. As a result, each of the Company's major brands
has historically operated to a certain degree as an independent business unit.
The Company believes there are significant opportunities to improve operating
efficiencies and reduce costs through intercompany cooperation. The Company has
recently implemented several cost reduction initiatives which have begun to
positively impact the Company's results in 1996. The most significant of these
initiatives include: (i) the consolidation of two smaller product lines into the
Company's Drexel Heritage(R) line; (ii) the consolidation and closing of several
Asian retail facilities and (iii) consolidation and overhead reductions in
European manufacturing and distribution. The Company expects such measures to
result in annual savings of up to approximately $16 million beginning in 1996
(of which an estimated $7.2 million has been realized in the six months ended
June 30, 1996). Furthermore, the Company's intercompany cooperation has been
evidenced by an increase in intercompany sales from $57.8 million in 1991 to
$168.0 million in 1995.
The Company believes there are significant opportunities for additional
improvement in margins and cash flow through intercompany cooperation,
including: (i) realizing economies of scale in the procurement of raw materials;
(ii) reducing working capital levels; (iii) reducing capital expenditures from
coordinated use of manufacturing resources and (iv) focusing on cooperative
sales and marketing efforts. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Business
Strategy."
LIFESTYLE FURNISHINGS INTERNATIONAL LTD., a corporation organized under the
laws of Delaware, has its principal executive offices at 1300 National Highway,
Thomasville, North Carolina 27360, and its telephone number is (910) 476-4777.
5
<PAGE>
THE TRANSACTIONS
On August 5, 1996, pursuant to an acquisition agreement (as amended, the
"Acquisition Agreement") between Holdings, which owns all the capital stock of
the Company, and Masco, the following occurred (the "Acquisition"):
(a) Lineage Home Furnishings, Inc. ("Lineage"), then a subsidiary of
Masco that marketed a line of furniture manufactured by the Home
Furnishings Group, and Masco Home Furnishings, Inc. ("MHF" and,
together with Lineage, the "Holdings Business"), then a subsidiary of
Masco that distributed furniture in the contract market, were
acquired by Holdings by merger with and into Holdings, with Holdings
as the surviving corporation in such merger;
(b) Holdings acquired from Masco all the capital stock of the other
corporations previously comprising the Home Furnishings Group (the
"Capital Stock");
(c) Holdings contributed to the Company the Capital Stock and all assets
of the Holdings Business other than certain immaterial assets and
payables (such contributed assets, the "Specified Assets" and,
together with the Capital Stock, the "Acquired Business");
(d) all outstanding intercompany advances by Masco to the Home
Furnishings Group were repaid; and
(e) Holdings and Masco entered into a transition services agreement (the
"Transition Services Agreement") under which Masco will continue to
perform certain administrative services for the Company until April
30, 1997.
The aggregate consideration paid to Masco in connection with the Acquisition
(the "Acquisition Consideration") consisted of:
(a) approximately $705.3 million in cash (substantially all of which
consisted of the repayment of intercompany advances owing to Masco);
(b) the issuance to Masco of $285.0 million of senior pay-in-kind notes
of Holdings (the "Holdings PIK Notes");
(c) the issuance to Masco of common and preferred stock of Holdings
valued at an aggregate of $59.7 million (collectively, the "Masco
Holdings Stock"); and
(d) the assumption of indebtedness owing to non-affiliates of the Home
Furnishings Group, in an aggregate amount of $28.3 million (the
"Assumed Indebtedness").
The cash portion of the Acquisition Consideration (approximately $705.3
million) and the fees and expenses in connection with the Transactions
(approximately $40.0 million) came from the following sources:
(a) 399 Venture Partners, Inc. ("399 Ventures") and certain other
investors, including affiliates of Travelers Group Inc.
(collectively, "Travelers") (the "Institutional Investors") and Wayne
B. Lyon, who became Chief Executive Officer, President and Chairman
of the Board of Holdings, made a capital contribution to Holdings for
common and preferred stock in an aggregate amount of $65.3 million
(the "Equity Contribution") and Holdings paid the Equity Contribution
to Masco in connection with the acquisition of the Holdings Business
(see "Ownership of Securities" for a description of the stock
ownership of Holdings and certain agreements among its stockholders);
(b) the Company and the Guarantor Subsidiaries obtained senior secured
credit facilities (the "Senior Bank Facilities") in an aggregate
principal amount of $450.0 million consisting of (i) $300.0 million
of term loans (the "Term Loans") and (ii) a $150.0 million revolving
credit facility (the "Revolving Credit Facility");
6
<PAGE>
(c) a wholly-owned, special purpose subsidiary of the Company (the
"Receivables Subsidiary") obtained a receivables purchase facility
(the "Receivables Facility") in an aggregate principal amount of up
to $175.0 million; and
(d) the Company issued, and the Guarantor Subsidiaries guaranteed, the
$200.0 million aggregate principal amount of Old Notes (the
"Offering").
The transactions effected in connection with the Acquisition, the repayment
of debt, the financing thereof and the payment of related transaction fees and
expenses are collectively referred to as the "Transactions."
The following table sets forth the sources and uses of funds in connection
with the consummation of the Transactions:
n>
AMOUNT
---------------------
(DOLLARS IN MILLIONS)
SOURCES OF FUNDS
Senior Bank Facilities(1):
Revolving Credit Facility........................ $ 25.0
Tranche A Term Loan.............................. 125.0
Tranche B Term Loan.............................. 175.0
Receivables Facility(2).............................. 155.0
Assumed Indebtedness(3).............................. 28.3
Senior Subordinated Notes due 2006................... 200.0
Stockholder's Equity(4).............................. 410.0
----------
Total............................................ $ 1,118.3
----------
----------
USES OF FUNDS
Acquisition Consideration............................ $ 1,078.3
Transaction Fees and Expenses........................ 40.0
----------
Total............................................ $ 1,118.3
----------
----------
- ------------
(1) Borrowings of up to $150.0 million under the Revolving Credit Facility will
be available for working capital and general corporate purposes, including
up to $50.0 million for letters of credit. See "Description of Senior Bank
Facilities."
(2) See "Description of Receivables Facility."
(3) The Assumed Indebtedness consists of indebtedness to non-affiliates owed by
subsidiaries of the Company at the consummation of the Transactions.
(4) Holdings contributed to the Company as common equity the Acquired Business.
Holdings issued (i) the Holdings PIK Notes ($285.0 million); (ii) common and
preferred stock representing the Equity Contribution (approximately $65.3
million, all of which was paid to Masco in connection with the acquisition
of the Holdings Business) and (iii) the Masco Holdings Stock (approximately
$59.7 million). The common equity of the Company is valued at $410.0
million. See "Ownership of Securities."
7
<PAGE>
OWNERSHIP OF THE COMPANY
The Company is a wholly-owned subsidiary of Holdings. Holdings is owned by
the Institutional Investors (primarily 399 Ventures), Masco and certain members
of management of Holdings (the "Management Investors"). Masco and 399 Ventures
and/or their affiliates have invested together in several companies.
399 Ventures. 399 Ventures is an affiliate of Citicorp Venture Capital,
Ltd., which, together with 399 Ventures and its other affiliated companies, has
a current portfolio of investments in over 100 companies.
Masco. Masco is a manufacturer of brand-name consumer products designed for
the improvement and building of the home. Masco's products include faucets,
kitchen and bath cabinetry, kitchen appliances, plumbing accessories,
ventilating equipment, builders' hardware and other building products. Masco's
1995 net sales (exclusive of the Home Furnishings Group) were approximately $2.9
billion.
Management. Members of the former management of the Home Furnishings Group
joined the Company upon the completion of the Acquisition. The management group
includes Wayne B. Lyon, the former President of Masco (who became the Chief
Executive Officer, President and Chairman of the Board of Holdings and the
Company), each of the divisional presidents and more than 50 other key
employees. See "Management."
The following chart illustrates the corporate structure of the Company. See
"Ownership of Securities."
[FLOWCHART]
* Holdings has an additional subsidiary not shown in the chart, Simmons
Upholstered Furniture Corporation ("Simmons"). Certain shareholders of
Holdings in addition to those shown above hold a special class of common stock
designed to track the performance of such subsidiary.
8
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
Securities Offered.......... Up to $200,000,000 aggregate principal amount of 10 7/8%
Senior Subordinated Notes due 2006 (the "New Notes"). The
terms of the New Notes and Old Notes are identical in all
material respects, except for certain transfer restrictions
and registration rights relating to the Old Notes.
The Exchange Offer.......... The New Notes are being offered in exchange for a like
principal amount of Old Notes. Old Notes may be exchanged only
in integral multiples of $1,000. The issuance of the New Notes
is intended to satisfy obligations of the Company and the
Guarantor Subsidiaries contained in the Registration Rights
Agreement.
Expiration Date; Withdrawal
of Tender................... The Exchange Offer will expire 5:00 p.m. New York City time,
on , 1996, or such later date and time to which it is extended
by the Company. The tender of Old Notes pursuant to the
Exchange Offer may be withdrawn at any time prior to the
Expiration Date. Any Old Notes not accepted for exchange for
any reason will be returned without expense to the tendering
holder thereof as promptly as practicable after the expiration
or termination of the Exchange Offer.
Certain Conditions to the
Exchange Offer.............. The Company's obligation to accept for exchange, or to issue
New Notes in exchange for, any Old Notes is subject to certain
customary conditions relating to compliance with any
applicable law, or any applicable interpretation by any staff
of the Commission, or any order of any governmental agency or
court of law, which may be waived by the Company in its
reasonable discretion. The Company currently expects that each
of the conditions will be satisfied and that no waivers will
be necessary. See "The Exchange Offer--Certain Conditions to
the Exchange Offer."
Procedures for Tendering Old
Notes....................... Each holder of Old Notes wishing to accept the Exchange Offer
must complete, sign and date the Letter of Transmittal, or a
facsimile thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise deliver
such Letter of Transmittal, or such facsimile, together with
such Old Notes and any other required documentation, to the
Exchange Agent (as defined) at the address set forth herein.
See "The Exchange Offer--Procedures for Tendering Old Notes."
Use of Proceeds............. There will be no proceeds to the Company from the exchange of
Notes pursuant to the Exchange Offer.
Exchange Agent.............. IBJ Schroder Bank & Trust Company is serving as the Exchange
Agent in connection with the Exchange Offer.
Federal Income Tax
Consequences................ The exchange of Notes pursuant to the Exchange Offer should
not be a taxable event for federal income tax purposes. See
"Certain Federal Income Tax Considerations."
</TABLE>
9
<PAGE>
CONSEQUENCES OF EXCHANGING OLD NOTES PURSUANT TO THE EXCHANGE OFFER
Based on certain interpretive letters issued by the staff of the Commission
to third parties in unrelated transactions, the Company is of the view that
holders of Old Notes (other than any holder who is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) who exchange their Old
Notes for New Notes pursuant to the Exchange Offer generally may offer such New
Notes for resale, resell such New Notes and otherwise transfer such New Notes
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided such New Notes are acquired in the ordinary course
of the holders' business and such holders have no intention, or any arrangement
with any person, to participate in a distribution of such New Notes. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes must acknowledge that it will deliver a prospectus in connection with any
resale of such New Notes. See "Plan of Distribution." In addition, to comply
with the securities laws of certain jurisdictions, if applicable, the New Notes
may not be offered or sold unless they have been registered or qualified for
sale in such jurisdiction or an exemption from registration or qualification is
available and is complied with. The Company has agreed, pursuant to the
Registration Rights Agreement and subject to certain specified limitations
therein, to register or qualify the New Notes for offer or sale under the
securities or blue sky laws of such jurisdictions as any holder of the Notes
reasonably requests in writing. If a holder of Old Notes does not exchange such
Old Notes for New Notes pursuant to the Exchange Offer, such Old Notes will
continue to be subject to the restrictions on transfer contained in the legend
thereon. In general, the Old Notes may not be offered or sold, unless registered
under the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. Holders of Old Notes do not have any appraisal or dissenters' rights under
Delaware General Corporation Law in connection with the Exchange Offer. See "The
Exchange Offer-- Consequences of Failure to Exchange; Resales of New Notes."
The Old Notes are currently eligible for trading in the Private Offerings,
Resales and Trading through Automated Linkages ("PORTAL") market. Following
commencement of the Exchange Offer but prior to its consummation, the Old Notes
may continue to be traded in the PORTAL market. Following consummation of the
Exchange Offer, the New Notes will not be eligible for PORTAL trading.
THE NEW NOTES
The terms of the New Notes are identical in all material respects to the Old
Notes, except for certain transfer restrictions and registration rights relating
to the Old Notes.
<TABLE>
<S> <C>
Issuer...................... LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
Securities Offered.......... $200,000,000 aggregate principal amount of 10 7/8% Senior
Subordinated Notes due 2006.
Maturity.................... August 1, 2006.
Interest Payment Dates...... February 1 and August 1 of each year, commencing February 1,
1997.
Sinking Fund................ None.
Optional Redemption......... Except as described below, the Company may not redeem the New
Notes (or the Old Notes) prior to August 1, 2001. On or after
such date, the Company may redeem the New Notes (and any
outstanding Old Notes), in whole or in part, at the redemption
prices set forth herein together with accrued and unpaid
interest, if
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
any, to the date of redemption. In addition, at any time and
from time to time on or prior to August 1, 1999, the Company,
at its option, may redeem up to 33 1/3% of the original
aggregate principal amount of the Notes, with the net cash
proceeds of one or more Public Equity Offerings (as defined)
by the Company or Holdings following which there is a Public
Market (as defined), at a redemption price equal to 110.875%
of the principal amount to be redeemed, together with accrued
and unpaid interest, if any, to the date of redemption,
provided that at least 66 2/3% of the original aggregate
principal amount of the Notes remains outstanding immediately
after each such redemption. See "Description of
Notes--Optional Redemption."
Change of Control........... Upon the occurrence of a Change of Control, (i) the Company
will have the option, at any time prior to August 1, 2001, to
redeem the New Notes (and any outstanding Old Notes), in whole
or in part, at a redemption price equal to 100% of the
principal amount thereof plus the Applicable Premium (as
defined), together with accrued and unpaid interest, if any,
to the date of redemption and (ii) if the Company does not so
redeem the New Notes (or such Old Notes) or if such Change of
Control occurs on or after August 1, 2001, each holder will
have the right to require the Company to make an offer to
repurchase the New Notes (and such Old Notes) at a price equal
to 101% of the principal amount thereof, together with accrued
and unpaid interest, if any, to the date of purchase. The
Senior Bank Facilities prohibit the purchase of the New Notes
by the Company in the event of a Change of Control, unless and
until such time as the indebtedness under the Senior Bank
Facilities is paid in full. See "Description of Notes--Change
of Control."
Subsidiary Guaranties....... The New Notes will be (as are the Old Notes) fully and
unconditionally guaranteed on an unsecured, senior
subordinated basis by each of the Guarantor Subsidiaries. See
"Description of Notes--Subsidiary Guaranties."
Ranking..................... The New Notes will be (as are the Old Notes) unsecured and
subordinated in right of payment to all existing and future
Senior Indebtedness (as defined) of the Company. The New Notes
will (as do the Old Notes) rank pari passu with any future
Senior Subordinated Indebtedness (as defined) of the Company
and will rank senior to all other subordinated indebtedness of
the Company. The Subsidiary Guaranties will be general,
unsecured obligations of the Guarantor Subsidiaries,
subordinated in right of payment to all existing and future
Senior Indebtedness of the Guarantor Subsidiaries. As of June
30, 1996, on a pro forma basis after giving effect to the
Transactions, the Company would have had no outstanding Senior
Indebtedness (excluding unused commitments and the obligations
in respect of borrowings by subsidiaries under the Senior Bank
Facilities), the outstanding Senior Indebtedness of the
Guarantor Subsidiaries would have been $327.2 million
(excluding unused commitments) and all liabilities of the
Company and its subsidiaries (including such Senior
Indebtedness but excluding the Notes and the Subsidiary
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
Guaranties) would have been approximately $758.0 million, and
the Company and its subsidiaries would have had no Senior
Subordinated Indebtedness outstanding other than the Old Notes
and no indebtedness outstanding that was subordinate or junior
in right of payment to the Old Notes. See "Description of
Notes-- Ranking."
Restrictive Covenants....... The indenture under which the New Notes will be issued, which
is the indenture under which the Old Notes were issued, limits
(i) the incurrence of additional indebtedness by the Company
and its Restricted Subsidiaries (as defined); (ii) the payment
of dividends on, and redemption of, capital stock of the
Company and its Restricted Subsidiaries and the redemption of
certain subordinated obligations of the Company and its
Restricted Subsidiaries; (iii) investments; (iv) sales of
assets and Restricted Subsidiary stock; (v) certain
transactions with affiliates; (vi) the sale or issuance of
capital stock of Domestic Subsidiaries; (vii) the creation of
liens; (viii) the lines of business in which the Company and
its Restricted Subsidiaries may operate; (ix) sale and
leaseback transactions and (x) consolidations, mergers and
transfers of all or substantially all of the Company's assets.
The Indenture also prohibits certain restrictions on
distributions from Restricted Subsidiaries. However, all of
these limitations and prohibitions are subject to a number of
important qualifications and exceptions. See "Description of
Notes--Certain Covenants" and "--Merger and Consolidation."
Absence of a Public Market
for the New Notes........... The New Notes are new securities and there is currently no
established market for the New Notes. Accordingly, there can
be no assurance as to the development or liquidity of any
market for the New Notes. The Initial Purchasers have advised
the Company and the Guarantor Subsidiaries that they currently
intend to make a market in the New Notes. However, they are
not obligated to do so, and any market making with respect to
the New Notes may be discontinued without notice. The Company
and the Guarantor Subsidiaries do not intend to apply for
listing of the New Notes on any national securities exchange
or for their quotation through the National Association of
Securities Dealers Automated Quotation System.
</TABLE>
RISK FACTORS
Holders of Old Notes should carefully consider all of the information set
forth in this Prospectus and, in particular, should evaluate the specific
factors under "Risk Factors" in connection with the Exchange Offer.
12
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table presents as of the dates and for the periods indicated
(i) summary historical combined financial information and (ii) summary pro forma
consolidated financial information, after giving effect to the Transactions. The
historical financial information for each of the four years in the period ended
December 31, 1995 has been derived from the audited combined financial
statements of the Company. Such combined financial statements for the three
years in the period ended December 31, 1995 have been audited by Coopers &
Lybrand L.L.P. and are included elsewhere herein. The historical financial
information for the year ended December 31, 1991 has been derived from the
unaudited combined financial statements of the Company not included herein. The
historical information for the six months ended June 30, 1995 and 1996 has been
derived from the unaudited combined financial statements of the Company included
herein. In the opinion of management, the information for the six month periods
ended June 30, 1995 and June 30, 1996 includes all material adjustments
(consisting only of adjustments of a normal and recurring nature) necessary for
a fair presentation of the results for such periods. The results of operations
for any interim period are not necessarily indicative of the results of
operations for a full year. The summary pro forma information does not purport
to represent what the Company's results actually would have been if the
Transactions had occurred at the dates indicated, nor does such information
purport to project the results of the Company for any future period. The summary
financial information should be read in conjunction with "Unaudited Pro Forma
Financial Information," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and the
related notes thereto included elsewhere in this Prospectus.
13
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION(1)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------- -------------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995 1995 1996 1996
-------- -------- -------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
STATEMENT OF
OPERATIONS DATA:
Net sales........ $1,457.6 $1,589.6 $1,763.5 $1,897.5 $1,992.6 $1,975.1 $ 984.4 $ 981.1 $ 973.8
Cost of sales.... 1,120.6 1,192.2 1,326.8 1,434.0 1,501.0 1,487.9 737.7 742.0 734.7
-------- -------- -------- -------- -------- --------- -------- -------- ---------
Gross
profit........... 337.0 397.4 436.7 463.5 491.6 487.2 246.7 239.1 239.1
Selling, general
and
administrative
expenses(2)...... 304.4 334.6 367.5 385.4 400.3 355.7 202.6 189.4 174.9
-------- -------- -------- -------- -------- --------- -------- -------- ---------
Operating
profit........... 32.6 62.8 69.2 78.1 91.3 131.5 44.1 49.7 64.2
Interest
expense(3)....... 86.0 84.1 82.7 87.1 94.8 65.6 48.8 44.5 32.4
Other, net(4).... -- 2.6 3.2 7.3 8.3 10.5 0.8 2.9 4.7
-------- -------- -------- -------- -------- --------- -------- -------- ---------
Income (loss)
before income
taxes............ (53.4) (23.9) (16.7) (16.3) (11.8) 55.4 (5.5) 2.3 27.1
Income taxes..... (6.1) 1.0 8.3 6.5 6.1 23.8 3.4 4.9 11.7
-------- -------- -------- -------- -------- --------- -------- -------- ---------
Net income
(loss)........... $ (47.3) $ (24.9) $ (25.0) $ (22.8) $ (17.9) $ 31.6 $ (8.9) $ (2.6) $ 15.4
-------- -------- -------- -------- -------- --------- -------- -------- ---------
-------- -------- -------- -------- -------- --------- -------- -------- ---------
OTHER DATA:
Gross profit
margin........... 23.1% 25.0% 24.8% 24.4% 24.7% 24.7% 25.1% 24.4% 24.6%
EBITDA(5)........ $ 85.2 $ 120.7 $ 133.6 $ 140.9 $ 157.6 $ 174.8 $ 78.5 $ 81.6 $ 84.7
EBITDA margin.... 5.8% 7.6% 7.6% 7.4% 7.9% 8.9% 7.9% 8.3% 8.7%
Capital
expenditures..... $ 35.8 $ 35.1 $ 75.1 $ 68.8 $ 61.0 $ 61.0 $ 32.3 $ 13.9 $ 13.9
Sample book
expenditures(6).... 16.7 29.2 14.2 14.1 15.2 15.2 7.1 6.6 6.6
Depreciation and
amortization..... 54.6 60.5 66.8 66.4 67.9 47.1 34.8 33.8 24.2
Cash interest
expense(7)....... 86.0 84.1 82.7 87.1 94.8 61.2 48.8 44.5 30.2
Ratio of earnings
to fixed
charges.......... -- (8) -- (8) -- (8) -- (8) (8) 1.8 x -- (8) 1.1x 1.7 x
Ratio of total
debt to
EBITDA(9)(10).... 4.0 x
Ratio of EBITDA
to cash interest
expense(9)....... 2.9 x 2.8 x
BALANCE SHEET
DATA (AT PERIOD
END):
Working capital(11)........................................................................... $ 752.7 $ 648.0
Total assets.................................................................................. 1,893.6 1,368.0
Total debt.................................................................................... 26.6 706.6
Total liabilities............................................................................. 293.5 958.0
Masco net investment and advances(12)......................................................... 1,600.1 --
Stockholder's equity.......................................................................... -- 410.0
</TABLE>
- ------------
(1) Historical results include The Berkline Corporation, which was acquired in
April 1994 in a pooling-of-interests transaction. The summary pro forma
financial information for the year ended December 31, 1995 and for the six
months ended June 30, 1996 gives effect to the Transactions as if they had
occurred on January 1, 1995. The pro forma balance sheet information at
June 30, 1996 gives effect to the Transactions as if they had occurred on
such date. The historical financial information includes, but the pro forma
financial information excludes, the Holdings Business.
(2) Included in historical selling, general and administrative expenses are
general corporate expenses which represent certain corporate staff support
and administrative services provided by Masco. These expenses, which were
charged to the Company by Masco, consisted of $10.8, $9.8, $10.5, $12.7 and
$16.0 in 1991 through 1995, respectively, and $7.9 and $8.0 for the six
months ended June 30, 1995 and 1996, respectively.
(3) Historical interest expense consists primarily of interest on advances from
Masco.
(4) Other, net, is net of interest income.
(5) EBITDA is defined as net income (loss) before interest expense, income
taxes, depreciation and amortization expense (including amortization of
sample book expenditures) and certain other non-cash charges. Such other
non-cash charges were $(2.0), $0, $0.7, $3.8, $6.7, $0.4 and $1.0 for 1991
through 1995 and the six months ended June 30, 1995 and 1996, respectively.
The Company believes that EBITDA provides additional information for
determining its ability to meet debt service requirements. EBITDA does not
represent and should not be considered as an alternative to net income or
cash flow from operations as determined by generally accepted accounting
principles, and EBITDA does not necessarily indicate whether cash flow will
be sufficient for cash requirements. This definition of EBITDA differs from
that specified under the Indenture, with the principal difference being
that Indenture EBITDA does not add back to net income amortization of debt
issuance costs. Exclusion of such amortization would decrease pro forma
EBITDA to $170.4 and $82.5 for 1995 and the six months ended June 30, 1996,
and would have no impact on historical EBITDA as presented. Not every
company calculates EBITDA in exactly the same fashion. As a result, EBITDA
as presented above may not necessarily be comparable to similarly titled
measures of other companies. See "Description of Notes--Certain
Definitions."
(6) Sample book expenditures, which consist of the cost of producing books
containing actual samples of the Company's decorative home furnishing
fabrics, are capitalized and amortized over a three-year period.
(7) Cash interest expense is defined as interest expense less amortization of
debt issuance costs.
(8) For the purpose of computing this ratio, earnings consist of income before
income taxes and fixed charges and fixed charges consist of interest
expense plus the interest portion of the Company's rental expense under
operating leases. Earnings were insufficient to cover fixed charges by
$55.9, $24.5, $17.6, $15.6 and $11.4 in 1991 through 1995, respectively and
by $5.7 for the six months ended June 30, 1995.
(9) These ratios are not shown for historical periods because substantially all
debt of the Company during such periods was owed to Masco.
(10) The ratio of total debt to EBITDA for the pro forma year ended December 31,
1995 is calculated using the pro forma total debt outstanding as of June
30, 1996.
(11) Working capital is defined as total current assets (excluding cash and cash
equivalents) less total current liabilities (excluding current maturities
of long-term debt).
(12) At June 30, 1996, advances from Masco totaled $1,163.4. Pursuant to the
Acquisition Agreement, Masco agreed that the outstanding amount of such
advances upon the consummation of the Transactions would not exceed $705.3.
The excess of such advances over $705.3 was converted to equity prior to
the consummation of the Transactions.
14
<PAGE>
RISK FACTORS
Holders of Old Notes should carefully consider the following factors in
addition to the other information set forth in this Prospectus in connection
with the Exchange Offer. The risk factors set forth below are generally
applicable to the Old Notes as well as the New Notes.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE INDEBTEDNESS
The Company is highly leveraged. After giving pro forma effect to the
Transactions as of June 30, 1996, the Company's and its subsidiaries'
indebtedness would have been approximately $706.6 million and the Company's
stockholder's equity would have been $410.0 million. In addition, subject to the
restrictions in the Senior Bank Facilities and the Indenture, the Company may
incur additional indebtedness from time to time. The degree to which the Company
is leveraged could have important consequences to holders of the New Notes (and
to holders of the Old Notes), including the following: (i) the Company's ability
to obtain additional financing for working capital, capital expenditures,
acquisitions or general corporate purposes may be limited; (ii) a substantial
portion of the Company's cash flow from operations must be dedicated to the
payment of interest on the Notes and its other existing indebtedness, thereby
reducing the funds available to the Company for other purposes; (iii) certain
indebtedness under the Senior Bank Facilities will be at variable rates of
interest, which will cause the Company to be vulnerable to increases in interest
rates; (iv) all of the indebtedness outstanding under the Senior Bank Facilities
will be secured by pledges of all the capital stock of the Guarantor
Subsidiaries and 65% of the capital stock of the Company's first-tier foreign
subsidiaries, and security interests in, or liens on, substantially all other
tangible and intangible assets located in the United States of the Guarantor
Subsidiaries, and will become due prior to the time the principal on the Notes
will become due; (v) the Company may be hindered in its ability to adjust
rapidly to changing market conditions and (vi) the Company's substantial degree
of leverage could make it more vulnerable in the event of a downturn in general
economic conditions or in its business.
The Company's ability to pay interest on the New Notes (and on any
outstanding Old Notes) and to satisfy its other debt obligations will depend
upon its future operating performance, which will be affected by prevailing
economic conditions and financial, business and other factors, certain of which
are beyond its control. If the Company's cash flow and capital resources are
insufficient to fund its debt service obligations, the Company may be forced to
reduce or delay capital expenditures, sell assets, obtain additional equity
capital or restructure its debt. There can be no assurance that the Company's
cash flow and capital resources will be sufficient for payment of its
indebtedness in the future. In the absence of such operating results and
resources, the Company could face substantial liquidity problems and might be
required to dispose of material assets or operations to meet its debt service
and other obligations, and there can be no assurance as to the timing of such
sales or the proceeds which the Company could realize therefrom. However,
although there can be no assurance, the Company does not believe that its cash
flow and capital resources will result in or are likely to result in its
liquidity decreasing in any material way in the near future.
SUBORDINATION; ASSET ENCUMBRANCE
The payment of principal of and interest on, and any premium or other
amounts owing in respect of, the New Notes will be (as is the case with the Old
Notes) subordinated to the prior payment in full of all existing and future
Senior Indebtedness of the Company, including all amounts owing or guaranteed
under the Senior Bank Facilities. Consequently, in the event of a bankruptcy,
liquidation, dissolution, reorganization or similar proceeding with respect to
the Company, assets of the Company will be available to pay obligations of the
New Notes (and any outstanding Old Notes) only after all Senior Indebtedness of
the Company has been paid in full, and there can be no
15
<PAGE>
assurance that there will be sufficient assets to pay amounts due on all or any
of the New Notes (and any outstanding Old Notes).
Payments in respect of the respective Subsidiary Guaranties of the New Notes
will be (as is the case with the Old Notes) subordinated to the prior payment in
full of all existing and future Senior Indebtedness of the respective Guarantor
Subsidiaries, including all amounts owing or guaranteed in respect of the Senior
Bank Facilities. As of June 30, 1996, on a pro forma basis after giving effect
to the Transactions, the aggregate principal amount of such Senior Indebtedness
would have been the $325.0 million guaranteed or borrowed under the Senior Bank
Facilities and $2.2 million of Assumed Indebtedness. Consequently, in the event
of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding
with respect to a Guarantor Subsidiary, its assets will be available to pay
obligations only after the Senior Indebtedness of such Guarantor Subsidiary has
been paid in full, and there can be no assurance that there will be sufficient
assets to pay amounts due in respect of such Guarantor Subsidiary's guaranty of
the New Notes (or of the Old Notes).
The Indenture permits the Company and the Guarantor Subsidiaries to incur
certain secured indebtedness, including indebtedness under the Senior Bank
Facilities, which is secured by pledges of all the capital stock of the Company,
the Guarantor Subsidiaries and 65% of the capital stock of the Company's
first-tier foreign subsidiaries, and security interests in, or liens on,
substantially all other tangible and intangible assets located in the United
States of the Guarantor Subsidiaries. The New Notes (and the Old Notes) and the
Subsidiary Guaranties are unsecured and therefore do not have the benefit of
such collateral. Accordingly, if an event of default occurs under the Senior
Bank Facilities, the lenders will have a prior right to the assets of the
Company and the Guarantor Subsidiaries, and may foreclose upon such collateral
to the exclusion of the holders of the New Notes (and of any outstanding Old
Notes), notwithstanding the existence of an event of default with respect
thereto. In such event, such assets would first be used to repay in full amounts
outstanding under the Senior Bank Facilities, resulting in all or a portion of
the Company's and the Guarantor Subsidiaries' assets being unavailable to
satisfy the claims of the holders of the New Notes (and of any outstanding Old
Notes) and other unsecured indebtedness.
RESTRICTIVE COVENANTS
The Senior Bank Facilities include certain covenants that, among other
things, restrict the ability of the Company and its subsidiaries to: (i) dispose
of assets; (ii) incur additional indebtedness; (iii) incur guarantee
obligations; (iv) prepay other indebtedness or amend certain other debt
instruments; (v) pay dividends; (vi) create liens on assets; (vii) enter into
sale and leaseback transactions; (viii) make investments, loans or advances;
(ix) make acquisitions; (x) engage in mergers or consolidations; (xi) change the
business conducted by the Company; (xii) make capital expenditures or (xiii)
engage in certain transactions with affiliates and otherwise restrict certain
corporate activities. In addition, under the Senior Bank Facilities the Company
is required to comply with specified financial ratios and tests, including
minimum interest coverage ratios, maximum leverage ratios, annual capital
expenditures limitations and net worth tests. There can be no assurance that
these requirements will be met in the future. If they are not, the holders of
the indebtedness under the Senior Bank Facilities would be entitled to declare
such indebtedness immediately due and payable. See "Description of Senior Bank
Facilities."
The Indenture includes certain covenants that, among other things, limit (i)
the incurrence of additional indebtedness by the Company and its Restricted
Subsidiaries; (ii) the payment of dividends on, and redemption of, capital stock
of the Company and its Restricted Subsidiaries and the redemption of certain
subordinated obligations of the Company and its Restricted Subsidiaries; (iii)
investments; (iv) sales of assets and Restricted Subsidiary stock; (v) certain
transactions with affiliates; (vi) the sale or issuance of capital stock of
Domestic Subsidiaries; (vii) the creation of
16
<PAGE>
liens; (viii) the lines of business in which the Company and its Restricted
Subsidiaries may operate; (ix) sale and leaseback transactions and (x)
consolidations, mergers and transfers of all or substantially all of the
Company's assets. The Indenture also prohibits certain restrictions on
distributions from Restricted Subsidiaries. There can be no assurance that such
restrictions will not have an adverse effect on the Company. See "Description of
Notes--Certain Covenants" and "-- Merger and Consolidation."
HOLDING COMPANY STRUCTURE; POSSIBLE UNENFORCEABILITY OF THE SUBSIDIARY
GUARANTIES
The Company is a holding company which derives all of its operating income
from its subsidiaries. The holders of the New Notes will have (as is the case
with the holders of the Old Notes) no direct claim against such subsidiaries
other than the claim created by the Subsidiary Guaranties, which may themselves
be subject to legal challenge in the event of the bankruptcy of a subsidiary.
See "--Fraudulent Conveyance." If such a challenge were upheld, the Subsidiary
Guaranties would be unenforceable. To the extent that the Subsidiary Guaranties
are not enforceable, the rights of holders of the New Notes (and of any
outstanding Old Notes) to participate in any distribution of assets of any
Guarantor Subsidiary upon liquidation, bankruptcy, reorganization or otherwise
may, as is the case with other unsecured creditors of the Company, be subject to
prior claims of creditors of that Guarantor Subsidiary. The Company must rely
upon dividends and other payments from its subsidiaries to generate the funds
necessary to meet its obligations, including the payment of principal of and
interest on the New Notes. The Indenture contains covenants which restrict the
ability of Restricted Subsidiaries to enter into agreements limiting
distributions and transfers, including dividends. However, the ability of the
Company's subsidiaries to pay dividends and make other payments may be
restricted by, among other things, applicable state corporate laws and
regulations or by terms of agreements to which they may become party. See
"Description of Notes."
LACK OF INDEPENDENT OPERATING HISTORY
Prior to the consummation of the Transactions, the business of the Home
Furnishings Group had been conducted as a part of Masco. The Company had no
prior operating history and was formed to consummate the Transactions. The
Company will not be able to rely on Masco for financial support (other than with
respect to Masco's agreement to provide up to $15.0 million in credit
enhancement--see "Certain Transactions--Acquisition Arrangements"), or to
benefit from its relationship with Masco, as it has in the past, in order to
obtain credit or receive favorable terms for the purchase of goods and services
from third parties. Holdings and Masco entered into the Transition Services
Agreement under which Masco agreed to provide certain administrative services to
the Company and Holdings until April 30, 1997. Upon expiration of this period,
the Company and Holdings will be responsible for obtaining such services on
their own. If the Company and Holdings are unable to perform such services or
obtain them on acceptable terms, the Company's business, financial condition and
results of operations may be adversely affected. See "Certain
Transactions--Acquisition Arrangements" and "--Transition Services Agreement."
ECONOMIC FACTORS AFFECTING THE INDUSTRY
Historically, the home furnishings industry has been cyclical, fluctuating
with economic cycles, and is highly sensitive to general economic conditions,
housing starts, interest rate levels, credit availability and other factors that
affect consumer spending habits. Purchases of home furnishings are discretionary
and tend to be deferred during times of economic uncertainty. There can be no
assurance that an economic downturn would not have a material adverse effect on
the Company.
17
<PAGE>
FLUCTUATIONS IN PRICE AND SUPPLY OF RAW MATERIALS
The Company is dependent upon outside suppliers for all of its raw material
needs and, therefore, is subject to price increases and delays in receiving
supplies of such materials. An increase in demand for raw materials could
increase delivery times for supplies and possibly further affect prices. No
assurance can be given that the Company will continue to have available
necessary raw materials at a reasonable price or that any increases in raw
material costs would not have a material adverse effect on the Company. See
"Business--Raw Materials."
HIGHLY COMPETITIVE INDUSTRY
The home furnishings industry is highly competitive and includes a large
number of domestic and foreign manufacturers. No company has a dominant position
in the industry. Competition is generally based on product quality, brand name
recognition, price and service. Certain of the Company's competitors may have
greater financial and other resources than the Company and may have greater
sales or brand recognition than the Company in particular industry segments.
Competition could adversely affect the Company's operating results by forcing it
to reduce its sales prices, offer enhanced credit terms, increase customer
discounts or incentives, increase spending for co-operative advertising
arrangements with customers, incur additional shipping costs or provide other
services. See "Business--Competition."
FOREIGN OPERATIONS
Significant portions of the Company's operations are conducted in Taiwan,
Singapore, the Philippines, China, Malaysia, Indonesia and Thailand. As a
result, the Company may be adversely affected by changes in currency values, the
prevailing political climate in such countries, such countries' relations with
the United States and the general economic climate in such countries. The
Company manufactures a number of its products in China. Loss of China's "most
favored nation" trade status would result in an increase in duty for the
Company's products produced in China and imported into the United States, but
would not, the Company believes, have a material adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The ability of the Company to maintain its competitive position will depend
to a significant degree upon its ability to continue to attract and maintain
highly qualified managerial, manufacturing and sales and marketing personnel.
There can be no assurance that the Company will be able to continue to recruit
and retain such personnel. In particular, the Company is dependent on certain
key management personnel, and there can be no assurance that the loss of key
personnel would not have a material adverse effect on the Company's results of
operations. All of the key members of management will have an equity interest in
Holdings; however the Company does not presently intend to enter into employment
agreements with any members of management. See "Management."
CONTROLLING STOCKHOLDERS
The Company is a wholly-owned subsidiary of Holdings. The Institutional
Investors, the Management Investors and Masco own all of the voting stock of
Holdings. By virtue of such stock ownership, such persons have the power,
indirectly, to control all matters submitted to stockholders of the Company and
to elect all directors of the Company and its subsidiaries. See "Ownership of
Securities."
Although the terms of the Indenture restrict dividends and distributions to
Holdings, the Company is permitted to make certain payments to Holdings,
including payments: (i) to cover
18
<PAGE>
certain operating expenses of Holdings relating to the Company; (ii) to cover
certain tax liabilities allocable to the Company and (iii) to fund certain
losses of Holdings incurred as a result of the operation of the Holdings
Business. The Indenture does not restrict Holdings or its activities. See
"Description of Notes--Certain Covenants."
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, unless the Company redeems the
Notes, each holder of the New Notes (and of any outstanding Old Notes) will have
the right to require the Company to repurchase such Notes at a price equal to
101% of the principal amount thereof, plus accrued and unpaid interest, if any,
to the date of purchase. The occurrence of a Change of Control would constitute
a default under the Senior Bank Facilities. In addition, the Senior Bank
Facilities prohibit the purchase of the New Notes (and any outstanding Old
Notes) by the Company in the event of a Change of Control, unless and until such
time as the indebtedness under the Senior Bank Facilities is repaid in full. The
Company's failure to purchase the New Notes (and any outstanding Old Notes)
would result in a default under the Indenture. The inability to repay the
indebtedness under the Senior Bank Facilities, if accelerated, would also
constitute an event of default under the Indenture, which could have adverse
consequences to the Company and the holders of the New Notes (and of any
outstanding Old Notes). In the event of a Change of Control, there can be no
assurance that the Company would have sufficient assets to satisfy all of its
obligations under the Senior Bank Facilities and the New Notes (and any
outstanding Old Notes). See "Description of Senior Bank Facilities" and
"Description of Notes--Change of Control."
ENVIRONMENTAL MATTERS
The Company is subject to comprehensive and frequently changing federal,
state, local and foreign environmental laws and regulations, including those
governing emissions of air pollutants, discharges of wastewaters and storm
waters and the disposal of non-hazardous and hazardous wastes. The Company
anticipates that it will incur additional costs in the future to comply with
currently existing laws and regulations, new regulatory requirements arising
from recently enacted statutes and any new statutory requirements. The Company
estimates it will spend approximately $1.0-$1.5 million in 1996 for capital
expenditures to comply with environmental laws. The actual capital expenditures
in 1996 may differ from this amount, and capital expenditures in future years
may significantly exceed the amounts budgeted for 1996. The Company's operating
costs for compliance with environmental requirements also may increase in future
years. Under the provisions of the Clean Air Act Amendments of 1990 (the "CAA"),
in December 1995, the United States Environmental Protection Agency promulgated
hazardous air emission standards applicable to the wood furniture industry.
These regulations, known as the National Emission Standards for Hazardous Air
Pollutants ("NESHAPs"), will require the Company to reduce emissions of certain
volatile organic compounds by November 1997. In order to comply with NESHAPs,
the Company intends to reformulate certain furniture finishes or institute
process changes to reduce emissions of volatile organic compounds. The furniture
industry and its suppliers are attempting to develop water-based and other forms
of compliant finishing materials to replace commonly-used, organic-based
finishes which are a major source of regulated emissions. The Company cannot at
this time estimate the impact of these new standards on the Company's operations
and future capital expenditure requirements, or the cost of compliance. There
can be no assurance that reformulation of finishes or process changes will not
adversely affect the quality or durability of the Company's products.
Furthermore, if the Company cannot satisfy applicable regulatory requirements
following reformulation or process changes, the Company will likely be required
to install air pollution control technology at its facilities. However, the
Company does not believe that any expenditures in connection therewith would be
likely to materially adversely affect the Company's liquidity.
19
<PAGE>
FRAUDULENT CONVEYANCE
The incurrence by the Company and the Guarantor Subsidiaries of indebtedness
such as the Old Notes (and the New Notes exchanged therefor) and the Subsidiary
Guaranties, respectively, to finance the Transactions may be subject to review
under relevant state and federal fraudulent conveyance laws if a bankruptcy case
or lawsuit is commenced by or on behalf of unpaid creditors of the Company or a
Guarantor Subsidiary. Under these laws, if a court were to find that, after
giving effect to the sale of the Old Notes (and the exchange of the New Notes
therefor) and the application of the net proceeds therefrom, either (a) the
Company or such Guarantor Subsidiary incurred such indebtedness with the intent
of hindering, delaying or defrauding creditors or (b) the Company or such
Guarantor Subsidiary received less than reasonably equivalent value or
consideration for incurring such indebtedness and (i) was insolvent or was
rendered insolvent by reason of such transactions; (ii) was engaged in a
business or transaction for which the assets remaining with the Company or such
Guarantor Subsidiary constituted unreasonably small capital or (iii) intended to
incur, or believed that it would incur, debts beyond its ability to pay as they
matured, such court may subordinate such indebtedness to presently existing and
future indebtedness of the Company or such Guarantor Subsidiary, avoid the
issuance of such indebtedness and direct the repayment of any amounts paid
thereunder to the creditors of the Company or such Guarantor Subsidiary, as the
case may be, or take other action detrimental to the holders of such
indebtedness.
The measure of insolvency for purposes of determining whether a transfer is
avoidable as a fraudulent transfer varies depending upon the law of the
jurisdiction which is being applied. Generally, however, a debtor would be
considered insolvent if the sum of all its liabilities, including contingent
liabilities, were greater than the value of all its property at a fair
valuation, or if the present fair saleable value of the debtor's assets were
less than the amount required to repay its probable liabilities on its debts,
including contingent liabilities, as they become absolute and matured.
There can be no assurance as to what standard a court would apply in order
to determine solvency. To the extent that proceeds from the sale of the Old
Notes were used to finance the Transactions, a court may find that the Company
or the Guarantor Subsidiaries, as the case may be, did not receive fair
consideration or reasonably equivalent value for the incurrence of the
indebtedness represented thereby (and by the New Notes issued in exchange
therefor). In addition, if a court were to find that any of the components of
the Transactions constituted a fraudulent transfer, to the extent that proceeds
from the sale of the Old Notes were used to finance such Transactions, a court
may find that the Company or the Guarantor Subsidiaries did not receive fair
consideration or reasonably equivalent value for the incurrence of the
indebtedness represented by the Old Notes (and by the New Notes issued in
exchange therefor) or the Subsidiary Guaranties, as the case may be. Pursuant to
the terms of the Subsidiary Guaranties, the liability of each Guarantor
Subsidiary is limited to the maximum amount of indebtedness permitted, at the
time of the grant of such Subsidiary Guaranty, to be incurred in compliance with
fraudulent conveyance or similar laws.
Each of the Company and the Guarantor Subsidiaries believes that it received
equivalent value at the time the indebtedness under the Old Notes was incurred.
In addition, neither the Company nor any Guarantor Subsidiary, after giving
effect to the consummation of the Transactions: (i) believes that it was
insolvent or rendered insolvent; (ii) believes that it was engaged in a business
or transaction for which its remaining assets constituted unreasonably small
capital or (iii) intended to incur, or believed that it would incur, debts
beyond its ability to pay as they mature. These beliefs are based on the
Company's analysis of internal cash flow projections and estimated values of
assets and liabilities of the Company and the Guarantor Subsidiaries at the time
of the offering of the Old Notes. There can be no assurance, however, that a
court passing on the issues would make the same determination.
20
<PAGE>
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFER
The New Notes are new securities for which there currently is no market.
Although the Initial Purchasers have informed the Company and the Guarantor
Subsidiaries that they currently intend to make a market in the New Notes, they
are not obligated to do so and any such market making may be discontinued at any
time without notice. Accordingly, there can be no assurance as to the
development or liquidity of any market for the New Notes. The Old Notes
currently are eligible for trading by qualified buyers in the Private Offerings,
Resale and Trading through Automated Linkages (PORTAL) market. The Company and
the Guarantor Subsidiaries do not intend to apply for listing of the New Notes
on any securities exchange or for quotation through the National Association of
Securities Dealers Automated Quotation System.
The liquidity of, and trading market for, the New Notes also may be
adversely affected by general declines in the market or by declines in the
market for similar securities. Such declines may adversely affect such liquidity
and trading markets independent of the financial performance of, and prospects
for, the Company.
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange of Notes pursuant
to the Exchange Offer.
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996 on a pro forma basis after giving effect to the Transactions. This
table should be read in conjunction with the "Selected Historical and Pro Forma
Financial Information," "Unaudited Pro Forma Financial Information,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and the related notes thereto included
elsewhere in this Prospectus. LIFESTYLE FURNISHINGS INTERNATIONAL LTD. was
incorporated in May 1996 for the purpose of consummating the Transactions.
<TABLE>
<CAPTION>
PRO FORMA AS OF
JUNE 30, 1996
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
Long-term debt (including current portion thereof):
Revolving Credit Facility(1)............................................ $ 25.0
Tranche A Term Loan(1).................................................. 125.0
Tranche B Term Loan(1).................................................. 175.0
Receivables Facility(2)................................................. 155.0
Assumed Indebtedness(3)................................................. 26.6
Senior Subordinated Notes due 2006...................................... 200.0
----------
Total long-term debt.................................................. 706.6
Stockholder's equity:
Common stock, $.01 par value, 3,000 authorized and 100 outstanding...... --
Additional paid-in capital(4)........................................... 410.0
----------
Total stockholder's equity............................................ 410.0
----------
Total capitalization.................................................. $ 1,116.6
----------
----------
</TABLE>
- ------------
(1) Borrowings of up to $150.0 million under the Revolving Credit Facility will
be available for working capital and general corporate purposes, including
up to $50.0 million for letters of credit. See "Description of Senior Bank
Facilities."
(2) See "Description of Receivables Facility."
(3) The Assumed Indebtedness consists of indebtedness to non-affiliates to be
owed by subsidiaries of the Company at the consummation of the Transactions.
At the closing of the Transactions on August 5, 1996, the Assumed
Indebtedness was $28.3 million.
(4) Holdings contributed to the Company as common equity the Acquired Business.
Holdings issued (i) the Holdings PIK Notes ($285.0 million); (ii) common and
preferred stock representing the Equity Contribution (approximately $65.3
million, all of which was paid to Masco in connection with the acquisition
of the Holdings Business) and (iii) the Masco Holdings Stock (approximately
$59.7 million). The common equity of the Company is valued at $410.0
million. See "Ownership of Securities."
22
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table presents as of the dates and for the periods indicated
(i) selected historical combined financial information of the Company and (ii)
pro forma consolidated financial information of the Company, after giving effect
to the Transactions. The historical financial information for each of the four
years in the period ended December 31, 1995 has been derived from the audited
combined financial statements of the Company. Such combined financial statements
for the three years in the period ended December 31, 1995 have been audited by
Coopers & Lybrand L.L.P. and are included elsewhere herein. The historical
financial information for the year ended December 31, 1991 has been derived from
the unaudited combined financial statements of the Company not included herein.
The historical information for the six months ended June 30, 1995 and 1996 has
been derived from the unaudited combined financial statements of the Company
included herein. In the opinion of management, the information for the six month
periods ended June 30, 1995 and June 30, 1996 includes all material adjustments
(consisting only of adjustments of a normal and recurring nature) necessary for
a fair presentation of the results for such periods. The results of operations
for any interim period are not necessarily indicative of the results of
operations for a full year. The pro forma information does not purport to
represent what the Company's results actually would have been if the
Transactions had occurred at the dates indicated, nor does such information
purport to project the results of the Company for any future period. The
selected financial information should be read in conjunction with "Unaudited Pro
Forma Financial Information," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and the
related notes thereto included elsewhere in this Prospectus.
23
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION(1)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------- ---------------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995 1995 1996 1996
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
STATEMENT OF OPERATIONS
DATA:
Net sales............... $1,457.6 $1,589.6 $1,763.5 $1,897.5 $1,992.6 $1,975.1 $ 984.4 $ 981.1 $ 973.8
Cost of sales........... 1,120.6 1,192.2 1,326.8 1,434.0 1,501.0 1,487.9 737.7 742.0 734.7
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......... 337.0 397.4 436.7 463.5 491.6 487.2 246.7 239.1 239.1
Selling, general and
administrative
expenses(2)............. 304.4 334.6 367.5 385.4 400.3 355.7 202.6 189.4 174.9
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Operating profit..... 32.6 62.8 69.2 78.1 91.3 131.5 44.1 49.7 64.2
Interest expense(3)..... 86.0 84.1 82.7 87.1 94.8 65.6 48.8 44.5 32.4
Other, net(4)........... -- 2.6 3.2 7.3 8.3 10.5 0.8 2.9 4.7
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before
income taxes........ (53.4 ) (23.9 ) (16.7 ) (16.3 ) (11.8 ) 55.4 (5.5 ) 2.3 27.1
Income taxes............ (6.1 ) 1.0 8.3 6.5 6.1 23.8 3.4 4.9 11.7
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss).... $ (47.3 ) $ (24.9 ) $ (25.0 ) $ (22.8 ) $ (17.9 ) $ 31.6 $ (8.9 ) $ (2.6 ) $ 15.4
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
OTHER DATA:
Gross profit margin..... 23.1% 25.0% 24.8% 24.4% 24.7% 24.7% 25.1% 24.4% 24.6%
EBITDA(5)............... $ 85.2 $ 120.7 $ 133.6 $ 140.9 $ 157.6 $ 174.8 $ 78.5 $ 81.6 $ 84.7
EBITDA margin........... 5.8% 7.6% 7.6% 7.4% 7.9% 8.9% 7.9% 8.3% 8.7%
Capital expenditures.... $ 35.8 $ 35.1 $ 75.1 $ 68.8 $ 61.0 $ 61.0 $ 32.3 $ 13.9 $ 13.9
Sample book
expenditures(6)......... 16.7 29.2 14.2 14.1 15.2 15.2 7.1 6.6 6.6
Depreciation and
amortization............ 54.6 60.5 66.8 66.4 67.9 47.1 34.8 33.8 24.2
Cash interest
expense(7).............. 86.0 84.1 82.7 87.1 94.8 61.2 48.8 44.5 30.2
Cash (used for) provided
by operating
activities.............. (37.1 ) (56.2 ) (42.9 ) (0.7 ) 34.3 63.0 (32.6 ) 38.2 46.7
Cash (used for) provided
by investing
activities.............. (53.1 ) (51.1 ) (77.9 ) (53.1 ) (57.5 ) (57.5 ) (37.2 ) (15.0 ) (15.0 )
Cash (used for) provided
by financing
activities.............. 90.7 106.3 129.9 53.1 15.8 15.8 67.8 (28.5 ) (28.5 )
Ratio of earnings to
fixed
charges................ -- (8 ) -- (8 ) -- (8 ) -- (8 ) -- (8 ) 1.8 x -- (8 ) 1.1 x 1.7 x
Ratio of total debt to
EBITDA(9)(10)........... 4.0 x
Ratio of EBITDA to cash
interest expense(9).... 2.9 x 2.8 x
BALANCE SHEET DATA (AT
PERIOD END):
Working capital(11)..... $ 602.8 $ 678.5 $ 734.1 $ 754.9 $ 758.1 $ 808.0 $ 752.7 $ 648.0
Total assets............ 1,662.8 1,743.3 1,863.6 1,919.1 1,913.0 1,987.4 1,893.6 1,368.0
Total debt.............. 142.5 124.5 61.9 15.2 27.7 43.7 26.6 706.6
Total liabilities....... 358.1 343.0 295.9 274.4 282.9 312.4 293.5 958.0
Masco net investment and
advances(12)............ 1,304.7 1,400.3 1,567.7 1,644.7 1,630.1 1,675.0 1,600.1 --
Stockholder's equity.... -- -- -- -- -- -- -- 410.0
</TABLE>
- ------------
(1) Historical results include The Berkline Corporation, which was acquired in
April 1994 in a pooling-of-interests transaction. The selected pro forma
financial information for the year ended December 31, 1995 and for the six
months ended June 30, 1996 gives effect to the Transactions as if they had
occurred on January 1, 1995. The pro forma balance sheet information at
June 30, 1996 gives effect to the Transactions as if they had occurred on
such date. The historical financial information includes, but the pro forma
financial information excludes, the Holdings Business.
(2) Included in historical selling, general and administrative expenses are
general corporate expenses which represent certain corporate staff support
and administrative services provided by Masco. These expenses, which were
charged to the Company by Masco, consisted of $10.8, $9.8, $10.5, $12.7 and
$16.0 in 1991 through 1995, respectively, and $7.9 and $8.0 for the six
months ended June 30, 1995 and 1996, respectively.
(3) Historical interest expense consists primarily of interest on advances from
Masco.
(4) Other, net, is net of interest income.
(5) EBITDA is defined as net income (loss) before interest expense, income
taxes, depreciation and amortization expense (including amortization of
sample book expenditures) and certain other non-cash charges. Such other
non-cash charges were $(2.0), $0, $0.7, $3.8, $6.7, $0.4 and $1.0 for 1991
through 1995 and the six months ended June 30, 1995 and 1996, respectively.
The Company believes that EBITDA provides additional information for
determining its ability to meet debt service requirements. EBITDA does not
represent and should not be considered as an alternative to net income or
cash flow from operations as determined by generally accepted accounting
principles, and EBITDA does not necessarily indicate whether cash flow will
be sufficient for cash requirements. This definition of EBITDA differs from
that specified under the Indenture, with the principal difference being
that Indenture EBITDA does not add back to net income amortization of debt
issuance costs. Exclusion of such amortization would decrease pro forma
EBITDA to $170.4 and $82.5 for 1995 and the six months ended June 30, 1996,
and would have no impact on historical EBITDA as presented. Not every
company calculates EBITDA in exactly the same fashion. As a result, EBITDA,
as presented above may not necessarily be comparable to similarly titled
measures of other companies. See "Description of Notes--Certain
Definitions."
(6) Sample book expenditures, which consist of the cost of producing books
containing actual samples of the Company's decorative home furnishing
fabrics, are capitalized and amortized over a three-year period.
(7) Cash interest expense is defined as interest expense less amortization of
debt issuance costs.
(8) For the purpose of computing this ratio, earnings consist of income before
income taxes and fixed charges and fixed charges consist of interest
expense plus the interest portion of the Company's rental expense under
operating leases. Earnings were insufficient to cover fixed charges by
$55.9, $24.5, $17.6, $15.6 and $11.4 in 1991 through 1995, respectively and
by $5.7 for the six months ended June 30, 1995.
(9) These ratios are not shown for historical periods because substantially all
debt of the Company during such periods was owed to Masco.
(10) The ratio of total debt to EBITDA for the pro forma year ended December 31,
1995 is calculated using the pro forma total debt outstanding as of June
30, 1996.
(11) Working capital is defined as total current assets (excluding cash and cash
equivalents) less total current liabilities (excluding current maturities
of long-term debt).
(12) Advances from Masco were $847.9, $943.4, $1,091.0, $1,192.0, $1,195.0,
$1,229.8 and $1,163.4 at December 31, 1991 through 1995 and June 30, 1995
and 1996, respectively. Pursuant to the Acquisition Agreement, Masco agreed
that the outstanding amount of such advances upon the consummation of the
Transactions would not exceed $705.3. The excess of such advances over
$705.3 was converted to equity prior to the consummation of the
Transactions.
24
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated balance sheet of the Company
at June 30, 1996 gives effect to the Transactions as if they had occurred on
such date. The unaudited pro forma consolidated statements of operations for the
year ended December 31, 1995 and for the six months ended June 30, 1996 give
effect to the Transactions as if they had occurred on January 1, 1995.
The Acquisition has been accounted for by the purchase method of accounting
and, accordingly, the purchase price of approximately $1.1 billion (including
estimated fees and expenses) has been allocated to the acquired assets and
assumed liabilities based upon estimated fair values as of the closing of the
Acquisition.
Because the Holdings Business was part of the Home Furnishings Group but is
not part of the Company (except with respect to the Specified Assets),
adjustments are shown first to eliminate the Holdings Business (other than the
Specified Assets) and then to reflect the Transactions.
The unaudited pro forma consolidated balance sheet and statements of
operations are based on the historical combined financial statements for the
Company and the assumptions and adjustments described in the accompanying notes.
The unaudited pro forma consolidated statements of operations do not purport to
represent what the Company's results of operations actually would have been if
the Transactions described above had occurred as of the date indicated or what
results will be for any future periods. The unaudited pro forma financial
information is based upon assumptions that the Company believes are reasonable
and should be read in conjunction with the Financial Statements and the related
notes thereto included elsewhere in this Prospectus.
The pro forma financial statements are based upon available information and
certain assumptions that the Company believes are reasonable in the
circumstances, including estimates for a proposed plan to restructure certain of
its businesses. The Company's allocation of purchase price was based upon the
estimated fair value of assets acquired and liabilities assumed. The pro forma
information presented may be adjusted from the amounts included in these
statements once the proposed plan of restructuring is finalized. Management
expects to finalize its plan of restructuring in early 1997 as permitted by
Emerging Issues Task Force ("EITF") Issue 95-3 "Recognition of Liabilities in
Connection with a Purchase Business Combination." Any adjustment would be
reflected as a pro forma adjustment to property and equipment in accordance with
Accounting Principles Board Opinion No. 16.
25
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
---------------------------------------------------------------------
ADJUSTMENTS AS ADJUSTED PRO FORMA
FOR EXCLUSION FOR EXCLUSION ADJUSTMENTS
OF HOLDINGS OF HOLDINGS FOR
HISTORICAL BUSINESS (A) BUSINESS TRANSACTIONS PRO FORMA
---------- ------------- ------------- ------------ ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash investments....... $ 12.1 -$- $ 12.1 $ -- $ 12.1
Receivables..................... 325.8 1.6 327.4 (5.4)(b) 322.0
Inventories..................... 568.1 (3.6) 564.5 (48.6)(b) 515.9
Prepaid expenses................ 35.0 (1.4) 33.6 (10.8)(b) 22.8
Deferred income taxes........... 17.0 -- 17.0 (17.0)(b) --
---------- ----- ------------- ------------ ---------
Total current assets...... 958.0 (3.4) 954.6 (81.8) 872.8
Property and equipment, net..... 478.5 -- 478.5 (62.5)(b) 416.0
Excess of cost over acquired net
assets.......................... 395.4 -- 395.4 (395.4)(b) --
Notes receivable................ 18.9 -- 18.9 (2.8)(b) 16.1
Other assets.................... 42.8 -- 42.8 20.3(b)(c) 63.1
---------- ----- ------------- ------------ ---------
Total assets.............. $ 1,893.6 $(3.4) $ 1,890.2 $ (522.2) $1,368.0
---------- ----- ------------- ------------ ---------
---------- ----- ------------- ------------ ---------
LIABILITIES AND EQUITY:
Notes payable................... $ 24.5 -$- $ 24.5 $ 16.0(d) $ 40.5
Accounts payable................ 97.0 (0.3) 96.7 96.7
Accrued liabilities............. 96.2 (3.1) 93.1 22.9(b) 116.0
---------- ----- ------------- ------------ ---------
Total current
liabilities..................... 217.7 (3.4) 214.3 38.9 253.2
Long-term debt.................. 2.1 -- 2.1 664.0(e) 666.1
Deferred income taxes and
other........................... 73.7 -- 73.7 (35.0)(b)(f) 38.7
---------- ----- ------------- ------------ ---------
Total liabilities......... 293.5 (3.4) 290.1 667.9 958.0
Masco net investment and
advances........................ 1,600.1 -- 1,600.1 (1,600.1)(b)(g) --
Stockholder's equity............ -- -- -- 410.0(h) 410.0
---------- ----- ------------- ------------ ---------
$ 1,893.6 $(3.4) $ 1,890.2 $ (522.2) $1,368.0
---------- ----- ------------- ------------ ---------
---------- ----- ------------- ------------ ---------
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Balance Sheet.
26
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
(a) Represents elimination of assets and liabilities of the Holdings Business
(other than the Specified Assets).
(b) To record purchase price allocation using the purchase method of accounting
based upon the fair value of the assets acquired and the liabilities
assumed. A reconciliation of the allocation of the excess of the book value
of the net assets acquired over the purchase price as of June 30, 1996 is
provided below:
Book value of net assets acquired..................... $1,600.1
To eliminate certain assets and liabilities not
purchased or assumed under the terms of the
Acquisition Agreement:
Deferred income tax assets........................ (17.0)
Deferred income tax liabilities (see footnote (f)
below)................................................ 69.3
To adjust book value of balance sheet items to their
estimated fair values under Accounting Principles
Board Opinion No. 16
To state inventories at net realizable value...... 3.5
Liabilities assumed for benefit obligations (see
footnote (f) below)................................... (34.3)
Eliminate historical goodwill (excess of cost over
acquired net assets) pertaining to prior
acquisitions.......................................... (395.4)
Reduce property and equipment, net to estimated
fair value............................................ (62.5)
Adjustments to reflect acquiring management's plans to
restructure certain portions of the business and to
reposition inventory production and distribution
practices:
To adjust carrying value of balance sheet items to
reflect management plans that are demonstrably
different from the plans that served as a basis
for the carrying value in the predecessor
financial statements in accordance with Staff
Accounting Bulletin No. 61 as follows:
To record inventory at the net pro-
ceeds expected to be received from
the accelerated sale/
liquidation of inventory........... $ (52.1)
To write-down advances to equity
investment joint ventures to
reflect current management's plan
to exit certain activities and
business relationships............. (19.7)
To adjust prepaid expenses to reflect
an estimate of the future economic
value to current management................ (10.8)
Other adjustments.................... (2.8) (85.4)
--------
27
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET--(CONTINUED)
(DOLLARS IN MILLIONS)
All the aforementioned adjustments are as a
result of new management's plan to reduce its
working capital requirements, thus allowing it
to reduce interest costs associated with the
acquisition debt and exit from certain business
activities that are not in new management's long
term plan for the Company.
To accrue for incremental costs that have no
future economic benefits and will be incurred as
a result of management's plan to restructure its
business in accordance with EITF Issue 95-3
"Recognition of Liabilities in Connection with a
Purchase Business Combination"
Severance costs associated with clo-
sure of various facilities................. $ (12.7)
Costs associated with the relocation
of equipment and office facilities......... (6.3)
Closure related expenses............. (9.3) (28.3)
-------- --------
Fair value of assets acquired.............. 1,050.0
Transaction fees (see footnote c below).... 40.0
--------
Total purchase price....................... $1,090.0
--------
--------
The pro forma adjustments reflect the application of EITF Issue 88-16 in
relation to Masco's carryover interest.
28
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET--(CONTINUED)
(DOLLARS IN MILLIONS)
(c) Primarily reflects deferred financing and organization costs of $40.0
million associated with the consummation of the Transactions.
(d) Represents current portion of indebtedness incurred for the Transactions
consisting of amounts due on the Term Loans under of the Senior Bank
Facilities.
(e) Represents long-term debt incurred to finance the Transactions, as follows:
Revolving Credit Facility.................................... $ 25.0
Tranche A Term Loan.......................................... 125.0
Tranche B Term Loan.......................................... 175.0
Receivables Facility......................................... 155.0
Senior Subordinated Notes.................................... 200.0
--------
680.0
Less current portion:
Tranche A Term Loan.......................................... (15.0)
Tranche B Term Loan.......................................... (1.0)
--------
$ 664.0
--------
--------
The $285.0 million Holdings PIK Notes are liabilities of Holdings, and have
not been reflected as liabilities of the Company in this unaudited pro forma
consolidated balance sheet. Although the Company's cash flows may be used to
service the Holdings PIK Notes, the Company has no obligation to assume this
debt, does not intend to use the proceeds of a debt or equity offering to
retire this debt and has not guaranteed the repayment or pledged its assets
for repayment of this debt.
(f) Reflects the net effect of the following two purchase price adjustments
discussed above:
To increase liabilities for pension and profit sharing benefits
resulting from the Company assuming plans in which the
projected benefit obligation is in excess of plan assets........ $ 34.3
To eliminate deferred income tax liabilities not assumed under
the terms of the Acquisition Agreement........................ (69.3)
--------
Net pro forma adjustment........................................ $ (35.0)
--------
--------
(g) Represents elimination of Masco net investment and advances.
(h) Represents capital contribution by Holdings to Company consisting of the
Acquired Business.
29
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------------------
ADJUSTMENTS AS ADJUSTED PRO FORMA
FOR EXCLUSION FOR EXCLUSION ADJUSTMENTS
OF HOLDINGS OF HOLDINGS FOR
HISTORICAL BUSINESS (A) BUSINESS TRANSACTIONS PRO FORMA
---------- ------------- ------------- ------------ ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net sales.......................... $ 1,992.6 $ (17.5) $ 1,975.1 $ -- $1,975.1
Cost of sales...................... 1,501.0 (6.5) 1,494.5 (6.6)(b) 1,487.9
---------- ------------- ------------- ------------ ---------
Gross profit................... 491.6 (11.0) 480.6 6.6 487.2
Selling, general and administrative
expenses......................... 400.3 (12.9) 387.4 (31.7)(c) 355.7
---------- ------------- ------------- ------------ ---------
Operating profit............... 91.3 1.9 93.2 38.3 131.5
---------- ------------- ------------- ------------ ---------
Other (income) expense, net:
Interest expense, Masco
Corporation........................ 92.4 (1.7) 90.7 (90.7)(d) --
Interest expense, other.......... 2.4 -- 2.4 63.2(e) 65.6
Other, net....................... 8.3 0.3 8.6 1.9(f) 10.5
---------- ------------- ------------- ------------ ---------
103.1 (1.4) 101.7 (25.6) 76.1
---------- ------------- ------------- ------------ ---------
Income (loss) before taxes......... (11.8) 3.3 (8.5) 63.9 55.4
Income taxes................... 6.1 -- 6.1 17.7(g) 23.8
---------- ------------- ------------- ------------ ---------
Net income (loss).............. $ (17.9) $ 3.3 $ (14.6) $ 46.2 $ 31.6
---------- ------------- ------------- ------------ ---------
---------- ------------- ------------- ------------ ---------
OTHER DATA:
EBITDA (h)......................... $ 157.6 $ 1.6 $ 159.2 $ 15.6 $ 174.8
---------- ------------- ------------- ------------ ---------
---------- ------------- ------------- ------------ ---------
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Statement of
Operations.
30
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
------------------------------------------------------------------------
ADJUSTMENTS AS ADJUSTED PRO FORMA
FOR EXCLUSION FOR EXCLUSION ADJUSTMENTS
OF HOLDINGS OF HOLDINGS FOR
HISTORICAL BUSINESS (A) BUSINESS TRANSACTIONS PRO FORMA
---------- ------------- ------------- ------------ ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net sales......................... $981.1 $(7.3) $ 973.8 $-- $ 973.8
Cost of sales..................... 742.0 (4.0) 738.0 (3.3)(b) 734.7
---------- ----- ------------- ------ ---------
Gross profit.................. 239.1 (3.3) 235.8 3.3 239.1
Selling, general and
administrative expenses......... 189.4 (4.3) 185.1 (10.2)(c) 174.9
---------- ----- ------------- ------ ---------
Operating profit.............. 49.7 1.0 50.7 13.5 64.2
Other (income) expense, net:
Interest expense, Masco
Corporation....................... 43.7 -- 43.7 (43.7)(d) --
Interest expense, other......... 0.8 -- 0.8 31.6(e) 32.4
Other, net...................... 2.9 0.8 3.7 1.0(f) 4.7
---------- ----- ------------- ------ ---------
47.4 0.8 48.2 (11.1) 37.1
---------- ----- ------------- ------ ---------
Income (loss) before taxes........ 2.3 0.2 2.5 24.6 27.1
Income taxes.................. 4.9 -- 4.9 6.8(g) 11.7
---------- ----- ------------- ------ ---------
Net income (loss)............. $ (2.6) $ 0.2 $ (2.4) $ 17.8 $ 15.4
---------- ----- ------------- ------ ---------
---------- ----- ------------- ------ ---------
OTHER DATA:
EBITDA (h)........................ $ 81.6 $ 0.4 $ 82.0 $ 2.7 $ 84.7
---------- ----- ------------- ------ ---------
---------- ----- ------------- ------ ---------
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Statement of
Operations.
31
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS)
<TABLE>
<C> <S>
(a) Represents elimination of the operating results of the Holdings Business. Eliminations
are net of intercompany transactions since most sales by the Holdings Business
constituted sales of products purchased from other subsidiaries of the Home Furnishings
Group which are part of the Company. In addition, elimination of selling, general and
administrative expenses and interest are net of amounts incurred by the Holdings
Business for the benefit of such other subsidiaries. As set forth in note (c) below,
the Company will be making certain payments to Holdings for services. In addition as
set forth in note (f) below, the Company will be making certain payments to Holdings to
fund operating losses of the Holdings Business.
(b) Represents the decrease in depreciation expense as a result of the write-down in
property and equipment to reflect the allocation of the estimated fair value of the net
assets over the purchase price.
(c) Represents the net amount of the following adjustments:
</TABLE>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
Elimination of fee to Masco for corporate
services................................... $(16.0) $ (8.0)
Other eliminations:
Participation in a Masco marketing
incentive program.......................... (4.5) --
Consulting services and staff
consolidations............................. (3.9) --
Additional stand-alone costs............... 6.9 4.3
------------ ------------
Net stand-alone corporate overhead
adjustment................................. (17.5) (3.7)
Elimination of amortization of goodwill.... (14.2) (6.5)
------------ ------------
Net pro forma adjustment................... $(31.7) $(10.2)
------------ ------------
------------ ------------
<TABLE>
<C> <S>
Included in historical selling, general and administrative expenses are general
corporate expenses which represent certain corporate staff support and administrative
services which were historically provided by Masco and allocated to the Home
Furnishings Group. In addition, the Home Furnishings Group participated in certain
programs provided by Masco, including various insurance, incentive compensation, and
corporate identity marketing programs. Management is currently taking actions to
replace such services previously provided by Masco. The net stand-alone corporate
overhead adjustment reflects the expected savings which would have been achieved if
these actions had been implemented as of January 1, 1995. The Company has entered into
a management agreement (the "Holdings Management Agreement") with Holdings pursuant to
which Holdings will provide the Company executive management, legal, environmental,
audit, treasury and tax services, and the Company will reimburse Holdings for the cost
of such services. The Company estimates that its annual corporate general and
administrative expenses (which will be provided under and paid for pursuant to the
Holdings Management Agreement) on a pro forma basis for 1995 (giving effect to the
Transactions as if they had occurred on January 1, 1995) would have been $15.8 million.
The $6.9 million above represents the difference between the estimated stand-alone
annual corporate general and administrative expenses of $15.8 million and the
historical corporate general and administrative expenses included in historical
selling, general and administrative expenses. Holdings has in turn entered into the
Transition Services Agreement with Masco pursuant to which Masco will provide certain
of such services during a transitional period. See "Certain Transactions--Business
Arrangements with Holdings" and "--Transition Services Agreement."
(d) Reflects the elimination of interest expense on advances from Masco which were repaid
or converted into equity in connection with the Transactions.
</TABLE>
32
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT
OF OPERATIONS--(CONTINUED)
(DOLLARS IN MILLIONS)
(e) Represents interest expense on financing incurred for the Transactions at
the following assumed rates as of August 5, 1996:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
<S> <C> <C>
Revolving Credit Facility--$25.0 at 8.00%........... $ 2.0 $ 1.0
Tranche A Term Loan--$125.0 at 8.00%................ 10.0 5.0
Tranche B Term Loan--$175.0 at 8.50%................ 14.9 7.5
Receivables Facility--$155.0 at 6.50%............... 10.1 5.0
Senior Subordinated Notes--$200.0 at 10.875%........ 21.8 10.9
------ ------
58.8 29.4
Estimated amortization of debt issuance costs....... 4.4 2.2
------ ------
Pro forma interest expense.......................... $ 63.2 $ 31.6
------ ------
------ ------
</TABLE>
<TABLE>
<C> <S>
The effects of fluctuations of .125% and .250% in interest rates with respect to the
Senior Bank Facilities and the Receivables Facility on pro forma interest expense would
have been $0.6 and $1.2, respectively, for the year ended December 31, 1995, and $0.3
and $0.6, respectively, for the six months ended June 30, 1996.
(f) Represents estimated payments to Holdings in respect of operating losses of the
Holdings Business. As part of the Transactions, Holdings acquired the Holdings Business
from Masco by the merger of Lineage and MHF into Holdings. As successor to Lineage and
MHF, Holdings will purchase products manufactured by the Company for resale. See
"Certain Transactions-- Business Arrangements with Holdings." During the periods
covered by the Unaudited Pro Forma Consolidated Statements of Operations, Lineage and
MHF, which similarly purchased products from the Company for resale, generated
operating losses. The Indenture permits the Company to advance sums to Holdings to fund
operating losses of the Holdings Business. However, for purposes of the Indenture
covenants, such advances reduce Consolidated Net Income in a manner similar to the
result that would occur if the Company reduced the price charged to Holdings for such
goods by an aggregate amount equal to such loss. See "Description of Notes--Certain
Covenants--Limitation on Restricted Payments" and "--Certain Definitions--Consolidated
Net Income."
(g) Adjustment to reflect the assumed 43.0% effective tax rate applied to pro forma income
before income taxes. A reconciliation of the statutory tax rate to the assumed pro
forma tax rate is provided below.
</TABLE>
U.S. Federal statutory tax rate................................. 35.0%
Statutory state and local tax rates, net of federal tax
benefit......................................................... 4.9
Effect of higher taxes on foreign earnings and other............ 3.1
----
Pro forma effective tax rate................................ 43.0%
----
----
<TABLE>
<S> <S>
The foregoing does not give effect to the tax sharing agreement (the "Tax Sharing
Agreement") entered into by Holdings and the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Certain Effects of the
Transactions--Taxes" and "Certain Transactions--Tax Sharing Agreement."
</TABLE>
33
<PAGE>
<TABLE>
<S> <S>
(h) EBITDA is defined as net income (loss) before interest expense, income taxes,
depreciation and amortization expense (including amortization of sample book
expenditures) and certain other non-cash charges. Such other non-cash charges were $6.7
and $1.0 for the year ended December 31, 1995 and the six months ended June 30, 1996,
respectively. The Company believes that EBITDA provides additional information for
determining its ability to meet debt service requirements. EBITDA does not represent
and should not be considered as an alternative to net income or cash flow from
operations as determined by generally accepted accounting principles, and EBITDA does
not necessarily indicate whether cash flows will be sufficient for cash requirements.
This definition differs from that specified for EBITDA under the Indenture, with the
principal difference being that Indenture EBITDA does not add back to net income
amortization of debt issuance costs. Exclusion of such amortization would decrease pro
forma EBITDA to $170.4 and $82.5 for 1995 and the six months ended June 30, 1996 and
would have no impact on historical EBITDA as presented. Not every company calculates
EBITDA in exactly the same fashion. As a result, EBITDA as presented above may not
necessarily be comparable to similarly titled measures of other companies. See
"Description of Notes--Certain Definitions."
</TABLE>
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results
of operations covers periods before completion of the Transactions. As part of
the Transactions, the Holdings Business was acquired by, and (except with
respect to the Specified Assets) remains the property of, Holdings. Thus, the
results of the Holdings Business, which are included in the historical results,
will not be included in future results. The results of the Holdings Business
have not been material to the historical results as a whole. For further
discussion relating to the impact that the Transactions may have on the Company,
see "Summary--The Transactions," "Risk Factors," "Selected Historical and Pro
Forma Financial Information" and "Unaudited Pro Forma Financial Information."
GENERAL
The Company is the largest U.S. based manufacturer and marketer of
residential furniture and the nation's largest designer, marketer and
distributer of decorative home furnishing fabrics. Approximately 86% of 1995 net
sales were derived from residential furniture, which includes decorative
accessories. Decorative home furnishing fabrics accounted for the other 14% of
1995 net sales. Over the last four years, net sales grew at a compound annual
rate of 8.1% from $1.5 billion in 1991 to $2.0 billion in 1995.
The Company's costs and expenses include manufacturing (approximately 75.3%
of 1995 net sales), selling (approximately 11.9% of 1995 net sales) and general
and administrative (approximately 8.2% of 1995 net sales). General and
administrative expenses include an annual management fee paid to Masco for
corporate staff support and administrative services. Over the last four years,
the Company's gross profit grew at a compound annual rate of 9.9%, from $337.0
million in 1991 to $491.6 million in 1995.
Significant amounts are expended on the production of fabric sample books,
containing actual samples of the Company's decorative home furnishing fabrics
for marketing purposes. Sample book expenditures were $14.2 million, $14.1
million and $15.2 million in 1993, 1994 and 1995, respectively, and $7.1 million
and $6.6 million for the six-month periods ended June 30, 1995 and 1996,
respectively. Sample book expenditures are capitalized and amortized over a
three-year period.
RECENT COST REDUCTION INITIATIVES
The Company was formed by Masco through a series of acquisitions of
individual brand name companies. As a result, each of the Company's major
brands has historically operated to a certain degree as an independent
business unit, with its own manufacturing and distribution facilities,
distribution network and employees and has been responsible for purchasing
its own raw materials, selling its own products, collecting receivables,
paying suppliers and maintaining independent financial controls. The Company
believes there are significant opportunities to improve operating
efficiencies and reduce costs through intercompany cooperation. The Company
has recently implemented several cost reduction initiatives which have begun
to positively impact the Company's results in 1996. The most significant of
these initiatives include: (i) the consolidation of two smaller product lines
into the Company's Drexel Heritage(R) line; (ii) the consolidation and
closing of several Asian retail facilities and (iii) consolidation and
overhead reductions in European manufacturing and distribution. The Company
expects such measures to result in annual savings of up to approximately $16
million beginning in 1996 (of which an estimated $7.2 million has been
realized in the six months ended June 30, 1996) There can be no assurance all
of such savings will be realized. Furthermore, the Company's intercompany
cooperation has been evidenced by an increase in intercompany sales from
$57.8 million in 1991 to $168.0 million in 1995.
35
<PAGE>
The Company believes there are significant opportunities for additional
improvement in margins and cash flow through intercompany cooperation,
including: (i) realizing economies of scale in the procurement of raw materials;
(ii) reducing working capital levels; (iii) reducing capital expenditures from
coordinated use of manufacturing resources and (iv) focusing on cooperative
sales and marketing efforts. See "Business--Business Strategy."
CERTAIN EFFECTS OF THE TRANSACTIONS
General and Administrative Expenses. In connection with the consummation of
the Transactions, the Company entered into the Holdings Management Agreement
pursuant to which Holdings will provide the Company executive management, legal,
environmental, audit, treasury and tax services. See "Certain
Transactions--Business Arrangements with Holdings." The Company estimates that
its annual corporate general and administrative expenses (which will be provided
under and paid for pursuant to the Holdings Management Agreement) on a pro forma
basis for 1995 (giving effect to the Transactions as if they had occurred on
January 1, 1995) would have been $15.8 million, as compared to actual 1995
corporate general and administrative expenses of $33.3 million. Major components
of such estimated savings would have included: (i) $16.0 million from the
elimination of an annual management fee paid to Masco for corporate staff
support and administrative services; (ii) $4.5 million from the discontinuance
of participation in a Masco marketing incentive program and (iii) $3.9 million
from the reduction of consulting services and staff consolidations. The savings
would have been partially offset by the expenditure of an additional $6.9
million, which is the additional amount the Company estimated it would have
incurred during such period on a stand-alone basis for overhead, legal fees,
corporate staff and auditing. There is no assurance the Company will actually
realize such savings in any future periods. See "Unaudited Pro Forma Financial
Information."
Taxes. The Company had historically been included in the consolidated
federal and certain combined state income tax returns of Masco. The Company will
now be included in the consolidated federal and certain combined state income
tax returns of Holdings. Pursuant to the Tax Sharing Agreement, the Company will
be required to make tax sharing payments to Holdings (or Holdings will be
required to make tax sharing payments to the Company in certain cases) with
respect to the Company's pro rata share of consolidated federal and combined
state and local income tax liabilities (excluding for purposes of this
calculation, the income, deductions, credits, carryovers and tax attributes
associated with the business of Simmons, a subsidiary of Holdings that is not a
subsidiary of the Company). As a result of the deductions available in respect
of the interest accruing on the Holdings PIK Notes and assuming that Holdings
(without regard to its subsidiaries) does not have taxable income, the federal
income tax liabilities of Holdings and its consolidated subsidiaries may be less
than the federal income tax liabilities of the Company and its consolidated
subsidiaries would be on a stand-alone basis. Under the Tax Sharing Agreement,
the Company will share in this benefit by paying tax sharing payments to
Holdings in amounts less than what its stand-alone federal income tax liability
would be. On a pro forma basis for 1995 (giving effect to the Transactions as if
they had occurred on January 1, 1995), such savings would have been $12.0
million.
Certain Pro Forma Effects. On a pro forma basis for 1995 (giving effect to
the Transactions as if they had occurred on January 1, 1995), the Company's net
income would have been $30.6 million, an increase of $48.5 million from the
reported loss in 1995 of $17.9 million (which included a $3.3 million loss
attributable to the Holdings Business). Major components of such increase
include: (i) an $4.8 million decrease in depreciation expense as a result of the
write-down in property and equipment to reflect the allocation of the excess of
the book value of the net assets acquired over the purchase price in the
Acquisition; (ii) a $17.5 million reduction in selling, general and
administrative expenses for the reasons discussed above in "--General and
Administrative Expenses;"
36
<PAGE>
(iii) the elimination of $14.2 million in goodwill amortization and (iv) a $27.5
million reduction in interest expense resulting from the elimination of $90.7
million in interest expense on advances from Masco which were repaid or
converted to equity in connection with the Transactions, partially offset by
$63.2 million in interest expense resulting from the financing incurred in
connection with the Transactions. See "Unaudited Pro Forma Financial
Information."
The following discussion should be read in conjunction with "Unaudited Pro
Forma Financial Information" and the Financial Statements and the related notes
thereto included elsewhere in this Prospectus.
RESULTS OF OPERATIONS
The following table sets forth certain data from the Company's Combined
Financial Statements expressed as a percentage of net sales.
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
-------------------------------- ----------------
1993 1994 1995 1995 1996
-------- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................... 75.2 75.6 75.3 74.9 75.6
-------- -------- -------- ------ ------
Gross profit............................ 24.8 24.4 24.7 25.1 24.4
Selling, general and administrative
expenses.................................... 20.8 20.3 20.1 20.6 19.3
-------- -------- -------- ------ ------
Operating profit........................ 4.0 4.1 4.6 4.5 5.1
Interest expense............................ 4.7 4.6 4.8 5.0 4.5
Other, net.................................. 0.2 0.4 0.4 0.1 0.4
-------- -------- -------- ------ ------
Income (loss) before income taxes........... (0.9) (0.9) (0.6) (0.6) 0.2
Income taxes................................ 0.5 0.3 0.3 0.3 0.5
-------- -------- -------- ------ ------
Net income (loss)....................... (1.4)% (1.2)% (0.9)% (0.9)% (0.3)%
-------- -------- -------- ------ ------
-------- -------- -------- ------ ------
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1996 TO SIX MONTHS ENDED JUNE 30, 1995
Net sales. Net sales were $981.1 million for the six months ended June 30,
1996, a decrease of $3.3 million, or 0.3%, from $984.4 million in the comparable
period of 1995. Net sales of fine furniture increased 0.5% to $848.0 million in
the six months ended June 30, 1996 from $843.7 million in the six months ended
June 30, 1995. Net sales of fine furniture grew only modestly primarily due to
severe weather conditions in early 1996 which resulted in several
weather-related plant shutdowns, and due to slower industry sales. Net sales of
decorative home furnishings fabrics decreased 5.4% to $133.1 million in the six
months ended June 30, 1996 from $140.7 million in the six months ended June 30,
1995, primarily due to severe weather conditions in early 1996 which caused slow
retail sales, and due to decreased industry demand for certain product lines.
Gross profit. Gross profit was $239.1 million for the six months ended June
30, 1996, a decrease of $7.6 million, or 3.1%, from $246.7 million for the
comparable period of 1995. This decrease was primarily attributable to lower net
sales and a decline in the gross profit margin, which decreased to 24.4% for the
six months ended June 30, 1996 from 25.1% for the comparable period of 1995. The
decrease in gross profit margin was primarily the result of temporary plant
closings due to bad weather and start-up costs related to substantial new
product introductions.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $189.4 million for the six months ended June 30,
1996, a decrease of $13.2 million, or 6.5%, from $202.6 million for the
comparable period of 1995. As a percentage of net sales, selling,
37
<PAGE>
general and administrative expenses improved to 19.3% for the six months ended
June 30, 1996 from 20.6% for the six months ended June 30, 1995. Of this total,
selling expense was 11.3%, as compared to 12.0% for the comparable period of
1995, and general and administrative expenses decreased to 8.0%, from 8.6% for
the comparable period of 1995. This decrease in general and administrative
expenses reflects the benefits of the Company's cost reduction initiatives
implemented in the last half of 1995. These initiatives resulted in
approximately $7.2 million in savings. Included in selling, general and
administrative expenses were general corporate expenses which represent certain
corporate staff support and administrative services provided by Masco.
Operating profit. Operating profit increased to $49.7 million for the six
months ended June 30, 1996, an increase of $5.6 million, or 12.7%, from $44.1
million for the comparable period of 1995. As a percentage of net sales,
operating profit increased to 5.1% for the six months ended June 30, 1996 from
4.5% for the comparable period of 1995. This improvement was achieved primarily
for the reasons discussed above.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994
Net sales. Net sales were $1,992.6 million for the twelve months ended
December 31, 1995, an increase of $95.1 million, or 5.0%, from $1,897.5 million
for the year ended December 31, 1994. Net sales of fine furniture increased 6.8%
to $1,721.2 million in 1995 from $1,611.5 million in 1994. This increase in net
sales of fine furniture was primarily the result of the success of the
"Lifestyles" collections such as The World of Bob TimberlakeTM, increased sales
of motion furniture products and increased sales of decorative accessories. Net
sales of decorative home furnishing fabrics decreased 5.1% to $271.4 million in
1995 from $285.9 million in 1994. This decline was primarily the result of
softness in the printed fabrics market and management's focus on reducing the
number of lower margin product lines.
Gross profit. Gross profit was $491.6 million for the year ended December
31, 1995, an increase of $28.1 million, or 6.1%, from $463.5 million for the
year ended December 31, 1994, primarily due to an increase in net sales and
gross profit margin. Gross profit margin increased to 24.7% in 1995 from 24.4%
in the prior year. This increase was primarily due to continued rationalization
of manufacturing facilities that resulted in greater capacity utilization,
increased manufacturing efficiency due to cost reduction programs, continued
rationalization of raw materials purchasing and personnel reductions. The
Company also benefitted from the elimination of certain low margin product
lines.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $400.3 million for the year ended December 31,
1995, an increase of $14.9 million, or 3.9%, from $385.4 million for the year
ended December 31, 1994. As a percentage of net sales, selling, general and
administrative expenses decreased slightly to 20.1% for the year ended December
31, 1995 from 20.3% for the year ended December 31, 1994. Of this total, selling
expense was 11.9%, as compared to 11.6% for 1994, and general and administrative
expenses decreased to 8.2%, from 8.7% for 1994. Included in selling, general and
administrative expenses were general corporate expenses which represent certain
corporate staff support and administrative services provided by Masco.
Operating profit. Operating profit increased to $91.3 million for the year
ended December 31, 1995, an increase of $13.2 million, or 16.9%, from $78.1
million for the year ended December 31, 1994. As a percentage of net sales,
operating profit increased to 4.6% for the year ended December 31, 1995 from
4.1% for the same period in 1994. This improvement was achieved primarily for
the reasons discussed above.
38
<PAGE>
COMPARISON OF YEAR ENDED DECEMBER 31, 1994 TO YEAR ENDED DECEMBER 31, 1993
Net sales. Net sales were $1,897.5 million for the year ended December 31,
1994, an increase of $134.0 million, or 7.6%, from $1,763.5 million for the year
ended December 31, 1993. Net sales of fine furniture increased 9.1% to $1,611.5
million in 1994 from $1,476.9 million in 1993. This increase was primarily the
result of improved marketing efforts and the introduction of new product lines.
Net sales in the "Lifestyles" collections, motion furniture, decorative
accessories and designer showroom business grew at a rate above that of the
Company's fine furniture products as a whole. Net sales of decorative home
furnishing fabrics decreased 0.2% to $285.9 million in 1994 from $286.6 million
in 1993.
Gross profit. Gross profit was $463.5 million for the year ended December
31, 1994, an increase of $26.8 million, or 6.1%, from $436.7 million for the
year ended December 31, 1993. This increase was principally due to higher sales
volume. Gross profit margin decreased to 24.4% for the year ended December 31,
1994 from 24.8% for the year ended December 31, 1993 due to a slight increase in
the cost of raw materials.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $385.4 million for the year ended December 31,
1994, an increase of $17.9 million, or 4.9%, from $367.5 million for the year
ended December 31, 1993. As a percentage of net sales, selling, general and
administrative expenses decreased to 20.3% for the year ended December 31, 1994
from 20.8% for the year ended December 31, 1993. Of this total, selling expense
was 11.6%, as compared to 11.5% in 1993, and general and administrative expenses
decreased to 8.7%, from 9.3% in 1993, due to cost cutting initiatives involving
significant reductions in salaried overhead. These initiatives resulted in
approximately $1.5 million in savings. Included in selling, general and
administrative expenses were general corporate expenses which represent certain
corporate staff support and administrative services provided by Masco.
Operating profit. Operating profit increased to $78.1 million for the year
ended December 31, 1994, an increase of $8.9 million, or 12.9%, from $69.2
million for the year ended December 31, 1993. As a percentage of net sales,
operating profit increased to 4.1% for the year ended December 31, 1994 from
3.9% for 1993. This improvement was achieved primarily for the reasons discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise primarily from debt service on the
indebtedness incurred in connection with the Transactions, working capital needs
and the funding of capital expenditures. At June 30, 1996, on a pro forma basis
after giving effect to the Transactions, the Company's consolidated indebtedness
would have been approximately $706.6 million, consisting of $200.0 million of
the Old Notes, $300.0 million in Term Loans, $25.0 million in borrowings under
the Revolving Credit Facility, $155.0 million under the Receivables Facility and
$26.6 million of Assumed Indebtedness. The degree to which the Company is
leveraged could have a significant effect on its results of operations.
Principal and interest payments under the Senior Bank Facilities, the
Receivables Facility and the Notes will represent significant liquidity
requirements for the Company. Under the terms of the Senior Bank Facilities, the
Company will be required to make principal payments totalling approximately
$21.3 million in 1997, $21.0 million in 1998, $21.0 million in 1999, $21.3
million in 2000 and $34.5 million in 2001. Loans under the Senior Bank
Facilities bear interest at floating rates based upon the interest rate option
selected by the Company. Under the terms of the Senior Bank Facilities, the
Company is required to purchase and maintain interest rate protection with
respect to 50% of the Term Loans for three years. For a description of the
Senior Bank Facilities, see "Description of Senior Bank Facilities."
39
<PAGE>
The Company's capital expenditures were $75.1 million, $68.8 million, and
$61.0 million in 1993, 1994 and 1995, respectively. Of such amounts, capital
expenditures for expansion averaged approximately $30.0 million for each year,
with the balance expended on maintenance/productivity. Significant projects for
expansion over the past three years have included capital expenditures of
approximately $11.4 million on Asian manufacturing facilities ($8.4 million of
this on new facilities), $13.0 million on warehouse and distribution facilities
and $7.0 million on a new High Point, North Carolina furniture showroom. The
Company made capital expenditures of $13.9 million for the six months ended June
30, 1996, which consisted of $10.5 million for maintenance/productivity and $3.4
million for expansion. The Company estimates that for the remainder of 1996,
approximately $26.1 million of capital expenditures will be required, primarily
for maintenance/productivity and $4.5 million for capacity expansion.
Maintenance/productivity capital expenditures consist primarily of machinery
replacement, building renovation, environmental compliance and productivity
improvement. Expansion capital expenditures consist primarily of new capacity to
accommodate increased demand. The Company believes that as a result of the
availability of excess capacity in its manufacturing facilities, it will be able
to pursue its strategy over the next several years without the necessity of
making significant additional capital expenditures to expand capacity. The
Company's ability to make capital expenditures is subject to certain
restrictions under the Senior Bank Facilities. See "Description of Senior Bank
Facilities."
The Company's principal source of cash to fund its liquidity needs will be
net cash from operating activities and borrowings under the Revolving Credit
Facility. The components of net cash from operating activities are detailed in
the Financial Statements and the related notes thereto included elsewhere in
this Prospectus and include net income or loss adjusted for (i) depreciation and
amortization; (ii) bad debt provision; (iii) deferred income taxes and (iv)
changes in operating assets and liabilities. Net cash from operating activities
for the six months ended June 30, 1996 was $38.2 million, an increase of $70.8
million from ($32.6) million in the comparable period of 1995, primarily as a
result of an increase in earnings offset by a smaller increase in inventory and
a decrease in accounts receivable. Net cash from operating activities was $34.3
million for the year ended December 31, 1995, an increase of $35.0 million from
($0.7) million for the year ended December 31, 1994, primarily as a result of a
reduced net loss and a decrease in inventory offset by a larger increase in
accounts receivable. For the year ended December 31, 1994, net cash from
operating activities of ($0.7) million increased $42.2 million from ($42.9)
million for the year ended December 31, 1993, primarily as a result of smaller
increases in inventory and accounts receivable offset by an increase in current
liabilities.
As of June 30, 1996, on a pro forma basis after giving effect to the
Transactions, the amount outstanding under the Revolving Credit Facility would
have been $25.0 million, and $125.0 million would have been available to be
drawn (less the face amount of existing letters of credit of $17.0 million).
Amounts available under the Revolving Credit Facility may be used for working
capital and general corporate purposes (including up to $50.0 million for
letters of credit), subject to certain limitations under the Senior Bank
Facilities. Pursuant to the Acquisition Agreement, Masco has agreed to guarantee
or provide up to $15.0 million in stand-by letters of credit or comparable
credit enhancement arrangements in support of any obligation as to which the
Company is a primary obligor or an account party. See "Certain
Transactions--Acquisition Arrangements." The Company believes that cash
generated from operations, together with the amounts available under the
Revolving Credit Facility, will be adequate to meet its debt service
requirements, capital expenditures and working capital needs for the foreseeable
future, although no assurance can be given in this regard. The Company's future
operating performance and ability to service or refinance the Notes and to
extend or refinance the Senior Bank Facilities will be subject to future
economic conditions and to financial, business and other factors, many of which
are beyond the Company's control.
40
<PAGE>
INTERNATIONAL OPERATIONS
The Company conducts operations in several foreign countries including
Canada, Taiwan, Singapore, the Philippines, China, Malaysia, Indonesia, Thailand
and several European countries. Net sales from international operations during
1995 were approximately $232.0 million, or 12.0% of net sales. At June 30, 1996,
net assets associated with these operations were approximately 16.3% of total
assets, and the Company had indebtedness denominated in currencies other than
the U.S. dollar of approximately $8.3 million.
The operating profit percentage for the Pacific Rim operations is higher
than the operating profit percentage of the United States due to the fact that
goodwill amortization did not effect the Pacific Rim operations. The design and
licensing intangibles for goods produced in the Pacific Rim that are sold in the
United States result in higher profit being realized in these operations in
accordance with the value of such intangibles.
The Company has been experiencing operating losses in the European Union and
other foreign countries due to extended start-up costs for fabric and
distribution operations and from a prolonged slowdown in the economies of most
European countries where it conducts activities.
The Company's international operations may be subject to volatility because
of currency fluctuations, inflation and changes in political and economic
conditions in these countries. Most of the revenues and costs and expenses of
the Company's operations in these countries are denominated in the local
currencies. The financial position and results of operations of the Company's
foreign subsidiaries are measured using the local currency as the functional
currency, although the dollar would be used if any of these countries were
deemed hyperinflationary in accordance with Statement of Financial Acounting
Standards No. 52 ("FASB 52").
Assets and liabilities of the Company's foreign subsidiaries are translated
at the balance sheet date exchange rate and statement of operations' accounts
are translated at the average rate prevailing during the period. Translation
adjustments, approximately $5.2 million at December 31, 1995 and approximately
$6.5 million at June 30, 1996, arising entirely from differences in exchange
rates from period to period are included in Masco net investment and advances.
Fluctuations in exchange rates, as well as higher inflation rates, may have
an adverse effect on the Company. In the periods discussed, the U.S. dollar has
generally weakened against most of the currencies in which the Company's foreign
operations are conducted. As a result, fluctuations in foreign exchange rates
impacted operating profit negatively by approximately $3.0 million for each of
the years ended December 31, 1993, 1994 and 1995.
The Company may periodically use foreign currency forward option contracts
to offset the effects of exchange rate fluctuations on cash flows denominated in
foreign currencies. The balance of these contracts as of June 30, 1996 was not
material, and the Company does not use derivative financial instruments for
trading or speculative purposes.
In some of the countries (China, the Philippines, Malaysia, Indonesia) where
the Company has manufacturing facilities, the inflation rate for 1995 exceeded
that of the United States, sometimes exceeding 10.0% per annum inflation rates.
No country in which the Company has significant operations is deemed
hyperinflationary in accordance with FASB 52. Management does not believe the
impact of this inflation will significantly impact margins after normal selling
price increases. Inventories in countries outside the United States are
primarily accounted for using the first-in first-out (FIFO) basis; thus, the
charge to cost of sales does not necessarily reflect current cost. However, if
the Company's operations were restated to reflect higher cost of sales charges
related to current cost required to replace existing inventories, the Company
estimates that reported income would not be significantly decreased.
41
<PAGE>
The Company's financial performance in future periods may be adversely
impacted as a result of changes in the above factors which are largely beyond
the control of the Company. See "Risk Factors--Foreign Operations."
1994 RESTATEMENT
The Company's combined financial statements for 1994 have been restated
primarily to reflect the correction of the accounting for certain Asian joint
ventures. As a result of this restatement, the 1994 net loss has increased by
approximately $3.6 million, while the Masco net investment and advances
decreased by a corresponding amount.
INFLATION
The Company does not believe that inflation has had a material impact on its
financial position or results of operations during the periods covered by the
Combined Financial Statements and the related notes thereto included herein.
SEASONALITY
The Company does not believe that its results of operations fluctuate
materially due to seasonality.
42
<PAGE>
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Old Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m., New
York City time, on , 1996; provided, however, that if the Company has
extended the period of time for which the Exchange Offer is open, the term
"Expiration Date" means the latest time and date to which the Exchange Offer is
extended.
As of the date of this Prospectus, $200.0 million aggregate principal amount
of the Old Notes are outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about , 1996, to all holders of
Old Notes known to the Company. The Company's obligation to accept Old Notes for
exchange pursuant to the Exchange Offer is subject to certain conditions as set
forth under "--Certain Conditions to the Exchange Offer" below.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for any exchange of any Old Notes, by giving notice of
such extension to the holders thereof. During any such extension, all Old Notes
previously tendered will remain subject to the Exchange Offer and may be
accepted for exchange by the Company. Any Old Notes not accepted for exchange
for any reason will be returned without expense to the tendering holder thereof
as promptly as practicable after the expiration or termination of the Exchange
Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions of the Exchange Offer
specified below under "--Certain Conditions to the Exchange Offer." The Company
will give notice of any extension, amendment, non-acceptance or termination to
the holders of the Old Notes as promptly as practicable, such notice in the case
of any extension to be issued no later than 9:00 a.m., New York City time, on
the next business day after the previously scheduled Expiration Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a holder who wishes to tender
Old Notes for exchange pursuant to the Exchange Offer must transmit a properly
completed and duly executed Letter of Transmittal, including all other documents
required by such Letter of Transmittal, to IBJ Schroder Bank & Trust Company
(the "Exchange Agent") at one of the addresses set forth below under "Exchange
Agent" on or prior to the Expiration Date. In addition, either (i) certificates
for such Old Notes must be received by the Exchange Agent along with the Letter
of Transmittal or (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Old Notes, if such procedure is available,
into the Exchange Agent's account at The Depository Trust Company (the
"Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date, or the holder must comply with the guaranteed delivery
procedures described below. THE METHOD OF DELIVERY OF OLD NOTES, LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE
HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
43
<PAGE>
TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE
COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Old Notes who
has not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution (as defined below). In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm that is a member or
participant in the Securities Transfer Agents Medallion Program, the New York
Stock Exchange Medallion Signature Program or the Stock Exchange Medallion
Program, or by an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (collectively, "Eligible Institutions"). If Old
Notes are registered in the name of a person other than a signer of the Letter
of Transmittal, the Old Notes surrendered for exchange must be endorsed by, or
be accompanied by a written instrument or instruments of transfer or exchange,
in satisfactory form as determined by the Company in its sole discretion, duly
executed by, the registered holder with the signature thereon guaranteed by an
Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or to not accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to waive
any defects or irregularities or conditions of the Exchange Offer as to any
particular Old Notes either before or after the Expiration Date (including the
right to waive the ineligibility of any holder who seeks to tender Old Notes in
the Exchange Offer). The interpretation of the terms and conditions of the
Exchange Offer as to any particular Old Notes either before or after the
Expiration Date (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the Company
shall determine. Neither the Company, the Exchange Agent nor any other person
shall be under any duty to give notification of any defect or irregularity with
respect to any tender of Old Notes for exchange, nor shall any of them incur any
liability for failure to give such notification.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each broker-dealer holder will represent to the Company that,
among other things, the New Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business of the holder and any
beneficial holder, that neither the holder nor any such beneficial holder has an
arrangement or understanding with any person to participate in the distribution
of such New Notes and that neither the holder nor any such other person is an
"affiliate," as defined under Rule 405 of the Securities Act, of the Company. If
the holder is not a broker-dealer, the holder must represent that it is not
engaged in nor does it intend to engage in a distribution of the New Notes.
44
<PAGE>
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. For purposes of the Exchange Offer, the Company shall be deemed to
have accepted properly tendered Old Notes for exchange when, as and if the
Company has given oral and written notice thereof to the Exchange Agent.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or non-exchanged Old Notes will be
returned without expense to the tendering holder thereof (or, in the case of Old
Notes tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described below, such non-exchanged Old Notes will be credited to an account
maintained with such Book-Entry Transfer Facility) as promptly as practicable
after the expiration of the Exchange Offer.
BOOK-ENTRY TRANSFER
Any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof
with any required signature guarantees and any other required documents must, in
any case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under "Exchange Agent" on or prior to the Expiration
Date or the guaranteed delivery procedures described below must be complied
with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes and
the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent receives from such Eligible Institution a properly competed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by telegram, telex,
facsimile and transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Notes and the amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within five New York
Stock Exchange ("NYSE") trading days after the date of execution of the Notice
of Guaranteed Delivery, the certificates for all physically tendered Old Notes,
in proper form for transfer, or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility
(a "Book-Entry Confirmation"), as the case may be, and any other documents
required by the Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent and (iii) the certificates for all
physically tendered Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and all other documents required by the Letter
of Transmittal are received by the Exchange Agent within five NYSE trading days
after the date of execution of the Notice of Guaranteed Delivery.
45
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WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time 5:00 p.m., New York City
time on the business day prior to the Expiration Date. For a withdrawal to be
effective, a written notice of withdrawal must be received by the Exchange Agent
at one of the addresses set forth below under "Exchange Agent." Any such notice
of withdrawal must specify the name of the person having tendered the Old Notes
to be withdrawn, identify the Old Notes to be withdrawn (including the principal
amount of such Old Notes), and (where certificates for Old Notes have been
transmitted) specify the name in which such Old Notes are registered, if
different from that of the withdrawing holder. If certificates for Old Notes
have been delivered or otherwise identified to the Exchange Agent, then, prior
to the release of such certificates, the withdrawing holder must also submit the
serial numbers of the particular certificates to be withdrawn and a signed
notice of withdrawal with signatures guaranteed by an Eligible Institution
unless such holder is an Eligible Institution. If Old Notes have been tendered
pursuant to the procedure for book-entry transfer described above, any notice of
withdrawal must specify the name and number of the account at the Book-Entry
Transfer Facility to be credited with the withdrawn Old Notes and otherwise
comply with the procedures of such facility. All questions as to the validity,
form and eligibility (including time of receipt) of such notices will be
determined by the Company, whose determination shall be final and binding on all
parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the Exchange Offer. Any Old Notes which
have been tendered for exchange but which are not exchanged for any reason will
be returned to the holder thereof without cost to such holder (or, in the case
of Old Notes tendered by book-entry transfer into the Exchange Agent's account
at the Book-Entry Transfer Facility pursuant to the book entry transfer
described above, such Old Notes will be credited to an account maintained with
such Book-Entry Transfer Facility for the Old Notes) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Old Notes may be retendered by following one of the
procedures described under "--Procedures for Tendering Old Notes" above at any
time on or prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old Notes and may terminate or amend the Exchange Offer if at any time
before the Expiration Date, the Company determines that the Exchange Offer
violates applicable law, any applicable interpretation of the staff of the
Commission or any order of any governmental agency or court of competent
jurisdiction.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its reasonable discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver of
such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
prior to the Expiration Date any stop order shall be threatened or in effect
with respect to the registration statement of which this Prospectus constitutes
a part or the qualification of the Indenture under the Trust Indenture Act of
1939, as amended (the "TIA"). In any such event the Company is required to use
every reasonable effort to obtain the withdrawal of any stop order at the
earliest possible time.
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EXCHANGE AGENT
IBJ Schroder Bank & Trust Company, New York, has been appointed as the
Exchange Agent for the Exchange Offer. All executed Letters of Transmittal
should be directed to the Exchange Agent at one of the addresses set forth
below. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
<TABLE>
<CAPTION>
BY REGISTERED OR CERTIFIED MAIL: BY HAND OR OVERNIGHT DELIVERY:
<S> <C> <C>
IBJ Schroder Bank & Trust Company IBJ Schroder Bank & Trust Company
P.O. Box 84 One State Street
Bowling Green Station New York, New York 10004
New York, New York 10274-0084 Attention: Securities Processing Window
Attention: Reorganization Operations Subcellar One (SC-1)
Department
</TABLE>
VIA FACSIMILE:
(212) 858-2611
CONFIRM BY TELEPHONE:
(212) 858-2103
FOR INFORMATION CALL:
(212) 858-2103
DELIVERY OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
The Company will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The principal solicitation is
being made by mail; however, additional solicitations may be made in person or
by telephone by officers and employees of the Company.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs among others.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is the principal amount as reflected in the Company's accounting records
on the date of the exchange. Accordingly, no gain or loss for accounting
purposes will be recognized. The expenses of the Exchange Offer will be
capitalized for accounting purposes.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct the
Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
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CONSEQUENCES OF FAILURE TO EXCHANGE; RESALES OF NEW NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to the exemptions from, or
in transactions not subject to, the registration requirements of, the Securities
Act and applicable state securities law. Old Notes not exchanged pursuant to the
Exchange Offer will continue to accrue interest at 10 7/8% per annum and will
otherwise remain outstanding in accordance with their terms. Holders of Old
Notes do not have any appraisal or dissenters' rights under the Delaware General
Corporation Law in connection with the Exchange Offer. In general, the Old Notes
may not be offered or sold unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. However, (i) if the Initial Purchasers so request with respect to Old Notes
not eligible to be exchanged for New Notes in the Exchange Offer and held by
them following consummation of the Exchange Offer or (ii) if any holder of Old
Notes is not eligible to participate in the Exchange Offer or, in the case of
any holder of Old Notes that participates in the Exchange Offer, does not
receive freely tradable New Notes in exchange for Old Notes, the Company is
obligated to file a registration statement on the appropriate form under the
Securities Act relating to the Old Notes held by such persons.
Based on certain interpretive letters issued by the staff of the Commission
to third parties in unrelated transactions, the Company is of the view that New
Notes issued pursuant to the Exchange Offer may be offered for resale, resold or
otherwise transferred by holders thereof (other than (i) any such holder which
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act or (ii) any broker-dealer that purchases Notes from the Company
to resell pursuant to Rule 144A or any other available exemption) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such holders' business and such holders have no intention, or any arrangement
or understanding with any person, to participate in the distribution of such New
Notes. If any holder has any arrangement or understanding with respect to the
distribution of the New Notes to be acquired pursuant to the Exchange Offer,
such holder (i) could not rely on the applicable interpretations of the staff of
the Commission and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction. A broker-dealer who holds Old Notes that were acquired for
its own account as a result of market-making or other trading activities may be
deemed to be an "underwriter" within the meaning of the Securities Act and must,
therefore, deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of New Notes. Each such broker-dealer that
receives New Notes for its own account in exchange for Old Notes, where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge in the Letter of
Transmittal that it will deliver a prospectus in connection with any resale of
such New Notes. See "Plan of Distribution."
In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the New Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, pursuant to the Registration Rights Agreement and subject to certain
specified limitations therein, to register or qualify the New Notes for offer or
sale under the securities or blue sky laws of such jurisdictions as any holder
of the Notes reasonably requests in writing.
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BUSINESS
GENERAL
The Company is the largest U.S. based manufacturer and marketer of
residential furniture and the nation's largest designer, marketer and
distributor of decorative home furnishing fabrics. The Company markets a
comprehensive selection of quality products under well-known brand names through
an extensive worldwide distribution network. The Company offers products in
price categories ranging from "promotional" to "premium," with a primary
concentration on the "good," "better" and "best" categories. The Company's
products enjoy an international reputation for quality, craftsmanship, style and
value.
Fine Furniture. The Company designs, manufactures and markets a full range
of quality wood and upholstered furniture to furnish any room of a home in
virtually any style, under such well-known brand names as Henredon(R), Drexel
Heritage(R), Lexington(R), Universal(R), Berkline(R) and BenchCraft(R), and a
wide range of furniture accessories under the Maitland-SmithTM and La Barge(R)
brand names.
Decorative Home Furnishing Fabrics. The Company designs, markets and
distributes over 25,000 decorative home furnishing fabrics, such as fabrics for
upholstery and draperies, under such well-known brand names as Robert AllenTM,
SunburyTM and Beacon Hill(R).
COMPETITIVE ADVANTAGES
The Company believes it benefits from the following competitive advantages
which have helped it to increase sales and operating profitability and to
maintain its leadership position in the home furnishings industry:
Industry Leadership. As the largest U.S. based manufacturer and marketer of
residential furniture and the nation's largest designer, marketer and
distributor of decorative home furnishing fabrics, the Company enjoys several
marketing advantages, including: (i) a strong share of retail floor space; (ii)
the ability to support its products with significant marketing and advertising
resources and (iii) the resources to introduce and support new design and
product innovations. In addition, the Company also benefits from several
operating advantages, including: (i) economies of scale in purchasing raw
materials; (ii) efficient utilization of its worldwide manufacturing base and
distribution network and (iii) complementary sales and marketing activities.
Established, Well-Known Brand Names. The Company markets its products under
some of the most established and well-known brand names in the industry,
including Henredon(R), Drexel Heritage(R), Lexington(R), Universal(R),
Berkline(R), BenchCraft(R), Maitland-SmithTM and La Barge(R) in fine furniture,
and Robert AllenTM, SunburyTM and Beacon Hill(R) in decorative home furnishing
fabrics. The Company believes that brand name recognition is an important
competitive advantage and that retailers and consumers associate its brands with
a high degree of quality, craftsmanship, style and value.
Comprehensive Product Lines. The Company believes it is the most
comprehensive resource in the home furnishings industry, providing retailers and
consumers with more product alternatives than any of its competitors. The
Company offers products across all price categories and in most major style
categories, including American Traditional, Country, Eighteenth Century,
European Country, European Traditional, Casual, Contemporary, Home Office, Youth
and Oriental. By offering such a broad product line, the Company can supply up
to 75% of the product demands of most furniture retailers, and more easily
satisfy furniture retailers who increasingly prefer to buy from a smaller number
of larger suppliers.
Extensive and Diverse Distribution Network. The Company believes it has more
active accounts than any other manufacturer in the furniture or home furnishings
industry. It distributes its
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products through an extensive worldwide distribution network that includes: (i)
more than 25,000 independent retail locations, including national and regional
chains, department stores, specialty stores and more than 570 galleries within
retail stores; (ii) more than 90 independent dedicated stores exclusively
selling Company products and (iii) 16 Company owned and operated decorator
showrooms. The Company also sells its fine furniture products to the hospitality
and government markets. The Company distributes its decorative home furnishing
fabrics through numerous distribution channels, including its own showrooms, to
an extensive customer base consisting of over 30,000 retailers, decorators and
designers worldwide. The Company also sells decorative home furnishing fabrics
to furniture manufacturers.
Design and Style Leader. Through its new product offerings and other
innovations, the Company believes it has firmly established itself as an
industry design and style leader, which it believes has been essential to its
success. The Company pioneered "Lifestyle" and designer collections, and its
collections such as The World of Bob TimberlakeTM, Ralph Lauren Furniture
CollectionTM, The Palmer Home CollectionTM and Alexander Julian Home ColoursTM
are among the industry's best sellers. In addition, the Company's innovative
Berkline(R) products have enabled it to acquire a significant share of the
rapidly growing market for motion furniture.
Modern Facilities. The Company operates 89 strategically located,
well-equipped facilities in North America, Asia and Europe with over 24 million
square feet of manufacturing and distribution space. Over the past five years
more than $275.0 million has been invested in the Company's facilities to meet
projected growth, reduce operating costs and maximize operating flexibility. The
Company believes that these facilities enable it to serve its worldwide customer
base efficiently and to allocate capacity to best meet its manufacturing
requirements.
Worldwide Presence. The Company's Asian operations include over five million
square feet of manufacturing and distribution facilities, decorator showrooms
and dedicated galleries throughout the region. As the largest U.S. furniture
manufacturer in Asia, the Company has access to a highly skilled (in such areas
as intricate veneering and hand carving), low-cost workforce, and to scarce raw
materials such as Chinese oak, wicker, rattan and certain exotic woods. Although
the large majority of the Company's Asian-made products are sold in the United
States, certain products are sold in Asia, positioning the Company to increase
the distribution of all of its products into this region. The Company also
manufactures and distributes fine furniture products in Europe. The Company's
decorative home furnishing fabrics are manufactured in the United States and in
Europe, and are distributed worldwide.
BUSINESS STRATEGY
The Company's strategy for achieving continued growth in sales and cash flow
includes the following elements:
Enhance Strong Brand Names. The Company is committed to enhancing the
reputation and consumer awareness enjoyed by its leading brands, such as
Henredon(R), Drexel Heritage(R), Lexington(R), Universal(R), Berkline(R),
BenchCraft(R), Maitland-SmithTM and La Barge(R) in fine furniture, and Robert
AllenTM, SunburyTM and Beacon Hill(R) in decorative fabrics, through innovative
consumer advertising in various media, promotions and the ongoing development
and sale of well-received products under its brand names. Additionally, the
Company intends to continue the promotional focus on its well-known "Lifestyle"
and designer collections such as The World of Bob TimberlakeTM, Ralph Lauren
Furniture CollectionTM, The Palmer Home CollectionTM and Alexander Julian Home
ColoursTM.
Increase Customer Satisfaction. The Company will continue to implement a
number of initiatives designed to increase retailer and consumer satisfaction.
These include: (i) continuing to shorten delivery times by streamlining
distribution systems and utilizing advanced manufacturing
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processes (which include cellular manufacturing, just-in-time ("JIT") production
and inventory control, the use of numerically controlled laser fabric cutting
equipment and computer-aided design and manufacturing ("CAD/CAM") applications);
(ii) enhancing quality assurance programs and (iii) increasing product diversity
and customization. It is the Company's expectation that these initiatives will
provide consumers with a more enjoyable and satisfying experience when
purchasing furniture.
Focus on Product Innovation. The Company will continue to design and develop
innovative, fashionable and affordable products intended to appeal to a wide
variety of consumers and to provide the Company with attractive operating
margins. In particular, the Company intends to continue to focus its design
capabilities on its successful "Lifestyle" and designer collections and the
growing motion furniture market.
Increase Operating Efficiencies. The Company believes there are significant
opportunities for additional improvement in margins and cash flow through
intercompany cooperation, including: (i) realizing economies of scale in the
procurement of raw materials; (ii) reducing working capital levels; (iii)
reducing capital expenditures from coordinated use of manufacturing resources
and (iv) focusing on cooperative sales and marketing efforts.
Expand Worldwide Presence. The Company intends to increase its market
position in the United States and abroad by expanding its extensive distribution
network and, where appropriate, expanding its product offerings in existing
distribution channels. In international markets, the Company intends to expand
its presence by continuing to take advantage of its production capabilities in
Asia and Europe, its worldwide distribution network and the strength of its
brand names in foreign markets.
INDUSTRY OVERVIEW
Since 1975, the domestic residential furniture industry has grown at a
compound annual rate of 5.9%, from $6.0 billion in shipments in 1975 to $19.0
billion in 1995, according to the AFMA. While the domestic residential furniture
industry fluctuates with the general economy, periods of decline have been
relatively brief, with industry shipments declining in only two years since
1975. The Company believes that the industry will continue to grow in part due
to favorable demographic and other trends, including: (i) the maturation of the
"baby boom" generation, which will increase the portion of the U.S. population
between the ages of 35-54 by more than 8 million people by the end of the decade
(this age group has historically had the highest level of discretionary income
and consumer spending, and represents the largest number of consumers of
residential furniture, according to the Census Bureau); (ii) increases in
average new home size from approximately 1,400 square feet in 1975 to nearly
2,000 square feet in 1994, according to the Census Bureau, which generally
results in increased purchases of furniture per home and (iii) growth in the
number of Americans who work at home and who therefore require home office
furniture. The Company believes that it is well positioned to capitalize on
these favorable trends as a result of its broad range of products and well-known
brands.
The domestic residential furniture industry is highly fragmented with more
than 600 manufacturers in the United States, of which the top ten accounted for
approximately 40% of industry shipments in 1995. Nonetheless, the industry has
experienced significant consolidation since 1985, when the top ten manufacturers
accounted for approximately 23% of the industry shipments. Relative to smaller
competitors, larger manufacturers benefit from several competitive advantages,
including the ability to offer a broad selection of products, diverse
distribution networks, purchasing power and economies of scale in manufacturing,
marketing and product innovation.
The residential furniture market consists of three principal product
categories: wood (principally casegoods), upholstery and metal. Of these
categories, wood is the largest, representing
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approximately half of industry sales, with upholstery representing approximately
one-third of total industry sales, and metal and other products accounting for
the balance. The wood furniture market has a high cost of entry and is capital
intensive because of the heavy mechanization needed in the manufacturing
process, the time-consuming manufacturing process and the need to purchase raw
materials well in advance. In contrast, the upholstery market (exclusive of
recliners, motion furniture and sleep sofas) is characterized by a low cost of
entry and minimal mechanization and technology, and as a result is more highly
fragmented. Certain segments of the upholstered furniture market, particularly
those for recliners, motion furniture and sleep sofas, have grown more rapidly
than others in recent years, and the Company expects opportunities for growth in
these areas to continue. Since a significant portion of upholstered furniture is
used in the entertainment rooms, such as the living room or family room,
consumers desire to have these items new and fashionable. In addition, due to
high use, many upholstered items tend to wear more quickly.
Residential furniture manufacturers have become increasingly focused on
access to diverse distribution channels. Furniture stores with locations in a
single geographic market have seen their share of retail sales decline from 43%
in 1987 to 38% in 1995. This decline can be attributed to increased sales by
multi-market furniture stores, specialty stores, galleries and department
stores. The Company believes that these non-traditional retailers require
suppliers that offer broad product lines combined with substantial marketing and
advertising resources. In addition, because presentation to the consumer has
become more important to residential furniture manufacturers, the "gallery"
concept has been an important industry development. Galleries are dedicated
space within a larger retail store that display products in complete and fully
accessorized room settings instead of as individual pieces. A gallery generally
takes up a significant portion of a retailer's floor space. For example, the
average retail furniture store has approximately 30,000 square feet and up to
7,500 square feet might be dedicated to a single gallery. In return for
featuring a manufacturer's merchandise in a gallery, the retailer receives
layout designs, cooperative promotions and other assistance from the
manufacturer. The Company believes that stores with galleries result in higher
sales per square foot than furniture stores without galleries. Residential
furniture manufacturers have also focused on raising brand awareness with
consumers through "Lifestyle" or designer collections. Such collections are
becoming an increasingly important element of the industry's growth.
PRODUCTS
The Company is the largest U.S. based manufacturer and marketer of
residential furniture and the nation's largest designer, marketer and
distributor of decorative home furnishing fabrics. It believes it offers the
most comprehensive product line in the home furnishings industry, including (i)
bedroom, dining room, living room, family room and home office casegoods; (ii)
stationary upholstered products such as sofas, love seats, sectionals and
chairs; (iii) upholstered recliners, motion furniture and sleep sofas; (iv)
occasional furniture such as home entertainment centers, lamps, chairs, tables,
mirrors and other accent items and (v) decorative home furnishing fabrics.
FINE FURNITURE
The product category "Fine Furniture" includes wood and upholstered
residential furniture (other than "ready-to-assemble" products), as well as
occasional tables, decorative mirrors, lighting and other related furnishing
accessories. The Company designs, manufactures and markets a full range of
quality wood and upholstered furniture to furnish any room of a home in
virtually any style, under such well-known brand names as Henredon(R), Drexel
Heritage(R), Lexington(R), Universal(R), Berkline(R) and BenchCraft(R), and a
wide range of furniture accessories under the Maitland-SmithTM and La Barge(R)
brand names. The Company offers these products across all major price
categories, from "promotional" to "premium," and in every major style category,
including
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American Traditional, Country, Eighteenth Century, European Country, European
Traditional, Casual, Contemporary, Home Office, Youth and Oriental. By offering
such a broad product line, the Company can supply up to 75% of the product
demands of most furniture retailers, and more easily satisfy retailers who
increasingly prefer to buy from a smaller number of larger suppliers.
The following table illustrates the product and price category coverage of
the Company's fine furniture brands. The residential furniture industry
generally classifies its products by several price categories ranging from
"promotional" to "premium". Products in such successively higher price
categories are made using more expensive raw materials, have higher quality
finishes, and often involve higher labor costs.
<TABLE>
<CAPTION>
PRODUCT CATEGORY
STATIONARY
PRICE CATEGORY CASEGOODS UPHOLSTERY MOTION/RECLINER OCCASIONAL
<S> <C> <C> <C> <C>
PREMIUM Henredon(R) Beacon Hill(R) Henredon(R)
Maitland-SmithTM Henredon(R) La Barge(R)
Maitland-SmithTM
BEST Drexel Beacon Hill(R) Drexel Drexel
Heritage(R) Drexel Heritage(R) Heritage(R)
Henredon(R) Heritage(R) Henredon(R)
Henredon(R) La Barge(R)
Maitland-SmithTM
BETTER Drexel BenchCraft(R) BenchCraft(R) Drexel
Heritage(R) Drexel Berkline(R) Heritage(R)
Lexington(R) Heritage(R) Lexington(R)
Universal(R) Lexington(R)
Universal(R)
GOOD Lexington(R) BenchCraft(R) BenchCraft(R) Universal(R)
Universal(R) Universal(R) Berkline(R)
PROMOTIONAL Universal(R) BenchCraft(R) BenchCraft(R) Universal(R)
Berkline(R)
</TABLE>
Shaded area indicates product category does not exist.
Henredon(R)
Henredon designs and manufactures wood, upholstered and occasional furniture
for the bedroom, dining room, living room, family room and home office. Its
products are primarily in the "best" and "premium" price categories and are
aimed at the "replacement" market, where customers typically trade-up in price
and quality and demand superior design, materials and craftsmanship. Product
design and development represent an important element of Henredon's success, and
Henredon is considered to be one of the premier names in design for furniture in
the high-end price categories. Henredon currently sells approximately 19
collections, and designs and develops approximately four new product collections
each year. Henredon's products cover all major style categories within the
high-end niche, including Eighteenth Century, European Traditional,
Transitional, Contemporary, Sophisticated Country and Casual. Since 1993,
Henredon has manufactured and marketed products for the Ralph Lauren Furniture
CollectionTM under a special licensing relationship with the Ralph Lauren
organization. Henredon believes this line of high-end wood and upholstered
furniture is an excellent complement to its other product lines.
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Drexel Heritage(R)
Drexel Heritage designs and manufactures wood, upholstered, motion and
occasional furniture for the bedroom, dining room, living room, family room and
home office in the "better" to "best" price categories. It currently produces
approximately 26 collections of wood and upholstered furniture. Approximately
four to six new collections are offered each year. Drexel Heritage's product
styles include American Traditional, Country, Eighteenth Century, European
Traditional, Contemporary and Transitional. Drexel Heritage also produces
furniture for sale to the hospitality and government markets.
Lexington(R)
Lexington designs and manufactures wood, upholstered and occasional
furniture for the bedroom, dining room, living room, family room and home office
primarily in the "better" price category. Lexington currently produces over 40
collections of furniture and designs and develops 4 to 6 new collections each
period. The Company believes that Lexington's merchandising and design teams,
which have received several industry awards for product design and marketing in
recent years, are among the industry's best. Product design and development
represent an integral part of Lexington's success. Lexington pioneered
"Lifestyle" and designer collections, and its collections currently include the
popular The World of Bob TimberlakeTM, The Palmer Home CollectionTM, Lynn Hollyn
at HomeTM, Weekend RetreatTM, American Country WestTM, Old Salem CollectionTM,
DeCristofaroTM, VestigesTM and Pacific OverturesTM. These collections have
become an important part of Lexington's offerings. Product styles include
Traditional, Eighteenth Century, Country and Casual.
Universal(R)
Universal's products include wood, upholstered and occasional furniture
targeted primarily to the "good" or "better" price categories. Universal
products are manufactured in part in Asia, where the Company is the largest
United States residential furniture manufacturer, with access to a
highly-skilled (in such areas as intricate veneering and hand carving), low-cost
workforce, and to scarce raw materials such as Chinese oak, wicker, rattan and
certain exotic woods. Universal currently sells approximately 20 collections of
furniture, including styles such as Eighteenth Century, Traditional,
Transitional, Oriental and Country, and introduces four to six new collections a
year. Universal's Alexander Julian Home ColoursTM collection is among the
industry's best sellers. Universal's contract furniture is manufactured for
specific contract jobs involving the interior furnishings of hotels located
primarily in Asia.
Berkline(R)
Berkline designs and manufactures a wide range of recliners, motion
furniture and sleep sofas, primarily in the "good" to "better" price categories.
The Berkline(R) brand name is well known in the rapidly growing market for
upholstered modular and motion furniture and free standing recliners. Berkline
offers a wide range of styles, fabrics and leathers for these products, as well
as popular innovative features such as hidden cup holders and built-in tables.
BenchCraft(R)
BenchCraft designs and manufactures a comprehensive line of upholstered
furniture, including stationary, motion, leather, wicker and rattan.
BenchCraft's products are primarily in the "good" price category and are
marketed as fashionable, affordable furniture for "casual living."
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Maitland-SmithTM
Maitland-Smith designs and manufactures an innovative line of "best" to
"premium" hand-crafted, antique-inspired furniture, accessories and lighting,
utilizing a wide range of unique materials, including leather, fancy faced
veneer, stone and hand-painted metal.
La Barge(R)
La Barge(R) designs and sells decorative mirrors, metal and glass occasional
tables, decorative lighting and related accessories under three brand names: La
Barge(R), Marbro(R) and EntreeTM, primarily in the "best" and "premium" price
categories. La Barge(R) designs its products, and contracts their manufacture
with established suppliers around the world who it believes can produce high
quality, specialty products with decorative style.
Beacon Hill(R)
The Company's Beacon Hill Showrooms sell "best" and "premium" fine furniture
products manufactured by the Company and third parties, including certain
products under the Beacon Hill(R) brand name, exclusively to interior design
professionals and their clients.
DECORATIVE HOME FURNISHING FABRICS
The Company designs, markets and distributes over 25,000 decorative home
furnishing fabrics, such as fabrics for upholstery and draperies, under such
well-known brand names as Robert AllenTM, SunburyTM and Beacon Hill(R). The
Company offers decorative home furnishing fabrics (including trim and finished
products) in each of the "good," "better," "best" and "premium" price
categories. The following table illustrates the price category coverage of the
Company's decorative home furnishing fabric brands:
<TABLE>
<CAPTION>
PRICE CATEGORY BRAND
<S> <C>
Premium Beacon Hill(R)
Ramm, Son & CrockerTM
Best Beacon Hill(R)
Ramm, Son & CrockerTM
SunburyTM
Better AmetexTM
Robert Allen Total HomeTM
SunburyTM
Good AmetexTM
American Town & CountryTM
</TABLE>
Robert AllenTM
Robert Allen's products include over 22,000 different SKU's of upholstery
fabrics, drapery fabrics, trim and finished products (bedspreads, comforters,
pillows, and similar products), sourced from a variety of independent fabric
mills and manufacturers located around the world. Robert Allen offers products
in all price categories. Its American Town & CountryTM fabrics, which are in the
"good" price category, are targeted at smaller upholstery and drapery shops. Its
Robert Allen Total HomeTM fabrics, which are in the "better" price category, are
targeted at designer and specialty stores. Within this line, Robert Allen has
created the "MansfieldTM Collection" targeted at large format home furnishings
stores. Its Beacon Hill(R) fabrics, which are in the "best" and "premium" price
categories, are targeted at upper-end interior designers.
55
<PAGE>
AmetexTM
Ametex's products include a broad line of printed and woven fabrics in the
"good" to "better" price categories. Ametex converts fabrics from both its own
designs and those licensed from third parties, including designs based on the
Vatican Museum collection. Ametex also produces (to order) finished fabric
products such as bedding and draperies. Ametex U.K. produces a line of "better"
printed and woven fabrics, which include many designs that are in the domestic
Ametex line, as well as designs that are made specifically for the European
market.
SunburyTM
Sunbury designs and weaves a line of proprietary decorative jacquard
upholstery fabrics for the furniture industry in the "better" to "best" price
categories. Fabrics are woven in traditional, transitional, contemporary,
sophisticated country and custom designs. Sunbury strives to produce fabrics
that allow furniture manufacturers to differentiate their products from those of
their competitors, rather than commodity fabric products. Most of Sunbury's
woven designs are protected by exclusive copyright, and all of its products are
woven to order.
Ramm, Son & CrockerTM
Ramm, Son & Crocker produces traditional furnishing fabrics in the "best"
and "premium" price categories. Its product line consists primarily of
decorative printed fabrics, and to a lesser extent, woven fabrics and wallpaper.
It owns a unique archive of approximately 17,000 documented 18th and 19th
Century designs, and also has exclusive United States distribution rights to
such major brands as Liberty of London, Zoffany, Pepe Penalver, Haas and Blue
Home.
DISTRIBUTION
The Company distributes its fine furniture products through an extensive
worldwide distribution network that includes (i) more than 25,000 independent
retail locations, including national and regional chains, department stores,
specialty stores and more than 570 galleries within retail stores; (ii) more
than 90 independent dedicated stores exclusively selling Company products and
(iii) 16 Company owned and operated Beacon Hill(R) decorator showrooms. The
Company also sells its fine furniture domestically and internationally to the
hospitality and government markets and has recently begun offering product
information through non-traditional channels such as the Internet. The Company
distributes over 25,000 different decorative home furnishing fabrics through
numerous distribution channels, including the Beacon Hill(R) showrooms, to an
extensive customer base consisting of over 30,000 retailers, decorators and
designers worldwide. The Company also sells decorative home furnishing fabrics
to furniture manufacturers. The Company's extensive distribution network
provides limited exposure to any one customer. In 1995, the Company's 20 largest
customers represented only 17.6% of net sales, with no single customer
representing more than 2.0%. The Company believes it has more active accounts
than any other manufacturer in the furniture or home furnishings industry.
FINE FURNITURE
The Company believes that it is the most comprehensive and complete resource
in the residential furniture industry, capable of supplying up to 75% of the
product demands of most furniture retailers, whether local, regional or national
in scope. This, in turn, enables the Company to secure additional display space
from retailers, who increasingly are relying on a smaller number of larger
suppliers. The Company sells its fine furniture products worldwide primarily
through approximately 580 commissioned independent representatives. The Company
offers substantial services to retailers to support their marketing efforts,
including national advertising, merchandising and display programs and extensive
dealer training in its High Point, North Carolina training center. The Company
also displays its fine furniture products at the semi-annual International Home
Furnishings Market in High Point.
56
<PAGE>
The following illustrates the distribution of the Company's fine furniture
products by brand:
<TABLE>
<CAPTION>
DISTRIBUTION CHANNEL
- ------------------------------------------------------------------------------------------
INDEPENDENT DEDICATED DESIGNER
RETAILERS GALLERIES STORES SHOWROOMS
- --------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
BenchCraft(R) Berkline(R) Drexel Heritage(R) Beacon Hill(R)
Berkline(R) Drexel Heritage(R) Drexel Heritage(R)
Drexel Heritage(R) Henredon(R) Henredon(R)
Henredon(R) La Barge(R) La Barge(R)
La Barge(R) Lexington(R) Lexington(R)
Lexington(R) Maitland-SmithTM Maitland-SmithTM
Maitland-SmithTM
Universal(R)
</TABLE>
Furniture retailers remain the most significant distribution channel in the
industry, and the Company is committed to maintaining these important
relationships. The Company's diverse product offerings and national distribution
enable it to effectively service national retailers such as Levitz, Sears,
Montgomery Ward, J.C. Penney and Federated Department Stores and large regional
retailers such as Homestead House, Baers Furniture, Kittles Furniture, Wayside
Furniture and Breunners, as well as independent single store retailers
nationwide. As the furniture retailing industry consolidates, large retailers
are commanding an increasing presence, and management believes that the Company
is better positioned than its competitors to meet their needs.
The Company has developed gallery programs for its Henredon(R), Drexel
Heritage(R), Lexington(R), Berkline(R), Maitland-SmithTM and La Barge(R) product
lines with more than 570 retailers. Galleries are dedicated space within a
larger retail store that display products in complete and fully accessorized
room settings instead of as individual pieces. This presentation format
encourages consumers to purchase an entire room of furniture instead of
individual pieces from different manufacturers. The Company believes that stores
with galleries result in higher sales per square foot than furniture stores
without galleries.
The Company also sells its products through dedicated stores that
exclusively offer the Company's products. Drexel Heritage(R) products are sold
through Drexel Heritage Showcase Stores and the newly formatted Home
Inspirations Stores, a group of more than 90 independently owned and operated
stores which sell Drexel Heritage(R) products exclusively in a gallery format.
Each store employs a consistent, but not identical, lifestyle concept, with
products displayed in complete rooms and eclectic settings, which include
furnishings, wall decor, window treatments and accessories. The Company also
operates seven dedicated retail stores for its Universal(R) products in Asia and
owns and operates a Maitland-SmithTM retail store in Hong Kong.
The Company owns and operates the Beacon Hill(R) Showrooms, a national
network of 16 showrooms for the sale of "best" and "premium" price category
products to interior design professionals and their clients. The showrooms are
located in Atlanta, Boston, Chicago, Cleveland, Dallas, Dania (Florida),
Houston, Los Angeles, New York, Philadelphia, San Francisco, Seattle, Troy
(Michigan) and Washington, D.C. Approximately 50% of Beacon Hill's sales are of
the Company's fine furniture products, primarily Henredon(R), Maitland-SmithTM,
Drexel Heritage(R) and Lexington(R). In addition to Company products, Beacon
Hill offers products manufactured by such well-known, high-end furniture
manufacturers as Kindel Furniture and John Widdicomb Co. The Beacon Hill
Showrooms feature Robert Allen's Beacon Hill(R) fabric line, which is produced
exclusively for sale in the Company's showrooms.
57
<PAGE>
DECORATIVE HOME FURNISHINGS FABRICS
The Company distributes its Robert AllenTM products through numerous
distribution channels, including its own showroom and approximately 55 exclusive
commissioned, independent representatives, to over 30,000 retailers, decorators
and designers worldwide. The Company sells its AmetexTM products through
approximately 36 exclusive commissioned independent representatives primarily to
furniture manufacturers, bedding and drapery manufacturers and contract
purchasing agents. SunburyTM products are sold to furniture manufacturers and
distributors of decorative home furnishing fabrics in the United States and
Canada by eight exclusive commissioned sales representatives. The Company's
decorative home furnishing fabrics are also sold to decorators and designers
through the Company's Beacon Hill(R) showrooms, which offer Robert AllenTM and
Ramm, Son & CrockerTM fabrics on a commission basis.
MARKETING AND ADVERTISING
The Company seeks to increase consumer buying and strengthen relationships
with its retailers through extensive cataloging, cooperative advertising and
selective promotional programs.
The Company promotes its product lines to dealers through advertising in
industry publications, such as Furniture/Today, and uses various means to
strengthen existing dealer relations, including promotions for certain select
lines such as special sale periods, cooperative advertising, merchandising and
display programs, and sales support materials. The Company also provides
extensive dealer training (both live and through the use of videos). Sale
promotions are offered throughout the year on entire product lines and on
selected products. Summer sales typically encompass an entire product line, Fall
sales generally focus on dining room products and December sales feature "gift"
type products.
Designers and decorators are targeted through advertising in publications
such as Architectural Digest, promotions and other special events, such as the
Beacon Hill Showroom educational programs where designers are invited to
participate with noted speakers.
Advertising is used to increase consumer awareness of the Company's brand
names. Consumer advertising is targeted to specific customer segments through
leading shelter magazines. The Company advertises its products in such
periodicals as Architectural Digest, Traditional Home, Country Home, Country
Living, Martha Stewart Living, Metropolitan Home, Brides, House Beautiful and
Southern Accents. The Company benefits from economies of scale in purchasing
advertising due to the large combined volume of advertising among all its
product lines. In addition, the Company attempts to draw the attention of major
shelter publication editors to its innovative products in order to receive
editorial coverage at no cost. For example, Lexington(R) products have received
editorial coverage in Southern Living and elsewhere in connection with the
Company's participation in select showhome and model home projects.
Recently, the Company has created interactive sites on the Internet which
allow users to browse its product lines, learn more about the Company and be
directed to local dealers.
MANUFACTURING
The Company believes that it has a modern and efficient manufacturing base
that will enable it to meet the manufacturing requirements of its business
strategy over the next several years without the necessity of making significant
additional capital expenditures to expand capacity.
Currently, the Company manufactures its products worldwide through 89
manufacturing and distribution facilities, with more than 24 million square
feet, including over 20 million square feet of
58
<PAGE>
production space. These facilities are strategically located to efficiently
supply the Company's worldwide distribution network. The Company's facilities
have benefited from investment in state-of-the-art equipment and other capital
expenditures in excess of $275.0 million over the past five years. The Company
is also beginning to realize the benefits from its continuous improvement
programs directed at manufacturing methods and process improvements
incorporating just-in-time logistics, cellular concepts, quality circles,
reduced cycle times, laser cutting methodologies, computerization and related
modern production methods.
The Company utilizes certain specialized facilities dedicated to
manufacturing a limited number of products, as well as sub-contracted
manufacturing facilities. The Company also promotes intercompany sourcing of
products and components. Intercompany sales grew from $57.8 million in 1991 to
$168.0 million in 1995. These steps have helped the Company balance its global
manufacturing capacity and increase its operating efficiency.
The Company's fine furniture lines are produced in domestic manufacturing
and distribution facilities located in North Carolina, Tennessee, Michigan,
Massachusetts, South Carolina, Mississippi and California, and internationally
in facilities located in Taiwan, Singapore, Malaysia, China, Indonesia, Hong
Kong, Thailand, the United Kingdom, Canada, Sweden, Japan and Germany.
With manufacturing and distribution facilities encompassing over five
million square feet, the Company is the largest U.S. furniture manufacturer in
Asia, and this provides it with access to a highly-skilled (in such areas as
intricate veneering and hand carving), low-cost workforce, and to scarce raw
materials such as Chinese oak, exotic woods, wicker and rattan. Five of the
Asian facilities with over 1.0 million square feet have been built or renovated
in the last five years and all are equipped with the latest manufacturing
technology. In addition, the Asian manufacturing facilities have developed a
process to use readily available rubber tree wood, a fast-growing wood resource.
Substantially all of the Company's decorative home furnishing fabrics are
purchased from third parties.
FACILITIES
As of June 30, 1996, the Company operated manufacturing and distribution
facilities, showrooms, and retail and office space with a total area of
approximately 26.4 million square feet. The Company owns approximately 20
million square feet and leases approximately 6.4 million square feet. Management
believes the Company's facilities and equipment are in good condition and are
adequate for the Company's present and anticipated future operations.
59
<PAGE>
The following is a summary of the Company's total square footage by domestic
and international location and function:
<TABLE>
<CAPTION>
FUNCTION DOMESTIC INTERNATIONAL TOTAL
- ---------------------------------------------------------- -------- -------------- ------
<S> <C> <C> <C>
(SQUARE FEET IN THOUSANDS)
MANUFACTURING & WAREHOUSE/DISTRIBUTION
Wood.................................................... 12,832 4,853 17,685
Upholstery.............................................. 5,380 203 5,583
Wicker, Rattan & Other.................................. 384 776 1,160
-------- ------ ------
Total............................................. 18,596 5,832 24,428
OFFICE.................................................... 596 61 657
SHOWROOM.................................................. 945 55 1,000
RETAIL.................................................... 198 98 296
-------- ------ ------
TOTAL SQUARE FOOTAGE...................................... 20,335 6,046 26,381
-------- ------ ------
-------- ------ ------
</TABLE>
RAW MATERIALS AND SUPPLIERS
The principal raw materials used by the Company in the manufacture of its
products include: lumber, finishing products (stains, sealants, lacquers), glue,
steel, leather, cotton, wool, synthetic and vinyl fabrics, polyester batting and
non-chlorofluorocarbonated polyurethane foam. The various types of wood used in
the Company's products are purchased both domestically and internationally.
Management believes that its supply sources of those materials are adequate. The
Company has no long-term supply contracts and has experienced no significant
problems in supplying its operations. Although the Company has ongoing
relationships with certain suppliers of raw materials, the Company believes that
there are a number of reliable vendors available contributing to its ability to
obtain competitive pricing for raw materials. Raw material prices fluctuate over
time depending on supply, demand and other factors. Increases in raw material
prices may have a short-term impact on the Company's financial performance.
Under the provisions of the CAA, in December 1995, the United States
Environmental Protection Agency promulgated hazardous air emission standards
applicable to the wood furniture industry, known as the NESHAPs. The furniture
industry and its suppliers are attempting to develop water-based and other forms
of compliant finishing material to replace commonly-used, organic-based finishes
which are a major source of regulated emissions. The Company cannot at this time
estimate how these new standards will affect the Company. See "--Environmental
Regulations."
COMPETITION
The furniture manufacturing industry is highly competitive and includes a
large number of domestic and foreign manufacturers. The industry is highly
fragmented, and no one company is dominant. Competition is generally based on
product quality, brand name recognition, price and service. The Company's
furniture products compete with products made by a number of furniture
manufacturers, including Furniture Brands International, Inc., La-Z-Boy Chair
Company, Klaussner Furniture Industries Inc., LADD Furniture, Inc. and Bassett
Furniture Industries, Inc., as well as numerous smaller producers. In decorative
home furnishing fabrics, competition is based upon design, price, style and
quality, and competitors include Schumacher/Waverly, Richloom and Collins &
Aikman.
EMPLOYEES
As of June 30, 1996, the Company employed approximately 33,200 persons.
Virtually all are non-union, although approximately 30%, most of whom are
employed in Asia, are subject to certain
60
<PAGE>
government-mandated terms of employment. The Company believes it has good
relations with its employees.
LEGAL PROCEEDINGS
From time to time, the Company is a party to various legal actions in the
normal course of its business. The Company is not currently a party to any
litigation which, if adversely determined, would have a material adverse effect
on the liquidity or results of operations of the Company.
INTELLECTUAL PROPERTY
The Company owns a number of trademarks, copyrights, licenses and patents.
The Company believes that many of its trademarks are important to the Company
because they are well recognized and associated with quality and value in the
home furnishings industry. The Company aggressively protects its major
trademarks, trade names and copyrights.
ENVIRONMENTAL REGULATIONS
The Company is subject to a wide range of federal, state and local
environmental laws and regulations relating to the protection of the
environment, worker health and safety and the emission, discharge, storage,
treatment and disposal of hazardous materials. These laws include the Clean Air
Act of 1970, as amended, the Resource Conservation and Recovery Act, the Federal
Water Pollution Control Act, and the Comprehensive Environmental Response,
Compensation and Liability Act ("Superfund" or "CERCLA"). The Company believes
that it is in material compliance with applicable federal, state, local and
foreign environmental regulations. Compliance with these regulations has not in
the past had any material effect on the Company's earnings, capital expenditures
or competitive position; however, the effect of such compliance on the Company
in the future cannot be determined. The Company does not anticipate making any
material capital expenditures for environmental control facilities in the
foreseeable future.
Under the provisions of the CAA, in December 1995, the United States
Environmental Protection Agency promulgated hazardous air emission standards for
the wood furniture industry. These regulations, known as the NESHAPs, will
require the Company to reduce emissions of certain volatile organic compounds by
November 1997.
In order to comply with NESHAPs, the Company intends to reformulate certain
furniture finishes or institute process changes to reduce emissions of volatile
organic compounds. The furniture industry and its suppliers are attempting to
develop water-based and other forms of compliant finishing materials to replace
commonly-used, organic-based finishes which are a major source of regulated
emissions. The Company cannot at this time estimate the impact of these new
standards on the Company's operations and future capital expenditure
requirements, or the cost of compliance. There can be no assurance that
reformulation of finishes or process changes will not adversely affect the
quality or durability of the Company's products. Furthermore, if the Company
cannot satisfy applicable regulatory requirements following reformulation or
process changes, the Company likely will be required to install air pollution
control technology at its facilities. However, while there can be no assurance,
the Company does not believe at this time that its future financial performance
is likely to be materially adversely impacted as a result of these regulations.
Superfund imposes strict, joint and several liability upon owners or
operators of facilities at, from, or to which a release of hazardous substances
has occurred, upon parties who generated hazardous substances that were released
or threaten to be released at such facilities, and upon parties who arranged for
the transportation or disposal of hazardous substances to such facilities.
61
<PAGE>
As the result of historical operations, spills and releases of hazardous
substances may have occurred at several of the Company's facilities. These
releases may warrant further investigation, including soil and groundwater
sampling. If hazardous substances are detected in the soil or groundwater, the
Company would be required to incur expenses relating to the investigation and
remediation of these releases. Furthermore, the Company could incur liability as
an owner or operator under CERCLA as the result of these releases of hazardous
substances. The Company does not believe that the costs associated with
investigating or remediating these releases or any associated Superfund
liability will have a material adverse effect on the Company's financial
condition, operating expenses or earnings. Furthermore, pursuant to the
Acquisition Agreement, Masco will indemnify the Company for liabilities relating
to the existence of hazardous substances at certain of the facilities in excess
of specified amounts. See "Certain Transactions--Acquisition Arrangements."
The Company has been named as a potentially responsible party at a total of
seven Superfund sites. The Company believes that any potential liability
relating to these Superfund sites will not have a material adverse effect on the
Company's earnings, capital expenditures or competitive position. Actual
resolution of these matters, however, could differ from management's estimates
and assumptions.
OTHER GOVERNMENT REGULATIONS
The Company's operations must meet extensive federal, state, and local
regulatory standards in the areas of health and safety. Historically, these
standards have not had any material adverse effect on the Company's sales or
operations.
BACKLOG
The combined backlog of the Company as of December 31, 1995 aggregated
approximately $323.0 million, compared to approximately $302.0 million as of
December 31, 1994. The combined backlog as of June 30, 1996 aggregated
approximately $306.7 million, compared to approximately $301.0 million as of
June 30, 1995. Backlog for the first six months of 1996 increased from the 1995
level primarily as a result of increased order rates on certain product lines
partially offset by Company implemented manufacturing initiatives designed to
improve delivery and reduce cycle times.
62
<PAGE>
MANAGEMENT
The following table identifies each of the executive officers and directors
of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Wayne B. Lyon.................. 63 Chairman of the Board, President and
Chief Executive Officer
Douglas C. Barnard............. 37 Vice President, General Counsel and Secretary
Frank W. Burr.................. 63 Senior Vice President
Ronald J. Hoffman.............. 52 Vice President, Treasurer and Chief Financial Officer
James R. Melton................ 53 Vice President and Controller
Ronnie R. Robbins, Jr.......... 49 Vice President--Taxes
Richard M. Cashin, Jr. ........ 43 Director
C. Sean Day.................... 47 Director
Robert George.................. 49 Director
John A. Morgan................. 65 Director
Donald M. Roberts.............. 61 Director
David F. Thomas................ 46 Director
</TABLE>
MR. LYON is Chairman of the Board, President and Chief Executive Officer of
the Company. Mr. Lyon has been a director of Masco since 1988, and was its
President from 1985 until 1996 and its Chief Operating Officer from 1974 to
1996. Prior to joining Masco in 1972, Mr. Lyon served as Vice
President--Business Development for Illinois Tool Works, Inc. Mr. Lyon is also a
director of Comerica Incorporated, Payless Cashways, Inc. and Emco Limited.
MR. BARNARD is Vice President, General Counsel and Secretary of the Company.
Mr. Barnard was an Associate Corporate Counsel of Masco from 1992 to 1996.
Previously, he was a partner at Kirkland & Ellis in Chicago.
MR. BURR is Senior Vice President of the Company. Mr. Burr was Senior Vice
President of the Home Furnishings Group from 1993 to 1996 and was Vice President
of the Home Furnishings Group from 1992 to 1993. Previously, he served as
Executive Vice President of Thomasville Furniture Industries, Inc.
MR. HOFFMAN is Vice President, Treasurer and Chief Financial Officer of the
Company. Mr. Hoffman was Vice President and Group Controller of the Home
Furnishings Group from 1993 to 1996. Mr. Hoffman joined Masco in 1970, serving
as Staff Accountant until 1976, and as Group Controller until he joined the Home
Furnishings Group in April 1993.
MR. MELTON is Vice President and Corporate Controller of the Company. Mr.
Melton was Vice President--Administration and Group Controller of the Home
Furnishings Group from 1987 to 1996. Mr. Melton joined Masco in 1967. During his
tenure at Masco he held the position of chief financial officer of Electra
Corp., a consumer products electronic company.
MR. ROBBINS is Vice President--Taxes of the Company. Mr. Robbins was Vice
President-- Taxes of the Home Furnishings Group from 1994 to 1996. Previously,
he was Assistant Secretary of Masco Building Products from 1985 to 1994 and Vice
President--Taxes from 1989 to 1994, and Assistant Treasurer and Tax Manager from
1983 to 1989, of N.I. Industries Inc. (a Masco affiliate since 1985).
MR. CASHIN is a director of the Company. Mr. Cashin has been President since
1994, and a Managing Director for more than the past five years, of Citicorp
Venture Capital, Ltd. In addition, he serves as a director of Levitz Furniture
Incorporated and Titan Wheel International Inc.
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<PAGE>
MR. DAY is a director of the Company. Mr. Day has been President and Chief
Executive Officer of Navios Corporation, a ship owning and operating company,
since 1989. He is also a director of Kirby Corporation.
MR. GEORGE is a director of the Company. Mr. George has been Executive Vice
President and a director of Holdings since 1995 and has been a Managing Partner
of Rosenthal & George, Inc., a management consulting firm, for more than the
past five years.
MR. MORGAN is a director of the Company. Mr. Morgan is a partner of Morgan
Lewis Githens & Ahn, investment bankers. He has been a director of Masco since
1969. In addition, he serves as a director of FlightSafety International Inc.,
MascoTech Inc., McDermott International Inc. and TriMas Corporation. Morgan
Lewis Githens & Ahn acted as advisor to Masco in connection with the
Transactions.
MR. ROBERTS is a director of the Company. Mr. Roberts was Vice Chairman and
Treasurer of the United States Trust Company of New York and its parent, U.S.
Trust Corporation, from February 1990 until his retirement in September 1995.
Prior thereto, Mr. Roberts was Executive Vice President and Treasurer of both
companies from January 1989 to February 1990 and Executive Vice President of
both companies from November 1979 to January 1989. Mr. Roberts is a Director of
Burlington Resources Inc. and York International Corporation.
MR. THOMAS is a director of the Company. Mr. Thomas has been President of
399 Ventures since 1994 and has been a Managing Director of Citicorp Venture
Capital, Ltd. for more than the past five years. Mr. Thomas is a director of
Galey & Lord, Inc.
COMPENSATION OF DIRECTORS
The directors of the Company who are officers, employees or otherwise
affiliates of Holdings or the Company do not presently receive compensation for
their services as directors. Directors of the Company are entitled to
reimbursement of their reasonable out-of-pocket expenses in connection with
their travel to and attendance at meetings of the board of directors or
committees thereof. No determination has yet been made with respect to annual
fees or board attendance fees, if any, to be paid to directors of the Company
who are not also officers, employees or otherwise affiliates of Holdings or the
Company.
COMPENSATION OF EXECUTIVE OFFICERS
The Company was formed in May 1996 to consummate the Transactions. The
listed individuals became executive officers of the Company upon consummation of
the Transactions on August 5, 1996, and did not receive any compensation from
the Company or Holdings prior to that date.
OWNERSHIP OF SECURITIES
The Company's authorized capital stock consists of 3,000 shares of common
stock, par value $.01 per share (the "Company Common Stock"), 100 shares of
which are issued and outstanding and owned by Holdings.
Holdings' authorized capital stock consists of 6,000,000 shares of Class A
Common Stock, par value $.01 per share (the "Class A Common Stock") (consisting
of four series, 1,000,000 shares of Series A-1 Common Stock, 1,000,000 shares of
Series A-2 Common Stock, 1,000,000 shares of Series A-3 Common Stock and
3,000,000 shares of Series I Common Stock (which will only be issuable after the
occurrence of a Qualifying Offering, as described below under "--Capitalization
of Holdings")), 6,000,000 shares of Class B Common Stock, par value $.01 per
share (the "Class B Common Stock") (consisting of four series, 1,000,000 shares
of Series B-1 Common Stock, 1,000,000 shares of Series B-2 Common Stock,
1,000,000 shares of Series B-3 Common Stock and 3,000,000 shares of Series II
Common Stock (which will only be issuable after a
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<PAGE>
Qualifying Offering)), 116,100 shares of Class C Common Stock, par value $.01
per share (the "Class C Common Stock" and, together with the Class A Common
Stock and Class B Common Stock, the "Holdings Common Stock"), 100,000 shares of
Class D Common Stock, par value $.01 per share, a special class designed to
track the performance of Simmons, a subsidiary of Holdings that is not a
subsidiary of the Company (the "Class D Common Stock"), and 4,000,000 shares of
Preferred Stock, par value $.01 per share, of which the following series have
been designated: 1,103,320 shares of Series A-1 Preferred Stock, stated value
$100 per share (the "Series A-1 Preferred Stock"), 96,681 shares of Series A-2
Preferred Stock, stated value $100 per share (the "Series A-2 Preferred Stock"
and, together with the Series A-1 Preferred Stock, the "Senior Preferred
Stock"), 303,503 shares of Series B Convertible Preferred Stock, stated value
$6.02 per share (the "Series B Preferred Stock"), and 102,622 shares of Series C
Convertible Preferred Stock, stated value $6.02 per share (the "Series C
Preferred Stock" and, together with the Series B Preferred Stock, the
"Convertible Preferred Stock"). See "--Capitalization of Holdings." There is no
established public trading market for these securities of Holdings.
The table below sets forth certain information regarding the equity
ownership of Holdings as of September 30, 1996 by (i) each person or entity who
beneficially owns five percent or more of any class of voting capital stock;
(ii) each director of the Company; and (iii) the directors and officers of the
Company, as a group. Each holder of Class A Common Stock and each holder of
Class B Common Stock holds an equal number of shares of each series thereof
(other than Series I or II). As described below in "--Capitalization of
Holdings," certain of the securities of Holdings are convertible into other
securities. Except as noted in the footnotes to the table the information in the
table below assumes no such conversion.
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------------------------------------- ---------------------------------------------------
NAME AND ADDRESS CLASS A CLASS B CLASS C CLASS D SERIES A-1 SERIES A-2 SERIES B SERIES C
- -------------------------- ------- ------- ------- ------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
399 Venture Partners, 48,999 233,529 -- 6,158 553,230 13,770 -- 90,572
Inc.(1)................... 49.0% 61.8% 64.8% 50.1% 14.2% 88.3%
399 Park Ave.
New York, NY
Travelers(2).............. 4,905 23,385 -- 1,009 -- -- -- 12,050
388 Greenwich St. 4.9% 6.2% 10.6% 11.7%
New York, NY
Masco Corporation(3)...... 15,000 71,490 -- 1,009 550,090 -- 303,503 --
21001 Van Born Rd. 15.0% 18.9% 10.6% 49.9% 100.0%
Taylor, MI
Wayne B. Lyon(4).......... 32,766 90,561 -- 1,009 550,090 23,085 303,503 --
1300 National Highway 32.8% 23.9% 10.6% 49.9% 23.9% 100.0%
Thomasville, NC
Douglas C. Barnard,....... 31,101 49,374 98,978 -- -- * -- --
as voting trustee for 31.1% 13.1% 100.0%
the Management
Investors(5)
1300 National Highway
Thomasville, NC
Richard M. Cashin, 48,999 233,529 -- 6,317 553,230 13,770 -- 90,572
Jr.(6).................... 49.0% 61.8% 66.5% 50.1% 14.2% 88.3%
399 Venture Partners,
Inc.
399 Park Avenue
New York, NY
C. Sean Day............... -- -- -- -- -- -- -- --
Navios Corporation
Stamford Harbour Park
333 Ludlow Street
Stamford, CT
Robert George............. * * * -- -- -- -- --
1314 Hanley Industrial
Court
St. Louis, MO
John A. Morgan(7)......... 15,000 71,490 -- 1,009 550,090 -- 303,503 --
Morgan Lewis Githens & 15.0% 18.9% 10.6% 49.9% 100.0%
Ahn
767 Fifth Avenue
New York, NY
Donald M. Roberts......... -- -- -- -- -- -- -- --
430 Park Avenue Suite 600
New York, NY
David F. Thomas(6)........ 48,999 233,529 -- 6,317 553,230 13,770 -- 90,572
399 Venture Partners 49.0% 61.8% 66.5% 50.1% 14.2% 88.3%
399 Park Avenue
New York, NY
Directors and executive 95,094 354,393 98,978 7,326 1,103,320 36,855 303,503 90,572
officers.................. 95.1% 93.8% 100.0% 77.1% 100.0% 35.1% 100.0% 88.3%
of the Company, as
a group (12 persons)(8)
</TABLE>
(Footnotes on following page)
65
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(Footnotes for preceding page)
- ------------
* less than 1.0%
(1) Amounts shown exclude the shares that could be obtained from Travelers as
described in note (2). In connection with the Transactions, 399 Ventures
granted to Travelers an option exercisable for one year to acquire 55,419
shares of Series A-1 Preferred Stock at a price per share equal to the
stated value plus accrued but unpaid dividends, and to Holdings an option to
acquire 4,842 shares of Class A Common Stock (divided equally among the
series thereof other than Series I) and 5,199 shares of Class B Common Stock
(divided equally among the series thereof other than Series II) in each case
at a price per share of $5.44, and 13,770 shares of Series A-2 Preferred
Stock at a price per share equal to the stated value plus accrued but unpaid
dividends for Holdings' use in the event Holdings establishes an employee
stock incentive program within 9 months after consummation of the
Transactions. 399 Ventures' fully-diluted (assuming conversion of all
Convertible Preferred Stock) ownership of Holdings Common Stock, including
shares subject to the option granted to Holdings, will be 38.0%.
(2) Amounts shown exclude the shares that could be obtained from 399 Ventures as
described in note (1). In connection with the Transactions, Travelers
granted to 399 Ventures an option, exercisable for two years commencing on
the first anniversary of the consummation of the Transactions, in the event
the option described in note (1) is not exercised by Travelers, to acquire
all shares of Class A Common Stock and Class B Common Stock held by
Travelers at a price per share equal to the lesser of fair market value or
$5.44, and all shares of Series C Preferred Stock held by Travelers at a
price per share equal to the lesser of fair market value or the stated value
plus accrued but unpaid dividends. Travelers' fully-diluted (assuming
conversion of all Convertible Preferred Stock) ownership of Holdings Common
Stock, including the shares subject to the option granted to 399 Ventures,
will be 4.1%.
(3) Masco's fully-diluted (assuming conversion of all Convertible Preferred
Stock) ownership of Holdings Common Stock is 39.7%. However, Masco is
restricted from holding more than 19.9% of the Holdings Common Stock.
(4) Includes shares held by Masco, which may be deemed to be beneficially owned
by Mr. Lyon. Mr. Lyon disclaims beneficial ownership of such shares. Mr.
Lyon's fully-diluted (assuming conversion of all Convertible Preferred
Stock) ownership of Holdings Common Stock (excluding shares held by Masco)
is 3.7%.
(5) Consists of shares held by Mr. Barnard as voting trustee for the Management
Investors. See "Certain Transactions-- Management Investors." Mr. Barnard
has no pecuniary interest in such shares other than 203 shares of Class A
Common Stock, 218 shares of Class B Common Stock and 2,000 shares of Class C
Common Stock. In addition, Mr. Barnard holds less than 1.0% of Series A-2
Preferred Stock.
(6) Consists of shares held by 399 Ventures, which may be deemed to be
beneficially owned by Messrs. Cashin and Thomas, and 160 shares each of
Class D Common Stock. Messrs. Cashin and Thomas disclaim beneficial
ownership of such shares (except for such 160 shares each of Class D Common
Stock).
(7) Consists of shares held by Masco, which may be deemed to be beneficially
owned by Mr. Morgan. Mr. Morgan disclaims beneficial interest of such
shares.
(8) Includes shares held by 399 Ventures which may be deemed to be beneficially
owned by Messrs. Cashin and Thomas, shares held by Masco which may be deemed
to be beneficially owned by Messrs. Lyon and Morgan, and shares held by Mr.
Barnard, as voting trustee for the Management Investors. Messrs. Cashin and
Thomas disclaim beneficial ownership of shares held by 399 Ventures, Messrs.
Lyon and Morgan disclaim beneficial ownership of shares held by Masco and
Mr. Barnard disclaims beneficial ownership of shares held by him as voting
trustee for other Management Investors.
CAPITALIZATION OF HOLDINGS
The Company is a wholly-owned subsidiary of Holdings. The assets of Holdings
consist of all the issued and outstanding Company Common Stock, all the issued
and outstanding common stock of Simmons and the Holdings Business. See
"Unaudited Pro Forma Financial Information" and "Certain Transactions--Business
Arrangements with Holdings." The following is a summary description of the
capitalization of Holdings and is subject to and qualified in its entirety by
reference to the Holdings PIK Notes and the Certificate of Incorporation of
Holdings.
Holdings PIK Notes
As part of the Transactions, Holdings issued the Holdings PIK Notes to Masco
in an aggregate principal amount of $285.0 million. The Holdings PIK Notes bear
interest at 12% per annum. Interest is payable semi-annually, and may be paid in
kind until and including the eighth anniversary of the original date of
issuance, except that after the fifth anniversary and until and including the
eighth anniversary of the original date of issuance, current interest will be
payable in cash in an amount up to Holdings' Excess Cash Flow (as defined in the
Holdings PIK Notes), provided such cash payments are then permitted under the
terms of Holdings' and its subsidiaries' other indebtedness.
The Holdings PIK Notes may be redeemed by Holdings at any time at par plus
accrued but unpaid interest. However, the terms of the Senior Bank Facilities
prohibit such redemption, except that Holdings is permitted under the Senior
Bank Facilities to redeem Holdings PIK Notes with up to 60% of the net cash
proceeds from any public offering of Holdings' capital stock. Holdings will be
required, commencing February 5, 2007, or if none of the Notes are then
outstanding, December 15, 2006, to redeem 25% of the principal amount
semi-annually. The final maturity of the Holdings PIK Notes will be August 5,
2008. Upon the occurrence of a change of control as defined in the Holdings
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PIK Notes (a "Holdings Change of Control"), the holders may require Holdings to
repurchase the Holdings PIK Notes, in whole or in part, at a purchase price in
cash equal to par plus accrued but unpaid interest.
The Holdings PIK Notes are subordinated to Holdings' obligations as a
guarantor of the Senior Bank Facilities and any increase, refunding or
refinancing thereof that is secured by substantially all the assets of Holdings,
and rank pari passu with or senior to all unsecured indebtedness of Holdings.
The Holdings PIK Notes contain covenants and events of default typical of
instruments of their type.
Subject to the limitations on transfer described below, holders of the
Holdings PIK Notes have the right to require Holdings either to register the
Holdings PIK Notes for sale under the Securities Act and to keep such
registration effective for up to 90 days or, alternatively, to exchange the
Holdings PIK Notes for registered notes of like tenor.
The terms of the Holdings PIK Notes limit the ability of Masco to transfer
such notes until the earlier of (i) the consummation of an underwritten public
equity offering by Holdings that raises at least $100.0 million in net proceeds
and results in at least 25% of Holdings' common equity being sold to the public
(a "Qualifying Offering") and (ii) August 5, 1998, subject in each case to
Holdings' satisfaction of certain financial tests.
Preferred Stock
Holdings is authorized to issue 4,000,000 shares of Preferred Stock, par
value $.01 per share, of which 1,103,320 shares designated as Series A-1
Preferred Stock, 96,681 shares designated as Series A-2 Preferred Stock, 303,503
shares designated as Series B Preferred Stock and 102,622 shares designated as
Series C Preferred Stock are issued and outstanding.
____Senior Preferred Stock. Shares of Series A-1 Preferred Stock have a stated
value of $100 and are entitled to quarterly dividends, which are cumulative and
accrue at a rate per annum of 13%, compounding. Shares of Series A-2 Preferred
Stock have a stated value of $100 and are entitled to quarterly dividends, which
are cumulative and accrue at a rate per annum of 13.5%, compounding. The vote of
67% of the shares of the Senior Preferred Stock, voting as a separate class, is
required to (i) authorize or issue any class of preferred stock of Holdings that
ranks senior to or pari passu with the Senior Preferred Stock with respect to
dividends or upon liquidation or (ii) amend Holdings' Certificate of
Incorporation or By-Laws if such amendment would adversely affect the powers,
rights and privileges of the holders of the Senior Preferred Stock. Except as
described in the foregoing and as otherwise required by law, the Senior
Preferred Stock is not entitled to vote. The Series A-1 Preferred Stock and
Series A-2 Preferred Stock rank pari passu with each other with respect to
dividends and upon liquidation, dissolution and winding up. In the event of the
liquidation, dissolution or winding up of Holdings, the Senior Preferred Stock
will have a preference over all other classes of Holdings' capital stock, except
the Class D Common Stock, in an amount equal to the stated value plus accrued
but unpaid dividends. The Senior Preferred Stock is subject to mandatory
redemption upon the earlier of (i) a Holdings Change of Control or (ii) February
5, 2009. At the option of Holdings in certain circumstances, Senior Preferred
Stock may be exchanged for junior subordinated debentures of Holdings (the
"Holdings Debentures"), at an exchange rate of $1.00 in principal amount of
Holdings Debentures for each $1.00 in stated value of Senior Preferred Stock,
plus an additional principal amount equal to the dollar amount of any accrued
and unpaid dividends. Holdings Debentures, if issued, will bear interest at a
rate per annum of 13%, which interest will be paid in kind semi-annually in lieu
of cash until and including August 5, 2004, and may be paid in kind or in cash,
subject to certain limitations, thereafter. The Holdings Debentures will mature
on February 5, 2009. The Holdings Debentures will be subordinated in right of
payment to the Holdings PIK Notes.
____Convertible Preferred Stock. Shares of Convertible Preferred Stock have a
stated value of $6.02. The Series B Preferred Stock and the Series C Preferred
Stock rank pari passu with each
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<PAGE>
other with respect to dividends and upon liquidation, dissolution and winding
up. Such shares have no preferential dividend rights but are entitled to
dividends paid on Holdings Common Stock on an as-if-converted basis. In the
event of the liquidation, dissolution or winding up of Holdings, the Convertible
Preferred Stock will be subject to the liquidation preference of the Senior
Preferred Stock and will have a preference over the Holdings Common Stock in an
amount equal to the stated value per share. Except as required by law, the
Convertible Preferred Stock is not entitled to vote. In certain circumstances,
subject to adjustments in the event of stock splits and the like, the Series B
Preferred Stock is convertible at the option of the holders thereof into shares
of Class A Common Stock on a share-for-share basis. Subject to adjustments in
the event of stock splits and the like, the Series C Preferred Stock is
convertible at the option of the holders thereof into shares of Class A Common
Stock or Class B Common Stock on a share-for-share basis. On the date of
consummation of a sale of all or substantially all of the assets or business or
capital stock of Holdings (a "Sale Transaction"), each share of Convertible
Preferred Stock will be automatically converted, on a share-for-share basis,
into fully paid and nonassessable shares of Class B Common Stock or, if the
holders elect, into fully paid and nonassessable shares of Class A Common Stock.
Common Stock
There are four classes of common stock of Holdings. Class A Common Stock and
Class B Common Stock are each divided into four series. One series of each of
the Class A Common Stock and the Class B Common Stock will be issuable only
after the occurrence of a Qualifying Offering, as described under "Conversion"
below. Except as described below with respect to voting and conversion rights,
the shares of Class A Common Stock, Class B Common Stock and Class C Common
Stock are identical in all respects. The Class D Common Stock is a special class
of non-voting common stock designed to track the performance of Simmons, a
subsidiary of Holdings that is not a subsidiary of the Company.
____Voting. Holders of Series A-1 Common Stock are entitled to elect two members
of Holdings' seven member Board of Directors (the "Holdings Board"), holders of
Series A-2 Common Stock are entitled to elect one member of the Holdings Board,
holders of Series A-3 Common Stock are entitled to elect two members of the
Holdings Board and holders of Class C Common Stock are entitled to elect two
members of the Holdings Board. Holdings' Certificate of Incorporation provides
for weighted voting by the directors such that each director elected by the
Series A-1 Common Stock has a weighted vote of 24.5%, each director elected by
the Series A-2 Common Stock has a weighted vote of 15%, each director elected by
the Series A-3 Common Stock has a weighted vote of 7.5%, and each director
elected by the Class C Common Stock has a weighted vote of 10.5%. Such weighted
voting will shift in certain circumstances and supermajority votes will be
required in certain instances. See "--Holdings Stockholders Agreement." In
addition, Holdings' Certificate of Incorporation provides for the automatic
conversion of Holdings Common Stock into single series of voting and non-voting
common stock. See "--Conversion." Except as otherwise required by law, Class B
Common Stock is non-voting. On all matters other than the election of directors,
Class A Common Stock and Class C Common Stock vote together as a single class.
____Conversion. Under certain circumstances, each share of any series of Class A
Common Stock is convertible into one share of the corresponding series of Class
B Common Stock and each share of any series of Class B Common Stock is
convertible into one share of the corresponding series of Class A Common Stock.
All series of Class A Common Stock and the Class C Common Stock will
automatically convert into Series I Common Stock, a single series of voting
common stock, and all series of Class B Common Stock will automatically convert
into Series II Common Stock, a single series of non-voting common stock in the
event of a Sale Transaction or upon consummation of a Qualifying Offering.
HOLDINGS STOCKHOLDERS AGREEMENT
As part of the Transactions, Holdings entered into an agreement (the
"Holdings Stockholders Agreement") with Masco, the Institutional Investors and
the Management Investors. The following is
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<PAGE>
a summary description of the principal terms of the Holdings Stockholders
Agreement. The term "Masco Stockholders" refers to Masco and certain of its
permitted transferees under the terms of the Holdings Stockholders Agreement.
Board of Directors. The Holdings Board is comprised of seven members. The
Holdings Stockholders Agreement provides that two directors are to be designated
and elected by a majority of the holders of the Class C Common Stock (each, a
"Management Director"); two directors are to be designated by the Institutional
Investors and elected by the holders of the Series A-1 Common Stock (each, an
"Institutional Director"); one director is to be designated by the Masco
Stockholders and elected by the holders of the Series A-2 Common Stock (the
"Masco Director"); and two disinterested directors are to be designated by
Holdings' Nominating Committee (described below) and elected by the holders of
the Series A-3 Common Stock (each, a "Disinterested Director"). The Nominating
Committee is to be comprised of one Management Director, one Institutional
Director and one Disinterested Director. In the event the Institutional
Investors determine it is permitted by law, they may cause the removal of any or
all of the Disinterested Directors and thereafter designate his or her
replacement(s). Holdings' Certificate of Incorporation and By-Laws provide for
weighted voting by the Holdings Board on all matters as described above in
"Capitalization of Holdings--Common Stock." In the event there are more than 50
stockholders of Holdings, the Institutional Investors will be entitled to reduce
the weighted vote allocated to the Institutional Directors to 9.5% each, with a
corresponding increase in the votes of the Disinterested Directors to 22.5%
each. If the Masco Stockholders or the Institutional Investors, as the case may
be, either elect not to, or no longer have the right to, designate directors,
the Nominating Committee will designate the Masco Director and the Institutional
Directors, as the case may be. The right of the Institutional Investors to
designate directors will terminate if the Institutional Investors no longer hold
any Senior Preferred Stock and hold less than 10% of Holdings Common Stock (on a
fully-diluted basis). The right of the Masco Stockholders to designate a
director will terminate if the Masco Stockholders no longer hold any Holdings
PIK Notes, no longer hold any Senior Preferred Stock and hold less than 5% of
Holdings Common Stock (on a fully-diluted basis).
Certain actions by Holdings and its subsidiaries require the approval of a
majority of weighted votes of the Holdings Board, including a majority of the
weighted votes of the Institutional Directors. These actions include significant
business combinations, significant asset dispositions, modification of Holdings'
Certificate of Incorporation or By-Laws, certain acquisitions, increases and
decreases in capital, incurring or guaranteeing certain indebtedness,
dissolution, liquidation and bankruptcy, changes in the compensation of senior
management and certain transactions involving stockholders or their affiliates.
Certain actions require the approval of a majority of the weighted votes of the
Holdings Board, including the affirmative vote of the Masco Director. These
actions include certain amendments to Holdings' Certificate of Incorporation or
By-Laws, certain transactions involving stockholders or other affiliates,
certain amendments to the Senior Bank Facilities or the Holdings PIK Notes, the
entry of Holdings or any of its subsidiaries into certain agreements that
contain certain covenants that are more restrictive than similar covenants in
the Credit Agreement (as defined) and the Indenture, and certain transactions
between Holdings and Simmons.
The Holdings Stockholders Agreement provides each of the Masco Stockholders
and the Institutional Investors with the option to designate a director of the
Company and each of its significant subsidiaries. The balance of the directors
of the boards of directors of the Company and its subsidiaries is to be
determined by the Holdings Board.
Rights Offering. The Holdings Stockholders Agreement provides the parties to
that agreement with the right to participate ratably, in accordance with their
fully-diluted common equity ownership (excluding Class D Common Stock), in all
additional offerings of Holdings Common Stock or of securities exercisable,
convertible or exchangeable for or into Holdings Common Stock ("Equity
Equivalents") (other than the issuance of Holdings Common Stock or Equity
Equivalents to
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Management Investors, in a public offering, to a financial institution in
connection with the extension of credit, in connection with acquisitions or upon
the conversion of other securities of Holdings).
Right of First Offer. If Masco makes a good faith determination that there
is a strong likelihood that it will be unable to continue its chosen accounting
treatment to be applied to the Acquisition as a result of its (and/or any Masco
Stockholders') ownership of Holdings Common Stock or Equity Equivalents and is
unable to restructure its ownership of such securities in a manner which
continues such accounting treatment and is not materially adverse to Masco, the
Masco Stockholders shall first offer such Holdings Common Stock or Equity
Equivalents to Holdings and subject to a priority in favor of Holdings, the
Institutional Investors. If such offers are not accepted in full within a total
period of 20 days, the Masco Stockholders may sell such securities to a third
party on terms which are either substantially similar to those offered to
Holdings and the Institutional Investors or are more favorable to the Masco
Stockholders.
Right of First Refusal. Shares of Holdings Common Stock and Equity
Equivalents held by a Masco Stockholder or a Management Investor are subject to
a right of first refusal in favor of Holdings and subject to a priority in favor
of Holdings, in the case of a Masco Stockholder, the Institutional Investors,
and in the case of a Management Investor, the Masco Stockholders and the
Institutional Investors (together on a pro-rata basis based on their
fully-diluted common equity ownership (excluding Class D Common Stock)).
Tag-Along and Drag-Along Rights. If the Institutional Investors propose to
transfer Holdings Common Stock or Equity Equivalents representing more than 10%
of the Holdings Common Stock (on a fully-diluted basis), other than in a
registered public offering or other permitted transaction, or an amount of
Holdings Common Stock or Equity Equivalents that would result in a Holdings
Change of Control, the other stockholders, under certain circumstances, have the
option to sell to the same offeree pursuant to Tag-Along Rights their Holdings
Common Stock or Equity Equivalents on the same terms and on a pro rata basis.
Tag-Along Rights also apply to sales of Class D Common Stock by Institutional
Investors and to sales of Senior Preferred Stock by Institutional Investors,
Masco Stockholders and Management Investors. If the Institutional Investors
propose to sell or otherwise transfer for value to an unaffiliated third party
all of their Holdings Common Stock, Equity Equivalents and Senior Preferred
Stock, the Institutional Investors have the right under certain circumstance to
require the other stockholders to sell or transfer all of their Holdings Common
Stock, Equity Equivalents and Senior Preferred Stock to such party on the same
terms. If the Institutional Investors propose the sale or other transfer for
value of all or substantially all of the assets or business of Holdings to a
third party, the Institutional Investors have the right under certain
circumstances to require the other stockholders to approve such transaction in
their capacity as stockholders of Holdings.
Management Repurchase. All shares of Holdings Common Stock and Senior
Preferred Stock held by a Management Investor are subject to repurchase by
Holdings for a specified period of time following the termination of employment
of such Management Investor for any reason. The Institutional Investors and the
Masco Stockholders have the right for a specified period to purchase, on a
pro-rata basis, such stock not so purchased by Holdings.
REGISTRATION RIGHTS AGREEMENT
Pursuant to a registration rights agreement, the Institutional Investors are
entitled to require Holdings to effect an initial public offering of Holdings
Common Stock underwritten on a firmly committed basis. The Institutional
Investors (as a group) and the Masco Stockholders (as a group) are each entitled
to three long-form registrations and unlimited short-form registrations on
demand, in each case at the expense of Holdings (other than underwriting
commissions and discounts). The Institutional Investors, the Masco Stockholders
and the Management Investors are entitled to include, at the expense of
Holdings, their shares of Holdings Common Stock in any primary registration by
Holdings or any secondary registration on behalf of other stockholders on a
pro-rata basis, subject to customary underwriter's cutback rights.
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CERTAIN TRANSACTIONS
BUSINESS ARRANGEMENTS WITH HOLDINGS
As part of the Transactions, (i) Holdings acquired from Masco the Holdings
Business by the merger of Lineage and MHF into Holdings, (ii) Holdings
contributed the Specified Assets, consisting primarily of inventory, machinery
and equipment, office furniture and receivables to the Company and (iii) the
Company and Holdings entered into leases providing for the rent of certain of
the Specified Assets to Holdings at rates the Company believes to be comparable
to rates that would be negotiated by unrelated parties in arm's length
transactions. Lineage was established by Masco in 1991 as a marketing division
to provide a restricted distribution furniture product line. A key element of
the Lineage concept was to utilize existing but under-utilized facilities. Thus,
Holdings' production needs (as successor to Lineage) will be performed by the
Company, and the Company will be reimbursed by Holdings for such services at
rates the Company believes to be comparable to rates that would be negotiated by
unrelated parties in arm's length transactions. MHF is a distributor of
furniture, accessories and fabrics to the contract industry. Approximately 80%
of its 1995 sales ($35.7 million) were of products manufactured by the Home
Furnishings Group. Holdings (as successor to MHF) will purchase products from
the Company, at prices comparable to those charged by the Company to similarly
situated unrelated third parties.
As part of the Transactions, Holdings and the Company entered into the
Holdings Management Agreement pursuant to which Holdings will provide to the
Company executive management, corporate support, administrative, data
processing, human resources, legal, environmental, audit, treasury, tax and
other management-related services. The Company will compensate Holdings pursuant
to such agreement in an amount equal to Holdings' actual cost of providing such
services. The Company estimates that its annual corporate general and
administrative expenses (which will be provided under and paid for pursuant to
the Holdings Management Agreement) on a pro forma basis for 1995 (giving effect
to the Transactions as if they had occurred on January 1, 1995), would have been
$15.8 million. As part of the Transactions, Holdings entered into the Transition
Services Agreement with Masco, pursuant to which Masco will provide certain
services for Holdings and the Company. As a result, certain services to be
provided to the Company under the Holdings Management Agreement will be provided
by Masco. See "--Transition Services Agreement."
ACQUISITION ARRANGEMENTS
As part of the Transactions, Masco received the cash consideration, Masco
Holdings Stock and the Holdings PIK Notes described in "Summary--The
Transactions." In addition, approximately $705.3 million of indebtedness owed by
the Home Furnishings Group to Masco was repaid.
Certain provisions of the Acquisition Agreement survive the consummation of
the Acquisition and continue for a period as contractual obligations between
Masco and Holdings. The following summarizes the principal such provisions of
the Acquisition Agreement.
Masco has made various representations, warranties and covenants respecting
the Home Furnishings Group, and the Acquisition Agreement provides for
indemnification by Masco for periods of one to three years in the event of any
breach of such representations, warranties or covenants. With certain
exceptions, Masco will not be obligated to make payments for the first $15.0
million of indemnifiable claims nor be obligated to make payments of more than
$100.0 million. The Acquisition Agreement provides that Masco has the exclusive
right to undertake certain activities relating to environmental matters
pertaining to the Company for which Masco may be responsible under the
indemnification provisions with the prior written consent of Holdings, such
consent not to be unreasonably withheld. Holdings will cooperate with Masco
regarding these activities and, with certain exceptions, reimburse Masco for
reasonable costs and expenses until Holdings has incurred damages in specified
amounts.
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Masco has agreed to guarantee or provide up to $15.0 million in stand-by
letters of credit or comparable credit enhancement arrangements (collectively,
"Guaranteed LCs") in support of any obligation as to which the Company or a
subsidiary is a primary obligor or an account party. This obligation will
continue until the earlier of (i) the date on which the Holdings PIK Notes
become due and payable and (ii) any business day if on each business day of the
preceding 18 month period the aggregate amount of unused availability for
borrowings under credit lines available to the Company and its subsidiaries
equaled at least $75.0 million. The Company or a subsidiary will remain
primarily responsible for such obligations and Holdings will indemnify Masco (by
providing a promissory note having the same terms as the Holdings PIK Notes) for
any damages resulting from any breach of the Company's or such subsidiary's
obligations under such Guaranteed LCs.
Masco has agreed to not (i) on or prior to August 5, 2001 engage in the
design or manufacture of certain furniture and fabric products (the "Restricted
Activities") or acquire an interest in an entity that would result in Masco
having annual revenues from Restricted Activities that exceed certain levels or
(ii) on or prior to August 5, 1998 (a) cause or attempt to cause any customer or
supplier of the Company or its subsidiaries to terminate or materially reduce
its business with the Company or its subsidiaries or (b) initiate contact (other
than through general solicitation to the public) with any officer of the Company
or its subsidiaries for the purpose of offering employment by Masco or any of
its subsidiaries.
MANAGEMENT INVESTORS
As part of the Transactions, Masco acquired the Masco Holdings Stock, and
sold to the Management Investors, 15,993 shares of Class B Common Stock (divided
equally among the series thereof other than Series II) at a price per share of
$5.44, and 21,930 shares of Series A-2 Preferred Stock at a price per share of
$100. In addition, Wayne B. Lyon, Chief Executive Officer, President and
Chairman of the Board of Holdings, acquired from Holdings 21,180 shares of Class
A Common Stock (divided equally among the series thereof other than Series I) at
a price per share of $5.44, 9,645 shares of Class A Common Stock (divided
equally among the series thereof other than Series I) for no cash consideration,
22,734 shares of Class B Common Stock (divided equally among the series thereof
other than Series II) at a price per share of $5.44, 10,356 shares of Class B
Common Stock (divided equally among the series thereof other than Series II) for
no cash consideration, and 60,212 shares of Series A-2 Preferred Stock at a
price per share of $100. Mr. Lyon sold to the other Management Investors 13,059
shares of Class A Common Stock (divided equally among the series thereof other
than Series I) at a price per share of $5.44, 14,019 shares of Class B Common
Stock (divided equally among the series thereof other than Series II) at a price
per share of $5.44, and 37,127 shares of Series A-2 Preferred Stock at a price
per share of $100 per share. The Management Investors received from Holdings for
no cash consideration an aggregate of 98,978 shares of Class C Common Stock. As
a result, Mr. Lyon holds 3.7% of the Holdings Common Stock, and all Management
Investors (including Mr. Lyon) hold 18.3%, in each case on a fully-diluted basis
assuming the conversion of all Convertible Preferred Stock. The Management
Investors deposited their shares (other than Series A-2 Preferred Stock) into a
voting trust, the trustees of which must be senior members of management. The
initial voting trustee is Douglas C. Barnard, Vice President, General Counsel
and Secretary of Holdings and the Company.
An aggregate of 17,122 authorized but unissued shares of Class C Common
Stock is reserved by Holdings for issuance to future members of management. In
addition, if, prior to May 5, 1997, Holdings establishes an employee stock
incentive plan, Holdings has the option to purchase from 399 Ventures 4,842
shares of Class A Common Stock (divided equally among the series thereof other
than Series I) and 5,199 shares of Class B Common Stock (divided equally among
the series thereof other than Series II), in each case for a purchase price of
$5.44 per share, and 13,770 shares of Series A-2 Preferred Stock at a price per
share equal to $100 plus accrued but unpaid
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dividends. Giving effect to the foregoing, the Management Investors'
fully-diluted ownership of Holdings Common Stock would be 20.7%.
TRANSITION SERVICES AGREEMENT
As part of the Transactions, Holdings and Masco entered into the Transition
Services Agreement under which until April 30, 1997 Masco will perform certain
services for the Company similar to those provided by Masco to the Home
Furnishings Group prior to the Acquisition (other than legal and litigation
support services). Such services include assistance in financial reporting,
preparation of federal, state and local tax returns, human resources, pension
and payroll administration, assistance in compliance with environmental laws and
coordination of insurance. Holdings will make monthly payments to Masco of
$500,000, as reduced to take into account certain current Masco personnel and
other personnel or third parties that are employed or retained by Holdings, the
Company or any of their subsidiaries after the Acquisition. If requested by
Holdings, Masco and Holdings will negotiate in good faith regarding the
provision of such transitional services after April 30, 1997; provided, however,
that the fees for any services provided by Masco after April 30, 1997 shall be
based on Masco's costs (including overhead and other allocated costs). The
Transition Services Agreement provides Masco with customary exculpation,
indemnification and other provisions.
TAX SHARING AGREEMENT
Holdings, the Company and its United States subsidiaries will be included in
the consolidated United States federal income tax return of Holdings. Holdings,
the Company, Simmons and certain of the Company's United States subsidiaries
have entered into the Tax Sharing Agreement whereby the Company will pay
Holdings (or Holdings will pay the Company) its pro rata share of the total tax
liability, as set out in the Tax Sharing Agreement. In the event the Company is
included in a joint, combined, consolidated or unitary state or local income or
franchise tax return with Holdings, the Company shall make payments to Holdings,
and Holdings shall make payments to the Company, in a manner consistent with
that described above for federal tax purposes.
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DESCRIPTION OF SENIOR BANK FACILITIES
As part of the Transactions, the Company and certain of the Guarantor
Subsidiaries (collectively, the "Borrowers") and Holdings entered into a credit
agreement (the "Credit Agreement") with The Chase Manhattan Bank, as
administrative agent and collateral agent (the "Agent"), Chase Manhattan Bank
Delaware as issuing bank and the lenders named therein (the "Lenders") that
provides for term loans of $300.0 million and a revolving credit facility of
$150.0 million. Chase Securities Inc. acted as advisor and arranger in
connection with the Senior Bank Facilities (the "Arranger").
Structure. Loans under the Credit Agreement consist of (i) a term loan (the
"Tranche A Term Loan") in the amount of $125.0 million; (ii) a second term loan
(the "Tranche B Term Loan," and together with the Tranche A Term Loan, the "Term
Loans") in the amount of $175.0 million and (iii) a revolving credit facility
(the "Revolving Credit Facility," and together with the Term Loans, the "Senior
Bank Facilities") in the amount of $150.0 million (of which $50.0 million will
be available for letters of credit). The Company used the Term Loans and $25.0
million of the Revolving Credit Facility to provide funding necessary to
consummate the Transactions, with the remainder of the Revolving Credit Facility
being available for general corporate purposes in the ordinary course of the
Company's business.
Security, Guaranty. The obligations of the Borrowers under the Credit
Agreement are unconditionally guaranteed, jointly and severally, by Holdings and
by each existing domestic subsidiary of the Company that is not a direct
Borrower (other than the Receivables Subsidiary, the Master Servicer and certain
subsidiaries with substantially no assets or operations). In addition, the
Senior Bank Facilities and the guarantees thereunder are secured by
substantially all the assets of the Borrowers and the guarantors (collectively,
the "Collateral"), including but not limited to (i) a first priority pledge of
all the capital stock of the Company and of each subsidiary (other than the
Receivables Subsidiary) of the Company (which pledge, in the case of foreign
subsidiaries, will be limited to 65% of the capital stock of each first-tier
foreign subsidiary) and (ii) perfected first priority security interests in, and
mortgages on, substantially all tangible and intangible assets of the Borrowers
and the guarantors (including but not limited to accounts receivable (other than
those sold in connection with the Receivables Facility), inventory, equipment,
intellectual property, general intangibles, owned real property, cash and
proceeds of the foregoing), in each case subject to certain limited exceptions.
Amortization, Interest. The Tranche A Term Loan is repayable in quarterly
principal payments over six years and bears interest at a rate per annum equal
(at the Borrowers' option) to: (i) an adjusted London inter-bank offered rate
("Adjusted LIBOR") plus 2.5% or (ii) an Alternate Base Rate (equal to the
highest of the Agent's prime rate, a certificate of deposit rate plus 1% and the
Federal Funds effective rate plus 1/2 of 1%) plus 1.5%, in each case subject to
certain reductions based on financial performance. The Tranche B Term Loan is
repayable in quarterly principal payments over eight years and bears interest at
a rate per annum equal (at the Borrowers' option) to: (i) Adjusted LIBOR plus
3.0% or (ii) the Alternate Base Rate plus 2.0%. The Revolving Credit Facility is
a six-year facility and bears interest at a rate per annum equal (at the
Borrowers' option) to: (i) Adjusted LIBOR plus 2.5% or (ii) the Alternate Base
Rate plus 1.5%, in each case subject to certain reductions based on the
Company's financial performance. Amounts relating to principal under the Senior
Bank Facilities not paid when due bear interest at a default rate equal to 2.0%
above the otherwise applicable rate.
Prepayments. The Senior Bank Facilities permit the Borrowers to prepay loans
and to permanently reduce revolving credit commitments, in whole or in part, at
any time. In addition, the Borrowers are required to make mandatory prepayments
of Term Loans, subject to certain exceptions, in amounts equal to (i) 75% of
excess cash flow (as such term is defined in the Credit
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Agreement) (subject to a reduction to 50% based upon financial performance and
the Borrowers having repaid a certain amount of the Term Loans); (ii) 100% of
the net proceeds of certain dispositions of assets or issuances of debt or
equity of the Company or any of its subsidiaries and (iii) 40% of the net
proceeds of equity issuances of Holdings. Mandatory and optional prepayments of
the Term Loans will be allocated pro rata between the Tranche A Term Loan and
the Tranche B Term Loan and applied pro rata against the remaining scheduled
amortization payments of such Term Loans, except that, so long as the Tranche A
Term Loan is outstanding, any Lender participating in the Tranche B Term Loan
will have the right to refuse mandatory prepayments, in which case such
prepayments will be applied to the Tranche A Term Loan. Any prepayment of LIBOR
loans other than at the end of an interest period is subject to reimbursement of
breakage costs.
Fees. The Borrowers are required to pay the Lenders under the Revolving
Credit Facility, on a quarterly basis, a commitment fee equal to 1/2 of 1% per
annum on the undrawn portion of the Revolving Credit Facility. The Borrowers are
also required to pay (i) a per annum letter of credit fee on the aggregate
undrawn amount of outstanding letters of credit equal to the interest rate
spread over Adjusted LIBOR applicable to loans under the Revolving Credit
Facility from time to time; (ii) a fronting bank fee for the letter of credit
issuing bank; (iii) annual administration fees and (iv) agent, arrangement and
other similar fees.
Covenants. The Senior Bank Facilities contain a number of covenants that,
among other things, restrict the ability of Holdings or the Company and its
subsidiaries to dispose of assets, incur additional indebtedness, incur
guarantee obligations, prepay other indebtedness or amend certain other debt
instruments, pay dividends, create liens on assets, enter into sale and
leaseback transactions, make investments, loans or advances, make acquisitions,
engage in mergers or consolidations, change the business conducted by Holdings
or the Company or its subsidiaries, make capital expenditures, or engage in
certain transactions with affiliates and otherwise restrict certain corporate
activities. In addition, under the Senior Bank Facilities the Company is
required to comply with specified financial ratios and tests, including minimum
interest coverage ratios, maximum leverage ratios, annual capital expenditures
limitations and net worth tests.
The Senior Bank Facilities also contain provisions that prohibit any
modification of the Indenture in any manner adverse to the Lenders and that
limit the Company's ability to refinance the Notes without the consent of such
Lenders.
Events of Default. The Senior Bank Facilities contain customary events of
default, including payment defaults, breach of representations and warranties,
covenant defaults, cross-defaults and cross-acceleration to certain other
indebtedness, certain events of bankruptcy and insolvency, ERISA, judgment
defaults, actual or asserted invalidity of any security interest and change of
control.
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DESCRIPTION OF RECEIVABLES FACILITY
As part of the Transactions, the Company established the Receivables
Facility, with Chase Securities Inc. as arranger, pursuant to which The Chase
Manhattan Bank ("Chase"), and if Chase elects at any time, a syndicate of banks
and other financial institutions (together with Chase, the "Participants")
agreed to purchase up to $175.0 million in investor certificates (the "Investor
Certificates") representing fractional undivided interests in the Receivables
(defined below) held by the Master Trust (defined below).
In connection with the establishment of the Receivables Facility, the
Company formed and capitalized the Receivables Subsidiary, a wholly owned,
bankruptcy-remote subsidiary. The Receivables Subsidiary purchases, on a
revolving basis, all trade receivables and related property (collectively, the
"Receivables") generated by Holdings and certain of the Company's subsidiaries
(in such capacity, the "Sellers"). The Receivables Subsidiary purchases, at a
discount from face, the Receivables from the Sellers pursuant to a receivables
sale agreement (the "Receivables Sale Agreement"). Such discounting reflects
historical losses, interest costs, servicing fees and other ongoing expenses
associated with the Receivables. Pursuant to a pooling agreement (the "Pooling
Agreement"), the Receivables Subsidiary established a master trust (the "Master
Trust") to which it transfered and assigned all its rights in the Receivables in
exchange for (i) an exchangeable investor certificate (the "Exchangeable
Certificate"), which represents the entire undivided interest in the Receivables
not represented by other outstanding investor certificates; (ii) a subordinated
investor certificate (the "Subordinated Certificate"), which represents credit
enhancement for the Investor Certificates purchased by the Participants and
(iii) the proceeds from the sale of Investor Certificates to the Participants.
The Receivables Subsidiary financed its initial purchase of Receivables from
the Sellers with a combination of cash proceeds from the sale of Investor
Certificates to Participants, an initial capital contribution by the Company and
a subordinated unsecured note issued to the Sellers in payment of the
Receivables. Ongoing purchases of Receivables by the Receivables Subsidiary will
be financed with a combination of collections in respect of the Receivables,
proceeds from new purchases of Investor Certificates made by the Participants,
an increase in the amount of the subordinated unsecured note issued to the
Sellers in payment of the Receivables, further capital contributions by the
Company and (to a limited extent) through offsets against certain repurchase
obligations of the Sellers to the Receivables Subsidiary.
The purchase by the Participants of Investor Certificates under the
Receivables Facility was made with limited recourse and at an interest cost to
the Receivables Subsidiary equal to, at the Receivables Subsidiary's election,
Adjusted LIBOR plus 1.00% per annum or the Alternate Base Rate. The
Participants' interest in Receivables of up to $175.0 million is an undivided
senior interest in all Receivables held by the Master Trust. If at any point in
time the Sellers generate insufficient Receivables, the character of the
Receivables held by the Master Trust do not satisfy customary eligibility
criteria (such as no bankruptcy, no delinquency and no excessive concentration
levels) or the Company elects to reduce the size of the Receivables Facility,
the investment of the Participants may be less than $175.0 million. The
investment of the Participants at August 5, 1996 was $155.0 million.
The Receivables Subsidiary has retained a pari passu interest (represented
by the Exchangeable Certificate) and a subordinated interest (represented by the
Subordinated Certificate) in the Receivables, both of which will vary in amount
from time to time. The Receivables Subsidiary will generally apply any
distributions it receives in respect of the Exchangeable Certificate or
Subordinated Certificate in the following priority: first, to purchase
Receivables from the Sellers; second, to make payments in respect of any
unsecured subordinated notes issued to any Seller and third, to pay dividends to
the Company.
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The Receivables Sale Agreement contains certain restrictions on the Sellers
customary for facilities of this type, including, but not limited to,
limitations on liens on the Receivables, limitations on modifications of the
terms of the Receivables, limitations on changes from historical credit and
collection practices and limitations on changes in payment instructions. The
Sellers continue to service the receivables (including all billing and
collection activities) and receive a customary servicing fee from the Master
Trust for providing such services. A subsidiary of the Company acts as a master
servicer, overseeing the servicing activities of the Sellers.
The Pooling Agreement contains certain restrictions on the Receivables
Subsidiary customary for facilities of this type, including, but not limited to,
limitations on liens on the Receivables, limitations on indebtedness (including
guarantee obligations), limitations on changes from historical credit and
collection practices and limitations on fundamental changes. The Pooling
Agreement also contains certain conditions precedent customary for facilities of
this type.
The Participants' commitments under the Receivables Facility will terminate
on the earlier of (i) January 1, 2002 and (ii) the occurrence of certain early
amortization events, including but not limited to nonpayment by the Sellers or
the Receivables Subsidiary of amounts when due, violation of covenants by the
Sellers or the Receivables Subsidiary, incorrectness of the representations and
warranties of the Sellers or the Receivables Subsidiary, cross-default and
cross-acceleration (including under the Senior Bank Facilities), a material
insolvency event with respect to the Sellers or the Receivables Subsidiary,
material judgments against the Sellers or the Receivables Subsidiary and
invalidity of any transaction documents relating to the Receivables Facility.
The Company anticipates that the Receivables Facility will be replaced by a
similar facility under which the Master Trust will issue asset-backed investor
certificates (which may have additional or re-sized classes as compared with the
Investor Certificates purchased by the Participants) in one or more
transactions. If the Receivables Facility has not been replaced 180 days after
the date of initial purchase of Investor Certificates by the Participants, the
interest rate on the Receivables Facility will increase by 1.5%, or if less, to
the rate equal to the then applicable rate on the Revolving Facility.
The Receivables Facility requires a commitment fee of 1/2 of 1% per annum on
the Facility Amount minus the amount of Investor Certificates held by the
Participants for Investor Certificates (net of any amounts that have been paid
to the Participants out of collections).
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DESCRIPTION OF NOTES
GENERAL
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that (i) the New Notes will have been registered under the
Securities Act and thus will not bear restrictive legends restricting their
transfer pursuant to the Securities Act and (ii) holders of New Notes will not
be entitled to certain rights of holders of the Old Notes under the Registration
Rights Agreement which will terminate upon the consummation of the Exchange
Offer. The Old Notes have been, and the New Notes are to be, issued under an
Indenture, dated as of August 5, 1996 (the "Indenture"), among the Company, the
Guarantor Subsidiaries and IBJ Schroder Bank & Trust Company, as Trustee (the
"Trustee").
The following summary of certain provisions of the Indenture and the Notes
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part thereof by the
Trust Indenture Act of 1939, as amended ("TIA"). Capitalized terms used herein
and not otherwise defined have the meanings set forth in the section "Certain
Definitions."
Principal of, premium, if any, and interest on the Notes is payable, and the
Notes may be exchanged or transferred, at the office or agency of the Company in
the Borough of Manhattan, The City of New York (which initially shall be the
corporate trust office of the Trustee, at One State Street, New York, New York
10004), except that, at the option of the Company, payment of interest may be
made by check mailed to the registered holders of the Notes at their registered
addresses.
The Notes may be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
TERMS OF THE NOTES
The Notes are unsecured senior subordinated obligations of the Company,
limited to $200.0 million aggregate principal amount, and will mature on August
1, 2006. Each Note will bear interest at a rate per annum shown on the front
cover of this Prospectus from August 5, 1996 or from the most recent date to
which interest has been paid or provided for, payable semiannually to Holders of
record at the close of business on the January 15 or July 15 immediately
preceding the interest payment date on February 1 and August 1 of each year,
commencing February 1, 1997.
OPTIONAL REDEMPTION
Except as set forth below, the Notes are not redeemable at the option of the
Company prior to August 1, 2001. On and after such date, the Notes are
redeemable, at the Company's option, in whole or in part, at any time upon not
less than 30 nor more than 60 days' prior notice mailed by first-class mail to
each Holder's registered address, at the following redemption prices (expressed
in percentages of principal amount), plus accrued and unpaid interest, if any,
to the redemption date (subject to the right of Holders of record on the
relevant record date to receive interest due on
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the relevant interest payment date that is on or prior to the date of
redemption), if redeemed during the 12-month period commencing on August 1 of
the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- --------------------------------------------------------------- ----------
<S> <C>
2001........................................................... 105.438%
2002........................................................... 103.625%
2003........................................................... 101.813%
2004 and thereafter............................................ 100.000%
</TABLE>
In addition, at any time and from time to time on or prior to August 1,
1999, the Company may redeem in the aggregate up to 33 1/3% of the original
aggregate principal amount of the Notes ($200.0 million) with the proceeds of
one or more Public Equity Offerings following which there is a Public Market, at
a redemption price (expressed as a percentage of principal amount thereof) of
110.875% plus accrued and unpaid interest, if any, to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date that is on or prior
to the date of redemption); provided, however, that at least 66 2/3% of the
original aggregate principal amount of the Notes must remain outstanding after
each such redemption.
The Notes are subject to redemption at the option of the Company, prior to
August 1, 2001, in whole or in part, at any time within 180 days after a Change
of Control on not less than 30 nor more than 60 days' prior notice to each
holder of Notes to be redeemed, in amounts of $1,000 or an integral multiple
thereof, at a redemption price equal to the sum of (i) the principal amount
thereof plus (ii) accrued and unpaid interest, if any, to the redemption date
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date that is on or prior
to the date of redemption) plus (iii) the Applicable Premium. Each holder of
Notes also has certain rights to require the Company to purchase such Notes upon
the occurrence of a Change of Control. See "--Change of Control" below.
SELECTION
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee on a pro rata basis, by lot or by such other method
as the Trustee in its sole discretion shall deem to be fair and appropriate,
although no Note of $1,000 in original principal amount or less will be redeemed
in part. If any Note is to be redeemed in part only, the notice of redemption
relating to such Note shall state the portion of the principal amount thereof to
be redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note.
RANKING
The indebtedness evidenced by the Notes is unsecured Senior Subordinated
Indebtedness of the Company. The payment of the principal of, premium (if any)
and interest on the Notes is subordinate in right of payment, as set forth in
the Indenture, to all existing and future Senior Indebtedness of the Company,
ranks pari passu in right of payment with all existing and future Senior
Subordinated Indebtedness of the Company and is senior in right of payment to
all existing and future Subordinated Obligations of the Company. The Notes are
also effectively subordinated to any Secured Indebtedness of the Company to the
extent of the value of the assets securing such Indebtedness. However, payment
from the money or the proceeds of U.S. Government Obligations held in any
defeasance trust described under "Defeasance" below is not subordinated to any
Senior Indebtedness or subject to the restrictions described herein.
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The indebtedness evidenced by a Subsidiary Guaranty is unsecured Senior
Subordinated Indebtedness of such Guarantor Subsidiary. The payment of a
Subsidiary Guaranty is subordinated in right of payment, as set forth in the
Indenture, to all existing and future Senior Indebtedness of such Guarantor
Subsidiary, ranks pari passu in right of payment with all existing and future
Senior Subordinated Indebtedness of such Guarantor Subsidiary and is senior in
right of payment to all existing and future Subordinated Obligations of such
Guarantor Subsidiary. Each Subsidiary Guaranty is also effectively subordinated
to any Secured Indebtedness of the Guarantor Subsidiary to the extent of the
value of the assets securing such Indebtedness.
As of June 30, 1996, after giving pro forma effect to the consummation of
the Transactions, including the issuance and sale of the Notes and the
application of the net proceeds therefrom as described under "Use of Proceeds,"
the Company would have had no outstanding Senior Indebtedness (excluding unused
commitments and the obligations in respect of borrowings by subsidiaries under
the Senior Bank Facilities), the outstanding Senior Indebtedness of the
Guarantor Subsidiaries would have been $327.2 million (excluding unused
commitments) and all liabilities of the Company and its subsidiaries (including
such Senior Indebtedness but excluding the Notes and the Subsidiary Guaranties)
would have been approximately $758.0 million. Although the Indenture contains
limitations on the amount of additional Indebtedness that the Company and its
Guarantor Subsidiaries may Incur, under certain circumstances the amount of such
Indebtedness could be substantial and, in any case, such Indebtedness may be
Senior Indebtedness of the Company or a Guarantor Subsidiary, as the case may
be. See "Certain Covenants--Limitation on Indebtedness" below.
"Senior Indebtedness" of the Company means all principal of, premium (if
any), accrued interest (including interest accruing on or after the filing of
any petition in bankruptcy or for reorganization relating to the Company whether
or not a claim for post-filing interest is allowed in such proceedings), fees,
charges, expenses, reimbursement obligations, guarantees and other amounts owing
with respect to all Indebtedness of the Company, and including all Bank
Indebtedness, whether outstanding on the Issue Date or thereafter Incurred,
unless in the instrument creating or evidencing the same or pursuant to which
the same is outstanding it is provided that such obligations are not superior in
right of payment to the Notes; provided, however, that Senior Indebtedness shall
not include (1) any obligation of the Company to any Subsidiary, (2) any
liability for Federal, foreign, state, local or other taxes owed or owing by the
Company, (3) any accounts payable or other liability to trade creditors arising
in the ordinary course of business (including Guarantees thereof or instruments
evidencing such liabilities), (4) any Indebtedness or obligation of the Company
which is subordinate or junior in any respect (other than as a result of the
Indebtedness being unsecured) to any other Indebtedness or obligation of the
Company, including any Senior Subordinated Indebtedness and any Subordinated
Obligations, (5) any obligations with respect to any Capital Stock or (6) any
Indebtedness Incurred in violation of the Indenture. "Senior Indebtedness" of
any Guarantor Subsidiary has a correlative meaning.
Only Indebtedness of the Company or a Guarantor Subsidiary that is Senior
Indebtedness will rank senior to the Notes and the relevant Subsidiary Guaranty
in accordance with the provisions of the Indenture. The Notes and each
Subsidiary Guaranty will in all respects rank pari passu with all other Senior
Subordinated Indebtedness of the Company and the relevant Guarantor Subsidiary,
respectively. The Company and each Guarantor Subsidiary has agreed in the
Indenture that it will not Incur, directly or indirectly, any Indebtedness which
is subordinate or junior in ranking in any respect to Senior Indebtedness unless
such Indebtedness is Senior Subordinated Indebtedness, or is expressly
subordinated in right of payment to Senior Subordinated Indebtedness. Unsecured
Indebtedness of the Company or a Guarantor Subsidiary is not deemed to be
subordinate or junior to Secured Indebtedness, as the case may be, merely
because it is unsecured.
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The Company may not pay principal of, or premium (if any) or interest on,
the Notes or make any deposit pursuant to the provisions described under
"Defeasance" below, and may not otherwise purchase, redeem or otherwise retire
any Notes (collectively, "pay the Notes"), if (i) any Senior Indebtedness of the
Company is not paid when due or (ii) any other default on Senior Indebtedness of
the Company occurs and the maturity of such Senior Indebtedness is accelerated
in accordance with its terms unless, in either case, the default has been cured
or waived and any such acceleration has been rescinded or such Senior
Indebtedness has been paid in full. However, the Company may pay the Notes
without regard to the foregoing if the Company and the Trustee receive written
notice approving such payment from the Representative of the holders of the
Senior Indebtedness with respect to which either of the events set forth in
clause (i) or (ii) of the immediately preceding sentence has occurred and is
continuing. During the continuance of any default (other than a default
described in clause (i) or (ii) of the second preceding sentence) with respect
to any Designated Senior Indebtedness pursuant to which the maturity thereof may
be accelerated immediately without further notice (except such notice as may be
required to effect such acceleration) or the expiration of any applicable grace
periods, the Company may not pay the Notes for a period (a "Payment Blockage
Period") commencing upon the receipt by the Trustee (with a copy to the Company)
of written notice (a "Blockage Notice") of such default from the Representative
of the holders of the Designated Senior Indebtedness specifying an election to
effect a Payment Blockage Period and ending 179 days thereafter (or earlier if
such Payment Blockage Period is terminated (i) by written notice to the Trustee
and the Company from the Person or Persons who gave such Blockage Notice, (ii)
because the default giving rise to such Blockage Notice is no longer continuing
or (iii) because such Designated Senior Indebtedness has been repaid in full).
Notwithstanding the provisions described in the immediately preceding sentence,
unless the holders of such Designated Senior Indebtedness have, or the
Representative of such holders has, accelerated the maturity of such Designated
Senior Indebtedness, the Company may resume payments on the Notes after the end
of such Payment Blockage Period, including any missed payments. Not more than
one Blockage Notice may be given in any consecutive 360-day period, irrespective
of the number of defaults with respect to Designated Senior Indebtedness during
such period. However, if any Blockage Notice within such 360-day period is given
by or on behalf of any holders of Designated Senior Indebtedness other than the
Bank Indebtedness, the Representative of the Bank Indebtedness may give another
Blockage Notice within such period. In no event, however, may the total number
of days during which any Payment Blockage Period or Periods is in effect exceed
179 days in the aggregate during any 360 consecutive day period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Company or its property, the holders of Senior Indebtedness of
the Company will be entitled to receive payment in full of the Senior
Indebtedness of the Company before the Noteholders are entitled to receive any
payment and until the Senior Indebtedness of the Company is paid in full, any
payment or distribution to which Noteholders would be entitled but for the
subordination provisions of the Indenture will be made to holders of the Senior
Indebtedness of the Company as their respective interests may appear. If a
payment or distribution is made to Noteholders that due to the subordination
provisions should not have been made to them, such Noteholders are required to
hold such payment or distribution in trust for the holders of Senior
Indebtedness and pay it over to them as their respective interests may appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee shall promptly notify the holders of the Designated
Senior Indebtedness or the Representative of such holders of the acceleration.
The Company may not pay the Notes until five Business Days after such holders or
the Representative of the holders of the Designated Senior Indebtedness receive
notice of such acceleration and, thereafter, may pay the Notes only if the
subordination provisions of the Indenture otherwise permit payment at that time.
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The terms of the subordination provisions described above with respect to
the Company's obligations under the Notes apply equally to a Subsidiary
Guarantor and the obligations of such Subsidiary Guarantor under its Subsidiary
Guaranty.
By reason of such subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company or a Subsidiary Guarantor who
are holders of Senior Indebtedness of the Company or a Subsidiary Guarantor, as
the case may be, may recover more, ratably, than the Noteholders, and creditors
of the Company who are not holders of Senior Indebtedness of the Company or of
Senior Subordinated Indebtedness (including the Notes) may recover less,
ratably, than holders of Senior Indebtedness of the Company.
SUBSIDIARY GUARANTIES
Each of the Company's Domestic Subsidiaries (other than the Receivables
Subsidiary, any Master Servicer and certain subsidiaries with substantially no
assets or operations), as primary obligors and not merely as sureties, has
irrevocably and unconditionally Guaranteed on an unsecured senior subordinated
basis the performance and punctual payment when due, whether at Stated Maturity,
by acceleration or otherwise, of all obligations of the Company under the
Indenture and the Notes, whether for payment of principal of or interest on the
Notes, expenses, indemnification or otherwise (all such obligations guaranteed
by the Guarantor Subsidiaries being herein called the "Guaranteed Obligations").
The Guarantor Subsidiaries have agreed to pay, in addition to the amount stated
above, any and all expenses (including reasonable counsel fees and expenses)
incurred by the Trustee or the Holders in enforcing any rights under the
Subsidiary Guaranties. Each Subsidiary Guaranty is limited in amount to an
amount not to exceed the maximum amount that can be Guaranteed by the applicable
Guarantor Subsidiary without rendering such Subsidiary Guaranty voidable under
applicable law relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally. The Company will cause
each Domestic Subsidiary (other than the Receivables Subsidiary or the Master
Servicer) that is not at the time a Guarantor Subsidiary which Incurs
Indebtedness to execute and deliver to the Trustee a supplemental indenture
pursuant to which such Domestic Subsidiary will Guarantee payment of the Notes.
See "Certain Covenants--Future Guarantor Subsidiaries" below.
Each Subsidiary Guaranty is a continuing guarantee and shall (a) remain in
full force and effect until payment in full of all the Guaranteed Obligations,
(b) be binding upon each Guarantor Subsidiary and (c) enure to the benefit of
and be enforceable by the Trustee, the Holders and their successors, transferees
and assigns.
A Subsidiary Guaranty will be released upon the sale of the capital stock,
or all or substantially all of the assets, of the applicable Guarantor
Subsidiary if such sale is made in compliance with the Indenture.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder will have the right to require the Company to repurchase
all or any part of such Holder's Notes at a purchase price in cash equal to 101%
of the principal amount thereof, plus accrued and unpaid interest, if any, to
the date of purchase (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date that
is on or prior to the date of purchase), pursuant to the offer described below
and the other procedures set forth in the Indenture; provided, however, that
notwithstanding the occurrence of a Change of Control, the Company shall not be
obligated to purchase the Notes pursuant to this covenant in the event that it
has exercised its rights to redeem all of the Notes as described under
"--Optional Redemption":
(a) prior to the earlier to occur of the first public offering of Voting
Stock of Holdings or the Company, the Permitted Investors cease to be
entitled (by "beneficial ownership" (as defined
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in Rules 13d-3 and 13d-5 under the Exchange Act) of Voting Stock, contract
or otherwise) to elect or cause the election of directors of Holdings having
a majority of the total voting power of the board of directors of Holdings,
whether as a result of issuance of securities of Holdings, any merger,
consolidation, liquidation or dissolution of Holdings, any direct or
indirect transfer of securities by any Permitted Investor or otherwise (for
purposes of this clause (a), the Permitted Investors shall be deemed to
beneficially own any Voting Stock of a corporation (the "specified
corporation") held by any other corporation (the "parent corporation") so
long as one or more of the Permitted Investors beneficially own (as so
defined), directly or indirectly, in the aggregate a majority of the voting
power of the Voting Stock of the parent corporation);
(b) prior to the first public offering of Voting Stock of the Company,
Holdings shall cease to own 100% of the issued and outstanding Voting Stock
of the Company, whether as a result of issuance of securities of the
Company, any merger, consolidation, liquidation or dissolution of the
Company, any direct or indirect transfer of securities by Holdings or
otherwise;
(c) after the first public offering of Voting Stock of Holdings or the
Company, any person or group (as such terms are used in Sections 13(d) and
14(d) of the Exchange Act), other than one or more of the Permitted Holders,
is or becomes the beneficial owner (as defined in clause (a) above),
directly or indirectly, of Voting Stock that represents more than 30% of the
aggregate ordinary voting power of all classes of the Voting Stock of the
Company or Holdings, voting together as a single class, and either (x) the
Permitted Holders beneficially own (as defined in clause (a) above),
directly or indirectly, in the aggregate Voting Stock that represents a
lesser percentage of the aggregate ordinary voting power of all classes of
the Voting Stock of the Company or Holdings, as the case may be, voting
together as a single class, than such other person or group and are not
entitled (by voting power, contract or otherwise) to elect directors of the
Company or Holdings having a majority of the total voting power of the Board
of Directors or the board of directors of Holdings, as the case may be, or
(y) such other person or group is entitled to elect directors of the Company
or Holdings having a majority of the total voting power of the Board of
Directors or the board of directors of Holdings, as the case may be; or
(d) after the first public offering of Voting Stock of Holdings or the
Company, during any period of not greater than two consecutive years
beginning after the Issue Date, individuals who at the beginning of such
period constituted the Board of Directors or the board of directors of
Holdings, as the case may be (together with any new directors whose election
by such Board of Directors or such board of directors of Holdings, as the
case may be, or whose nomination for election by the shareholders of the
Company or Holdings, as the case may be, was approved by a vote of a
majority of the directors of the Company or Holdings, as the case may be,
then still in office who were either directors at the beginning of such
period or whose election or nomination for election was previously so
approved), cease for any reason to have a majority of the total voting power
of the Board of Directors or the board of directors of Holdings, as the case
may be.
Subject to the provision in the first paragraph in this section, within 30
days following any Change of Control, the Company shall mail a notice to each
Holder with a copy to the Trustee stating, among other things: (1) that a Change
of Control has occurred and that such Holder has the right to require the
Company to purchase all or any portion of such Holder's Notes at a purchase
price in cash equal to 101% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of purchase (subject to the right of
Holders of record on a record date to receive interest on the relevant interest
payment date that is on or prior to the date of purchase); (2) the circumstances
and relevant facts and financial information regarding such Change of Control;
(3) the repurchase date (which shall be no earlier than 30 days nor later than
60 days from the date such notice is mailed); and (4) the instructions
determined by the Company, consistent with this covenant, that a Holder must
follow in order to have its Notes or any portion thereof purchased.
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The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations described above by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company or Holdings would decide to do so in the future. Subject to the
limitations discussed below, the Company could, in the future, enter into
certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect the Company's capital structure or credit ratings.
The occurrence of a Change of Control would constitute a default under the
Credit Agreement. Future Senior Indebtedness of the Company may contain
prohibitions of certain events which would constitute a Change of Control or
require such Senior Indebtedness to be repurchased upon a Change of Control.
Moreover, the exercise by the Holders of their right to require the Company to
repurchase the Notes could cause a default under such Senior Indebtedness, even
if the Change of Control itself does not, due to the financial effect of such
repurchase on the Company. Finally, the Company's ability to pay cash to the
Holders upon a repurchase may be limited by the Company's then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any repurchases required in connection with a
Change of Control. The Company's failure to purchase the Notes in connection
with a Change of Control would result in a default under the Indenture.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness. (a) The Company will not, and will not permit
any Restricted Subsidiary to, Incur any Indebtedness unless on the date of such
Incurrence the Consolidated Coverage Ratio exceeds 2.25:1 if such Indebtedness
is Incurred on or prior to December 31, 1998, and 2.50:1 if such Indebtedness is
Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness: (i) Indebtedness
consisting of the Term Loans in an aggregate principal amount outstanding of up
to $300.0 million less the amount of any principal payments thereon; (ii)
Indebtedness consisting of revolving credit, working capital or letters of
credit financing in an aggregate principal amount at any time outstanding not in
excess of $150.0 million (less the aggregate amount of all repayments of
principal actually made thereunder since the Issue Date with Net Available Cash
from Asset Dispositions pursuant to clause (a)(iii)(A) of the covenant described
under "--Limitation on Sales of Assets and Subsidiary Stock"); (iii)
Indebtedness of the Receivables Subsidiary pursuant to a Permitted Receivables
Financing; (iv) Indebtedness of the Company owing to and held by any Wholly
Owned Subsidiary or Indebtedness of a Restricted Subsidiary owing to and held by
the Company or any Wholly Owned Subsidiary; provided, however, that any
subsequent issuance or transfer of any Capital Stock or any other event which
results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned
Subsidiary or any subsequent transfer of any such Indebtedness (except to the
Company or a Wholly Owned Subsidiary) will be deemed, in each case, to
constitute the Incurrence of such Indebtedness by the issuer thereof; (v)
Indebtedness of the Company represented by the Notes; (vi) any Indebtedness of
the Company and its Restricted Subsidiaries (other than (x) the Indebtedness
described in clauses (i), (ii), (iii) or
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(iv) above and (y) Indebtedness of any Foreign Subsidiary) outstanding on the
Issue Date; (vii) Indebtedness of the Company and its Restricted Subsidiaries
(A) in respect of performance bonds, bankers' acceptances, letters of credit and
surety or appeal bonds provided by the Company and its Restricted Subsidiaries
in the ordinary course of their business and which do not secure other
Indebtedness and (B) under Currency Agreements and Interest Rate Agreements that
are designed to protect the Company and its Restricted Subsidiaries against
fluctuations in interest rates or currency exchange rates and not for the
purposes of speculation; (viii) Indebtedness represented by Guarantees by the
Company of Indebtedness of a Restricted Subsidiary (other than Indebtedness of
the Receivables Subsidiary), or in respect of letters of credit provided by the
Company to support such Indebtedness, or Guarantees by a Restricted Subsidiary
(other than the Receivables Subsidiary) of Indebtedness of the Company or a
Restricted Subsidiary (other than Indebtedness of the Receivables Subsidiary),
or in respect of letters of credit provided by a Restricted Subsidiary (other
than the Receivables Subsidiary) to support such Indebtedness; provided,
however, that only Indebtedness that is Incurred in compliance with this
covenant may be guaranteed pursuant to this clause (viii); (ix) Purchase Money
Indebtedness, industrial revenue bond or similar indebtedness and Capitalized
Lease Obligations of the Company and its Restricted Subsidiaries in an aggregate
principal amount at any time outstanding not in excess of $30.0 million; (x)
Indebtedness of the Company and its Restricted Subsidiaries, to the extent the
proceeds thereof are immediately used after the Incurrence thereof to purchase
Notes tendered in an offer to purchase made as a result of a Change of Control;
(xi) Indebtedness of the Company and its Restricted Subsidiaries arising from
agreements providing for indemnification, adjustment of purchase price or
similar obligations, in any case Incurred in connection with the disposition of
any business, assets or Subsidiary of the Company (other than Guarantees of
Indebtedness Incurred by any Person acquiring all or any portion of such
business, assets or Subsidiary for the purpose of financing such acquisition),
in a principal amount not to exceed the gross proceeds actually received by the
Company or any Restricted Subsidiary of the Company in connection with such
disposition; (xii) Indebtedness of Foreign Subsidiaries in an aggregate
principal amount at any time outstanding not in excess of $50.0 million; (xiii)
Indebtedness of the Company or a Restricted Subsidiary owed to (including
obligations in respect of letters of credit for the benefit of) any Person in
connection with worker's compensation, health, disability or other employee
benefits or property, casualty or liability insurance provided by such Person to
the Company or such Restricted Subsidiary, pursuant to reimbursement or
indemnification obligations to such Person, in each case Incurred in the
ordinary course of business; (xiv) Indebtedness to Masco in an aggregate
principal amount not to exceed $15.0 million in respect of reimbursement
obligations for letters of credit or credit support provided by Masco under the
terms of the Acquisition Agreement; (xv) any Refinancing Indebtedness Incurred
in respect of any Indebtedness Incurred pursuant to paragraph (a) or pursuant to
clauses (i), (ii), (vi), (x), (xiv) or (xv) of this paragraph (b) and (xvi)
Indebtedness of the Company or any Restricted Subsidiary in an aggregate
principal amount at any time outstanding not in excess of $50.0 million.
(c) Notwithstanding the foregoing, the Company may not Incur any
Indebtedness if such Indebtedness is subordinate or junior in ranking in any
respect to any Senior Indebtedness of the Company unless such Indebtedness is
Senior Subordinated Indebtedness or is expressly subordinated in right of
payment to Senior Subordinated Indebtedness of the Company. In addition, the
Company may not Incur any Secured Indebtedness which is not Senior Indebtedness
of the Company unless contemporaneously therewith effective provision is made to
secure the Notes equally and ratably with (or on a senior basis to, in the case
of Indebtedness subordinated in right of payment to the Notes) such Secured
Indebtedness for so long as such Secured Indebtedness is secured by a Lien. A
Guarantor Subsidiary may not Incur any Indebtedness if such Indebtedness is
subordinate or junior in ranking in any respect to any Senior Indebtedness of
the Subsidiary Guarantor unless such Indebtedness is Senior Subordinated
Indebtedness of such Subsidiary Guarantor or is expressly subordinated in right
of payment to Senior Subordinated Indebtedness of
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such Subsidiary Guarantor. In addition, a Guarantor Subsidiary may not Incur any
Secured Indebtedness which is not Senior Indebtedness of such Guarantor
Subsidiary unless contemporaneously therewith effective provision is made to
secure the Subsidiary Guaranty equally and ratably with (or on a senior basis
to, in the case of Indebtedness subordinated in right of payment to such
Subsidiary Guaranty) such Secured Indebtedness for so long as such Secured
Indebtedness is secured by a Lien.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary, directly or indirectly, to (i) declare or pay
any dividend or make any distribution on or in respect of its Capital Stock
(including any payment in connection with any merger or consolidation involving
the Company) except dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock) and except dividends or distributions
payable to the Company or another Restricted Subsidiary (and, if such Restricted
Subsidiary has shareholders other than the Company or other Restricted
Subsidiaries, to its other shareholders on a pro rata basis or on a basis that
results in the receipt by the Company or a Restricted Subsidiary of dividends or
distributions of equal or greater value); (ii) purchase, redeem, retire or
otherwise acquire for value any Capital Stock of the Company or any Restricted
Subsidiary held by Persons other than the Company or another Restricted
Subsidiary; (iii) purchase, repurchase, redeem, defease or otherwise acquire or
retire for value, prior to scheduled maturity, scheduled repayment or scheduled
sinking fund payment any Subordinated Obligations (other than the purchase,
repurchase or other acquisition of Subordinated Obligations purchased in
anticipation of satisfying a sinking fund obligation, principal installment or
final maturity, in each case due within one year of the date of acquisition);
(iv) make any Investment (other than a Permitted Investment) in any Person or
(v) make any payment pursuant to the Management Agreement or any similar
agreement entered into with Holdings or extension or renewal thereof (any such
dividend, distribution, purchase, redemption, repurchase, defeasance, other
acquisition, retirement, Investment or payment being herein referred to as a
"Restricted Payment") if at the time the Company or such Restricted Subsidiary
makes such Restricted Payment: (1) a Default will have occurred and be
continuing (or would result therefrom); (2) the Company could not Incur at least
$1.00 of additional Indebtedness under paragraph (a) of the covenant described
under "--Limitation on Indebtedness"; or (3) the aggregate amount of such
Restricted Payment and all other Restricted Payments (the amount so expended, if
other than in cash, to be determined in good faith by the Board of Directors,
whose determination will be conclusive and evidenced by a resolution of the
Board of Directors) declared or made subsequent to the Issue Date would exceed
the sum of: (A) 50% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from the Issue Date to the end of the most
recent fiscal quarter ending at least 45 days prior to the date of such
Restricted Payment (or, in case such Consolidated Net Income will be a deficit,
minus 100% of such deficit); (B) the aggregate Net Cash Proceeds received by the
Company as a capital contribution or from the issue or sale of its Capital Stock
(other than Disqualified Stock) subsequent to the Issue Date (other than an
issuance or sale to a Subsidiary of the Company or an employee stock ownership
plan or other trust established by the Company or any of its Subsidiaries to the
extent the purchase by such plan or trust is financed by Indebtedness of such
plan or trust and for which the Company or a Subsidiary is liable, directly or
indirectly, as a guarantor or otherwise (including by the making of cash
contributions to such plan or trust which are used to pay interest or principal
on such Indebtedness)); (C) the amount by which Indebtedness of the Company or
its Restricted Subsidiaries is reduced on the Company's balance sheet upon the
conversion or exchange (other than by a Subsidiary) subsequent to the Issue Date
of any Indebtedness of the Company or its Restricted Subsidiaries convertible or
exchangeable for Capital Stock (other than Disqualified Stock) of the Company
(less the amount of any cash or other property (other than such Capital Stock)
distributed by the Company or any Restricted Subsidiary upon such conversion or
exchange) and (D) the amount equal to the net reduction in Investments in
Unrestricted Subsidiaries resulting from (i) payments of dividends, repayments
of the principal of loans, return of capital or advances or other
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transfers of assets to the Company or any Restricted Subsidiary from
Unrestricted Subsidiaries or (ii) the redesignation of Unrestricted Subsidiaries
as Restricted Subsidiaries (valued in each case as provided in the definition of
"Investment") or the receipt of proceeds from the sale or other disposition of
any portion of any Investment in an Unrestricted Subsidiary not to exceed, in
the case of any Unrestricted Subsidiary, the amount of Investments previously
made by the Company or any Restricted Subsidiary in such Unrestricted
Subsidiary, which amount was included in the calculation of the amount of
Restricted Payments.
(b) The provisions of the foregoing paragraph (a) will not prohibit: (i) any
purchase or redemption of Capital Stock or Subordinated Obligations of the
Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than Disqualified Stock
and other than Capital Stock issued or sold to a Subsidiary or an employee stock
ownership plan or other trust established by the Company or any of its
Subsidiaries to the extent the purchase by such plan or trust is financed by
Indebtedness of such plan or trust and for which the Company or a Subsidiary is
liable, directly or indirectly, as a guarantor or otherwise (including by the
making of cash contributions to such plan or trust which are used to pay
interest or principal on such Indebtedness)); provided, however, that (A) such
purchase or redemption will be excluded in the calculation of the amount of
Restricted Payments and (B) the Net Cash Proceeds from such sale to the extent
so used will be excluded from clause (3)(B) of paragraph (a) above; (ii) any
purchase or redemption of (A) Subordinated Obligations of the Company made by
exchange for, or out of the proceeds of the substantially concurrent sale of,
Indebtedness of the Company which is permitted to be Incurred pursuant to
paragraph (b) of the covenant described under "--Limitation on Indebtedness" or
(B) Subordinated Obligations of a Restricted Subsidiary made by exchange for, or
out of the proceeds of the substantially concurrent sale of, Indebtedness of any
Restricted Subsidiary or the Company which is permitted to be Incurred pursuant
to paragraph (b) of the covenant described under "--Limitation of Indebtedness";
provided, however, that such purchase or redemption will be excluded in the
calculation of the amount of Restricted Payments; (iii) any purchase or
redemption of Disqualified Stock made by exchange for, or out of the proceeds of
the substantially concurrent sale of, Disqualified Stock; provided, however,
that such purchase or redemption will be excluded in the calculation of the
amount of Restricted Payments; (iv) any purchase or redemption of Subordinated
Obligations from Net Available Cash to the extent permitted by the covenant
described under "--Limitation on Sales of Assets and Subsidiary Stock";
provided, however, that such purchase or redemption will be excluded in the
calculation of the amount of Restricted Payments; (v) upon the occurrence of a
Change of Control and within 60 days after the completion of the offer to
repurchase the Notes pursuant to the covenant described under "--Change of
Control" above (including the purchase of all Notes tendered), any purchase or
redemption of Subordinated Obligations of the Company required pursuant to the
terms thereof as a result of such Change of Control; provided, however, that
such purchase or redemption will be included in the calculation of the amount of
Restricted Payments; (vi) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would have
complied with this covenant; provided, however, that such dividend will be
included in the calculation of the amount of Restricted Payments; (vii) the
repurchase, for cash or notes, of shares of, or options or warrants to purchase
shares of, or payments to Holdings to enable Holdings to repurchase shares of,
or options or warrants to purchase shares of, Capital Stock of Holdings, the
Company or any of the Subsidiaries of the Company from employees, former
employees, officers, former officers, directors or former directors of Holdings,
the Company or any of the Subsidiaries of the Company (or permitted transferees
of such employees, former employees, directors or former directors) (or
repayments of, or payments to Holdings to permit Holdings to repay, notes
previously issued to so purchase such shares, options or warrants), pursuant to
the terms of the agreements (including employment agreements) or plans (or
amendments thereto) approved by the Board of Directors or the board of directors
of Holdings, as applicable, under which such individuals purchase or sell or are
granted the option to purchase or sell, shares of such capital stock;
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provided, however, that the aggregate amount of such repurchases (including the
amount of any such notes issued by the Company or any of its Restricted
Subsidiaries, and cash payments to pay principal and interest with respect to
any such notes issued by Holdings, but excluding the amount of any such notes
issued by Holdings until so paid) shall not exceed as of any date the product of
(x) $5.0 million and (y) the number of years (or fractions thereof) elapsed
since the Issue Date; provided further, however, that (x) the first $5.0 million
in aggregate amount of such purchases shall be excluded in the calculation of
the amount of Restricted Payments and (y) any amount of such purchases greater
than $5.0 million in the aggregate shall be included in the calculation of the
amount of Restricted Payments; (viii) to the extent otherwise deemed Restricted
Payments, payments to Holdings made pursuant to the Tax Sharing Agreement;
provided however, that such payments shall be excluded in the calculation of the
amount of Restricted Payments; (ix) payments to Holdings pursuant to the
Management Agreement for operating costs of Holdings but only to the extent such
costs (w) constitute or are directly related to the corporate general and
administrative expenses of the Company and its Restricted Subsidiaries and not
to any other business, subsidiary or investment of Holdings, (x) are not
otherwise paid for by the Company or its Restricted Subsidiaries and (y) do not
constitute payments in respect of the Masco Notes or otherwise in respect of any
Capital Stock of Holdings or in respect of Indebtedness held by an Affiliate of
Holdings; provided, however, that (A) the Company shall provide within 30 days
of the end of each fiscal quarter in which such payments are made a certificate
to the Trustee signed by the chief financial officer of the Company certifying
that such payments comply with the provisions hereof (which shall include a
report with respect to such certificate prepared by the independent accountants
to the Company in accordance with attestation standards established by the
American Institute of Certified Public Accountants if the payments in such
quarter exceed 1% of the consolidated revenues of the Company); (B) if the
Company provides such certificate, such payments shall be excluded from the
calculation of the amount of Restricted Payments; (C) if the Company fails to
provide such certificate or if all or any portion of such payments are not
certified to be in compliance with the provisions hereof, such payments (or
portions thereof) shall be included in the amount of Restricted Payments as of
such 30th day (or, if earlier, the date on which such certificate is provided)
and (D) if as a result of the inclusion of such payments as set forth in clause
(C) the aggregate amount of Restricted Payments declared or made subsequent to
the Issue Date would exceed the amount permitted to be so expended, the Company
shall be deemed to be in default of its obligations hereunder unless and until
such payments (or portions thereof) are repaid by Holdings; (x) advances or
loans to Holdings evidenced by a note in an amount for any year not in excess of
the amount which management estimates will be the Specified Loss of the Holdings
Business for such year but in no event in excess of $2.5 million in any year;
provided, however, that (A) the Company shall provide within 90 days of the end
of each fiscal year in which such payments are made a certificate to the Trustee
signed by the chief financial officer of the Company certifying that such
payments comply with the provisions hereof; (B) if the Company provides such
certificate, such payments shall be excluded from the calculation of the amount
of Restricted Payments; (C) if the Company fails to provide such certificate or
if all or any portion of such payments are not certified to be in compliance
with the provisions hereof, such payments (or portions thereof) shall be
included in the amount of Restricted Payments as of such 90th day (or, if
earlier, the date on which such certificate is provided) and (D) if as a result
of the inclusion of such payments as set forth in clause (C) the aggregate
amount of Restricted Payments declared or made subsequent to the Issue Date
would exceed the amount permitted to be so expended, the Company shall be deemed
to be in default of its obligations hereunder unless and until such payments (or
portions thereof) are repaid by Holdings and (xi) payments to Holdings to enable
Holdings to make payments to Masco consisting of indemnification obligations and
reimbursement of amounts expended by Masco for the benefit of the Company and
its Restricted Subsidiaries required to be made pursuant to the Acquisition
Agreement and payments required by Section 12(r) of the Acquisition Agreement;
provided, however, that such payments shall be excluded in the calculation of
the amount of Restricted Payments; provided further, however, that, at the time
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any such payment is to be made, the Company shall have received all
indemnification or similar payments made by Masco to or for the benefit of
Holdings or the Company pursuant to the Acquisition Agreement.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness owed to the Company, (ii) make any loans or
advances to the Company or (iii) transfer any of its property or assets to the
Company, except: (1) any encumbrance or restriction pursuant to an agreement in
effect at or entered into on the Issue Date; (2) any encumbrance or restriction
with respect to a Restricted Subsidiary pursuant to an agreement entered into
prior to the date on which such Restricted Subsidiary was acquired or designated
as a Restricted Subsidiary by the Company (other than as consideration in, in
contemplation of, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was otherwise acquired by the Company); (3) any encumbrance or
restriction pursuant to an agreement constituting Refinancing Indebtedness of
Indebtedness Incurred pursuant to an agreement referred to in clause (1) or (2)
of this covenant or this clause (3) or contained in any amendment to an
agreement referred to in clause (1) or (2) of this covenant or this clause (3);
provided, however, that the encumbrances and restrictions contained in any such
refinancing agreement or amendment are, collectively, no more restrictive in any
material respect, than the encumbrances and restrictions contained in such
agreements; (4) in the case of clause (iii) above, any encumbrance or
restriction contained in security agreements securing Indebtedness of a
Restricted Subsidiary which are not prohibited by the covenant described under
"--Limitation of Liens" to the extent such encumbrances or restrictions restrict
the transfer of the property subject to such security agreements; (5) any
encumbrance or restriction existing under or by reason of applicable law; (6)
any encumbrance or restriction with respect to the Receivables Subsidiary
pursuant to an agreement relating to Indebtedness of the Receivables Subsidiary
which is permitted under the covenant described under "--Limitation on
Indebtedness" or pursuant to an agreement relating to a Financing Disposition to
or by the Receivables Subsidiary; (7) customary non-assignment provisions of any
licensing agreement or of any lease; (8) any encumbrance or restriction
contained in contracts for sales of assets otherwise permitted by the Indenture;
(9) with respect to a Restricted Subsidiary, any encumbrance or restriction
imposed pursuant to an agreement that has been entered into for the sale of all
or substantially all of the Capital Stock of such Restricted Subsidiary and (10)
any encumbrance or restriction with respect to a Foreign Subsidiary pursuant to
an agreement relating to Indebtedness Incurred by such Foreign Subsidiary which
is permitted under the covenant described under "--Limitation on Indebtedness."
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company will
not, and will not permit any Restricted Subsidiary to, make any Asset
Disposition unless (i) the Company or such Restricted Subsidiary receives
consideration (including by way of relief from, or by any other Person assuming
sole responsibility for, any liabilities, contingent or otherwise) at the time
of such Asset Disposition at least equal to the fair market value, as determined
in good faith by the Board of Directors, whose determination will be conclusive
and evidenced by a resolution of the Board of Directors (including as to the
value of all noncash consideration), of the shares and assets subject to such
Asset Disposition, (ii) at least 80% (or 100% in the case of lease payments) of
the consideration thereof received by the Company or such Restricted Subsidiary
is in the form of cash or cash equivalents and (iii) an amount equal to 100% of
the Net Available Cash from such Asset Disposition is applied by the Company (or
such Restricted Subsidiary, as the case may be) (A) first, to the extent the
Company or such Restricted Subsidiary elects (or is required by the terms of any
Senior Indebtedness), to prepay, repay or purchase Senior Indebtedness of the
Company or a Wholly Owned Subsidiary or, in the case of a sale by a Restricted
Subsidiary which
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is not a Wholly Owned Subsidiary, to prepay, repay or purchase Senior
Indebtedness of such Restricted Subsidiary (in each case other than Indebtedness
owed to the Company or an Affiliate of the Company) within 360 days after the
later of the date of such Asset Disposition or the receipt of such Net Available
Cash; (B) second, to the extent of the balance of Net Available Cash after
application in accordance with clause (A), to the extent the Company or such
Restricted Subsidiary elects, to reinvest (or enter into a binding contract to
do so) in Additional Assets (including by means of an Investment in Additional
Assets by a Restricted Subsidiary with Net Available Cash received by the
Company or another Restricted Subsidiary) or to repay amounts borrowed under a
revolving credit facility or line of credit to the extent such funds were
invested in Additional Assets within 360 days prior to such Asset Disposition,
within 360 days from the later of such Asset Disposition or the receipt of such
Net Available Cash; (C) third, to the extent of the balance of such Net
Available Cash after application in accordance with clauses (A) and (B), to make
an Offer (as defined below) to purchase Notes pursuant to and subject to the
conditions set forth in section (b) of this covenant and (D) fourth, to the
extent of the balance of such Net Available Cash after application in accordance
with clauses (A), (B) and (C), to fund (to the extent consistent with any other
applicable provision of the Indenture) any corporate purpose; provided, however
that in connection with any prepayment, repayment or purchase of Indebtedness
pursuant to clause (A) above, the Company or such Restricted Subsidiary will
retire such Indebtedness and will cause the related loan commitment (if any) to
be permanently reduced in an amount equal to the principal amount so prepaid,
repaid or purchased. Notwithstanding the foregoing provisions of this covenant,
the Company and its Restricted Subsidiaries will not be required to apply any
Net Available Cash in accordance with this covenant except to the extent that
the aggregate Net Available Cash from all Asset Dispositions in any year which
are not applied in accordance with this covenant exceed $3.0 million in such
year.
For the purposes of clause (ii) of this covenant, the following are deemed
to be cash: (x) the assumption of Indebtedness of the Company (other than
Disqualified Stock of the Company) or any Restricted Subsidiary and the release
of the Company or such Restricted Subsidiary from all liability on such
Indebtedness in connection with such Asset Disposition and (y) securities
received by the Company or any Restricted Subsidiary from the transferee that
are promptly converted by the Company or such Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of Notes
pursuant to clause (a)(iii)(C) of this covenant, the Company will be required to
purchase Notes tendered pursuant to an offer, commenced within 30 days following
the expiration of the 360 day period referred to in clause (a)(iii)(B) of this
covenant (or, if the Company so elects, at any time within such 360 day period),
by the Company for the Notes (the "Offer") at a purchase price of 100% of their
principal amount plus accrued and unpaid interest, if any, to the date of
purchase in accordance with the procedures (including prorationing in the event
of oversubscription) set forth in the Indenture. If the aggregate purchase price
of Notes tendered pursuant to the Offer is less than the Net Available Cash
allotted to the purchase of the Notes, the Company will apply the remaining Net
Available Cash in accordance with clause (a)(iii)(D) of this covenant. The
Company will not be required to make an Offer for Notes pursuant to this
covenant if the Net Available Cash available therefor (after application of the
proceeds as provided in clauses (A) and (B) of section (a)(iii) of this
covenant) is less than $10 million (which lesser amount will be carried forward
for purposes of determining whether an Offer is required with respect to the Net
Available Cash from any subsequent Asset Disposition).
(c) The Company will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable
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securities laws and regulations and will not be deemed to have breached its
obligations under this covenant by virtue thereof.
(d)(1) The Company will not, and will not permit any Restricted Subsidiary
to, make any Financing Disposition unless the Board of Directors shall have
determined in good faith, which determination will be conclusive and evidenced
by a resolution of the Board of Directors, that such Financing Disposition is
economically fair and reasonable to the Company or such Subsidiary.
(2) The Company shall not permit Sunbury to make any sale of a Receivable,
or interest therein, pursuant to the Sunbury Factoring Arrangement unless the
Board of Directors shall have determined in good faith, which determination
shall be conclusive and evidenced by a resolution of the Board of Directors,
that such sale is economically fair and reasonable to Sunbury.
Limitation on Transactions with Affiliates. (a) The Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter into
or conduct any transaction (including the purchase, sale, lease or exchange of
any property or the rendering of any service) with any Affiliate of the Company
(an "Affiliate Transaction") on terms (i) that are less favorable to the Company
or such Restricted Subsidiary, as the case may be, than those that could be
obtained at the time of such transaction in arm's-length dealings with a Person
who is not such an Affiliate and (ii) that, in the event such Affiliate
Transaction involves an aggregate amount in excess of $2.5 million, are not in
writing and have not been approved by a majority of the members of the Board of
Directors having no personal stake in such Affiliate Transaction. In addition,
if such Affiliate Transaction involves an amount in excess of $15.0 million, a
fairness opinion must be obtained from a nationally recognized appraisal or
investment banking firm; provided no such opinion shall be required with respect
to (i) any series of transactions that comply with the requirements of clauses
(i) and (ii) of the preceding sentence (it being understood that annual approval
by the Board of Directors of such transaction will be sufficient) and that
consist of the sale by the Company or any Restricted Subsidiary of goods and
inventory in the ordinary course of business to a Person to whom the Home
Furnishings Group sold more than $15.0 million of goods and inventory in 1995;
and (ii) the sale by Holdings of Receivables to the Receivables Subsidiary
pursuant to a Permitted Receivables Financing.
(b) The provisions of the foregoing paragraph (a) will not prohibit (i) any
Restricted Payment or Permitted Investment permitted to be made pursuant to the
covenant described under "-- Limitation on Restricted Payments," (ii) fees,
compensation or employee benefit arrangements paid to and any indemnity provided
for the benefit of directors, officers or employees of the Company or any
Subsidiary of the Company in the ordinary course of business, (iii) any issuance
of securities, or other payments, awards or grants in cash, securities or
otherwise pursuant to, or the funding of, employment arrangements, stock options
and stock ownership plans approved by the Board of Directors, (iv) transactions
pursuant to agreements entered into or in effect on the Issue Date, including
amendments thereto entered into after the Issue Date, provided that the terms of
any such amendment are not, in the aggregate, less favorable to the Company or
such Restricted Subsidiary than the terms of such agreement prior to such
amendment and provided further that such agreements are set forth in a schedule
to the Indenture, (v) loans or advances to employees that are Affiliates of the
Company in the ordinary course of business, but in any event not to exceed $2.5
million in the aggregate outstanding at any one time, (vi) any transaction
between the Company and a Restricted Subsidiary or between Restricted
Subsidiaries (so long as the other stockholders of any participating Restricted
Subsidiaries which are not Wholly Owned Subsidiaries are not themselves
Affiliates of the Company) or (vii) payments with respect to Indebtedness
Incurred pursuant to clause (xiv) of paragraph (b) of the covenant described
under "--Limitation on Indebtedness."
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Limitation on the Sale or Issuance of Capital Stock of Domestic
Subsidiaries. The Company will not sell any shares of Capital Stock of a
Domestic Subsidiary, and will not permit any Domestic Subsidiary, directly or
indirectly, to issue or sell any shares of its Capital Stock, except (i) to the
Company or a Wholly Owned Subsidiary, (ii) directors' qualifying shares, (iii)
if, immediately after giving effect to such issuance or sale, such Domestic
Subsidiary would no longer constitute a Restricted Subsidiary or (iv) in a
Public Equity Offering as a result of or after which a Public Market exists. The
proceeds of any sale of such Capital Stock permitted by clauses (iii) and (iv)
will be treated as Net Available Cash from an Asset Disposition and must be
applied in accordance with the terms of the covenant described under
"--Limitation on Sales of Assets and Subsidiary Stock."
Limitation on Liens. The Company will not, and will not permit any Guarantor
Subsidiary to, directly or indirectly, create or permit to exist any Lien on any
of its property or assets (including Capital Stock), whether owned on the Issue
Date or thereafter acquired, securing any Indebtedness other than Senior
Indebtedness of the Company, in the case of the Company, or Senior Indebtedness
of a Guarantor Subsidiary, in the case of a Guarantor Subsidiary, unless
contemporaneously therewith effective provision is made to secure the Notes and,
in respect of Liens on any Guarantor Subsidiary's property or assets, the
Subsidiary Guaranty of such Guarantor Subsidiary equally and ratably with (or on
a senior basis to, in the case of Indebtedness subordinated in right of payment
to the Notes and such Subsidiary Guaranty) such obligation for so long as such
obligation is so secured.
SEC Reports. Notwithstanding that the Company may not be required to be or
remain subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, the Company will file with the Commission and provide the Trustee
and Noteholders and prospective Noteholders (upon request) with the annual
reports and the information, documents and other reports which are specified in
Sections 13 and 15(d) of the Exchange Act. The Company also will comply with the
other provisions of TIA Sec. 314(a).
Future Guarantor Subsidiaries. The Company will cause each Domestic
Subsidiary (other than the Receivables Subsidiary and any Master Servicer) which
Incurs Indebtedness to execute and deliver to the Trustee a supplemental
indenture pursuant to which such Subsidiary will Guarantee payment of the Notes;
provided, however, that such Subsidiary shall not be required to execute and
deliver a supplemental indenture pursuant to this section in the event that such
Subsidiary is a party to the Indenture at the time of such Incurrence of
Indebtedness. Each Subsidiary Guaranty will be limited to an amount not to
exceed the maximum amount that can be Guaranteed by that Subsidiary without
rendering the Subsidiary Guaranty, as it relates to such Subsidiary, voidable
under applicable law relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally.
Limitation on Lines of Business. (a) The Company will not, and will not
permit any Restricted Subsidiary (other than the Receivables Subsidiary) to,
engage in any business other than (i) a Related Business and (ii) the making of
Permitted Investments.
(b) The Company will not permit the Receivables Subsidiary to engage in any
business or transaction other than the purchase and sale of Receivables (or
participation interests therein) of Holdings and the Subsidiaries of the Company
and activities incidental thereto.
Limitation on Sale/Leaseback Transactions. The Company will not, and will
not permit any Restricted Subsidiary to, enter into any Sale/Leaseback
Transaction with respect to any property unless (i) the Company or such
Restricted Subsidiary would be entitled to (A) Incur Indebtedness in an amount
equal to the Attributable Debt with respect to such Sale/Leaseback Transaction
pursuant to the covenant described under "--Limitation on Indebtedness" and (B)
create a Lien on such property securing such Attributable Debt without equally
and ratably securing the Notes pursuant to the covenant described under
"--Limitation on Liens," (ii) the net cash proceeds
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received by the Company or any Restricted Subsidiary in connection with such
Sale/Leaseback Transaction are at least equal to the fair market value (as
determined in good faith by the Board of Directors, whose determination will be
conclusive and evidenced by a resolution of the Board of Directors) of such
property and (iii) the transfer of such property is permitted by, and the
Company applies the proceeds of such transaction in compliance with, the
covenant described under
"--Limitation on Sale of Assets and Subsidiary Stock."
MERGER AND CONSOLIDATION
The Company will not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor Company") will
be a corporation organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and the Successor Company
(if not the Company) will expressly assume, by an indenture supplemental hereto,
executed and delivered to the Trustee, in form satisfactory to the Trustee, all
the obligations of the Company under the Notes and the Indenture; (ii)
immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Restricted Subsidiary as a result of such transaction as having been Incurred by
the Successor Company or such Restricted Subsidiary at the time of such
transaction), no Default will have occurred and be continuing; (iii) except in
the case of a merger the sole purpose of which is to change the Company's
jurisdiction of incorporation, immediately after giving effect to such
transaction, the Successor Company would be able to Incur an additional $1.00 of
Indebtedness under paragraph (a) of the covenant described under "--Limitation
on Indebtedness"; (iv) immediately after giving effect to such transaction, the
Successor Company will have Consolidated Net Worth in an amount which is not
less than the Consolidated Net Worth of the Company immediately prior to such
transaction and (v) the Company will have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger or transfer and such supplemental indenture (if any) comply with the
Indenture.
Notwithstanding the foregoing clauses (ii), (iii) and (iv), any Restricted
Subsidiary may consolidate with, merge into or transfer all or part of its
properties and assets to the Company.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but the
predecessor Company in the case of a conveyance, transfer or lease of all or
substantially all its assets will not be released from the obligation to pay the
principal of and interest on the Notes.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in any
payment of interest on any Note when due (whether or not such payment is
prohibited by the provisions described under "Ranking" above), continued for 30
days, (ii) a default in the payment of principal of any Note when due at its
Stated Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise (whether or not such payment is prohibited by the
provisions described under "Ranking" above), (iii) the failure by the Company to
comply with its obligations under the covenant described under "Merger and
Consolidation" above, (iv) the failure by the Company to comply for 30 days
after notice with any of its obligations under the covenants described under
"Change of Control" or "Certain Covenants" above (in each case, other than a
failure to purchase Notes), (v) the failure by the Company or any Guarantor
Subsidiary to comply for 60 days after notice with its other agreements
contained in the Indenture, (vi) the failure by the Company or any Significant
Subsidiary to pay any Indebtedness within any applicable grace period after
final maturity or the acceleration of any such Indebtedness by the holders
thereof because of a default, if the total amount of such Indebtedness unpaid or
accelerated exceeds $10.0 million or its foreign currency equivalent (the "cross
acceleration provision"), (vii) certain events of bankruptcy, insolvency or
reorganization of
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the Company or a Significant Subsidiary (the "bankruptcy provisions"), (viii)
the rendering of any judgment or decree not covered by insurance for the payment
of money in excess of $10.0 million or its foreign currency equivalent against
the Company or a Significant Subsidiary and (A) an enforcement proceeding is
commenced with respect to such judgment or decree or (B) such judgment or decree
remains outstanding for a period of 60 days following such judgment or decree
and is not discharged, waived or stayed (the "judgment default provision") or
(ix) any Subsidiary Guaranty ceases to be in full force and effect (except as
contemplated by the terms thereof) or any Guarantor Subsidiary denies or
disaffirms its obligations under the Indenture or any Subsidiary Guaranty and
such Default continues for 10 days.
The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body.
However, a default under clauses (iv) or (v) will not constitute an Event of
Default until the Trustee or the Holders of 25% in principal amount of the
outstanding Notes notify the Company of the default and the Company does not
cure such default within the time specified in clauses (iv) and (v) hereof after
receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the outstanding Notes by notice to the
Company may declare the principal of and accrued but unpaid interest on all the
Notes to be due and payable. Upon such a declaration, such principal and
interest will be due and payable immediately. If an Event of Default relating to
certain events of bankruptcy, insolvency or reorganization of the Company occurs
and is continuing, the principal of and interest on all the Notes will become
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holders. Under certain circumstances, the Holders of a
majority in principal amount of the outstanding Notes may rescind any such
acceleration with respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
have offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such Holder has
previously given the Trustee notice that an Event of Default is continuing, (ii)
Holders of at least 25% in principal amount of the outstanding Notes have
requested the Trustee to pursue the remedy, (iii) such Holders have offered the
Trustee reasonable security or indemnity against any loss, liability or expense,
(iv) the Trustee has not complied with such request within 60 days after the
receipt of the request and the offer of security or indemnity and (v) the
Holders of a majority in principal amount of the outstanding Notes have not
given the Trustee a direction inconsistent with such request within such 60-day
period. Subject to certain restrictions, the Holders of a majority in principal
amount of the outstanding Notes are given the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or of exercising any trust or power conferred on the Trustee. The Trustee,
however, may refuse to follow any direction that conflicts with law or the
Indenture or that the Trustee determines is unduly prejudicial to the rights of
any other Holder or that would involve the Trustee in personal liability. Prior
to taking any action under the Indenture, the Trustee will be entitled to
indemnification satisfactory to it in its sole discretion against all losses and
expenses caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the Default
within the earlier of 90 days after it
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occurs or 30 days after it is known to a Trust Officer or written notice of it
is received by the Trustee. Except in the case of a Default in the payment of
principal of, premium (if any) or interest on any Note, the Trustee may withhold
notice if and so long as a committee of its Trust Officers in good faith
determines that withholding notice is in the interests of the Noteholders. In
addition, the Company is required to deliver to the Trustee, within 120 days
after the end of each fiscal year, a certificate indicating whether the signers
thereof know of any Default that occurred during the previous year. The Company
also is required to deliver to the Trustee, within 30 days after the occurrence
thereof, written notice of any event which would constitute certain Defaults,
their status and what action the Company is taking or proposes to take in
respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the Holders of a majority in principal amount of the Notes then outstanding
and any past default or compliance with any provisions may be waived with the
consent of the Holders of a majority in principal amount of the Notes then
outstanding. However, without the consent of each Holder of an outstanding Note
affected, no amendment may (i) reduce the amount of Notes whose Holders must
consent to an amendment or waiver, (ii) reduce the rate of or extend the time
for payment of interest on any Note, (iii) reduce the principal of or extend the
Stated Maturity of any Note, (iv) reduce the premium payable upon the redemption
of any Note or change the time at which any Note may be redeemed as described
under "Optional Redemption" above, (v) make any Note payable in money other than
that stated in the Note, (vi) make any change to the subordination provisions of
the Indenture that adversely affects the rights of any Holder, (vii) impair the
right of any Holder to receive payment of principal of and interest on such
Holder's Notes on or after the due dates therefor or to institute suit for the
enforcement of any payment on or with respect to such Holder's Notes, (viii)
make any change in the amendment provisions which require each Holder's consent
or in the waiver provisions or (ix) make any change in any Subsidiary Guaranty
that would adversely affect the Noteholders.
Without the consent of any Holder, the Company and Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation of the obligations of the Company
under the Indenture, to provide for uncertificated Notes in addition to or in
place of certificated Notes (provided that the uncertificated Notes are issued
in registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated Notes are described in Section 163(f)(2)(B) of the
Code), to add further Guarantees with respect to the Notes, to release Guarantor
Subsidiaries when permitted by the Indenture, to secure the Notes, to add to the
covenants of the Company for the benefit of the Noteholders or to surrender any
right or power conferred upon the Company, to make any change that does not
adversely affect the rights of any Holder or to comply with any requirement of
the Commission in connection with the qualification of the Indenture under the
TIA. However, no amendment may be made to the subordination provisions of the
Indenture that adversely affects the rights of any holder of Senior Indebtedness
then outstanding unless the holders of such Senior Indebtedness (or any group or
representative thereof authorized to give a consent) consent to such change.
The consent of the Noteholders is not necessary under the Indenture to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to Noteholders a notice briefly describing such amendment.
However, the failure to give such notice to all Noteholders, or any defect
therein, will not impair or affect the validity of the amendment.
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TRANSFER AND EXCHANGE
A Noteholder may transfer or exchange Notes in accordance with the
Indenture. Upon any transfer or exchange, the registrar and the Trustee may
require a Noteholder, among other things, to furnish appropriate endorsements
and transfer documents and the Company may require a Noteholder to pay any taxes
required by law or permitted by the Indenture. The Company is not required to
transfer or exchange any Note selected for redemption or to transfer or exchange
any Note for a period of 15 days prior to a selection of Notes to be redeemed.
The Notes will be issued in registered form and the registered holder of a Note
will be treated as the owner of such Note for all purposes.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under the covenants
described under "Certain Covenants," the operation of the cross acceleration
provision, the bankruptcy default provisions with respect to Subsidiaries and
the judgment default provision described under "Defaults" above and the
limitations contained in clauses (iii) and (iv) under "Merger and Consolidation"
above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii) (with respect to
Significant Subsidiaries only), (viii) (with respect to Significant Subsidiaries
only), (ix) or (x) under "Defaults" above or because of the failure of the
Company to comply with clause (iii) or (iv) under "Merger and Consolidation"
above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium (if any) and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel to the effect that holders of the Notes will not recognize
income, gain or loss for Federal income tax purposes as a result of such deposit
and defeasance and will be subject to Federal income tax on the same amount and
in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable Federal income tax law).
CONCERNING THE TRUSTEE
IBJ Schroder Bank & Trust Company is the Trustee under the Indenture and has
been appointed by the Company as Registrar and Paying Agent with regard to the
Notes.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
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CERTAIN DEFINITIONS
"Acquisition Agreement" means the Acquisition Agreement dated as of March
29, 1996 between Holdings and Masco as amended and as in effect on the Issue
Date.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock), including improvements to existing assets, to
be used by the Company or a Restricted Subsidiary in a Related Business; (ii)
the Capital Stock of a Person that becomes a Restricted Subsidiary as a result
of the acquisition of such Capital Stock by the Company or another Restricted
Subsidiary; or (iii) Capital Stock constituting a minority interest in any
Person that at such time is a Restricted Subsidiary; provided, however, that, in
the case of clauses (ii) and (iii), such Restricted Subsidiary is primarily
engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the provisions described under "--Certain Covenants--Limitation on
Transactions with Affiliates" and "--Certain Covenants--Limitation on Sales of
Assets and Subsidiary Stock" only, "Affiliate" shall also mean any beneficial
owner of shares representing 5% or more of the total voting power of the Voting
Stock (on a fully diluted basis) of the Company or of rights or warrants to
purchase such Voting Stock (whether or not currently exercisable) and any Person
who would be an Affiliate of any such beneficial owner pursuant to the first
sentence hereof.
"Applicable Premium" means, with respect to a Note, the greater of (i) 1.0%
of the then outstanding principal amount of such Note and (ii) the excess of (A)
the present value of all remaining required interest and principal payments due
on such Note, computed using a discount rate equal to the Treasury Rate plus 75
basis points, over (B) the then outstanding principal amount of such Note.
"Asset Disposition" means any sale, lease, transfer or other disposition of
shares of Capital Stock of a Restricted Subsidiary (other than directors'
qualifying shares and, in the case of Foreign Subsidiaries, to the extent
required by local ownership laws in foreign countries, shares owned by foreign
shareholders), property or assets (each referred to for the purposes of this
definition as a "disposition") by the Company or any of its Restricted
Subsidiaries (including any disposition by means of a merger, consolidation or
similar transaction) other than (i) a disposition by a Restricted Subsidiary to
the Company or by the Company or a Restricted Subsidiary to a Wholly Owned
Subsidiary; (ii) a disposition of property or assets, including inventory, in
the ordinary course of business consistent with past practices of the Home
Furnishings Group; (iii) a Financing Disposition; (iv) any sale of a Receivable,
or interest therein, pursuant to the Sunbury Factoring Arrangement and (v) for
purposes of the provisions described under "--Certain Covenants--Limitation on
Sales of Assets and Subsidiary Stock" only, a disposition subject to the
covenant described under "--Certain Covenants--Limitation on Restricted
Payments."
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
assumed in making calculations in accordance with FAS 13) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment
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of such Indebtedness or scheduled redemption or similar payment with respect to
such Preferred Stock multiplied by the amount of such payment by (ii) the sum of
all such payments.
"Bank Indebtedness" means any and all amounts payable under or in respect of
the Credit Agreement or any refinancing or replacements thereof including
principal, premium (if any), interest (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to the
Company whether or not a claim for post-filing interest is allowed in such
proceeding), fees, charges, expenses, reimbursement obligations, guarantees and
all other amounts payable thereunder or in respect thereof.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Bridge Receivables Financing" means (a) the sale by Holdings and the
Subsidiaries of the Company of Receivables to the Receivables Subsidiary
pursuant to the Receivables Sale Agreement, (b) the sale of such Receivables (or
participation interests therein) by the Receivables Subsidiary pursuant to the
Receivables Pooling Agreement and (c) the servicing of such Receivables pursuant
to the Receivables Servicing Agreement.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP. The amount of Indebtedness represented by a
Capitalized Lease Obligation shall be the capitalized amount of such obligation
determined in accordance with GAAP, and the Stated Maturity thereof shall be the
date of the last scheduled payment of rent or any other amount due under the
relevant lease prior to the first date upon which such lease may be terminated
by the lessee without payment of a penalty.
"Citicorp" means Citicorp, a Delaware corporation.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days prior to the date of
such determination (determined, for the four fiscal quarters ending prior to the
Issue Date, or any thereof, on a pro forma basis to give effect to the
acquisition of the Home Furnishings Group by the Company as if it occurred at
the beginning of such period) to (ii) Consolidated Interest Expense for such
four fiscal quarters (determined, for the four fiscal quarters ending prior to
the Issue Date, or any thereof, on a pro forma basis to give effect to the
acquisition of the Home Furnishings Group by the Company as if it had occurred
at the beginning of such period); provided, however, that (1) if the Company or
any Restricted Subsidiary has Incurred any Indebtedness since the beginning of
such period that remains outstanding on such date of determination or if the
transaction giving rise to the need to calculate the Consolidated Coverage Ratio
is an Incurrence of Indebtedness, EBITDA and Consolidated Interest Expense for
such period shall be calculated after giving effect on a pro forma basis to such
Indebtedness as if such Indebtedness had been Incurred on the first day of such
period and the discharge of any other Indebtedness repaid, repurchased, defeased
or otherwise discharged with the proceeds of such new Indebtedness as if such
discharge had occurred on the first day of such period (except that in the case
of Indebtedness to finance seasonal fluctuations in working capital needs
Incurred under a revolving credit or similar arrangement, the amount thereof
shall be deemed to be the average daily balance of such Indebtedness during such
four quarter period), (2) if since the beginning of such period the Company or
any Restricted Subsidiary shall have made any Asset Disposition, (x) the
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EBITDA for such period shall be reduced by an amount equal to the EBITDA (if
positive) directly attributable to the assets which are the subject of such
Asset Disposition for such period or increased by an amount equal to the EBITDA
(if negative) directly attributable thereto for such period and (y) Consolidated
Interest Expense for such period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Indebtedness of the
Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise
discharged with respect to the Company and its continuing Restricted
Subsidiaries in connection with such Asset Disposition for such period (or, if
the Capital Stock of any Restricted Subsidiary is sold, the Consolidated
Interest Expense for such period directly attributable to the Indebtedness of
such Restricted Subsidiary to the extent the Company and its continuing
Restricted Subsidiaries are no longer liable for such Indebtedness after such
sale), (3) if since the beginning of such period the Company or any Restricted
Subsidiary (by merger or otherwise) shall have made an Investment in any
Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary) or
an acquisition of assets, including any acquisition of assets occurring in
connection with a transaction causing a calculation to be made hereunder, which
constitutes all or substantially all of the assets of an operating unit of a
business, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto (including the Incurrence of
any Indebtedness in connection therewith) as if such Investment or acquisition
occurred on the first day of such period and (4) if since the beginning of such
period any Person (that subsequently became a Restricted Subsidiary or was
merged with or into the Company or any Restricted Subsidiary since the beginning
of such period) shall have made any Asset Disposition or any Investment or
acquisition of assets that would have required an adjustment pursuant to clause
(2) or (3) above if made by the Company or a Restricted Subsidiary during such
period, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto as if such Asset Disposition,
Investment or acquisition of assets occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting Officer of the Company.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest expense on such Indebtedness shall be calculated as
if the rate in effect on the date of determination had been the applicable rate
for the entire period (taking into account any Interest Rate Agreement
applicable to such Indebtedness if such Interest Rate Agreement has a remaining
term as at the date of determination in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total
consolidated interest expense of the Company and its Restricted Subsidiaries for
such period, plus, to the extent Incurred by the Company and its Restricted
Subsidiaries in such period but not included in such interest expense, (i)
interest expense attributable to Capitalized Lease Obligations, (ii)
amortization of debt discount, (iii) capitalized interest, (iv) noncash interest
expense, (v) commissions, discounts and other fees and charges with respect to
letters of credit and bankers' acceptance financing, (vi) net costs associated
with Hedging Obligations, (vii) the interest portion of any deferred payment
obligation, (viii) interest actually paid on any Indebtedness of any other
Person that is Guaranteed by the Company or any Restricted Subsidiary, (ix) the
cash contributions to any employee stock ownership plan or similar trust to the
extent such contributions are used by such plan or trust to pay interest or fees
to any Person (other than the Company or a Wholly Owned Subsidiary) in
connection with Indebtedness Incurred by such plan or trust and (x) the earned
discount or yield with respect to the sale of receivables (without duplication
of amounts included in Consolidated Net Income); but in no event shall include
(i) amortization of debt issuance costs, (ii) Preferred Stock dividends in
respect of all Preferred Stock of Subsidiaries of the Company and Disqualified
Stock of the Company held by Persons other than the Company or a Wholly Owned
Subsidiary, or (iii) interest Incurred in connection with Investments in
discontinued operations.
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"Consolidated Net Income" means, for any period, the consolidated net income
(loss) of the Company and its Subsidiaries for such period; provided, however,
that there shall not be included in such Consolidated Net Income: (i) any net
income (loss) of any Person if such Person is not a Restricted Subsidiary,
except that (A) subject to the limitations contained in clause (iv) below, the
Company's equity in the net income of any such Person for such period shall be
included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Person during such period to the Company or a
Restricted Subsidiary as a dividend or other distribution (subject, in the case
of a dividend or other distribution to a Restricted Subsidiary, to the
limitations contained in clause (iii) below) and (B) the Company's equity in a
net loss of any such Person (other than an Unrestricted Subsidiary) for such
period shall be included in determining such Consolidated Net Income, (ii) for
purposes of subclause (a)(3)(A) of the covenant described under "Limitation on
Restricted Payments" only, any net income (loss) of any person acquired by the
Company or a Subsidiary in a pooling of interests transaction for any period
prior to the date of such acquisition, (iii) any net income (loss) of any
Restricted Subsidiary if such Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions by such
Restricted Subsidiary, directly or indirectly, to the Company, except that (A)
subject to the limitations contained in (iv) below, the Company's equity in the
net income of any such Restricted Subsidiary for such period shall be included
in such Consolidated Net Income up to the aggregate amount of cash that could
have been distributed by such Restricted Subsidiary during such period to the
Company or another Restricted Subsidiary as a dividend (subject, in the case of
a dividend that could have been made to another Restricted Subsidiary, to the
limitation contained in this clause) and (B) the Company's equity in a net loss
of any such Restricted Subsidiary for such period shall be included in
determining such Consolidated Net Income, (iv) any gain (or loss) realized upon
the sale or other disposition of any asset of the Company or its consolidated
Subsidiaries (including pursuant to any Sale/Leaseback Transaction) which is not
sold or otherwise disposed of in the ordinary course of business and any gain
(or loss) realized upon the sale or other disposition of any Capital Stock of
any Person, (v) any extraordinary gain or loss, and (vi) the cumulative effect
of a change in accounting principles after the Issue Date. Notwithstanding the
foregoing, for the purpose of the covenant described under "Certain
Covenants--Limitation on Restricted Payments" only, there shall be excluded from
Consolidated Net Income any dividends, repayments of loans or advances or other
transfers of assets from Unrestricted Subsidiaries to the Company or a
Restricted Subsidiary to the extent such dividends, repayments or transfers
increase the amount of Restricted Payments permitted under such covenant
pursuant to clause (a)(3)(D) thereof. Nothwithstanding anything to the contrary
in the covenant described under "Certain Covenants-- Limitation on Restricted
Payments," all amounts paid, advanced or loaned to Holdings pursuant to clauses
(ix) or (x) of such covenant shall be deducted in computing Consolidated Net
Income and all repayments by Holdings of advances or loans made pursuant to such
clause (x) shall be included in calculating Consolidated Net Income. For
purposes of determining Consolidated Net Income for a period, tax expense with
respect to taxes covered by the Tax Sharing Agreement shall equal the amount of
payments required to be made by the Company and its Subsidiaries under the Tax
Sharing Agreement for such period.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and the Restricted Subsidiaries, determined on a
Consolidated basis, as of the end of the most recent fiscal quarter of the
Company ending at least 45 days prior to the taking of any action for the
purpose of which the determination is being made, as (i) the par or stated value
of all outstanding Capital Stock of the Company plus (ii) paid-in capital or
capital surplus relating to such Capital Stock plus (iii) any retained earnings
or earned surplus less (A) any accumulated deficit and (B) any amounts
attributable to Disqualified Stock.
"Consolidated Non-Cash Charges" of any Person means, for any period, the
aggregate depreciation, amortization (including the amortization of the cost of
the fabric sample books) and other non-cash charges of such Person and its
Consolidated Subsidiaries for such period, on a
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consolidated basis, as determined in accordance with GAAP (excluding any such
other non-cash charge which requires an accrual or reserve for cash charges for
any future period).
"Consolidation" means the consolidation of the accounts of each of the
Restricted Subsidiaries with those of the Company in accordance with GAAP
consistently applied; provided, however, that "Consolidation" will not include
consolidation of the accounts of any Unrestricted Subsidiary, but the interest
of the Company or any Restricted Subsidiary in an Unrestricted Subsidiary will
be accounted for as an investment. The term "Consolidated" has a correlative
meaning.
"Credit Agreement" means the Credit Agreement dated as of the Issue Date, as
amended, waived or otherwise modified from time to time, among Holdings, the
Company, the other borrowers party thereto from time to time, the lenders party
thereto from time to time and The Chase Manhattan Bank, a New York banking
corporation, as administrative agent, and Chase Manhattan Bank Delaware, as
issuing bank (except to the extent that any such amendment, waiver or other
modification thereto would be prohibited by the terms of the Indenture).
"Currency Agreement" means with respect to any Person any foreign exchange
contract, currency swap agreement or other similar agreement or arrangement as
to which such Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) the Bank Indebtedness and (ii)
any other Senior Indebtedness of the Company which, at the date of
determination, has an aggregate principal amount outstanding of, or under which,
at the date of determination, the holders thereof are committed to lend at least
$10.0 million and is specifically designated by the Company in the instrument
evidencing or governing such Senior Indebtedness as "Designated Senior
Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable or exercisable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to ninety-one days after the
Stated Maturity of the Notes. Disqualified Stock shall not include any Capital
Stock that is not otherwise Disqualified Stock if by its terms the holders have
the right to require the issuer to repurchase such stock upon a Change of
Control (or upon events substantially similar to a Change of Control).
"Domestic Subsidiary" means any Restricted Subsidiary of the Company other
than a Foreign Subsidiary.
"EBITDA" for any period means the Consolidated Net Income for such period,
plus the following to the extent deducted in calculating such Consolidated Net
Income: (i) income tax expense, (ii) Consolidated Interest Expense and (iii)
Consolidated Non-Cash Charges, in each case for such period. Notwithstanding the
foregoing, the provision for taxes based on the income or profits of, and the
depreciation and amortization of, a Subsidiary of the Company shall be added to
Consolidated Net Income to compute EBITDA only to the extent (and in the same
proportion) that the net income (loss) of such Subsidiary was included in
calculating Consolidated Net Income. For purposes of determining EBITDA for a
period, tax expense with respect to taxes covered by the Tax Sharing Agreement
shall equal the amount of payments required to be made by the Company and its
Subsidiaries under the Tax Sharing Agreement for such period.
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"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Financing Disposition" means any sale of a Receivable, or interest therein,
by the Company or any Subsidiary to the Receivables Subsidiary, or by the
Receivables Subsidiary, pursuant to the Permitted Receivables Financing.
"Foreign Subsidiary" means any Restricted Subsidiary of the Company which is
not organized under the laws of the United States of America or any State
thereof or the District of Columbia.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants, in statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession.
All ratios and computations based on GAAP contained in the Indenture shall be
computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness or other obligation of such other Person
(whether arising by virtue of partnership arrangements, or by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Guarantor Subsidiary" means any Person that has issued a Subsidiary
Guaranty.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is registered
on the Registrar's books.
"Holdings" means Furnishings International Inc., a Delaware corporation.
"Holdings Business" means the business conducted by Holdings (i) as
successor to Lineage Home Furnishings, Inc. ("Lineage") and Masco Home
Furnishings, Inc. ("MHF") and (ii) that is substantially consistent with the
business of Lineage and MHF as conducted immediately prior to the Issue Date.
"Home Furnishings Group" means the corporations comprising the home
furnishings group of Masco as constituted immediately prior to the Issue Date.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred
by such person at the time it becomes a Restricted Subsidiary; provided further,
however, that in the case of a discount security, the accretion of original
issue discount on such security shall not be considered an Incurrence of
Indebtedness but the whole face amount of such security shall be deemed Incurred
upon issuance of such security.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money; (ii) the principal
of and premium (if any) in respect of obligations of such Person
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evidenced by bonds, debentures, notes or other similar instruments; (iii) all
obligations of such Person in respect of letters of credit or other similar
instruments (including reimbursement obligations with respect thereto) other
than letters of credit or similar instruments supporting trade payables entered
into in the ordinary course of business of such person to the extent that such
letters of credit are not drawn upon or, if and to the extent drawn upon, such
drawing is reimbursed not later than the third business day following such
drawing; (iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except Trade Payables), which purchase
price is due more than six months after the date of placing such property in
service or taking delivery and title thereto or the completion of such services;
(v) all Capitalized Lease Obligations and all Attributable Debt of such Person;
(vi) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or, with
respect to any Subsidiary of the Company, any Preferred Stock (but excluding, in
each case, any accrued dividends); (vii) all Indebtedness of other Persons
secured by a Lien on any asset of such Person, whether or not such Indebtedness
is assumed by such Person; provided, however, that the amount of Indebtedness of
such Person shall be the lesser of (A) the fair market value of such asset at
such date of determination and (B) the amount of such Indebtedness of such other
Persons; (viii) all Indebtedness of other Persons to the extent Guaranteed by
such Person; and (ix) to the extent not otherwise included in this definition,
Hedging Obligations of such Person. The amount of Indebtedness of any Person at
any date shall be the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability, upon the occurrence of
the contingency giving rise to the obligation, of any contingent obligations at
such date.
"Interest Rate Agreement" means, with respect to any Person, any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance or loan
(other than advances or loans to customers or suppliers in the ordinary course
of business that are recorded as accounts receivable on the balance sheet of the
Person making such loan or advance) or other extension of credit (including by
way of Guarantee or similar arrangement) or capital contribution to (by means of
any transfer of cash or other property to others or any payment for property or
services for the account or use of others), or any purchase or acquisition of
Capital Stock, Indebtedness or other similar instruments issued by such Person.
For purposes of the definition of "Unrestricted Subsidiary" and the covenant
described under "--Certain Covenants--Limitation on Restricted Payments," (i)
"Investment" shall include the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of any
Subsidiary of the Company at the time that such Subsidiary is designated an
Unrestricted Subsidiary; provided, however, that upon a redesignation of such
Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue
to have a permanent "Investment" in an Unrestricted Subsidiary in an amount (if
positive) equal to (x) the Company's "Investment" in such Subsidiary at the time
of such redesignation less (y) the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the net assets
of such Subsidiary at the time of such redesignation; and (ii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer, in each case as determined in good
faith by the Board of Directors.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Management Agreement" means the Management Agreement dated as of the Issue
Date, between Holdings and the Company as in effect on the Issue Date.
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"Management Investors" means the officers and employees of Holdings, the
Company or a Subsidiary of the Company who acquire Voting Stock of Holdings on
or after the Issue Date and any of their Permitted Transferees.
"Masco" means Masco Corporation, a Delaware corporation.
"Masco Investors" means Masco and its Permitted Transferees.
"Masco Notes" means the senior pay-in-kind notes of Holdings issued to Masco
on the Issue Date in an aggregate amount of $285.0 million.
"Master Servicer" means any entity formed for purposes of acting as a master
servicer under a Permitted Receivables Financing, in each case, a special
purpose Wholly Owned Subsidiary.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or from an escrow account or
otherwise, in each case only as and when received, but excluding any other
consideration received in the form of assumption by the acquiring person of
Indebtedness or other obligations relating to the properties or assets that are
the subject of such Asset Disposition or received in any other noncash form)
therefrom, in each case net of (i) all legal, title and recording expenses,
commissions and other fees and expenses incurred, and all Federal, state,
provincial, foreign and local taxes required to be paid or accrued as a
liability under GAAP, as a consequence of such Asset Disposition, (ii) all
payments made on any Indebtedness which is secured by any assets subject to such
Asset Disposition, in accordance with the terms of any Lien upon such assets, or
which must by its terms, or in order to obtain a necessary consent to such Asset
Disposition, or by applicable law, be repaid out of the proceeds from such Asset
Disposition, (iii) all distributions and other payments required to be made to
minority interest holders in Subsidiaries or joint ventures as a result of such
Asset Disposition and (iv) appropriate amounts to be provided by the party or
parties making such Asset Disposition as a reserve, in accordance with GAAP,
against any liabilities associated with the assets disposed of in such Asset
Disposition and retained by the Company or any Restricted Subsidiary after such
Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, filing and registration fees, trustee's fees,
consultant and other fees actually incurred in connection with such issuance or
sale and net of taxes paid or payable as a result thereof.
"Officer" means the Chairman of the Board, the Chief Executive Officer, the
Chief Financial Officer, the President, any Vice President, the Treasurer or the
Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Permitted Holders" means the 399 Investors, the Masco Investors and the
Management Investors provided that any Management Investor and any 399 Investor
(other than 399 Venture Partners, Citicorp or any direct or indirect
wholly-owned Subsidiary of Citicorp) shall not be a "Permitted Holder" if such
Person is the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, of Voting Stock that represents at least
30% of the aggregate ordinary voting power of all classes of the Voting Stock of
the Company or Holdings, voting together as a single class (without giving
effect to the attribution of beneficial ownership as a result of any
stockholders agreement as in effect on the Issue Date, and any amendment to such
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agreement that does not materially change the allocation of voting power
provided for in such agreement).
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) the Company, (ii) a Restricted Subsidiary or a Person which
will, upon the making of such Investment, become a Restricted Subsidiary;
provided, however, that the primary business of such Restricted Subsidiary is a
Related Business; (iii) another Person if as a result of such Investment such
other Person is merged or consolidated with or into, or transfers or conveys all
or substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Related Business;
(iv) Temporary Cash Investments; (v) receivables owing to the Company or any
Restricted Subsidiary, if created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms; provided,
however, that such trade terms may include such concessionary trade terms as the
Company or any such Restricted Subsidiary deems reasonable under the
circumstances; (vi) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of business;
(vii) loans or advances to employees made in the ordinary course of business and
not exceeding $5.0 million in the aggregate outstanding at any one time; and
(viii) stock, obligations or securities received in settlement of debts created
in the ordinary course of business and owing to the Company or any Restricted
Subsidiary or in satisfaction of judgments; (ix) Investments in property or
assets to be used in (or in Restricted Subsidiaries and any entity that, as a
result of such Investment, is a Restricted Subsidiary engaged in) a Related
Business; (x) securities received as consideration in sales of assets made in
compliance with the covenant described under "-- Limitation on Sales of Assets
and Subsidiary Stock"; (xi) Guarantees relating to Indebtedness which is
permitted to be Incurred under the covenant described under "--Limitation on
Indebtedness" or (xii) other Investments, of any type, provided that the amount
of such Investments made after the Issue Date in reliance on this clause (xii)
and outstanding at any time does not exceed the amount of the Investments set
forth on a Schedule to the Indenture, plus $25.0 million.
"Permitted Investors" means (i) the Masco Investors, (ii) 399 Venture
Partners, Citicorp and any direct or indirect wholly-owned Subsidiary of
Citicorp and (iii) any voting trust for shares held by Management Investors the
voting trustees of which trust are (and must be) Management Investors and which
voting trust does not have the power (taking into account any voting agreement)
to elect or cause the election of directors having more than 30% of the total
voting power of directors on the board of directors of Holdings.
"Permitted Receivables Financing" means (a) the Bridge Receivables Financing
and (b) any subsequent financing secured substantially by Receivables (and
related assets) originated by Holdings and any Restricted Subsidiary in any
amount, provided that (i) such subsequent receivables financing has a later or
equal final maturity and a longer or equal weighted average life than the Bridge
Receivables Financing, (ii) all sales of Receivables to or by the Receivables
Subsidiary are made at fair market value (as determined in good faith by the
Board of Directors) (iii) the interest rate applicable to such subsequent
receivables financing shall be a market interest rate (as determined in good
faith by the Board of Directors) as of the time such financing is entered into,
(iv) such financing is non-recourse to the Company and its Subsidiaries (other
than the Receivables Subsidiary) except to a limited extent customary for such
financings and (v) the covenants, events of default and other provisions
thereof, collectively, shall be market terms (as determined in good faith by the
Board of Directors).
"Permitted Transferee" means (a) with respect to 399 Venture Partners (i)
Citicorp, any direct or indirect wholly owned subsidiary of Citicorp, and any
officer, director or employee of 399 Venture Partners, Citicorp or any wholly
owned subsidiary of Citicorp, (ii) any spouse or lineal descendant (including by
adoption and stepchildren) of the officers, directors and employees referred to
in clause (a)(i) above, (iii) any trust, corporation or partnership 100% in
interest of the beneficiaries,
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stockholders or partners of which consists of one or more of the persons
described in clause (a)(i) or (ii) above; (b) with respect to Masco, any direct
or indirect Subsidiary of Masco; and (c) with respect to any officer or employee
of Holdings, the Company or a Subsidiary of the Company, (i) any spouse or
lineal descendant (including by adoption and stepchildren) of such officer or
employee and (ii) any trust, corporation or partnership 100% in interest of the
beneficiaries, stockholders or partners of which consists of such officer or
employee, any of the persons described in clause (c)(i) above or any combination
thereof.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock," as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Public Equity Offering" means an underwritten primary public offering of
common stock of the Company or Holdings (or, for purposes of the covenant
described under "--Limitation on the Sale or Issuance of Capital Stock of
Domestic Subsidiaries," any Domestic Subsidiary) pursuant to an effective
registration statement (other than a registration statement on Form S-4, S-8 or
any successor or similar forms) under the Securities Act (whether alone or in
conjunction with any secondary public offering).
"Public Market" means any time after (x) a Public Equity Offering has been
consummated and (y) at least 15% of the total issued and outstanding common
stock of the Company or Holdings (or, for purposes of the covenant described
under "--Limitation on the Sale or Issuance of Capital Stock of Domestic
Subsidiaries," any Domestic Subsidiary) has been distributed by means of an
effective registration statement under the Securities Act.
"Purchase Money Indebtedness" means Indebtedness (i) consisting of the
deferred purchase price of an asset, any conditional sale obligation, any
obligation under any title retention agreement or any other purchase money
obligation, in each case where the maturity of such Indebtedness does not exceed
the anticipated useful life of the asset being financed, and (ii) incurred to
finance the acquisition by the Company or a Restricted Subsidiary of such asset,
including additions and improvements; provided, that such Indebtedness is
incurred within 180 days after the acquisition by the Company or Restricted
Subsidiary of such asset, or is in existence with respect to any asset or other
property at the time such asset or property is acquired.
"Receivable" means a right to receive payment arising from a sale or lease
of goods or services by a Person pursuant to an arrangement with another Person
pursuant to which such other Person is obligated to pay for goods or services
under terms that permit the purchase of such goods and services on credit, as
determined in accordance with GAAP.
"Receivables Pooling Agreement" means the Pooling Agreement relating to a
Permitted Receivables Financing, among the Receivables Subsidiary, the Master
Servicer and the Receivables Trustee.
"Receivables Sale Agreement" means the Receivables Sale Agreement relating
to a Permitted Receivables Financing, among the Receivables Subsidiary,
Holdings, the Company and the Subsidiaries of the Company party thereto.
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"Receivables Servicing Agreement" means the Servicing Agreement relating to
a Permitted Receivables Financing, among the Receivables Subsidiary, the Master
Servicer, the Subsidiaries of the Company party thereto and the Receivables
Trustee.
"Receivables Subsidiary" means LFI Receivables Corporation or any successor
thereto or other entity formed for purposes of a Permitted Receivables
Financing, in each case a bankruptcy-remote, special-purpose Wholly Owned
Subsidiary.
"Receivables Trustee" means the trustee on behalf of the holders of
participation interests in the receivables sold pursuant to a Permitted
Receivables Financing.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any defeasance
or discharge mechanism) (collectively, "refinances" and "refinanced" shall have
a correlative meaning) any Indebtedness existing on the Issue Date or Incurred
in compliance with the Indenture (including Indebtedness of the Company that
refinances Indebtedness of any Restricted Subsidiary (other than the Receivables
Subsidiary) (to the extent permitted in the Indenture) and Indebtedness of any
Restricted Subsidiary that refinances Indebtedness of that or another Restricted
Subsidiary (other than the Receivables Subsidiary) or of the Company), including
Indebtedness that refinances Refinancing Indebtedness; provided, however, that
(i) the Refinancing Indebtedness has a Stated Maturity no earlier than the
Stated Maturity of the Indebtedness being refinanced, (ii) the Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being refinanced, (iii) such Refinancing Indebtedness is Incurred in an
aggregate principal amount (or, if issued with original issue discount, an
aggregate issue price) that is equal to or less than the aggregate principal
amount (or, if issued with original issue discount, the aggregate accreted
value) then outstanding of the Indebtedness being refinanced plus the amount of
any premium reasonably determined by the Company or such Restricted Subsidiary,
as applicable, as necesary at the time of such refinancing to accomplish such
refinancing or required pursuant to the terms thereof, plus the amount of
expenses the Company or such Restricted Subsidiary, as applicable, Incurred in
connection with such refinancing and (iv) if the Indebtedness being refinanced
is subordinated in right of payment to the Notes, such Refinancing Indebtedness
is subordinated in right of payment to the Notes to the extent of the
Indebtedness being refinanced; provided further, however, that Refinancing
Indebtedness shall not include (x) Indebtedness of the Receivables Subsidiary
that refinances Indebtedness of the Company or (y) Indebtedness of the Company
or a Restricted Subsidiary that refinances Indebtedness of an Unrestricted
Subsidiary.
"Related Business" means any business of the Company and the Restricted
Subsidiaries as conducted on the Issue Date and any business related, ancillary
or complementary thereto.
"Representative" means the trustee, agent or representative (if any) for an
issue of Senior Indebtedness.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"S&P" means Standard and Poor's Ratings Group, a division of McGraw-Hill,
Inc. and its successors.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired by the Company or a Restricted Subsidiary whereby
the Company or such Restricted Subsidiary transfers such property to a Person
and the Company or such Restricted Subsidiary leases it from such Person, other
than leases between the Company and a Wholly Owned Subsidiary or between Wholly
Owned Subsidiaries.
"SEC" means the Securities and Exchange Commission.
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"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien. "Secured Indebtedness" of any Guarantor Subsidiary has a correlative
meaning.
"Senior Subordinated Indebtedness" means the Notes and any other
Indebtedness of the Company that specifically provides that such Indebtedness is
to rank pari passu with the Notes and is not subordinated by its terms to any
Indebtedness or other obligation of the Company which is not Senior
Indebtedness. "Senior Subordinated Indebtedness" of any Guarantor Subsidiary has
a correlative meaning.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of clause (w)(1) or
(2) of Rule 1-02 under Regulation S-X promulgated by the SEC.
"Simmons" means Simmons Upholstered Furniture Corporation, a Delaware
corporation.
"Specified Loss of the Holdings Business" means, for any period, the amount,
if any, by which the Cash Flow of the Holdings Business for such period is less
than zero. For such purpose, "Cash Flow of the Holdings Business" for any period
shall be calculated in accordance with the formula set forth in the next
sentence, for which purpose each item specified therein shall be determined on
an unconsolidated basis in accordance with GAAP on the basis of the
unconsolidated financial statements of Holdings for such period and in
accordance with such pro forma adjustments as are necessary (as determined in
the reasonable judgment of the Company) so as to take into account, with respect
to each item in such calculation, only the business and operations of Holdings
as they pertain to the Holdings Business in the form in which it is conducted on
the Issue Date and not to any other business, operation, investment or
subsidiary of Holdings (including the Company and including any other business
or investment undertaken by the entities comprising the Holdings Business),
whether in existence on the Issue Date or thereafter made, developed or
acquired. Cash Flow of the Holdings Business shall equal (a) the sum of (i) net
income for such period, (ii) the provision for income taxes to the extent such
provision reduces net income for such period, (iii) the amount of depreciation,
amortization and other non-cash expenses (including non-cash interest expense),
losses or other charges that were deducted in determining net income for such
period, and (iv) all Impermissible Expenses to the extent deducted in
calculating net income; minus (b) the sum of (i) any non-cash gains included in
net income and not otherwise excluded from clause (a) above, (ii) capital
expenditures paid for by Holdings with cash from operations during such period
for the sole purpose of the operations of the Holdings Business and (iii)
payments in respect of income taxes during such period but only to the extent
attributable to the taxable income, if any, of Holdings attributable to the
Holdings Business.
For purposes of the foregoing, non-cash interest expense shall be deemed to
include any interest expense (whether or not actually paid in cash) on the Masco
Notes prior to the eighth anniversary of the original issuance of the Masco
Notes. "Impermissible Expenses" shall mean all payments of any kind to, and
expenses or costs incurred by Holdings on behalf or for the benefit of, any
holder of any security of Holdings, any subsidiary of Holdings or any other
Affiliate of Holdings, except for payments for goods or services provided by
such Person but only to the extent of the fair market value of such goods and
services provided to or for the benefit of the Holdings Business.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes
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pursuant to a written agreement. "Subordinated Obligation" of any Guarantor
Subsidiary has a correlative meaning.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers, trustees or members of any other governing body
thereof is at the time owned or controlled, directly or indirectly, by (i) such
Person or (ii) one or more Subsidiaries of such Person.
"Subsidiary Guaranty" means any Guarantee of the Notes which may from time
to time be executed and delivered pursuant to the terms of the Indenture. Each
such Subsidiary Guaranty shall be in the form prescribed in the Indenture.
"Sunbury" means Sunbury Textile Mills., Inc., a New York corporation.
"Sunbury Factoring Arrangement" means factoring arrangements entered into in
the ordinary course of business by Sunbury in an aggregate amount not to exceed
$20.0 million at any time outstanding.
"Tax Sharing Agreement" means the Tax Sharing Agreement dated as of the
Issue Date among Holdings, the Company, Simmons and the Receivables Subsidiary
as in effect on the Issue Date.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations (x) of the United States of America or any agency thereof
or obligations Guaranteed by the United States of America or any agency thereof
or (y) of any foreign country recognized by the United States of America rated
at least "A" by S&P or "A-1" by Moody's, (ii) investments in time deposit
accounts, certificates of deposit and money market deposits maturing within 365
days of the date of acquisition thereof issued by a bank or trust company which
is organized under the laws of the United States of America, any state thereof
or any foreign country recognized by the United States of America having capital
and surplus in excess of $250.0 million (or the foreign currency equivalent
thereof) and whose long-term debt is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act), (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above, (iv) investments in commercial
paper, maturing not more than 270 days after the date of acquisition, issued by
a corporation (other than an Affiliate of the Company) organized and in
existence under the laws of the United States of America or any foreign country
recognized by the United States of America with a rating at the time as of which
any investment therein is made of "P-1" (or higher) according to Moody's or
"A-1" (or higher) according to S&P, (v) investments in securities with
maturities of six months or less from the date of acquisition issued or fully
guaranteed by any state, commonwealth or territory of the United States of
America, or by any political subdivision or taxing authority thereof, and rated
at least "A" by S&P or "A" by Moody's, (vi) any money market deposit accounts
issued or offered by a domestic commercial bank or a commercial bank organized
and located in a country recognized by the United States of America, in each
case, having capital and surplus in excess of $250.0 million (or the foreign
currency equivalent thereof), or investments in money market funds complying
with the risk limiting conditions of Rule 2a-7 (or any successor rule) of the
Commission under the Investment Company Act of 1940, as amended, and (vii)
similar investments approved by the Board of Directors in the ordinary course of
business.
"Term Loans" means the Tranche A Term Loans and the Tranche B Term Loans
available pursuant to the Credit Agreement.
"399 Investors" means 399 Venture Partners and its Permitted Transferees.
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"399 Venture Partners" means 399 Venture Partners, Inc., a Delaware
corporation.
"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled by, and
published in, the most recent Federal Reserve Statistical Release H.15(519)
which has become publicly available at least two business days prior to the date
fixed for redemption of the Notes following a Change of Control (or, if such
Statistical Release is no longer published, any publicly available source of
similar market data)) most nearly equal to the then remaining Average Life to
Stated Maturity of the Notes; provided, however, that if the Average Life to
Stated Maturity of the Notes is not equal to the constant maturity of a United
States Treasury security for which a weekly average yield is given, the Treasury
Rate shall be obtained by linear interpolation (calculated to the nearest
one-twelfth of a year) from the weekly average yields of United States Treasury
securities for which such yields are given, except that if the Average Life to
Stated Maturity of the Notes is less than one year, the weekly average yield on
actually traded United States Treasury securities adjusted to a constant
maturity of one year shall be used.
"Trustee" means the party named as such in the Indenture until a successor
replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President or any other
officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any other Subsidiary of the Company that
is not a Subsidiary of the Subsidiary to be so designated; provided, however,
that either (A) the Subsidiary to be so designated has total consolidated assets
of $1,000 or less or (B) if such Subsidiary has consolidated assets greater than
$1,000, then such designation would be permitted under the covenant entitled
"Limitation on Restricted Payments." The Board of Directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that
immediately after giving effect to such designation (x) the Company could Incur
$1.00 of additional Indebtedness under paragraph (a) of the covenant described
under "Limitation on Indebtedness" and (y) no Default shall have occurred and be
continuing. Any such designation by the Board of Directors shall be evidenced to
the Trustee by promptly filing with the Trustee a copy of the resolution of the
Board of Directors giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and, to the extent
required by local ownership laws in foreign countries, shares owned by foreign
shareholders) is owned by the Company or another Wholly Owned Subsidiary
(including shares held of record by a nominee for the benefit of the Company or
another Wholly Owned Subsidiary).
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material United States federal
income tax consequences of the Exchange Offer to a holder of Old Notes that is
an individual citizen or resident of the United States or a United States
corporation that purchased the Old Notes pursuant to their original issue (a
"U.S. Holder"). Morgan, Lewis & Bockius LLP, counsel to the Company, has
delivered an opinion to the Company to the effect that discussions set forth
below, to the extent that it relates to matters of U.S. Federal Income Tax Law,
is accurate in all material respects. The following discussion is based on the
Internal Revenue Code of 1986, as amended to the date hereof (the "Code"),
existing and proposed Treasury regulations, and judicial and administrative
determinations, all of which are subject to change at any time, possibly on a
retroactive basis. The following relates only to the Old Notes, and the New
Notes received therefor, that are held as "capital assets" within the meaning of
Section 1221 of the Code by U.S. Holders. It does not discuss state, local, or
foreign tax consequences, nor does it discuss tax consequences to categories of
holders that are subject to special rules, such as foreign persons, tax-exempt
organizations, insurance companies, banks, and dealers in stocks and securities.
Tax consequences may vary depending on the particular status of an investor. No
rulings will be sought from the Internal Revenue Service with respect to the
federal income tax consequences of the Exchange Offer.
THIS SECTION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO AN INVESTOR'S DECISION TO EXCHANGE OLD NOTES
FOR NEW NOTES. EACH INVESTOR SHOULD CONSULT WITH ITS OWN TAX ADVISOR CONCERNING
THE APPLICATION OF THE FEDERAL INCOME TAX LAWS AND OTHER TAX LAWS TO ITS
PARTICULAR SITUATION BEFORE DETERMINING WHETHER TO EXCHANGE OLD NOTES FOR NEW
NOTES.
THE EXCHANGE OFFER
The exchange of Old Notes for New Notes pursuant to the Exchange Offer
should be treated as a continuation of the corresponding Old Notes because the
terms of the New Notes are not materially different from the terms of the Old
Notes. Accordingly, such exchange should not constitute a taxable event to U.S.
Holders and, therefore, (i) no gain or loss should be realized by a U.S. Holder
upon receipt of a New Note; (ii) the holding period of the New Note should
include the holding period of the Old Note exchanged therefor and (iii) the
adjusted tax basis of the New Note should be the same as the adjusted tax basis
of the Old Note exchanged therefor immediately before the exchange.
STATED INTEREST
Stated interest on a Note will be taxable to a U.S. Holder as ordinary
interest income at the time that such interest accrues or is received, in
accordance with the U.S. Holder's regular method of accounting for federal
income tax purposes. The Notes are not considered to have been issued with
original issue discount for federal income tax purposes.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
A U.S. Holder's tax basis in a Note generally will be its cost. A U.S.
Holder generally will recognize gain or loss on the sale, exchange or retirement
of a Note in an amount equal to the difference between the amount realized on
the sale, exchange or retirement and the tax basis of the Note. Gain or loss
recognized on the sale, exchange or retirement of a Note (excluding amounts
received in respect of accrued interest, which will be taxable as ordinary
interest income) generally
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will be capital gain or loss and will be long-term capital gain or loss if the
Note was held for more than one year.
BACKUP WITHHOLDING
Under certain circumstances, a U.S. Holder of a Note may be subject to
"backup withholding" at a 31% rate with respect to payments of interest thereon
or the gross proceeds from the disposition thereof. This withholding generally
applies if the U.S. Holder fails to furnish his or her social security number or
other taxpayer identification number in the specified manner and in certain
other circumstances. Any amount withheld from a payment to a U.S. Holder under
the backup withholding rules is allowable as a credit against such U.S. Holder's
federal income tax liability, provided that the required information is
furnished to the IRS. Corporations and certain other entities described in the
Code and Treasury regulations are exempt from backup withholding if their exempt
status is properly established.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. Each of the Company and the Guarantor Subsidiaries has
agreed that, for a period of 180 days after the Expiration Date, it will make
this Prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale. In addition, until , 1996 (90
days after the date of this Prospectus), all dealers effecting transactions in
the New Notes may be required to deliver a prospectus.
Neither the Company nor the Guarantor Subsidiaries will receive any proceeds
from any sale of New Notes by broker-dealers. New Notes received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchasers of any such New Notes.
Any broker-dealer that resells New Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The Letter of Transmittal states that, by acknowledging that it will deliver and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. The Company and each of the Guarantor Subsidiaries has jointly
and severally agreed to pay all expenses incident to the Exchange Offer
(including the expenses of one counsel for the holders of the Old Notes) other
than commissions or concessions of any brokers or dealers and will indemnify the
holders of the Old Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for the
Company by Morgan, Lewis & Bockius LLP, New York, New York.
EXPERTS
The combined balance sheets as of December 31, 1995 and 1994 and the
combined statements of income and cash flows for each of the three years in the
period ended December 31, 1995, of Masco's Home Furnishings Group included in
this prospectus, have been included herein in reliance on the report, which
includes explanatory paragraphs related to the restatement of the 1994 financial
statements and the sale of the Group subsequent to December 31, 1995, of Coopers
& Lybrand L.L.P., independent accountants, given on the authority of that firm
as experts in accounting and auditing.
The balance sheet as of June 30, 1996, of LIFESTYLE FURNISHINGS
INTERNATIONAL LTD. included in this prospectus, has been included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
113
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MASCO HOME FURNISHINGS GROUP:
Report of Independent Accountants.................................................... F-2
Combined Balance Sheets at June 30, 1996 (unaudited), December 31, 1994 and 1995..... F-3
Combined Statements of Operations for the six months ended June 30, 1995 and 1996
(unaudited) and the years ended December 31, 1993, 1994 and 1995..................... F-4
Combined Statements of Cash Flows for the six months ended June 30, 1995 and 1996
(unaudited) and the years ended December 31, 1993, 1994 and 1995..................... F-5
Notes to Combined Financial Statements............................................... F-6
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.:
Report of Independent Accountants.................................................... F-25
Balance Sheet and Notes to Financial Statement at June 30, 1996...................... F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Masco Corporation:
We have audited the accompanying combined balance sheet of the Masco Home
Furnishings Group (certain subsidiaries of Masco Corporation, as described in
the Basis of Presentation Note) as of December 31, 1994 and 1995, and the
related combined statements of operations and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of Masco Corporation's management. Our responsibility is to
express an opinion on these financial statements 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 financial statements referred to above present fairly,
in all material respects, the combined financial position of the Masco Home
Furnishings Group as of December 31, 1994 and 1995, and the combined results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in the Accounting Policies Note, the accompanying 1994
financial statements have been restated.
As discussed in the Subsequent Event Note, Masco Corporation entered into an
agreement to sell the Masco Home Furnishings Group for proceeds (excluding
assumed indebtedness) of approximately $1,050.0 million. The accompanying
combined financial statements do not reflect the impact of this transaction.
Coopers & Lybrand L.L.P.
Detroit, Michigan
March 1, 1996, except for the last Note for
which the date is August 5, 1996
F-2
<PAGE>
MASCO HOME FURNISHINGS GROUP
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------- --------------
1994 1995 1996
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash investments............. $ 24,710,000 $ 17,310,000 $ 12,050,000
Receivables........................... 309,910,000 325,420,000 325,750,000
Inventories........................... 570,330,000 559,940,000 568,160,000
Prepaid expenses...................... 39,450,000 35,430,000 35,030,000
Deferred income taxes................. 19,900,000 17,000,000 17,000,000
-------------- -------------- --------------
Total current assets.............. 964,300,000 955,100,000 957,990,000
Property and equipment, net............. 466,400,000 484,100,000 478,470,000
Excess of cost over acquired net
assets.................................. 415,450,000 402,280,000 395,380,000
Notes receivable........................ 29,140,000 31,010,000 18,890,000
Other assets............................ 43,790,000 40,480,000 42,870,000
-------------- -------------- --------------
Total assets...................... $1,919,080,000 $1,912,970,000 $1,893,600,000
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND MASCO CORPORATION NET
INVESTMENT AND ADVANCES
CURRENT LIABILITIES:
Notes payable......................... $ 9,720,000 $ 25,500,000 $ 24,510,000
Accounts payable...................... 90,240,000 92,350,000 97,040,000
Accrued liabilities................... 94,480,000 87,300,000 96,170,000
-------------- -------------- --------------
Total current liabilities......... 194,440,000 205,150,000 217,720,000
Long-term debt.......................... 5,450,000 2,150,000 2,070,000
Deferred income taxes and other......... 74,480,000 75,570,000 73,710,000
-------------- -------------- --------------
Total liabilities................. 274,370,000 282,870,000 293,500,000
MASCO CORPORATION NET INVESTMENT AND
ADVANCES................................ 1,644,710,000 1,630,100,000 1,600,100,000
-------------- -------------- --------------
Total liabilities and Masco
Corporation Net Investment and
Advances................................ $1,919,080,000 $1,912,970,000 $1,893,600,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-3
<PAGE>
MASCO HOME FURNISHINGS GROUP
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------ ---------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales..................... $1,763,490,000 $1,897,480,000 $1,992,610,000 $984,430,000 $981,120,000
Cost of sales................. 1,326,800,000 1,434,030,000 1,500,990,000 737,710,000 741,960,000
-------------- -------------- -------------- ------------ ------------
Gross profit............. 436,690,000 463,450,000 491,620,000 246,720,000 239,160,000
Selling, general and
administrative expenses....... 367,450,000 385,350,000 400,330,000 202,630,000 189,390,000
-------------- -------------- -------------- ------------ ------------
Operating profit......... 69,240,000 78,100,000 91,290,000 44,090,000 49,770,000
-------------- -------------- -------------- ------------ ------------
Other expense, net:
Interest expense, Masco
Corporation................... 75,610,000 84,840,000 92,470,000 48,020,000 43,730,000
Interest expense, other...... 7,070,000 2,250,000 2,360,000 820,000 780,000
Other, net................... 3,210,000 7,280,000 8,260,000 800,000 2,930,000
-------------- -------------- -------------- ------------ ------------
85,890,000 94,370,000 103,090,000 49,640,000 47,440,000
-------------- -------------- -------------- ------------ ------------
Income (loss) before
income taxes.................. (16,650,000) (16,270,000) (11,800,000) (5,550,000) 2,330,000
Income taxes................. 8,370,000 6,560,000 6,090,000 3,380,000 4,930,000
-------------- -------------- -------------- ------------ ------------
Net loss................. $ (25,020,000) $ (22,830,000) $ (17,890,000) $ (8,930,000) $ (2,600,000)
-------------- -------------- -------------- ------------ ------------
-------------- -------------- -------------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-4
<PAGE>
MASCO HOME FURNISHINGS GROUP
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------ ---------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM (FOR): (UNAUDITED)
OPERATING ACTIVITIES:
Net income (loss)............ $(25,020,000) $(22,830,000) $(17,890,000) $ (8,930,000) $ (2,600,000)
Depreciation and
amortization................... 66,810,000 66,380,000 67,920,000 34,790,000 33,830,000
Bad debt provision........... 7,050,000 5,720,000 6,620,000 2,550,000 1,590,000
Deferred income taxes........ 890,000 (3,260,000) 4,560,000 -- --
(Increase) decrease in
receivables.................... (30,790,000) (10,240,000) (19,120,000) (18,030,000) 7,990,000
(Increase) decrease in
inventories.................... (52,860,000) (38,130,000) 10,390,000 (45,740,000) (8,220,000)
(Increase) in prepaid
expenses....................... (21,670,000) (21,050,000) (13,090,000) (7,110,000) (7,930,000)
Increase (decrease) in
current liabilities............ 12,740,000 22,730,000 (5,070,000) 9,850,000 13,560,000
------------ ------------ ------------ ------------ ------------
Net cash from (for)
operating activities........... (42,850,000) (680,000) 34,320,000 (32,620,000) 38,220,000
------------ ------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Capital expenditures......... (75,130,000) (68,790,000) (61,030,000) (32,300,000) (13,870,000)
Issuance of notes
receivable..................... (10,020,000) (1,000,000) (10,260,000) (9,160,000) (3,280,000)
Collection of notes
receivable..................... 5,440,000 3,710,000 5,020,000 3,030,000 5,490,000
Other, net................... 1,770,000 12,970,000 8,790,000 1,240,000 (3,350,000)
------------ ------------ ------------ ------------ ------------
Net cash (for) investing
activities..................... (77,940,000) (53,110,000) (57,480,000) (37,190,000) (15,010,000)
------------ ------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Increase in Masco Corporation
net investment and
advances....................... 192,640,000 99,830,000 3,280,000 39,210,000 (27,400,000)
Increase in other debt....... 4,640,000 5,360,000 16,200,000 31,340,000 65,460,000
Payment of other debt........ (67,380,000) (52,090,000) (3,720,000) (2,780,000) (66,530,000)
------------ ------------ ------------ ------------ ------------
Net cash from financing
activities..................... 129,900,000 53,100,000 15,760,000 67,770,000 (28,470,000)
------------ ------------ ------------ ------------ ------------
CASH:
Increase (decrease) for the
year........................... 9,110,000 (690,000) (7,400,000) (2,040,000) (5,260,000)
Beginning of period.......... 16,290,000 25,400,000 24,710,000 24,710,000 17,310,000
------------ ------------ ------------ ------------ ------------
End of period................ $ 25,400,000 $ 24,710,000 $ 17,310,000 $ 22,670,000 $ 12,050,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-5
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION. The combined financial statements reflect the
historical financial position, results of operations and cash flows of certain
subsidiaries of Masco Corporation, hereinafter called the Masco Home Furnishings
Group ("Group"), for the years presented. The Group is not a legal entity and
includes certain Masco subsidiaries whose operations consist of the manufacture
and sale of home furnishings products including quality furniture, fabrics and
other home furnishings. The financial position and results of operations, as
presented herein, may not be the same as would have occurred had the Group been
an entity independent of Masco Corporation.
Included in selling, general and administrative expenses in the financial
statements are general corporate expenses which represent certain corporate
staff support and administrative services provided by Masco Corporation. These
expenses are charged to the Group by Masco Corporation based upon approximately
1 percent of sales of most domestic Group operations. Masco Corporation's
management believes this method of allocation is reasonable. Because these
services were never contracted with outsiders nor bids obtained, it is not
practical to disclose estimates of what the cost would have been on a stand
alone basis. In addition, the Group participates in certain programs provided by
Masco Corporation including various insurance programs and incentive
compensation plans; related costs of these programs that exceed amounts included
in general corporate expenses are separately charged to the Group by Masco
Corporation. Outstanding liabilities related to the above services and programs
are included in Masco Corporation Net Investment and Advances in the
accompanying balance sheet.
INTERIM FINANCIAL INFORMATION. The financial information for June 30, 1995
and 1996, included herein is unaudited. In the opinion of management, the June
30, 1995 and 1996 financial information reflects all adjustments necessary,
consisting only of normal recurring adjustments for a fair presentation of such
financial information.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The preparation
of financial statements in conformity with generally accepted accounting
principles requires the Group 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 such estimates and assumptions.
RESTATEMENT OF 1994. The 1994 financial statements have been restated
primarily to reflect the correction of the accounting for certain Asian joint
ventures. As a result of this restatement, the 1994 net loss has increased by
approximately $3.6 million, while the Masco Corporation Net Investment and
Advances decreased by a corresponding amount.
PRINCIPLES OF COMBINATION. The accompanying combined financial statements
include the accounts and transactions of the Group. All significant intra-group
transactions have been eliminated.
CASH AND CASH INVESTMENTS. The Group considers all highly liquid investments
with an original maturity of three months or less to be cash and cash
investments.
RECEIVABLES. Accounts and notes receivable are presented net of aggregate
allowances for doubtful accounts of $7.7 million at December 31, 1994, $9.0
million at December 31, 1995, and $9.7 million at June 30, 1996.
PROPERTY AND EQUIPMENT. Property and equipment, including significant
betterments to existing facilities, are recorded at cost. Upon retirement or
disposal, the cost and accumulated
F-6
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
1. ACCOUNTING POLICIES--(CONTINUED)
depreciation are removed from the accounts and any gain or loss is included in
income. Maintenance and repair costs are charged to expense as incurred.
DEPRECIATION AND AMORTIZATION. Depreciation is computed principally using
the straight-line method over the estimated useful lives of the assets. Annual
depreciation rates are as follows: buildings and land improvements, 2 to 10
percent, and machinery and equipment, 5 to 33 percent. Depreciation was $34.5
million, $34.1 million and $36.0 million in 1993, 1994, and 1995, respectively
and $18.6 million and $18.7 million at June 30, 1995 and 1996, respectively. The
excess of cost over net assets of acquired companies is being amortized using
the straight-line method over periods not exceeding 40 years; at December 31,
1994, 1995 and June 30, 1996, such accumulated amortization totaled $98.6
million, $112.8 million and $119.3 million, respectively. At each balance sheet
date, Masco Corporation assesses whether there has been an impairment in the
carrying value of excess of cost over net assets of acquired companies of the
Group, primarily by comparing current and projected annual sales, operating
income and annual cash flows on an undiscounted basis with the related annual
amortization expense. The factors considered by management in performing this
assessment include current operating results and other economic factors. Based
on this assessment, there was no permanent impairment related to the excess of
cost over net assets of acquired companies at December 31, 1994 and 1995.
Amortization of intangible assets was $13.0 million in each of 1993 and 1994,
$14.2 million in 1995 and $7.7 million and $6.8 million as of June 30, 1995 and
1996, respectively.
The Group produces fabric sample books which are used to market some of its
products. The Group capitalizes the cost of these sample books and amortizes
their cost over three years as a selling expense. The unamortized net cost of
the sample books is included in other assets and prepaid expenses and at
December 31, 1994 and 1995 and June 30, 1996 aggregated $27.8 million, $24.4
million and $23.6 million, respectively, and the related amounts charged to
selling expense in 1993, 1994, and 1995 were $19.3 million, $19.3 million, and
$17.1 million, respectively. Amounts charged to selling expense through June 30,
1995 and 1996 were $8.5 million and $8.3 million, respectively.
JOINT VENTURES. The Group has investments in several fifty-fifty joint
ventures in the Far East which are accounted for on the equity method. At
December 31, 1994 and 1995, the Group's investment in these joint ventures
totalled $24.5 million and $24.1 million, respectively, and is included in other
assets. In connection with certain of these investments, the Group has
guaranteed a minimum return on investment to its joint venture partners. The
Group records the liability for these guarantees when it is both probable
payment is required and the amount is estimable.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying value of financial
instruments reported in the balance sheet for current assets and current
liabilities approximates fair value. The carrying values of notes receivable and
bank debt approximate fair value as the floating rates inherent in the related
financial instruments reflect changes in overall market interest rates.
The Group may periodically use foreign currency forward and option contracts
to offset the effects of exchange rate fluctuations on cash flows denominated in
foreign currencies. The balance of these contracts at December 31, 1995 is not
material and the Group does not use derivative financial instruments for trading
or speculative purposes.
FOREIGN CURRENCY TRANSLATION. The financial position and results of
operations of the Group's foreign subsidiaries are measured using the local
currency as the functional currency. Assets and liabilities of these
subsidiaries are translated at the balance sheet date exchange rate and
statement of operations' accounts are translated at the average rate prevailing
during the
F-7
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
1. ACCOUNTING POLICIES--(CONTINUED)
year. Translation adjustments, approximating $8.7 million, $5.2 million and $5.2
million at December 31, 1993, 1994 and 1995, arising entirely from differences
in exchange rates from period to period are included in Masco Corporation Net
Investment and Advances.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS. Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of," will not have a
material impact on the Group's financial statements when adopted in 1996. SFAS
No. 123, "Accounting for Stock-Based Compensation," becomes effective in 1996.
The Group intends to adopt the pro forma disclosure provisions of SFAS No. 123
and will account for stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
2. INVENTORIES
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
-------------------- -----------
1994 1995 1996
-------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Finished goods........................................... $270,440 $262,930 $ 264,260
Raw material............................................. 210,420 206,820 215,650
Work in process.......................................... 89,470 90,190 88,250
-------- -------- -----------
$570,330 $559,940 $ 568,160
-------- -------- -----------
-------- -------- -----------
</TABLE>
Inventories are stated at the lower of cost or net realizable value, with
cost determined principally by use of the first-in, first-out method.
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
-------------------- -----------
1994 1995 1996
-------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Land and improvements.................................... $ 26,250 $ 26,970 $ 27,710
Buildings................................................ 306,670 321,090 329,720
Machinery and equipment.................................. 370,810 398,320 399,770
-------- -------- -----------
703,730 746,380 757,200
Less accumulated depreciation............................ 237,330 262,280 278,730
-------- -------- -----------
$466,400 $484,100 $ 478,470
-------- -------- -----------
-------- -------- -----------
</TABLE>
The companies within the Group lease various facilities and equipment under
noncancelable lease arrangements. Certain of these lease arrangements have been
guaranteed by Masco Corporation. Rent expense for 1993, 1994, and 1995 was $21.9
million, $19.2 million, and $21.5 million, respectively. Rent expense for the
six months ended June 30, 1995 and 1996 was $11.2 million and $10.3 million,
respectively.
At December 31, 1995, future minimum rental commitments for operating leases
with noncancellable terms in excess of one year are as follows: 1996--$22.0
million; 1997--$18.4 million; 1998--$15.0 million; 1999--$13.3 million;
2000--$10.1 million; and thereafter--$21.1 million.
F-8
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. NOTES RECEIVABLE
The Group has notes receivable from certain of its customers. Generally,
these notes require periodic payments of principal and interest and are
collateralized by inventory and personal guarantees of the customers. These
notes bear interest based predominately on the prevailing prime rate.
Approximately $19.4 million of these notes are due from one customer at December
31, 1995. Although the Group does not currently foresee a material credit risk
associated with this receivable, repayment is dependent upon the financial
stability of this customer.
5. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
------------------ -----------
1994 1995 1996
------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Salaries, wages and commissions............................. $31,270 $25,930 $ 33,870
Employee retirement plans................................... 9,550 11,380 11,870
Advertising and sales promotion............................. 8,690 9,310 8,340
Insurance................................................... 8,260 6,050 13,840
Property, payroll and other taxes........................... 5,090 3,780 5,320
Income taxes................................................ 1,990 1,920 1,920
Other....................................................... 29,630 28,930 21,010
------- ------- -----------
$94,480 $87,300 $ 96,170
------- ------- -----------
------- ------- -----------
</TABLE>
<TABLE>
<CAPTION>
6. LONG-TERM DEBT
AT DECEMBER 31, AT JUNE 30,
---------------- -----------
1994 1995 1996
------ ------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Notes payable to banks........................................ $3,400 $ 220 $ 180
Other......................................................... 3,050 2,250 2,150
------ ------ -----------
6,450 2,470 2,330
Less current portion.......................................... 1,000 320 260
------ ------ -----------
$5,450 $2,150 $ 2,070
------ ------ -----------
------ ------ -----------
</TABLE>
The notes payable to banks relate to revolving-credit agreements with
various banks in Europe, North America and the Far East aggregating
approximately $131 million, most of which are guaranteed by Masco Corporation to
secure more favorable interest rates. Interest is payable on borrowings based
upon various floating rates as selected by the Group.
At December 31, 1995, the maturities of long-term debt during each of the
next five years were approximately as follows: 1996--$.3 million; 1997--$.4
million; 1998--$.2 million; 1999--$.1 million; and 2000--$.1 million.
The Group may periodically guarantee loans, leases or other credit
facilities for its customers and joint venture partners. At December 31, 1995,
the outstanding balance of these guarantees approximated $4.3 million. In
addition, the Group has guaranteed to certain joint venture partners a minimum
return on investment. Future guarantees under these arrangements aggregated
approximately $4.4 million at December 31, 1995.
F-9
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT--(CONTINUED)
Interest paid on total debt and net advances from Masco Corporation was
approximately $83.1 million, $87.0 million, and $94.7 million in 1993, 1994, and
1995, respectively.
7. MASCO CORPORATION NET INVESTMENT AND ADVANCES
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, Beginning of
period..................... $1,400,090 $1,567,710 $1,644,710 $1,644,710 $1,630,100
Net Income (loss).......... (25,020) (22,830) (17,890) (8,930) (2,600)
Additional net investment
and advances............... 192,640 99,830 3,280 39,210 (27,400)
---------- ---------- ---------- ---------- ----------
Balance, End of period..... $1,567,710 $1,644,710 $1,630,100 $1,674,990 $1,600,100
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
Investment and advances reflect the accumulation of transactions between the
Group and Masco Corporation. These transactions include operating results,
management fees, advances and other intercompany transactions.
Interest on funds advanced by Masco Corporation was charged to the Group
based on interest rates which approximated the bank prime rate, adjusted
monthly. Such interest rates approximated 6.0 percent, 7.1 percent, and 8.8
percent in 1993, 1994, and 1995, respectively. The outstanding balance of funds
advanced by Masco Corporation including accrued interest at December 31, 1993,
1994, and 1995 approximated $1,091.0 million, $1,192.0 million, and $1,195.0
million, respectively. The outstanding balance of funds advanced by Masco
Corporation including accrued interest at June 30, 1995 and 1996 approximated
$1,229.8 million and $1,163.4 million, respectively.
8. EMPLOYEE RETIREMENT PLANS
The Group sponsors defined-benefit and defined-contribution retirement plans for
most of its employees. The Group's defined contribution plans, available to most
domestic employees, contain a limited employer-matched savings provision that
permits pre-tax employee contributions. Aggregate charges to income under these
plans were $6.0 million in 1993, $5.8 million in 1994, and $7.1 million in 1995.
Net periodic pension cost for the Group's pension plans includes the
following components:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the year.............. $ 6,250 $ 6,980 $ 6,080
Interest cost on projected benefit obligation.............. 10,700 11,280 12,010
Actual return on assets.................................... (18,860) 5,870 (16,540)
Net amortization and deferral.............................. 3,520 (22,550) 3,540
-------- -------- --------
Net periodic pension cost.................................. $ 1,610 $ 1,580 $ 5,090
-------- -------- --------
-------- -------- --------
</TABLE>
F-10
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. EMPLOYEE RETIREMENT PLANS--(CONTINUED)
Major assumptions used in accounting for the Group's pension plans are as
follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Discount rate for obligations.............................. 7.25% 8.5% 7.25%
Rate of increase in compensation levels.................... 5.0% 5.0% 5.0%
Expected long-term rate of return on plan assets........... 12.0% 12.0% 11.0%
</TABLE>
The funded status of the Group's pension plans is summarized as follows, in
thousands, at December 31:
<TABLE>
<CAPTION>
1994 1995
------------------------- -------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation.................. $ 111,770 $ 4,840 $19,560 $ 126,660
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Accumulated benefit obligation............... $ 115,240 $ 5,120 $20,090 $ 130,040
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Projected benefit obligation................. $ 136,750 $ 7,110 $20,870 $ 159,810
Assets at fair value......................... 122,740 1,490 20,640 114,350
----------- ----------- ----------- -----------
Projected benefit obligation in excess of
plan assets................................ (14,010) (5,620) (230) (45,460)
Reconciling items:
Unrecognized net loss (gain)............... 14,900 (280) 3,970 33,980
Unrecognized prior service cost............ 9,210 5,630 330 13,870
Unrecognized net (asset) obligation at
transition................................... (10,470) (140) (1,540) (7,830)
Requirement to recognize minimum
liability.................................... -- (3,220) -- (10,250)
----------- ----------- ----------- -----------
(Accrued)/prepaid pension cost............... $ (370) $(3,630) $ 2,530 $ (15,690)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Statement of Financial Accounting Standards No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions, and Statement of Financial
Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits,
became effective in 1993 and 1994, respectively. These standards did not
materially affect the Group's financial position or results of operations.
F-11
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
9. GEOGRAPHIC INFORMATION
The group is engaged principally in one line of business--the manufacture
and sale of home furnishings products including quality furniture, fabrics and
other home furnishings.
The following table presents information about the Group by geographic area:
<TABLE>
<CAPTION>
NET SALES(1) OPERATING PROFIT (LOSS) ASSETS AT DECEMBER 31,
------------------------------------ ------------------------------- ------------------------------------
1993 1994 1995 1993 1994 1995 1993 1994 1995
---------- ---------- ---------- -------- -------- --------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Group's
operations by
geographic area
were:
United States.... $1,544,000 $1,673,000 $1,761,000 $ 60,000 $ 74,000 $ 88,000 $1,587,000 $1,616,000 $1,613,000
Pacific Rim...... 123,000 126,000 141,000 23,000 22,000 22,000 219,000 242,000 243,000
European Union
and other
foreign
countries......... 96,000 98,000 91,000 (4,000) (5,000) (3,000) 58,000 61,000 57,000
---------- ---------- ---------- -------- -------- --------- ---------- ---------- ----------
Total.......... $1,763,000 $1,897,000 $1,993,000 79,000 91,000 107,000 $1,864,000 $1,919,000 $1,913,000
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Other expense,
net............... (86,000) (94,000) (103,000)
General corporate
expense from
Masco
Corporation....... (10,000) (13,000) (16,000)
-------- -------- ---------
Loss before income
taxes............. $(17,000) $(16,000) $ (12,000)
-------- -------- ---------
-------- -------- ---------
</TABLE>
- ------------
(1) After elimination of intra-group sales between geographic areas of:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
United States.......................................... $ 17,000 $ 13,000 $ 12,000
-------- -------- --------
-------- -------- --------
Pacific Rim............................................ $235,000 $267,000 $289,000
-------- -------- --------
-------- -------- --------
European Union and other foreign countries............. $ 1,000 $ 1,000 $ 1,000
-------- -------- --------
-------- -------- --------
</TABLE>
F-12
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------- ---------
1993 1994 1995 1996
-------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Income (loss) before income taxes:
Domestic............................................. $(29,070) $(33,460) $(11,770) $ 1,620
Foreign.............................................. 12,420 17,190 (30) 710
-------- -------- -------- ---------
$(16,650) $(16,270) $(11,800) $ 2,330
-------- -------- -------- ---------
-------- -------- -------- ---------
Provision (credit) for income taxes:
Currently payable:
Federal -- U.S. losses............................. $ (7,450) $ (6,550) $ (5,710) $ 2,000
-- Certain foreign earnings........................ 10,380 10,640 3,030 350
State and local.................................... 3,950 5,050 3,200 1,800
Foreign............................................ 600 680 1,010 780
Deferred:
Federal............................................ 890 (3,290) 4,560 --
Foreign............................................ -- 30 -- --
-------- -------- -------- ---------
$ 8,370 $ 6,560 $ 6,090 $ 4,930
-------- -------- -------- ---------
-------- -------- -------- ---------
Deferred tax assets at December 31:
Inventories.......................................... $ 6,660 $ 6,670 $ 6,670
Accrued liabilities.................................. 13,930 10,710 10,710
Alternative minimum tax.............................. 860 860 860
-------- -------- ---------
21,450 18,240 18,240
-------- -------- ---------
Deferred tax liabilities at December 31:
Property and equipment............................... 68,010 69,220 69,220
Other................................................ 1,140 1,280 1,280
-------- -------- ---------
69,150 70,500 70,500
-------- -------- ---------
Net deferred tax liability at December 31............ $ 47,700 $ 52,260 $52,260
-------- -------- ---------
-------- -------- ---------
</TABLE>
The following is a reconciliation of tax computed at the U.S. federal
statutory rate to the provision for income taxes allocated to loss before income
taxes:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------- -----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. federal statutory rate........................ 35% 35% 35% 35% 35%
Tax (credit) at U.S. federal statutory rate........ $(5,830) $(5,690) $(4,050) $(1,940) $ 820
Higher taxes on foreign earnings................... 6,630 5,330 4,050 1,630 880
Amortization in excess of tax...................... 4,450 4,450 4,460 2,230 2,230
State and local taxes, net of federal tax
benefit............................................ 2,570 3,280 2,080 1,630 1,170
Change in tax rate................................. 1,300
Other.............................................. (750) (810) (450) (170) (170)
------- ------- ------- ------- ------
Income taxes...................................... $ 8,370 $ 6,560 $ 6,090 $ 3,380 $4,930
------- ------- ------- ------- ------
------- ------- ------- ------- ------
</TABLE>
The Group is included in the consolidated federal income tax returns of
Masco Corporation. Accordingly, substantially all income tax-related assets and
liabilities are due from or to Masco Corporation. Income taxes and credits are
computed on a separate return basis.
Income taxes paid were approximately $8 million, $10 million, and $2 million
in 1993, 1994, and 1995, respectively.
Earnings of foreign subsidiaries generally become taxable upon the
remittance of dividends and under certain other circumstances. Provision has not
been made for U.S. or additional foreign taxes on approximately $14 million of
remaining undistributed earnings of foreign subsidiaries, as those earnings are
intended to be permanently reinvested; it is not practical to estimate the
amount of deferred tax liability on such earnings.
11. ENVIRONMENTAL REGULATIONS
In the ordinary course of business, the Group may become exposed to
potential liabilities resulting from spills and releases of hazardous materials
at its manufacturing facilities. The Group also has been named as a potentially
responsible party at a total of seven Superfund sites. The Group does not
believe that the costs related to these Superfund sites or those costs
associated with investigating or remediating these releases will have a material
adverse effect on the Group's
F-13
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
11. ENVIRONMENTAL REGULATIONS--(CONTINUED)
financial condition, cash flows, operating expenses or earnings. Actual
resolution of these matters, however, could differ from management's estimates
and assumptions.
12. SUBSEQUENT EVENT
On August 5, 1996, the Group was sold to FURNISHINGS INTERNATIONAL INC.
("FII") for approximately $1.05 billion. The combined financial statements of
the Group do not reflect the impact of this transaction which resulted in a $650
million write-down of the Group's net assets in Masco's December 31, 1995
financial statements. FII contributed the businesses acquired to its
wholly-owned subsidiary, LIFESTYLE FURNISHINGS INTERNATIONAL LTD. ("LFI"). In
connection with the sale and as partial consideration, LFI issued, in a private
placement, $200 million aggregate principal amount of 10 7/8% unsecured Senior
Subordinated Notes maturing August 1, 2006 ("the Notes"). Interest on the Notes
is payable semi-annually at 10 7/8% commencing on February 1, 1997. The Notes
may be redeemed by LFI subsequent to August 1, 2001 at premiums which begin at
5.438% and decline each year to face for redemptions taking place after August
1, 2004. In addition, at any time prior to August 1, 1999, LFI may redeem up to
33 1/3% of the original aggregate principal amount of the Notes with the
proceeds of one or more public equity offerings at a redemption price of
110.875%. Also, upon the occurrence of a qualifying Change of Control as defined
in the Notes, the Notes may be redeemed at the option of LFI or in certain
instances at the option of the Note holders at a premium of 1%. The Notes
contain certain covenants which, among others, limit the incurrence of
additional indebtedness and restrict capital transactions, distributions, and
asset dispositions of certain subsidiaries.
In connection with the Note offering, each of LFI's domestic operating
subsidiaries ("the Guarantor Subsidiaries") fully and unconditionally guarantee
LFI's performance under the Notes on a joint and several basis. The Guarantor
Subsidiaries are direct or indirect wholly-owned subsidiaries of LFI. The
remaining subsidiaries are direct or indirect subsidiaries of the Guarantor
Subsidiaries. The following combining condensed financial data provides
information regarding the financial position, results of operations and cash
flows of the Guarantor Subsidiaries prior to the acquisition by FII
("predecessor combining condensed financial data"). Separate financial
statements of the Guarantor Subsidiaries are not presented because management
has determined those would not be material to the investors.
For purposes of the predecessor combining condensed financial data the
Guarantor Subsidiaries include all domestic subsidiaries of the Group, except
for certain subsidiaries with substantially no assets or operations. The
Guarantor Subsidiaries account for their investments in the non-guarantor
subsidiaries on the equity method. The principal elimination entries are to
eliminate the investments in subsidiaries and intercompany balances and
transactions.
F-14
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
12. SUBSEQUENT EVENT--(CONTINUED)
MASCO HOME FURNISHINGS GROUP
COMBINING BALANCE SHEETS
DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
MASCO HOME
GUARANTOR NON-GUARANTOR FURNISHINGS
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS COMBINED
------------ ------------- ------------ ----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash investments............. $ 6,840 $ 17,870 $ 24,710
Receivables........................... 243,460 67,160 $ (710) 309,910
Inventories........................... 438,610 131,720 570,330
Prepaid expenses...................... 24,140 15,310 39,450
Deferred income taxes................. 19,900 -- 19,900
Intercompany account.................. 159,630 4,280 (163,910) 0
------------ ------------- ------------ ----------
Total current assets................ 892,580 236,340 (164,620) 964,300
Property and equipment, net............. 360,920 105,480 466,400
Excess of cost over acquired net
assets.................................. 406,790 8,660 415,450
Notes receivable........................ 11,150 17,990 29,140
Investments in affiliates............... 345,720 -- (345,720) 0
Other assets............................ 25,630 23,550 (5,390) 43,790
------------ ------------- ------------ ----------
Total assets........................ $ 2,042,790 $ 392,020 $ (515,730) $1,919,080
------------ ------------- ------------ ----------
------------ ------------- ------------ ----------
LIABILITIES AND MASCO CORPORATION NET INVESTMENT AND ADVANCES
Current Liabilities
Notes payable......................... $ 2,420 $ 7,300 $ 9,720
Accounts payable...................... 64,270 26,680 $ (710) 90,240
Accrued liabilities................... 58,390 36,090 94,480
Intercompany account.................. 4,280 159,630 (163,910) 0
------------ ------------- ------------ ----------
Total current liabilities........... 129,360 229,700 (164,620) 194,440
Long-term debt.......................... 1,890 3,560 5,450
Deferred income taxes and other......... 67,750 6,730 74,480
------------ ------------- ------------ ----------
Total liabilities................... 199,000 239,990 (164,620) 274,370
Masco Corporation net investment and
advances................................ 1,843,790 152,030 (351,110) 1,644,710
------------ ------------- ------------ ----------
Total liabilities and Masco
Corporation net investment and
advances................................ $ 2,042,790 $ 392,020 $ (515,730) $1,919,080
------------ ------------- ------------ ----------
------------ ------------- ------------ ----------
</TABLE>
F-15
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
12. SUBSEQUENT EVENT--(CONTINUED)
MASCO HOME FURNISHINGS GROUP
COMBINING BALANCE SHEETS
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
MASCO HOME
GUARANTOR NON-GUARANTOR FURNISHINGS
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS COMBINED
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash investments............. $ 4,540 $ 12,770 $ 17,310
Receivables........................... 253,940 73,390 $ (1,910) 325,420
Inventories........................... 429,880 130,060 559,940
Prepaid expenses...................... 19,800 15,630 35,430
Deferred income taxes................. 17,000 -- 17,000
Intercompany account.................. 161,420 21,980 (183,400) 0
------------ ------------- ------------ -----------
Total current assets................ 886,580 253,830 (185,310) 955,100
Property and equipment, net............. 373,370 110,730 484,100
Excess of cost over acquired net
assets.................................. 394,100 8,180 402,280
Notes receivable........................ 4,540 26,470 31,010
Investments in affiliates............... 394,720 -- (394,720) 0
Other assets............................ 23,670 22,210 (5,400) 40,480
------------ ------------- ------------ -----------
Total assets........................ $ 2,076,980 $ 421,420 $ (585,430) $ 1,912,970
------------ ------------- ------------ -----------
------------ ------------- ------------ -----------
LIABILITIES AND MASCO CORPORATION NET INVESTMENT AND ADVANCES
Current liabilities:
Notes payable......................... $ 220 $ 25,280 $ 25,500
Accounts payable...................... 67,540 26,690 $ (1,880) 92,350
Accrued liabilities................... 64,070 23,230 87,300
Intercompany account.................. 21,980 161,420 (183,400) 0
------------ ------------- ------------ -----------
Total current liabilities........... 153,810 236,620 (185,280) 205,150
Long-term debt.......................... 1,910 240 2,150
Deferred income taxes and other......... 69,350 6,220 75,570
------------ ------------- ------------ -----------
Total liabilities................... 225,070 243,080 (185,280) 282,870
Masco Corporation net investment and
advances................................ 1,851,910 178,340 (400,150) 1,630,100
------------ ------------- ------------ -----------
Total liabilities and Masco
Corporation net investment and
advances................................ $ 2,076,980 $ 421,420 $ (585,430) $ 1,912,970
------------ ------------- ------------ -----------
------------ ------------- ------------ -----------
</TABLE>
F-16
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
12. SUBSEQUENT EVENT--(CONTINUED)
MASCO HOME FURNISHINGS GROUP
COMBINING STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
MASCO HOME
GUARANTOR NON-GUARANTOR FURNISHINGS
SUBSIDIARIES SUBSIDIARIES ELMINATIONS COMBINED
------------ ------------- ------------ ----------
<S> <C> <C> <C> <C>
1993
Net sales.................................... $ 1,522,100 $ 514,430 $ (273,040) $1,763,490
Cost of sales................................ 1,163,220 427,780 (264,200) 1,326,800
------------ ------------- ------------ ----------
Gross profit............................. 358,880 86,650 (8,840) 436,690
------------ ------------- ------------ ----------
Selling, general and administrative
expenses..................................... 287,120 89,240 (8,910) 367,450
------------ ------------- ------------ ----------
Operating profit......................... 71,760 (2,590) 70 69,240
Other (income) expense, net.................. 51,510 13,170 21,210 85,890
------------ ------------- ------------ ----------
Income (loss) before income taxes........ 20,250 (15,760) (21,140) (16,650)
Income taxes (credit)........................ 17,130 (8,760) -- 8,370
------------ ------------- ------------ ----------
Net income (loss)........................ $ 3,120 $ (7,000) $ (21,140) $ (25,020)
------------ ------------- ------------ ----------
------------ ------------- ------------ ----------
1994
Net sales.................................... $ 1,640,060 $ 551,740 $ (294,320) $1,897,480
Cost of sales................................ 1,256,440 462,800 (285,210) 1,434,030
------------ ------------- ------------ ----------
Gross profit............................. 383,620 88,940 (9,110) 463,450
------------ ------------- ------------ ----------
Selling, general and administrative
expenses..................................... 299,660 95,320 (9,630) 385,350
------------ ------------- ------------ ----------
Operating profit......................... 83,960 (6,380) 520 78,100
Other (income) expense, net.................. 58,170 16,230 19,970 94,370
------------ ------------- ------------ ----------
Income (loss) before income taxes........ 25,790 (22,610) (19,450) (16,270)
Income taxes (credit)........................ 16,420 (9,860) 6,560
------------ ------------- ------------ ----------
Net income (loss)........................ $ 9,370 $ (12,750) $ (19,450) $ (22,830)
------------ ------------- ------------ ----------
------------ ------------- ------------ ----------
1995
Net sales.................................... $ 1,728,250 $ 580,000 $ (315,640) $1,992,610
Cost of sales................................ 1,317,550 486,500 (303,060) 1,500,990
------------ ------------- ------------ ----------
Gross profit............................. 410,700 93,500 (12,580) 491,620
------------ ------------- ------------ ----------
Selling, general and administrative
expenses..................................... 315,060 98,120 (12,850) 400,330
------------ ------------- ------------ ----------
Operating profit......................... 95,640 (4,620) 270 91,290
Other (income) expense, net.................. 65,000 23,680 14,410 103,090
------------ ------------- ------------ ----------
Income (loss) before income taxes........ 30,640 (28,300) (14,140) (11,800)
Income taxes (credit)........................ 15,540 (9,450) -- 6,090
------------ ------------- ------------ ----------
Net income (loss)........................ $ 15,100 $ (18,850) $ (14,140) $ (17,890)
------------ ------------- ------------ ----------
------------ ------------- ------------ ----------
</TABLE>
F-17
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
12. SUBSEQUENT EVENT--(CONTINUED)
MASCO HOME FURNISHINGS GROUP
COMBINING CASH FLOWS STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
MASCO HOME
GUARANTOR NON-GUARANTOR FURNISHINGS
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS COMBINED
------------ ------------- ------------ ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM (FOR):
OPERATING ACTIVITIES:
Net income (loss)............................... $ 3,120 $ (7,000) $(21,140) $(25,020)
Depreciation and amortization................... 53,000 13,810 0 66,810
Bad debt provision.............................. 5,300 1,750 0 7,050
Deferred income taxes........................... 890 0 0 890
(Increase) decrease in receivables.............. 9,400 (40,190) 0 (30,790)
(Increase) decrease in inventories.............. (31,060) (21,800) 0 (52,860)
Increase (decrease) in prepaid expenses......... (13,830) (7,840) 0 (21,670)
(Increase) decrease in current liabilities...... 18,050 (5,310) 0 12,740
(Increase) decrease in intercompany account,
net............................................... (65,330) 65,330 0 0
------------ ------------- ------------ ----------
Net cash from (for) operating activities...... (20,460) (1,250) (21,140) (42,850)
------------ ------------- ------------ ----------
INVESTING ACTIVITIES:
Capital expenditures............................ (56,920) (18,210) (75,130)
Issuance of notes receivable.................... (900) (9,120) (10,020)
Collection of notes receivable.................. 4,400 1,040 5,440
Other, net...................................... (68,970) 38,620 32,120 1,770
------------ ------------- ------------ ----------
Net cash (for) investing activities........... (122,390) 12,330 32,120 (77,940)
------------ ------------- ------------ ----------
FINANCING ACTIVITIES:
Increase (decrease) in Masco Corporation net
investment and advances........................... 138,230 65,390 (10,980) 192,640
Payment of other debt........................... (430) (66,950) (67,380)
Increase in other debt.......................... 4,430 210 4,640
------------ ------------- ------------ ----------
Net cash from (for) financing activities...... 142,230 (1,350) (10,980) 129,900
------------ ------------- ------------ ----------
CASH:
Increase (decrease) for the year................ (620) 9,730 0 9,110
At Jaunary 1.................................... 4,520 11,770 0 16,290
------------ ------------- ------------ ----------
At December 31.................................. $ 3,900 $ 21,500 $ 0 $ 25,400
------------ ------------- ------------ ----------
------------ ------------- ------------ ----------
</TABLE>
F-18
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
12. SUBSEQUENT EVENT--(CONTINUED)
MASCO HOME FURNISHINGS GROUP
COMBINING CASH FLOWS STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
MASCO HOME
GUARANTOR NON-GUARANTOR FURNISHINGS
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS COMBINED
------------ ------------- ------------ ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM (FOR):
OPERATING ACTIVITIES:
Net income (loss)............................... $ 9,370 $ (12,750) $(19,450) $(22,830)
Depreciation and amortization................... 53,480 12,900 0 66,380
Bad debt provision.............................. 3,680 2,040 0 5,720
Deferred income taxes........................... (3,260) 0 0 (3,260)
(Increase) decrease in receivables.............. 850 (11,800) 710 (10,240)
(Increase) decrease in inventories.............. (27,180) (10,950) 0 (38,130)
(Increase) decrease in prepaid expenses......... (18,810) (2,240) 0 (21,050)
Increase (decrease) in current liabilities...... 11,480 11,960 (710) 22,730
(Increase) decrease in intercompany account,
net............................................... 4,290 (4,290) 0 0
------------ ------------- ------------ ----------
Net cash from (for) operating activities...... 33,900 (15,130) (19,450) (680)
INVESTING ACTIVITIES:
Capital expenditures............................ (57,140) (11,650) (68,790)
Issuance of notes receivable.................... 0 (1,000) (1,000)
Collection of notes receivable.................. 3,130 580 3,710
Other, net...................................... (15,340) 11,380 16,930 12,970
------------ ------------- ------------ ----------
Net cash from (for) investing activities...... (69,350) (690) 16,930 (53,110)
FINANCING ACTIVITIES:
Increase (decrease) in Masco Corporation net
investment and advances........................... 73,110 24,200 2,520 99,830
Increase (decrease) in other debt............... 5,360 5,360
Payment of other debt........................... (34,720) (17,370) (52,090)
------------ ------------- ------------ ----------
Net cash from (for) financing activities...... 38,390 12,190 2,520 53,100
CASH:
Increase (decrease) for the year................ 2,940 (3,630) 0 (690)
At January 1.................................... 3,900 21,500 0 25,400
------------ ------------- ------------ ----------
At December 31.................................. $ 6,840 $ 17,870 $ 0 $ 24,710
------------ ------------- ------------ ----------
------------ ------------- ------------ ----------
</TABLE>
F-19
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
12. SUBSEQUENT EVENT--(CONTINUED)
MASCO HOME FURNISHINGS GROUP
COMBINING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
MASCO HOME
GUARANTOR NON-GUARANTOR FURNISHINGS
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS COMBINED
------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM (FOR):
Operating Activities:
Net income (loss)....................... $ 15,100 $ (18,850) $ (14,140) $ (17,890)
Depreciation and amortization........... 55,630 12,290 67,920
Bad debt provision...................... 6,190 430 6,620
Deferred income taxes................... 4,560 -- 4,560
(Increase) decrease in receivables...... (16,670) (3,650) 1,200 (19,120)
(Increase) decrease in inventories...... 8,730 1,660 0 10,390
(Increase) decrease in prepaid
expenses.................................. (11,370) (1,720) 0 (13,090)
Increase (decrease) in current
liabilities............................... 8,950 (12,850) (1,170) (5,070)
(Increase) decrease in intercompany
accounts, net............................. 15,910 (15,910) 0 0
------------ ------------- ----------- -----------
Net cash from (for) operating
activities................................ 87,030 (38,600) (14,110) 34,320
Investing Activities:
Capital expenditures.................... (42,550) (18,480) (61,030)
Issuance of notes receivable............ (1,480) (8,780) (10,260)
Collection of notes receivable.......... 3,000 2,020 5,020
Other, net.............................. (4,600) (1,070) 14,460 8,790
------------ ------------- ----------- -----------
Net cash from (for) investing
activities................................ (45,630) (26,310) 14,460 (57,480)
Financing Activities:
Increase (decrease) in Masco Corporation
net investment and advances........... (41,530) 45,160 (350) 3,280
Increase (decrease) in other debt....... 120 16,080 16,200
Payment of other debt................... (2,290) (1,430) (3,720)
------------ ------------- ----------- -----------
Net cash from (for) financing
activities................................ (43,700) 59,810 (350) 15,760
Cash:
Increase (decrease) for the year........ (2,300) (5,100) 0 (7,400)
At January 1............................ 6,840 17,870 0 24,710
------------ ------------- ----------- -----------
At December 31.......................... $ 4,540 $ 12,770 $ 0 $ 17,310
------------ ------------- ----------- -----------
------------ ------------- ----------- -----------
</TABLE>
F-20
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
12. SUBSEQUENT EVENT--(CONTINUED)
MASCO HOME FURNISHINGS GROUP
COMBINING BALANCE SHEET
JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
MASCO HOME
GUARANTOR NON-GUARANTOR FURNISHINGS
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS COMBINED
------------ ------------- ------------ ----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash investments............... $ 2,590 $ 9,460 $ $ 12,050
Receivables............................. 254,810 73,650 (2,710) 325,750
Inventories............................. 455,150 113,010 568,160
Prepaid expenses........................ 18,110 16,920 35,030
Deferred income taxes................... 17,000 17,000
Intercompany account.................... 158,230 17,360 (175,990) 0
------------ ------------- ------------ ----------
Total current assets................ 905,890 230,800 (178,700) 957,990
Property and equipment, net............... 376,550 101,920 478,470
Excess of cost over acquired net assets... 387,230 8,150 395,380
Notes receivable.......................... 2,780 16,110 18,890
Investments in affiliates................. 202,170 (202,170) 0
Other assets.............................. 23,460 19,410 42,870
------------ ------------- ------------ ----------
Total assets........................ $ 1,898,080 $ 376,390 $ (380,870) $1,893,600
------------ ------------- ------------ ----------
------------ ------------- ------------ ----------
LIABILITIES AND MASCO CORPORATION NET
INVESTMENT AND ADVANCES
CURRENT LIABILITIES:
Notes payable........................... $ 220 $ 24,290 $ $ 24,510
Accounts payable........................ 72,940 26,820 (2,720) 97,040
Accrued liabilities..................... 75,410 20,760 96,170
Intercompany account.................... 17,760 158,230 (175,990) 0
------------ ------------- ------------ ----------
Total current liabilities........... 166,330 230,100 (178,710) 217,720
Long-term debt............................ 1,890 180 2,070
Deferred income taxes and other........... 69,420 4,290 73,710
------------ ------------- ------------ ----------
Total liabilities................... 237,640 234,570 (178,710) 293,500
MASCO CORPORATION NET INVESTMENT AND
ADVANCES.................................. 1,660,440 141,820 (202,160) 1,600,100
------------ ------------- ------------ ----------
Total liabilities and Masco
Corporation Net Investment and
Advances.................................. $ 1,898,080 $ 376,390 $ (380,870) $1,893,600
------------ ------------- ------------ ----------
------------ ------------- ------------ ----------
</TABLE>
F-21
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
12. SUBSEQUENT EVENT--(CONTINUED)
MASCO HOME FURNISHINGS GROUP
COMBINING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
MASCO HOME
GUARANTOR NON-GUARANTOR FURNISHINGS
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS COMBINED
------------ ------------- ------------ ----------
<S> <C> <C> <C> <C>
Net sales................................ $864,990 $ 252,150 $ (136,020) $981,120
Cost of sales............................ 666,180 211,800 (136,020) 741,960
------------ ------------- ------------ ----------
Gross profit....................... 198,810 40,350 0 239,160
------------ ------------- ------------ ----------
Selling, general and administrative
expenses................................. 153,980 35,410 189,390
------------ ------------- ------------ ----------
Operating profit..................... 44,830 4,940 0 49,770
Other (income) expense, net:............. 39,240 5,980 2,220 47,440
------------ ------------- ------------ ----------
Income (loss) before income taxes.... 5,590 (1,040) (2,220) 2,330
Income taxes (credit).................... 5,430 (500) 4,930
------------ ------------- ------------ ----------
Net income (loss).................... $ 160 $ (540) $ (2,220) $ (2,600)
------------ ------------- ------------ ----------
------------ ------------- ------------ ----------
</TABLE>
F-22
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
12. SUBSEQUENT EVENT--(CONTINUED)
MASCO HOME FURNISHINGS GROUP
COMBINING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
MASCO HOME
GUARANTOR NON-GUARANTOR FURNISHINGS
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS COMBINED
------------ ------------- ------------ ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM (FOR):
OPERATING ACTIVITIES:
Net income (loss)............................... $ 160 $ (540) $ (2,220) $ (2,600)
Depreciation and amortization................... 27,010 6,820 33,830
Bad debt provision.............................. 1,380 210 1,590
(Increase) decrease in receivables.............. (2,250) 9,440 800 7,990
(Increase) decrease in inventories.............. (25,270) 17,050 (8,220)
(Increase) decrease in prepaid expenses......... (5,970) (1,960) (7,930)
(Increase) decrease in intercompany accounts,
net............................................... (1,030) 1,030 0
Increase (decrease) in current liabilities...... 16,740 (2,340) (840) 13,560
------------ ------------- ------------ ----------
Net cash from (for) operating activities...... 10,770 29,710 (2,260) 38,220
------------ ------------- ------------ ----------
INVESTING ACTIVITIES:
Capital expenditures............................ (11,630) (2,240) (13,870)
Issuance of notes receivable.................... (3,280) (3,280)
Collection of notes receivable.................. 3,180 2,310 5,490
Other, net...................................... (4,100) 3,930 (3,180) (3,350)
------------ ------------- ------------ ----------
Net cash from (for) investing activities...... (15,830) 4,000 (3,180) (15,010)
------------ ------------- ------------ ----------
FINANCING ACTIVITIES:
Increase (decrease) in Masco Corporation net
investment and advances........................... 3,140 (35,980) 5,440 (27,400)
Increase (decrease) in other debt............... 800 64,660 65,460
Payment of other debt........................... (830) (65,700) (66,530)
------------ ------------- ------------ ----------
Net cash from financing activities............ 3,110 (37,020) 5,440 (28,470)
------------ ------------- ------------ ----------
CASH:
Increase (decrease) for the period.............. (1,950) (3,310) (5,260)
At January 1.................................... 4,540 12,770 17,310
------------ ------------- ------------ ----------
At June 30...................................... $ 2,590 $ 9,460 $ 0 $ 12,050
------------ ------------- ------------ ----------
------------ ------------- ------------ ----------
</TABLE>
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of LifeStyle Furnishings International Ltd.:
We have audited the accompanying balance sheet of LifeStyle Furnishings
International Ltd. (the "Company") as of June 30, 1996. This financial statement
is the responsibility of management. Our responsibility is to express an opinion
on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of financial
position. We believe that our audit of the balance sheet provides a reasonable
basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of LifeStyle Furnishings
International Ltd. as of June 30, 1996, in conformity with generally accepted
accounting principles.
As discussed in the Subsequent Event Note, the Company's parent, Furnishings
International Inc. (FII) acquired the Home Furnishings Group businesses of Masco
Corporation for $1.1 billion. Substantially all of the businesses were
contributed to the Company by FII. The accompanying financial statements do not
reflect the impact of this transaction.
Coopers & Lybrand L.L.P.
Greensboro, North Carolina
August 5, 1996
F-24
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
BALANCE SHEET
<TABLE>
<CAPTION>
AT JUNE 30, 1996
---------------------------
(DOLLARS IN ACTUAL DOLLARS)
<S> <C>
Assets:
Cash............................................................... $ 100
-----
-----
Stockholder's equity:
Common stock, par value $.01 per share, 3000 shares authorized, 100
shares issued and outstanding........................................ $ 1
Capital surplus.................................................... 99
-----
Total stockholder's equity....................................... $ 100
-----
-----
</TABLE>
See accompanying notes.
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
NOTES TO BALANCE SHEET
1. BASIS OF PRESENTATION
LIFESTYLE FURNISHINGS INTERNATIONAL LTD. (the "Company") was formed in May
1996. In the formation of the Company, 100 shares of common stock were issued to
FURNISHINGS INTERNATIONAL INC. ("FII"), the Company's stockholder. Since
formation, the Company has not engaged in any activities other than those
incident to its formation and capitalization, therefore, no statements of
operations or cash flows have been presented.
2. SUBSEQUENT EVENT
On August 5, 1996, FII acquired the Home Furnishings Group businesses from
Masco Corporation for approximately $1.1 billion. FII contributed substantially
all of the businesses acquired to the Company. The Company incurred $680 million
in debt to partially finance the acquisition. Debt outstanding as of August 5,
1996, is as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Revolving credit facility with interest at 8.0%................................ $ 25.0
Tranche A term loan, quarterly principal payments through 2002, with interest
at 8.0%..................................................................... 125.0
Tranche B term loan, quarterly principal payments through 2004, with interest
at 8.5%..................................................................... 175.0
Receivables facility with interest at 6.5%.................................... 155.0
Senior subordinated notes due 2006 with interest at 10.875%................... 200.0
-------------
680.0
Assumed indebtedness.......................................................... 28.3
-------------
$ 708.3
-------------
-------------
</TABLE>
In connection with the Senior Subordinated Note offering, each of the
Company's domestic operating subsidiaries ("the Guarantor Subsidiaries") fully
and unconditionally guarantee the Company's performance under the Notes on a
joint and several basis. The Guarantor Subsidiaries are direct or indirect
wholly-owned subsidiaries of the Company. The remaining subsidiaries are direct
or indirect subsidiaries of the Guarantor Subsidiaries.
F-25
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, and, if given
or made, such information or representations must not be relied upon as
having been authorized. This Prospectus does not constitute an offer to sell
or the solicitation of an offer to buy any securities other than the
securities to which it relates or any offer to sell or the solicitation of an
offer to buy such securities in any circumstances in which such offer or
solicitation is unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since the date
hereof or that the information contained herein is correct as of any time
subsequent to its date.
[LOGO]
- -------------------------------------------
Table of Contents
---------------
PROSPECTUS
<TABLE>
<S> <C>
Available Information................. 2
</TABLE>
---------------
<TABLE>
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 15
Use of Proceeds....................... 21
Capitalization........................ 22
Selected Historical and Pro Forma
Financial Data....................... 23
Unaudited Pro Forma Financial
Information........................... 25
Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................... 35
Exchange Offer........................ 43
Business.............................. 49
Management............................ 63
</TABLE>
OFFER TO EXCHANGE
<TABLE> 10 7/8% SENIOR SUBORDINATED
<S> <C> NOTES DUE 2006 FOR 10 7/8%
Ownership of Securities............... 64 SENIOR SUBORDINATED NOTES
Certain Transactions.................. 71 DUE 2006
</TABLE>
<TABLE>
<S> <C>
Description of Senior Bank
Facilities............................ 74
</TABLE>
<TABLE>
<S> <C>
Description of Receivables Facility... 76
</TABLE>
<TABLE>
<S> <C>
Description of Notes.................. 78
Certain Federal Income Tax
Considerations........................ 111
</TABLE>
<TABLE>
<S> <C>
Plan of Distribution.................. 113
Legal Matters......................... 113
Experts............................... 113
Index to Financial Statements......... F-1
</TABLE>
UNTIL , 199 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides that a Delaware
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"proceeding") (other than an action by or in the right of the corporation) by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his or her conduct was unlawful. A Delaware corporation may indemnify any person
under such section in connection with a proceeding by or in the right of the
corporation to procure judgment in its favor, as provided in the preceding
sentence, against expenses (including attorneys' fees) actually and reasonably
incurred by him or her in connection with the defense or settlement of such
action, except that no indemnification shall be made in respect thereof unless,
and then only to the extent that, a court of competent jurisdiction shall
determine upon application that such person is fairly and reasonably entitled to
indemnity for such expenses as the court shall deem proper. A Delaware
corporation must indemnify any peson who was successful on the merits or
otherwise in defense of any action, suit or proceeding or in defense of any
claim, issue or matter in any proceeding, by reason of the fact that such person
is or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and reasonably
incurred by such person in connection therewith. A Delaware corporation may pay
for the expenses (including attorneys' fees) incurred by an officer or director
in defending a proceeding in advance of the final disposition upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he or she is not entitled to be
indemnified by the corporation.
The Certificate of Incorporation and By-laws of LIFESTYLE FURNISHINGS
INTERNATIONAL LTD. (the "Company") provide for indemnification of directors and
officers to the fullest extent permitted by Section 145 of the Delaware General
Corporation Law.
Section 102(b)(7) of the Delaware General Corporation Law provides that a
Delaware corporation may in its articles of incorporation eliminate or limit the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director except for
liability: for any breach of the director's duty of loyalty to the corporation
or its stockholders; for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; under Section 174
(pertaining to certain prohibited acts including unlawful payment of dividends
or unlawful purchase or redemption of the corporation's capital stock); or for
any transaction from which the director derived an improper personal benefit.
The Company's Certificate of Incorporation eliminates the liability of directors
for monetary damages for breach of fiduciary duty as a director unless, and only
to the extent that, such director is liable (i) for any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the Delaware General Corporation Law or any
amendment thereto or successor provision thereto, or (iv) for any transaction
from which the director derived an improper personal
II-1
<PAGE>
benefit. The Delaware General Corporation Law permits the purchase of insurance
on behalf of directors and officers against any liability asserted against
directors and officers and incurred by such pesons in such capacity, or arising
out of their status as such, whether or not the corporation would have the power
to indemnify offices and directors against such liability. The Company's
corporate parent, FURNISHINGS INTERNATIONAL INC., has obtained liability
insurance coverage, which includes coverage to reimburse the Company (and the
Company's subsidiaries) for amounts required or permitted by law to be paid to
indemnify directors and officers.
The foregoing summary of the Delaware General Corporation Law, the Company's
Certificate of Incorporation and the Company's By-Laws is qualified in its
entirety by reference to the relevant provisions of the Delaware General
Corporation Law and by reference to the relevant provisions of the Company's
Certificate of Incorporation (filed as Exhibit 3.1) and the relevant provisions
of the Company's By-Laws (filed as Exhibit 3.25).
The Company provides for indemnification of directors and officers of its
subsidiaries, including the co-registrants, substantially to the same extent and
under the same conditions that such indemnification is provided at the Company
level.
See Item 22 for a statement of the co-registrants' undertaking as to the
Securities and Exchange Commission's position respecting indemnification for
liabilities arising under the Securities Act of 1933, as amended.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- ----------------------------------------------------------------------------------
<C> <S>
3.1* Certificate of Incorporation of LIFESTYLE FURNISHINGS INTERNATIONAL LTD. (the
"Company")
3.2* Certificate of Incorporation of Ametex Fabrics, Inc.
3.3* Certificate of Incorporation of The Berkline Corporation
3.4* Articles of Incorporation of Blue Mountain Trucking Corporation
3.5* Articles of Incorporation of Custom Truck Tires, Inc.
3.6* Certificate of Incorporation of D-H Retail Space, Inc.
3.7* Certificate of Incorporation of Drexel Heritage Advertising, Inc.
3.8* Certificate of Incorporation of Drexel Heritage Furnishings Inc.
3.9* Articles of Incorporation of Drexel Heritage Home Inspirations, Inc.
3.10* Certificate of Incorporation of Henredon Furniture Industries, Inc.
3.11* Articles of Incorporation of Henredon Transportation Company
3.12* Certificate of Incorporation of Interior Fabric Design, Inc.
3.13* Articles of Incorporation of Intro Europe, Inc.
3.14* Articles of Incorporation of La Barge, Inc.
3.15* Certificate of Incorporation of Lexington Furniture Industries, Inc.
3.16* Certificate of Incorporation of Lifestyle Holdings Ltd.
3.17* Articles of Incorporation of Maitland-Smith, Inc.
</TABLE>
- -------------------
* Previously filed
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- ----------------------------------------------------------------------------------
<C> <S>
3.18* Articles of Incorporation of Marbro Lamp Company
3.19* Certificate of Incorporation of Ramm, Son & Crocker, Inc.
3.20* Certificate of Incorporation of Robert Allen Fabrics, Inc.
3.21* Certificate of Incorporation of Robert Allen Fabrics of N.Y., Inc.
3.22* Certificate of Incorporation of Sunbury Textile Mills, Inc.
3.23* Certificate of Incorporation of Universal Furniture Industries
3.24* Certificate of Incorporation of Universal Furniture Limited
3.25* By-Laws of the Company
3.26* By-Laws of Ametex Fabrics, Inc.
3.27* By-Laws of The Berkline Corporation
3.28* By-Laws of Blue Mountain Trucking Corporation
3.29* By-Laws of Custom Truck Tires, Inc.
3.30* By-Laws of D-H Retail Space, Inc.
3.31* By-Laws of Drexel Heritage Advertising, Inc.
3.32* By-Laws of Drexel Heritage Furnishings Inc.
3.33* By-Laws of Drexel Heritage Home Inspirations, Inc.
3.34* By-Laws of Henredon Furniture Industries, Inc.
3.35* By-Laws of Henredon Transportation Company
3.36* By-Laws of Interior Fabric Design, Inc.
3.37* By-Laws of Intro Europe, Inc.
3.38* By-Laws of La Barge, Inc.
3.39* By-Laws of Lexington Furniture Industries, Inc.
3.40* By-Laws of Lifestyle Holdings Ltd.
3.41* By-Laws of Maitland-Smith, Inc.
3.42* By-Laws of Marbro Lamp Company
3.43* By-Laws of Ramm, Son & Crocker, Inc.
3.44* By-Laws of Robert Allen Fabrics, Inc.
3.45* By-Laws of Robert Allen Fabrics of N.Y., Inc.
3.46* By-Laws of Sunbury Textile Mills, Inc.
3.47* By-Laws of Universal Furniture Industries
3.48* By-Laws of Universal Furniture Limited
4* Indenture between the Company and IBJ Schroder Bank & Trust Company, as Trustee,
dated as of August 5, 1996.
5+ Opinion of Morgan, Lewis & Bockius LLP
8+ Opinion of Morgan, Lewis & Bockius LLP regarding tax matters
</TABLE>
- -------------------
* Previously filed
+ Filed herewith
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- ----------------------------------------------------------------------------------
<C> <S>
10.1* Acquisition Agreement between FURNISHINGS INTERNATIONAL INC. and Masco Corporation
dated as of March 29, 1996
10.2* Amendment No. 1 to Acquisition Agreement dated as of June 21, 1996
10.3* Amendment No. 2 to Acquisition Agreement dated as of August 5, 1996
10.4* Credit Agreement dated as of August 5, 1996 among FURNISHINGS INTERNATIONAL INC.,
the Company, the subsidiary borrowers named therein, the lenders named therein and
The Chase Manhattan Bank, as Swingline Lender, Administrative Agent and Collateral
Agent, Chase Manhattan Bank Delaware as Issuing Bank
10.5* Exchange and Registration Rights Agreement between the Company, the Guarantors
named therein, Chase Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, dated as of August 5, 1996.
10.6* Pooling Agreement, dated as of August 5, 1996, among LFI Receivables Corporation,
LFI Servicing Corporation and The Chase Manhattan Bank, as Trustee.
</TABLE>
<TABLE>
<C> <S>
10.7* Series 1996-A Supplement, dated as of August 5, 1996, among LFI Receivables
Corporation, LFI Servicing Corporation, Chemical Bank, as Agent and as Initial
Purchaser, and The Chase Manhattan Bank, as Trustee.
10.8* Servicing Agreement, dated as of August 5, 1996, among LFI Receivables
Corporation, LFI Servicing Corporation, as Master Servicer, each of the Servicers
party thereto and The Chase Manhattan Bank, as Trustee.
10.9* Receivables Sale Agreement, dated as of August 5, 1996, among LFI Receivables
Corporation, the Sellers named therein and the Servicers named therein.
10.10* Stockholders' Agreement, dated as of August 5, 1996, among Masco Corporation,
FURNISHINGS INTERNATIONAL INC., 399 Venture Partners, Inc., Associate Madison
Companies, Inc., and the other stockholders named therein.
10.11* Registration Rights Agreement, dated as of August 5, 1996, among Masco
Corporation, FURNISHINGS INTERNATIONAL INC., 399 Venture Partners, Inc., Associate
Madison Companies, Inc., and the other stockholders named therein.
10.12* Management Agreement, dated as of August 5, 1996, by and between FURNISHINGS
INTERNATIONAL INC. and the Company.
10.13* Tax Sharing Agreement, dated as of the 5th day of August, 1996, by and between
FURNISHINGS INTERNATIONAL INC., Simmons Upholstered Furniture Corporation, the
Company and LFI Receivables Corporation.
10.14* Transition Services Agreement, dated as of August 5, 1996, among FURNISHINGS
INTERNATIONAL INC. and Masco Corporation.
10.15* 12.0% Senior Pay-in-Kind Note of FURNISHINGS INTERNATIONAL INC. dated August 5,
1996.
10.16* Purchase Agreement dated July 31, 1996 between the Company, Chase Securities Inc.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, and the Guarantors named
therein.
12* Statement re: Computation of Ratio of Earnings to Fixed Charges
21* Subsidiaries of the Company
23.1+ Consent of Morgan, Lewis & Bockius LLP (included in opinion filed as Exhibits 5)
23.2+ Consent of Morgan, Lewis & Bockius LLP (included in opinion filed as Exhibit 8)
23.3+ Consent of Coopers & Lybrand L.L.P.
</TABLE>
- -------------------
* Previously filed
+ Filed herewith
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- ----------------------------------------------------------------------------------
<C> <S>
23.4+ Consent of Coopers & Lybrand L.L.P.
24* Powers of Attorney (included on the signature pages to this Registration
Statement)
25* Statement of Eligibility of IBJ Schroder Bank & Trust Company, as Trustee
27* Financial Data Schedule
99.1+ Form of Letter of Transmittal
99.2* Form of Notice of Guaranteed Delivery
</TABLE>
(b) Financial Statement Schedules:
1. Financial Statement Schedules filed herewith:
Schedule II Valuation and Qualifying Accounts
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
co-registrants pursuant to the provisions described under Item 20 or otherwise,
the the co-registrants have been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by a co-registrant of expenses incurred or paid by a director, officer
or controlling person of such co-registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, such co-registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned co-registrants hereby undertake:
To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form, within one
business day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
To supply by means of a post-effective amendment all information concerning
a transaction, and the company being acquired involved therein, that was not the
subject of and included in the registration statement when it became effective.
- ------------
* Previously filed
+ Filed herewith
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
LIFESTYLE FURNISHINGS
INTERNATIONAL LTD.
By /s/ WAYNE B. LYON
...................................
Wayne B. Lyon
Chairman of the Board,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------- ---------------------------------- -------------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board, President October 25, 1996
.................................. and Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Vice President, Treasurer and October 25, 1996
.................................. Chief Financial Officer
Ronald J. Hoffman (principal financial and
acounting officer)
* Director October 25, 1996
..................................
Richard M. Cashin, Jr.
* Director October 25, 1996
..................................
C. Sean Day
* Director October 25, 1996
..................................
Robert L. George
* Director October 25, 1996
..................................
John A. Morgan
* Director October 25, 1996
..................................
Donald M. Roberts
* Director October 25, 1996
..................................
David F. Thomas
</TABLE>
*By: /s/ DOUGLAS C. BARNARD
...........................................................................
Attorney-in-Fact
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
AMETEX FABRICS, INC.
By: /s/ WAYNE B. LYON
..................................
Wayne B. Lyon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities at the above-named registrant and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board and October 25, 1996
................................... Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Director, Vice President and October 25, 1996
................................... Treasurer (principal financial
Ronald J. Hoffman and accounting officer)
/s/ DOUGLAS C. BARNARD Director, Vice President and October 25, 1996
................................... Secretary
Douglas C. Barnard
</TABLE>
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
THE BERKLINE CORPORATION
By: /s/ WAYNE B. LYON
..................................
Wayne B. Lyon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities at the above-named registrant and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board and October 25, 1996
................................... Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Director, Vice President and October 25, 1996
................................... Treasurer (principal financial
Ronald J. Hoffman and accounting officer)
/s/ DOUGLAS C. BARNARD Director, Vice President and October 25, 1996
................................... Secretary
Douglas C. Barnard
</TABLE>
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
BLUE MOUNTAIN TRUCKING
CORPORATION
By: /s/ WAYNE B. LYON
..................................
Wayne B. Lyon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities at the above-named registrant and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board and October 25, 1996
................................... Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Director, Vice President and October 25, 1996
................................... Treasurer (principal financial
Ronald J. Hoffman and accounting officer)
/s/ DOUGLAS C. BARNARD Director, Vice President and October 25, 1996
................................... Secretary
Douglas C. Barnard
</TABLE>
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
CUSTOM TRUCK TIRES, INC.
By: /s/ WAYNE B. LYON
..................................
Wayne B. Lyon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities at the above-named registrant and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board and October 25, 1996
................................... Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Director, Vice President and October 25, 1996
................................... Treasurer (principal financial
Donald J. Hoffman and accounting officer)
/s/ DOUGLAS C. BARNARD Director, Vice President and October 25, 1996
................................... Secretary
Douglas C. Barnard
</TABLE>
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
D-H RETAIL SPACE, INC.
By: /s/ WAYNE B. LYON
..................................
Wayne B. Lyon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities at the above-named registrant and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board and October 25, 1996
................................... Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Director, Vice President and October 25, 1996
................................... Treasurer (principal financial
Ronald J. Hoffman and accounting officer)
/s/ DOUGLAS C. BARNARD Director, Vice President and October 25, 1996
................................... Secretary
Douglas C. Barnard
</TABLE>
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
DREXEL HERITAGE ADVERTISING, INC.
By: /s/ WAYNE B. LYON
..................................
Wayne B. Lyon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities at the above-named registrant and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board and October 25, 1996
................................... Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Director, Vice President and October 25, 1996
................................... Treasurer (principal financial
Ronald J. Hoffman and accounting officer)
/s/ DOUGLAS C. BARNARD Director, Vice President and October 25, 1996
................................... Secretary
Douglas C. Barnard
</TABLE>
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
DREXEL HERITAGE FURNISHINGS, INC.
By: /s/ WAYNE B. LYON
..................................
Wayne B. Lyon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities at the above-named registrant and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board and October 25, 1996
................................... Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Director, Vice President and October 25, 1996
................................... Treasurer (principal financial
Ronald J. Hoffman and accounting officer)
/s/ DOUGLAS C. BARNARD Director, Vice President and October 25, 1996
................................... Secretary
Douglas C. Barnard
</TABLE>
II-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
DREXEL HERITAGE HOME
INSPIRATIONS, INC.
By: /s/ WAYNE B. LYON
..................................
Wayne B. Lyon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities at the above-named registrant and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board and October 25, 1996
................................... Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Director, Vice President and October 25, 1996
................................... Treasurer (principal financial
Ronald J. Hoffman and accounting officer)
/s/ DOUGLAS C. BARNARD Director, Vice President and October 25, 1996
................................... Secretary
Douglas C. Barnard
</TABLE>
II-14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
HENREDON FURNITURE INDUSTRIES, INC.
By: /s/ WAYNE B. LYON
..................................
Wayne B. Lyon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities at the above-named registrant and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board and October 25, 1996
................................... Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Director, Vice President and October 25, 1996
................................... Treasurer (principal financial
Ronald J. Hoffman and accounting officer)
/s/ DOUGLAS C. BARNARD Director, Vice President and October 25, 1996
................................... Secretary
Douglas C. Barnard
</TABLE>
II-15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
HENREDON TRANSPORTATION COMPANY
By: /s/ WAYNE B. LYON
..................................
Wayne B. Lyon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities at the above-named registrant and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board and October 25, 1996
................................... Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Director, Vice President and October 25, 1996
................................... Treasurer (principal financial
Ronald J. Hoffman and accounting officer)
/s/ DOUGLAS C. BARNARD Director, Vice President and October 25, 1996
................................... Secretary
Douglas C. Barnard
</TABLE>
II-16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
INTERIOR FABRIC DESIGN, INC.
By: /s/ WAYNE B. LYON
..................................
Wayne B. Lyon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities at the above-named registrant and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board and October 25, 1996
................................... Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Director, Vice President and October 25, 1996
................................... Treasurer (principal financial
Ronald J. Hoffman and accounting officer)
/s/ DOUGLAS C. BARNARD Director, Vice President and October 25, 1996
................................... Secretary
Douglas C. Barnard
</TABLE>
II-17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
INTRO EUROPE, INC.
By: /s/ WAYNE B. LYON
..................................
Wayne B. Lyon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities at the above-named registrant and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board and October 25, 1996
................................... Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Director, Vice President and October 25, 1996
................................... Treasurer (principal financial
Ronald J. Hoffman and accounting officer)
/s/ DOUGLAS C. BARNARD Director, Vice President and October 25, 1996
................................... Secretary
Douglas C. Barnard
</TABLE>
II-18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
LA BARGE, INC.
By: /s/ WAYNE B. LYON
..................................
Wayne B. Lyon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities at the above-named registrant and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board and October 25, 1996
................................... Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Director, Vice President and October 25, 1996
................................... Treasurer (principal financial
Ronald J. Hoffman and accounting officer)
/s/ DOUGLAS C. BARNARD Director, Vice President and October 25, 1996
................................... Secretary
Douglas C. Barnard
</TABLE>
II-19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
LIFESTYLE HOLDINGS LTD.
By: /s/ WAYNE B. LYON
..................................
Wayne B. Lyon
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities at the above-named registrant and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board and October 25, 1996
................................... Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Director, Vice President and October 25, 1996
................................... Treasurer (principal financial
Ronald J. Hoffman and accounting officer)
/s/ DOUGLAS C. BARNARD Director, Vice President, General October 25, 1996
................................... Counsel and Secretary
Douglas C. Barnard
</TABLE>
II-20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
LEXINGTON FURNITURE INDUSTRIES, INC.
By: /s/ WAYNE B. LYON
..................................
Wayne B. Lyon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities at the above-named registrant and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board and October 25, 1996
................................... Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Director, Vice President and October 25, 1996
................................... Treasurer (principal financial
Ronald J. Hoffman and accounting officer)
/s/ DOUGLAS C. BARNARD Director, Vice President and October 25, 1996
................................... Secretary
Douglas C. Barnard
</TABLE>
II-21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
MAITLAND-SMITH, INC.
By: /s/ WAYNE B. LYON
..................................
Wayne B. Lyon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities at the above-named registrant and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board and October 25, 1996
................................... Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Director, Vice President and October 25, 1996
................................... Treasurer (principal financial
Ronald J. Hoffman and accounting officer)
/s/ DOUGLAS C. BARNARD Director, Vice President and October 25, 1996
................................... Secretary
Douglas C. Barnard
</TABLE>
II-22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
MARBRO LAMP COMPANY
By: /s/ WAYNE B. LYON
..................................
Wayne B. Lyon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities at the above-named registrant and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board and October 25, 1996
................................... Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Director, Vice President and October 25, 1996
................................... Treasurer (principal financial
Ronald J. Hoffman and accounting officer)
/s/ DOUGLAS C. BARNARD Director, Vice President and October 25, 1996
................................... Secretary
Douglas C. Barnard
</TABLE>
II-23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
RAMM, SON & CROCKER, INC.
By: /s/ WAYNE B. LYON
..................................
Wayne B. Lyon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities at the above-named registrant and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board and October 25, 1996
................................... Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Director, Vice President and October 25, 1996
................................... Treasurer (principal financial
Ronald J. Hoffman and accounting officer)
/s/ DOUGLAS C. BARNARD Director, Vice President and October 25, 1996
................................... Secretary
Douglas C. Barnard
</TABLE>
II-24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
ROBERT ALLEN FABRICS, INC.
By: /s/ WAYNE B. LYON
..................................
Wayne B. Lyon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities at the above-named registrant and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board and October 25, 1996
................................... Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Director, Vice President and October 25, 1996
................................... Treasurer (principal financial
Ronald J. Hoffman and accounting officer)
/s/ DOUGLAS C. BARNARD Director, Vice President and October 25, 1996
................................... Secretary
Douglas C. Barnard
</TABLE>
II-25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
ROBERT ALLEN FABRICS
OF NEW YORK, INC.
By: /s/ WAYNE B. LYON
..................................
Wayne B. Lyon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities at the above-named registrant and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board and October 25, 1996
................................... Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Director, Vice President and October 25, 1996
................................... Treasurer (principal financial
Ronald J. Hoffman and accounting officer)
/s/ DOUGLAS C. BARNARD Director, Vice President and October 25, 1996
................................... Secretary
Douglas C. Barnard
</TABLE>
II-26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
SUNBURY TEXTILE MILLS, INC.
By: /s/ WAYNE B. LYON
..................................
Wayne B. Lyon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities at the above-named registrant and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board and October 25, 1996
................................... Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Director, Vice President and October 25, 1996
................................... Treasurer (principal financial
Ronald J. Hoffman and accounting officer)
/s/ DOUGLAS C. BARNARD Director, Vice President and October 25, 1996
................................... Secretary
Douglas C. Barnard
</TABLE>
II-27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
UNIVERSAL FURNITURE INDUSTRIES, INC.
By: /s/ WAYNE B. LYON
..................................
Wayne B. Lyon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities at the above-named registrant and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board and October 25, 1996
................................... Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Director, Vice President and October 25, 1996
................................... Treasurer (principal financial
Ronald J. Hoffman and accounting officer)
/s/ DOUGLAS C. BARNARD Director, Vice President and October 25, 1996
................................... Secretary
Douglas C. Barnard
</TABLE>
II-28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 25th day of October, 1996.
UNIVERSAL FURNITURE LIMITED
By: /s/ WAYNE B. LYON
..................................
Wayne B. Lyon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities at the above-named registrant and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------- -----------------
<S> <C> <C>
/s/ WAYNE B. LYON Chairman of the Board and October 25, 1996
................................... Chief Executive Officer
Wayne B. Lyon (principal executive officer)
/s/ RONALD J. HOFFMAN Director, Vice President and October 25, 1996
................................... Treasurer (principal financial
Ronald J. Hoffman and accounting officer)
/s/ DOUGLAS C. BARNARD Director, Vice President and October 25, 1996
................................... Secretary
Douglas C. Barnard
</TABLE>
II-29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Masco Corporation:
In connection with our audits of the combined financial statements of the
Masco Home Furnishings Group as of December 31, 1995 and 1994, and for each of
the three years in the period ended December 31, 1995, which financial
statements are included in the Prospectus, we have also audited the financial
statement schedule listed in Item 21 herein.
In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included herein.
Coopers & Lybrand L.L.P.
Detroit, Michigan
March 1, 1996
S-1
<PAGE>
MASCO HOME FURNISHINGS GROUP
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
COLUMN B COLUMN C COLUMN D COLUMN E
------------ -------------------------- ---------- ----------
ADDITIONS
--------------------------
CHARGED
BALANCE AT CHARGED (CREDITED) BALANCE AT
BEGINNING TO COSTS TO OTHER END OF
OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS PERIOD
------------ ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts,
deducted from accounts
receivable in the balance sheet:
1995.................... $7.7 $6.6 $5.3 $9.0
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
1994.................... $9.9 $5.7 $7.9 $7.7
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
1993.................... $7.7 $7.1 $4.9 $9.9
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- ----------------------------------------------------------------------------------
<C> <S>
3.1* Certificate of Incorporation of LIFESTYLE FURNISHINGS INTERNATIONAL LTD. (the
"Company")
3.2* Certificate of Incorporation of Ametex Fabrics, Inc.
3.3* Certificate of Incorporation of The Berkline Corporation
3.4* Articles of Incorporation of Blue Mountain Trucking Corporation
3.5* Articles of Incorporation of Custom Truck Tires, Inc.
3.6* Certificate of Incorporation of D-H Retail Space, Inc.
3.7* Certificate of Incorporation of Drexel Heritage Advertising, Inc.
3.8* Certificate of Incorporation of Drexel Heritage Furnishings Inc.
3.9* Articles of Incorporation of Drexel Heritage Home Inspirations, Inc.
3.10* Certificate of Incorporation of Henredon Furniture Industries, Inc.
3.11* Articles of Incorporation of Henredon Transportation Company
3.12* Certificate of Incorporation of Interior Fabric Design, Inc.
3.13* Articles of Incorporation of Intro Europe, Inc.
3.14* Articles of Incorporation of La Barge, Inc.
3.15* Certificate of Incorporation of Lexington Furniture Industries, Inc.
3.16* Certificate of Incorporation of Lifestyle Holdings Ltd.
3.17* Articles of Incorporation of Maitland-Smith, Inc.
3.18* Articles of Incorporation of Marbro Lamp Company
3.19* Certificate of Incorporation of Ramm, Son & Crocker, Inc.
3.20* Certificate of Incorporation of Robert Allen Fabrics, Inc.
3.21* Certificate of Incorporation of Robert Allen Fabrics of N.Y., Inc.
3.22* Certificate of Incorporation of Sunbury Textile Mills, Inc.
3.23* Certificate of Incorporation of Universal Furniture Industries
3.24* Certificate of Incorporation of Universal Furniture Limited
3.25* By-Laws of the Company
3.26* By-Laws of Ametex Fabrics, Inc.
3.27* By-Laws of The Berkline Corporation
3.28* By-Laws of Blue Mountain Trucking Corporation
3.29* By-Laws of Custom Truck Tires, Inc.
3.30* By-Laws of D-H Retail Space, Inc.
3.31* By-Laws of Drexel Heritage Advertising, Inc.
3.32* By-Laws of Drexel Heritage Furnishings Inc.
3.33* By-Laws of Drexel Heritage Home Inspirations, Inc.
3.34* By-Laws of Henredon Furniture Industries, Inc.
3.35* By-Laws of Henredon Transportation Company
3.36* By-Laws of Interior Fabric Design, Inc.
3.37* By-Laws of Intro Europe, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- ----------------------------------------------------------------------------------
<C> <S>
3.38* By-Laws of La Barge, Inc.
3.39* By-Laws of Lexington Furniture Industries, Inc.
3.40* By-Laws of Lifestyle Holdings Ltd.
3.41* By-Laws of Maitland-Smith, Inc.
3.42* By-Laws of Marbro Lamp Company
3.43* By-Laws of Ramm, Son & Crocker, Inc.
3.44* By-Laws of Robert Allen Fabrics, Inc.
3.45* By-Laws of Robert Allen Fabrics of N.Y., Inc.
3.46* By-Laws of Sunbury Textile Mills, Inc.
3.47* By-Laws of Universal Furniture Industries
3.48* By-Laws of Universal Furniture Limited
4* Indenture between the Company and IBJ Schroder Bank & Trust Company, as Trustee,
dated as of August 5, 1996.
5+ Opinion of Morgan, Lewis & Bockius LLP
8+ Opinion of Morgan, Lewis & Bockius LLP regarding tax matters
10.1* Acquisition Agreement between FURNISHINGS INTERNATIONAL INC. and Masco Corporation
dated as of March 29, 1996
10.2* Amendment No. 1 to Acquisition Agreement dated as of June 21, 1996
10.3* Amendment No. 2 to Acquisition Agreement dated as of August 5, 1996
10.4* Credit Agreement dated as of August 5, 1996 among FURNISHINGS INTERNATIONAL INC.,
the Company, the subsidiary borrowers named therein, the lenders named therein and
The Chase Manhattan Bank, as Swingline Lender, Administrative Agent and Collateral
Agent, Chase Manhattan Bank Delaware as Issuing Bank
10.5* Exchange and Registration Rights Agreement between the Company, the Guarantors
named therein, Chase Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, dated as of August 5, 1996.
10.6* Pooling Agreement, dated as of August 5, 1996, among LFI Receivables Corporation,
LFI Servicing Corporation and The Chase Manhattan Bank, as Trustee.
10.7* Series 1996-A Supplement, dated as of August 5, 1996, among LFI Receivables
Corporation, LFI Servicing Corporation, Chemical Bank, as Agent and as Initial
Purchaser, and The Chase Manhattan Bank, as Trustee.
10.8* Servicing Agreement, dated as of August 5, 1996, among LFI Receivables
Corporation, LFI Servicing Corporation, as Master Servicer, each of the Servicers
party thereto and The Chase Manhattan Bank, as Trustee.
10.9* Receivables Sale Agreement, dated as of August 5, 1996, among LFI Receivables
Corporation, the Sellers named therein and the Servicers named therein.
10.10* Stockholders' Agreement, dated as of August 5, 1996, among Masco Corporation,
FURNISHINGS INTERNATIONAL INC., 399 Venture Partners, Inc., Associate Madison
Companies, Inc., and the other stockholders named therein.
10.11* Registration Rights Agreement, dated as of August 5, 1996, among Masco
Corporation, FURNISHINGS INTERNATIONAL INC., 399 Venture Partners, Inc., Associate
Madison Companies, Inc., and the other stockholders named therein.
10.12* Management Agreement, dated as of August 5, 1996, by and between FURNISHINGS
INTERNATIONAL INC. and the Company.
10.13* Tax Sharing Agreement, dated as of the 5th day of August, 1996, by and between
FURNISHINGS INTERNATIONAL INC., Simmons Upholstered Furniture Corporation, the
Company and LFI Receivables Corporation.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- ----------------------------------------------------------------------------------
<C> <S>
10.14* Transition Services Agreement, dated as of August 5, 1996, among FURNISHINGS
INTERNATIONAL INC. and Masco Corporation.
10.15* 12.0% Senior Pay-in-Kind Note of FURNISHINGS INTERNATIONAL INC. dated August 5,
1996.
10.16* Purchase Agreement dated July 31, 1996 between the Company, Chase Securities Inc.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, and the Guarantors named
therein.
12* Statement re: Computation of Ratio of Earnings to Fixed Charges
21* Subsidiaries of the Company
23.1+ Consent of Morgan, Lewis & Bockius LLP (included in opinion filed as Exhibits 5)
23.2+ Consent of Morgan, Lewis & Bockius LLP (included in opinion filed as Exhibit 8)
23.3+ Consent of Coopers & Lybrand L.L.P.
23.4+ Consent of Coopers & Lybrand L.L.P.
24* Powers of Attorney (included on the signature pages to this Registration
Statement)
25* Statement of Eligibility of IBJ Schroder Bank & Trust Company, as Trustee
27* Financial Data Schedule
99.1+ Form of Letter of Transmittal
99.2* Form of Notice of Guaranteed Delivery
</TABLE>
- ------------
<TABLE>
<C> <S>
* Previously filed.
+ Filed herewith.
</TABLE>
<PAGE>
Exhibit 5
MORGAN, LEWIS & BOCKIUS LLP
101 Park Avenue
New York, New York 10178
October 25, 1996
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
and the Guarantor Subsidiaries (as defined herein)
1300 National Highway
Thomasville, NC 27360
Re: Registration Statement on Form S-4 (No. 333-11905)
--------------------------------------------------
Ladies and Gentlemen:
In connection with the Registration Statement on Form S-4 (the "Registration
Statement") of LIFESTYLE FURNISHINGS INTERNATIONAL LTD., a Delaware corporation
(the "Company), and certain subsidiaries of the Company (the "Guarantor
Subsidiaries", and collectively with the Company, the "Co-Registrants") which
the Co-Registrants have filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), we have been requested to render our opinion as to the legality of up to
$200,000,000 aggregate principal amount of the Company's 10 7/8% Senior
Subordinated Notes due 2006 (the "New Notes") and the related guarantees thereof
by the Guarantor Subsidiaries (the "Subsidiary Guaranties"). The New Notes are
to be issued in exchange for an equal aggregate principal amount of the
Company's outstanding 10 7/8% Senior Subordinated Notes due 2006 (the "Old
Notes") pursuant to the Exchange and Registration Rights Agreement dated as of
August 5, 1996 among the Company, the Guarantor Subsidiaries, and the Initial
Purchasers (as defined therein). The New Notes are to be issued by the Company
pursuant to the terms of an Indenture dated as of August 5, 1996 (the
"Indenture") among the Company, the Guarantor Subsidiaries, and IBJ Schroder
Bank & Trust, as trustee (the "Trustee").
In this regard, we have examined originals or copies certified or otherwise
identified to our satisfaction of (i) the Registration Statement, (ii) the
Indenture, (iii) the certificate or articles of incorporation and the by-laws of
each of the Company and the Guarantor Subsidiaries and (iv) records of certain
corporate proceedings of each of the Company and the Guarantor Subsidiaries
<PAGE>
relating to, among other things, the issuance and sale of the Old Notes, and the
issuance and sale of the New Notes pursuant to an offer to exchange such New
Notes for all outstanding Old Notes, as described in the Registration Statement.
In addition, we have made such other examinations of law and fact as we
considered necessary in order to form a basis for the opinion hereinafter
expressed.
In our examination of the aforesaid documents, we have assumed without
independent investigation the genuiness of all signatures, the legal capacity of
all individuals who have executed any of the documents, the authenticity of all
documents submitted to us as originals, the conformity to the original documents
of all documents submitted to us as certified, reproduced or conformed copies
and the authenticity of all such documents. We have also assumed that the
Indenture has been duly authorized, executed and delivered by the Company and
each Guarantor Subsidiary, and that the terms of the Old Notes and of the New
Notes have been established in accordance with the terms thereof. In addition,
we have assumed that the Indenture has been duly authorized, executed and
delivered by the Trustee and constitutes the legal, valid and binding agreement
of the Trustee.
In rendering the opinion set forth below, we have assumed that the new notes and
the Subsidiary Guarantees will be issued as described in the Registration
Statement.
Based upon the foregoing examination and assumptions and in reliance thereon, it
is our opinion that when the New Notes are issued in accordance with the terms
of the Indenture, duly executed by the Company, duly authenticated by the
Trustee, and issued and delivered against exchange of the Old Notes in
accordance with the terms set forth in the prospectus that forms a part of the
Registration Statement, such New Notes and the Subsidiary Guaranties will
constitute the legal, valid and binding obligations of the Company and the
Guarantor Subsidiaries, respectively.
Our opinion is subject to: (i) the effect of applicable bankruptcy,
reorganization, insolvency, moratorium, arrangement and other laws affecting
creditors' rights, including, without limitation, the effect of statutory or
other laws regarding fraudulent conveyances, fraudulent transfers and
preferentials transfers; and (ii) the limitations imposed by general principles
of equity (regardless of whether such enforceability is considered in a
proceeding at law or in equity).
This opinion is limited to the federal laws of the United States of America
and the laws of the State of New York. The opinions expressed herein are
based upon the law and circumstances as they are in effect or exist on the
date hereof, and we assume no obligation to revise or supplement this letter
in the event of future changes in the law or interpretation thereof with
respect to circumstances or events that may occur subsequent to the date
hereof. We are expressing no opinion as to the effect of the laws of any
other jurisdiction.
<PAGE>
We consent to the filing of this opinion as an exhibit to the Registration
Statement, and we further consent to the use of our name under the caption
"Legal Matters" in the Registration Statement and the prospectus which forms a
part thereof. In giving this consent, we do not admit that we are within the
category of persons whose consent is required under Section 7 of the Securities
Act or the Rules and Regulations of the Commission promulgated thereunder.
Very truly yours,
MORGAN, LEWIS & BOCKIUS LLP
<PAGE>
EXHIBIT 8
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, New York 10178
October 25, 1996
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
and the Guarantor Subsidiaries
1300 National Highway
Thomasville, North Carolina 27360
Re: Registration Statement on Form S-4
- --------------------------------------
Ladies and Gentlemen:
We have acted as United States counsel to LIFESTYLE FURNISHINGS INTERNATIONAL
LTD. (the "Company") and certain subsidiaries thereof (the "Guarantor
Subsidiaries") in connection with the registration under the United States
Securities Act of 1933, as amended (the "Securities Act"), of up to
$200,000,000 aggregate principal amount of the Company's 10 7/8% Senior
Subordinated Notes due 2006 (the "New Notes") and the exchange (the
"Exchange") of the New Notes for a like principal amount of 10 7/8% Senior
Notes due 2006.
We are giving this opinion in connection with the Registration Statement on Form
S-4 (Registration No. 333-11905), and any amendments thereto, relating to the
registration by the Company of the New Notes to be offered in the Exchange,
filed by the Company and the Guarantor Subsidiaries with the Securities and
Exchange Commission (the "Commission") pursuant to the Securities Act and the
rules and regulations of the Commission promulgated thereunder.
Capitalized terms used herein and not otherwise defined herein have the
respective meanings ascribed to them in the Registration Statement.
In arriving at the opinion expressed below, we have examined and relied upon the
following documents:
(a) the Registration Statement;
(b) the form of the New Notes;
(c) the Indenture between the Company and IBJ Schroder Bank & Trust
Company; and
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
and the Guarantor Subsidiaries
October 25, 1996
Page 2
(d) the Registration Rights Agreement.
We have also read and relied upon originals or copies, certified or otherwise
identified to our satisfaction, of such records of the Company and such
certificates and representations of officers and representatives of the Company
and we have made such investigations of law as we have deemed appropriate as a
basis for the opinion expressed below. In our examination, we have assumed the
authenticity of original documents, the accuracy of copies and the genuineness
of signatures. We understand and assume that (i) each agreement referred to in
clauses (a) through (d) above represents the valid and binding obligation of the
respective parties thereto, enforceable in accordance with its respective terms,
and the entire agreement between the parties with respect to the subject matter
thereof, (ii) the parties to each agreement have complied, and will comply, with
all of their respective covenants, agreements and undertakings contained
therein, and (iii) the transactions provided for by each agreement were and will
be carried out in accordance with their terms.
Our opinion is based upon existing United States federal income tax laws,
regulations, administrative pronouncements and judicial decisions. All such
authorities are subject to change, either prospectively or retroactively. No
assurance can be provided as to the effect of any such change upon our opinion.
The opinion set forth herein has no binding effect on the United States Internal
Revenue Service or the courts of the United States. No assurance can be given
that, if the matter were contested, a court would agree with the opinion set
forth herein.
We have advised the Company in connection with the description of the material
United States federal income tax consequences to U.S. Holders that appears in
the Registration Statement under the caption "Certain Federal Income Tax
Considerations" and we confirm that, in our opinion, such discussion, to the
extent that it relates to matters of United States federal income tax law, is
accurate in all material respects. While such description discusses the
material anticipated federal income tax consequences applicable to certain U.S.
Holders, it does not purport to discuss all United States tax consequences and
our opinion is limited to those United States tax consequences specifically
discussed therein.
In giving the foregoing opinion, we express no opinion other than as to the
federal income tax law of the United States of America.
<PAGE>
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
and the Guarantor Subsidiaries
October 25, 1996
Page 3
We are furnishing this letter in our capacity as United States counsel to the
Company and this letter is solely for the Company's benefit. This letter is not
to be used, circulated, quoted or otherwise referred to for any other purpose,
except as set forth below.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and we further consent to the use of our name under the
captions "Legal Matters" and "Certain Federal Income Tax Considerations" in the
Registration Statement. In giving this consent, we do not thereby admit that we
are within the category of persons whose consent is required to be filed with
the Registration Statement under the provisions of the Securities Act or the
rules and regulations promulgated thereunder.
Very truly yours,
MORGAN, LEWIS & BOCKIUS LLP
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of
our reports dated March 1, 1996, except for the last Note for which the date
is August 5, 1996, on our audits of the financial statements and financial
statement schedule of the Masco Home Furnishings Group. We also consent to
the reference to our firm under the caption "Experts".
Coopers & Lybrand L.L.P.
Detroit, Michigan
October 24, 1996
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of our
report dated August 5, 1996, on our audit of the balance sheet of Lifestyle
Furnishings International Ltd. We also consent to the reference to our firm
under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Greensboro, North Carolina
October 24, 1996
<PAGE>
Exhibit 99.1
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1996, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF OLD NOTES MAY BE
WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M. ON THE EXPIRATION DATE.
LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
LETTER OF TRANSMITTAL
TO TENDER FOR EXCHANGE
10 7/8% SENIOR SUBORDINATED NOTES DUE 2006
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
IBJ SCHRODER BANK & TRUST COMPANY
FOR INFORMATION BY TELEPHONE: (212) 858-2103
<TABLE>
<CAPTION>
By Registered or Certified Mail: By Hand or Overnight Courier:
- ----------------------------------------------------- -----------------------------------------------------
<S> <C>
IBJ Schroder Bank & Trust Company IBJ Schroder Bank & Trust Company
P.O. Box 84 One State Street
Bowling Green Station New York, New York 10004
New York, New York 10274-0084 Attention: Securities Processing Window,
Attention: Reorganization Operations Department Subcellar One (SC-1)
By Facsimile: (212) 858-2611
Confirm by telephone:
(212) 858-2103
(Originals of all documents sent by facsimile should be sent
promptly by registered or certified mail, by hand or by overnight courier)
</TABLE>
Delivery of this instrument to an address other than as set forth above or
transmission of instructions via a facsimile number other than the one listed
above will not constitute a valid delivery. The instructions accompanying this
Letter of Transmittal should be read carefully before this Letter of Transmittal
is completed.
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE NEW NOTES FOR THEIR OLD NOTES
PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR OLD
NOTES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
The undersigned acknowledges receipt of the Prospectus dated , 1996 (the
"Prospectus") of LIFESTYLE FURNISHINGS INTERNATIONAL LTD. (the "Company") and
this Letter of Transmittal (the "Letter of Transmittal"), which together
constitute the Company's offer (the "Exchange Offer") to exchange $1,000
principal amount of its 10 7/8% Senior Subordinated Notes due 2006 (the "New
Notes"), which have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to a Registration Statement of which the
Prospectus is a part, for each $1,000 principal amount of its outstanding 10
7/8% Senior Subordinated Notes due 2006 (the "Old Notes"), of which $200,000,000
principal amount is outstanding, upon the terms and conditions set forth in the
Prospectus. Other capitalized terms used but not defined herein have the meaning
given to them in the Prospectus.
<PAGE>
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. Interest on the New Notes will accrue from the last interest payment
date on which interest was paid on the Old Notes surrendered in exchange
therefor or, if no interest has been paid on the Old Notes, from the date of
original issue of the Old Notes. Holders of Old Notes accepted for exchange will
be deemed to have waived the right to receive any other payments or accrued
interest on the Old Notes. The Company reserves the right, at any time or from
time to time, to extend the Exchange Offer at its discretion, in which event the
term "Expiration Date" shall mean the latest time and date to which the Exchange
Offer is extended. The Company shall notify holders of the Old Notes of any
extension by means of a press release or other public announcement prior to 9:00
A.M., New York City time, on the next business day after the previously
scheduled Expiration Date.
This Letter of Transmittal is to be used by Holders if: (i) certificates
representing Old Notes are to be physically delivered to the Exchange Agent
herewith by Holders; (ii) tender of Old Notes is to be made by book-entry
transfer to the Exchange Agent's account at The Depository Trust Company
("DTC"), pursuant to the procedures set forth in the Prospectus under "The
Exchange Offer--Procedures for Tendering" by any financial institution that is a
participant in DTC and whose name appears on a security position listing as the
owner of Old Notes; or (iii) tender of Old Notes is to be made according to the
guaranteed delivery procedures set forth in the Prospectus under "The Exchange
Offer--Guaranteed Delivery." DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE
DELIVERY TO THE EXCHANGE AGENT.
The term "Holder" with respect to the Exchange Offer means any person: (i)
in whose name Old Notes are registered on the books of the Company or any other
person who has obtained a properly completed bond power from the registered
Holder; or (ii) whose Old Notes are held of record by DTC who desires to deliver
such old Notes by book-entry transfer at DTC. The undersigned has completed,
executed and delivered this Letter of Transmittal to indicate the action the
undersigned desires to take with respect to the Exchange Offer.
Questions and requests for assistance or for additional copies of the
Prospectus, this Letter of Transmittal and the Notice of Guaranteed Delivery may
be directed to the Exchange Agent. See Instruction 11 herein.
HOLDERS WHO WISH TO ACCEPT THE EXCHANGE OFFER AND TENDER THEIR OLD NOTES
MUST COMPLETE THIS LETTER OF TRANSMITTAL IN ITS ENTIRETY.
<PAGE>
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE CHECKING ANY BOX BELOW
<TABLE>
<CAPTION>
DESCRIPTION OF 10 7/8% SENIOR SUBORDINATED NOTES DUE 2006 (OLD NOTES)
AGGREGATE
PRINCIPAL PRINCIPAL
AMOUNT AMOUNT
NAME(S) AND ADDRESS(ES) OF REPRESENTED TENDERED (IF
REGISTERED HOLDER(S) CERTIFICATE BY LESS
(PLEASE FILL IN, IF BLANK) NUMBER(S)* CERTIFICATE(S) THAN ALL)**
Total
<S> <C> <C> <C>
</TABLE>
* Need not be completed by Holders tendering by book-entry transfer.
** Unless indicated in the column labeled "Principal Amount Tendered," any
tendering Holder of Old Notes will be deemed to have tendered the entire
aggregate principal amount represented by the column labeled "Aggregate
Principal Amount Represented by Certificate(s)." If the space provided
above is inadequate, list the certificate numbers and principal amounts on
a separate signed schedule and affix the list to this Letter of
Transmittal. The minimum permitted tender is $1,000 in principal amount of
Old Notes. All other tenders must be integral multiples of $1,000.
<PAGE>
SPECIAL PAYMENT INSTRUCTIONS
(SEE INSTRUCTIONS 4, 5 AND 6)
To be completed ONLY if certificates for Old Notes in a principal amount not
tendered or not accepted for exchange, or New Notes issued in exchange for Old
Notes accepted for exchange, are to be issued in the name of someone other than
the undersigned, or if the Old Notes tendered by book-entry transfer that are
not accepted for exchange are to be credited to an account maintained by DTC.
Issue certificate(s) to:
Name............................................................................
(PLEASE PRINT)
Address.........................................................................
...............................................................................
(INCLUDE ZIP CODE)
...............................................................................
(TAX IDENTIFICATION OR SOCIAL SECURITY NO.)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 4, 5 AND 6)
To be completed ONLY if certificates for Old Notes in a principal amount not
tendered or not accepted for exchange, or New Notes issued in exchange for Old
Notes accepted for exchange, are to be sent to someone other than the
undersigned, or to the undersigned at an address other than that shown above.
Mail to:
Name............................................................................
(PLEASE PRINT)
Address.........................................................................
...............................................................................
(INCLUDE ZIP CODE)
...............................................................................
(TAX IDENTIFICATION OR SOCIAL SECURITY NO.)
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
TO THE EXCHANGE AGENT'S ACCOUNT AT DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:..............................................
DTC Book-Entry Account No.:.................................................
Transaction Code No.:.......................................................
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING:
Name(s) of Registered Holder(s):............................................
Window Ticket Number (if any):..............................................
Date of Execution of Notice of Guaranteed Delivery:.........................
IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING:
Account Number: ..................... Transaction Code Number:.............
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:.......................................................................
Address:....................................................................
....................................................................
<PAGE>
Ladies and Gentlemen:
Subject to the terms and conditions of the Exchange Offer, the undersigned
hereby tenders to the Company the principal amount of Old Notes indicated above.
Subject to and effective upon the acceptance for exchange of the principal
amount of Old Notes tendered in accordance with this Letter of Transmittal, the
undersigned sells, assigns and transfers to, or upon the order of, the Company
all right, title and interest in and to the Old Notes tendered hereby. The
undersigned hereby irrevocably constitutes and appoints the Exchange Agent its
agent and attorney-in-fact (with full knowledge that the Exchange Agent also
acts as the agent of the Company and as Trustee under the Indenture for the Old
Notes and New Notes) with respect to the tendered Old Notes with full power of
substitution to (i) deliver certificates for such Old Notes to the Company, or
transfer ownership of such Old Notes on the account books maintained by DTC and
deliver all accompanying evidence of transfer and authenticity to, or upon the
order of, the Company and (ii) present such Old Notes for transfer on the books
of the Company and receive all benefits and otherwise exercise all rights of
beneficial ownership of such Old Notes, all in accordance with the terms and
subject to the conditions of the Exchange Offer. The power of attorney granted
in this paragraph shall be deemed irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Old Notes
tendered hereby and that the Company will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim, when the same are acquired by the Company. The
undersigned hereby further represents that any New Notes acquired in exchange
for Old Notes tendered hereby will have been acquired in the ordinary course of
business of the Holder receiving such New Notes, whether or not such person is
the Holder, that neither the Holder nor any such other person has an arrangement
or understanding with any person to participate in the distribution of such New
Notes and that neither the Holder nor any such other person is an "affiliate,"
as defined in Rule 405 under the Securities Act, of the Company or any of its
subsidiaries.
The undersigned also acknowledges that this Exchange Offer is being made
in reliance on an interpretation by the staff of the Securities and Exchange
Commission (the "SEC") that the New Notes issued in exchange for the Old
Notes pursuant to the Exchange Offer may be offered for resale, resold and
otherwise transferred by holders thereof (other than any such holder that is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holders' business and such holders
have no intent, or oral arrangements with any person, to participate in the
distribution of such New Notes. If the undersigned is not a broker-dealer,
the undersigned represents that it is not engaged in, and does not intend to
engage in, a distribution of New Notes. If the undersigned is a broker-dealer
that will receive New Notes for its own account in exchange for Old Notes
that were acquired as a result of market-making activities or other trading
activities, it acknowledges that it will deliver a prospectus in connection
with any resale of such New Notes; however, by so acknowledging and by
delivering a prospectus, the undersigned will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the assignment, transfer and purchase of the Old Notes
tendered hereby. All authority conferred or agreed to be conferred by this
Letter of Transmittal shall survive the death, incapacity or dissolution of the
undersigned and every obligation of the undersigned under this Letter of
Transmittal shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns, trustees in bankruptcy or other legal
representatives of the undersigned. This tender may be withdrawn only in
accordance with the procedures set forth in "The Exchange Offer--Withdrawal
Rights" section of the Prospectus.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted validly tendered Old Notes when, as and if the Company has given oral
or written notice thereof to the Exchange Agent.
If any tendered Old Notes are not accepted for exchange pursuant to the
Exchange Offer for any reason, certificates for any such unaccepted Old Notes
will be returned (except as noted below with respect to tenders through DTC),
without expense, to the undersigned at the address shown below or at a different
address as may be indicated under "Special Delivery Instructions" as promptly as
practicable after the Expiration Date.
<PAGE>
The undersigned understands that tenders of Old Notes pursuant to the
procedures described under the caption "The Exchange Offer--Procedures for
Tendering Old Notes" in the Prospectus and in the instructions hereto will
constitute a binding agreement between the undersigned and the Company upon the
terms and subject to the conditions of the Exchange Offer.
Unless otherwise indicated under "Special Payment Instructions," please
issue the certificates representing the New Notes issued in exchange for the Old
Notes accepted for exchange and return any Old Notes not tendered or not
exchanged in the name(s) of the undersigned (or in either such event in the case
of the Old Notes tendered by DTC, by credit to the undersigned's account, at
DTC). Similarly, unless otherwise indicated under "Special Delivery
Instructions," please send the certificates representing the New Notes issued in
exchange for the Old Notes accepted for exchange and any certificates for Old
Notes not tendered or not exchanged (and accompanying documents, as appropriate)
to the undersigned at the address shown below the undersigned's signature(s),
unless, in either event, tender is being made through DTC. In the event that
both "Special Payment Instructions" and "Special Delivery Instructions" are
completed, please issue the certificates representing the New Notes issued in
exchange for the Old Notes accepted for exchange and return any Old Notes not
tendered or not exchanged in the name(s) of, and send said certificates to, the
person(s) so indicated. The undersigned recognizes that the Company has no
obligation pursuant to the "Special Payment Instructions" and "Special Delivery
Instructions" to transfer any Old Notes from the name of the registered
Holder(s) thereof if the Company does not accept for exchange any of the Old
Notes so tendered.
Holders of Old Notes who wish to tender their Old Notes and (i) whose Old
Notes are not immediately available or (ii) who cannot deliver their Old Notes,
this Letter of Transmittal or any other documents required hereby to the
Exchange Agent, or cannot complete the procedure for book-entry transfer, prior
to the Expiration Date, may tender their Old Notes according to the guaranteed
delivery procedures set forth in the Prospectus under the caption "The Exchange
Offer--Guaranteed Delivery Procedures." See Instruction 1 regarding the
completion of the Letter of Transmittal printed below.
<PAGE>
PLEASE SIGN HERE WHETHER OR NOT
OLD NOTES ARE BEING PHYSICALLY TENDERED HEREBY
<TABLE>
<CAPTION>
<S> <C>
X
...................................................... ..............................
DATE
X
...................................................... ..............................
SIGNATURE(S) OF REGISTERED HOLDER(S) DATE
OR AUTHORIZED SIGNATORY
</TABLE>
Area Code and Telephone Number:.......................
The above lines must be signed by the registered Holder(s) of
Old Notes as their name(s) appear(s) on the Old Notes or, if the
Old Notes are tendered by a participant in DTC, as such
participant's name appears on a security position listing as the
owner of Old Notes, or by person(s) authorized to become
registered Holder(s) by a properly completed bond power from the
registered Holder(s), a copy of which must be transmitted with
this Letter of Transmittal. If Old Notes to which this Letter of
Transmittal relates are held of record by two or more joint
Holders, then all such Holders must sign this Letter of
Transmittal. If signature is by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or
representative capacity, such person must (i) set forth his or
her full title below and (ii) unless waived by the Company,
submit evidence satisfactory to the Company of such person's
authority as to act. See Instruction 4 regarding the completion
of this Letter of Transmittal printed below.
<TABLE>
<CAPTION>
<S> <C>
Name(s): .........................................................................................
(PLEASE PRINT)
Capacity: .........................................................................................
Address: .........................................................................................
(INCLUDE ZIP CODE)
Signature(s) Guaranteed by an Eligible Institution:
(If required by Instruction 4)
.........................................................................................
(AUTHORIZED SIGNATURE)
.........................................................................................
(TITLE)
.........................................................................................
(NAME OF FIRM)
.........................................................................................
(ADDRESS (INCLUDING ZIP CODE) AND TELEPHONE NUMBER (INCLUDING AREA CODE) OF FIRM)
Dated:............................................................................., 1996
</TABLE>
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER AND NOTES; GUARANTEED DELIVERY PROCEDURES. This
Letter of Transmittal is to be completed by noteholders, either if certificates
are to be forwarded herewith or if tenders are to be made pursuant to the
procedures for delivery by book-entry transfer set forth in "The Exchange
Offer--Book-Entry Transfer" section of the Prospectus. Certificates for all
physically tendered Old Notes, or Book-Entry Confirmation, as the case may be,
as well as a properly completed and duly executed Letter of Transmittal (or
manually signed facsimile hereof) and any other documents required by this
Letter of Transmittal, must be received by the Exchange Agent at the address set
forth herein on or prior to the Expiration Date, or the tendering holder must
comply with the guaranteed delivery procedures set forth below. Old Notes
tendered hereby must be in denominations of principal amount that are integral
multiples of $1,000.
Noteholders whose certificates for Old Notes are not immediately available
or who cannot deliver their certificates and all other required documents to the
Exchange Agent on or prior to the Expiration Date, or who cannot complete the
procedure for book-entry transfer on a timely basis, may tender their Old Notes
pursuant to the guaranteed delivery procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures" section of the Prospectus. Pursuant to
such procedures, (i) such tender must be made through an Eligible Institution
(as defined in Instruction 4 below), (ii) prior to the Expiration Date, the
Exchange Agent must receive from such Eligible Institution a properly completed
and duly executed Letter of Transmittal (or facsimile thereof) and Notice of
Guaranteed Delivery, substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Notes and the amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within five New York
Stock Exchange ("NYSE") trading days after the date of execution of the Notice
of Guaranteed Delivery, the certificates for all physically tendered Old Notes,
or a Book-Entry Confirmation, and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent, and (iii) the certificates for all physically tendered Old Notes, in
proper form for transfer, or Book-Entry Confirmation, as the case may be, and
all other documents required by this Letter of Transmittal, must be received by
the Exchange Agent within five NYSE trading days after the date of execution of
the Notice of Guaranteed Delivery.
The method of delivery of this Letter of Transmittal, the Old Notes and all
other required documents is at the election and risk of the tendering holders,
but the delivery will be deemed made only when actually received or confirmed by
the Exchange Agent. If Old Notes are sent by mail, it is suggested that the
mailing be made sufficiently in advance of the Expiration Date to permit the
delivery to the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date.
See "The Exchange Offer" section in the Prospectus.
2. TENDER BY HOLDER. Only a holder of Old Notes may tender such Old Notes
in the Exchange Offer. Any beneficial holder of Old Notes who is not the
registered holder and who wishes to tender should arrange with the registered
holder to execute and deliver this Letter of Transmittal on his or her behalf or
must, prior to completing and executing this Letter of Transmittal and
delivering his or her Old Notes, either make appropriate arrangements to
register ownership of the Old Notes in such holder's name or obtain a properly
completed bond power form the registered holder.
<PAGE>
3. PARTIAL TENDERS. Tenders of Old Notes will be accepted only in integral
multiples of $1,000. If less than the entire principal amount of any Old Notes
is tendered, the tendering holder should fill in the principal amount tendered
in the fourth column of the box entitled "Description of 10 7/8% Senior
Subordinated Notes due 2006 (Old Notes)" above. The entire principal amount of
Old Notes delivered to the Exchange Agent will be deemed to have been tendered
unless otherwise indicated. If the entire principal amount of all Old Notes is
not tendered, then Old Notes for the principal amount of Old Notes not tendered
and a certificate or certificates representing New Notes issued in exchange for
any Old Notes accepted will be sent to the holder at his or her registered
address, unless a different address is provided in the appropriate box on this
Letter of Transmittal of Transmittal, promptly after the Old Notes are accepted
for exchange.
4. SIGNATURES ON THIS LETTER OF TRANSMITTAL; POWERS OF ATTORNEY AND
ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter of Transmittal is signed
by the registered holder of the Old Notes tendered hereby, the signature must
correspond exactly with the name as written on the face of the certificates
without any change whatsoever.
If any tendered Old Notes are owned of record by two or more joint owners,
all such owners must sign this Letter of Transmittal.
If any tendered Old Notes are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many separate
copies of this Letter of Transmittal as there are different registrations of
certificates.
When this Letter of Transmittal is signed by the registered holder or
holders of the Old Notes specified herein and tendered hereby, no endorsements
of certificates or separate powers of attorney are required. If, however, the
New Notes are to be issued, or any untendered Old Notes are to be reissued, to a
person other than the registered holder, then endorsements of any certificates
transmitted hereby or separate powers of attorney are required. Signatures on
such certificate(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder or holders of any certificate(s) specified herein, such
certificate(s) must be endorsed or accompanied by appropriate powers of
attorney, in either case signed exactly as the name or names on the registered
holder or holders appear(s) on the certificate(s) and signatures on such
certificate(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal or any certificates or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, proper evidence satisfactory to the Company of their authority to so
act must be submitted.
Endorsements on certificates for Old Notes or signatures on powers of
attorney required by this Instruction 4 must be guaranteed by an eligible
guarantor institution that is a member or participant in the Securities Transfer
Agents Medallion Program, the New York Stock Exchange Medallion Signature
Program, the Stock Exchange Medallion Program, or by an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Securities Exchange
Act of 1934, as amended (collectively "Eligible Institutions").
Signatures on this Letter of Transmittal must be guaranteed by an Eligible
Institution unless the Old Notes are tendered (i) by a registered holder of Old
Notes (which term, for purposes of the Exchange Offer, includes any participant
in the Book-Entry Transfer Facility system whose name appears on a security
position listing as the holder of such Old Notes) who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" on
this Letter of Transmittal, or (ii) for the account of an Eligible Institution.
<PAGE>
5. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. Tendering holders should
indicate, in the applicable box or boxes, the name and address to which New
Notes or substitute Old Notes for principal amounts not tendered or not accepted
for exchange are to be issued or sent, if different from the name and address of
the person signing this Letter of Transmittal of Transmittal (or in the case of
tender of Old Notes through DTC, if different from DTC). In the case of issuance
in a different name, the taxpayer identification or social security number of
the person named must also be indicated. Noteholders tendering Old Notes by
book-entry transfer may request that Old Notes not exchanged be credited to such
account maintained at the Book-Entry Transfer Facility as such noteholder may
designate hereon. If no such instructions are given, such Old Notes not
exchanged will be returned to the name and address of the person signing this
Letter of Transmittal.
6. TAX IDENTIFICATION NUMBER. United States federal income tax law may
require that a holder whose offered Old Notes are accepted for exchange provide
the Company (as payer) with his, her or its correct Taxpayer Identification
Number ("TIN"), which, in the case of an exchanging holder who is an individual,
is his or her social security number. If the Company is not provided with the
correct TIN or an adequate basis for exemption, such holder may be subject to a
$50 penalty imposed by the Internal Revenue Service (the "IRS"), and payments
made with respect to the Notes may be subject to backup withholding at a 31%
rate. If withholding results in an overpayment of taxes, a refund may be
obtained. Exempt holders (including, among others, all corporations and certain
foreign individuals) are not subject to these backup withholding requirements.
See the enclosed "Guidelines for Certification of Taxpayer Identification Number
on Substitute Form W-9."
To prevent backup withholding, each exchanging holder should provide his,
her or its correct TIN by completing the Substitute Form W-9 enclosed herewith,
certifying that the TIN provided is correct and as to certain other matters. If
a foreign individual qualifies as an exempt recipient, such holder should submit
a Form W-8 signed under penalty of perjury attesting to such exempt status. Such
forms may be obtained from the Exchange Agent. If the Old Notes are in more than
one name or are not in the name of the actual owner, consult the Substitute Form
W-9 for information on which TIN to report.
7. TRANSFER TAXES. The Company will pay all transfer taxes, if any,
applicable to the exchange of Old Notes pursuant to the Exchange Offer. If,
however, certificates representing New Notes or Old Notes for principal amounts
not tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered holder
of the Old Notes tendered hereby, or if tendered Old Notes are registered in the
name of any person other than the person signing this Letter of Transmittal of
Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Old Notes pursuant to the Exchange Offer, then the amount of any
such transfer taxes (whether imposed on the registered holder or on any other
persons) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted herewith, the
amount of such transfer taxes will be billed directly to such tendering holder.
8. WAIVER OF CONDITIONS. The Company reserves the absolute right to amend,
waive or modify specified conditions in the Exchange Offer in the case of any
Old Notes tendered.
9. NO CONDITIONAL TRANSFERS. No alternative, conditional, irregular or
contingent tenders will be accepted. All tendering holders of Old Notes, by
execution of this Letter of Transmittal, shall waive any right to receive notice
of the acceptance of their Old Notes for exchange.
Neither the Company, the Exchange Agent nor any other person is obligated
to give notice of any defect or irregularity with respect to any tender of Old
Notes nor shall any of them incur any liability for failure to give any such
notice.
10. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES. Any tendering holder
whose Old Notes have been mutilated, lost, stolen or destroyed should contact
the Exchange Agent at the address indicated herein for further instructions.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests
for assistance for additional copies of the Prospectus, this Letter of
Transmittal and the Notice of Guaranteed Delivery may be directed to the
Exchange Agent at the address specified in the Prospectus.
<PAGE>
(DO NOT WRITE IN THE SPACE BELOW)
CERTIFICATE OLD NOTES OLD NOTES
SURRENDERED TENDERED ACCEPTED
<TABLE>
<CAPTION>
<S> <C>
Delivery Prepared by
- ---------------------------------------- Checked By---------------- Date------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PAYER'S NAME: LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
SUBSTITUTE Name (if joint names, list first and circle the name of the person or entity whose number
FORM W-9 you enter in Part 1 below. See instructions if your name has changed.)
DEPARTMENT OF THE TREASURY Address
INTERNAL REVENUE SERVICE
City, state and ZIP code
List account number(s) here (optional)
PART 1--PLEASE PROVIDE YOUR TAXPAYER IDENTIFICATION NUMBER Social security number
("TIN") IN THE BOX AT RIGHT AND CERTIFY BY SIGNING AND DATING or TIN
BELOW.
PART 2--Check the box if you are NOT subject to backup withholding because (1) you have not
been notified that you are subject to backup withholding as a result of failure to report
all interest or dividends, (2) the Internal Revenue Service has notified you that you are
no longer subject to backup withholding or (3) you are exempt from backup withholding. / /
Payer's Request for TIN CERTIFICATION--UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT THE PART 3--
INFORMATION PROVIDED ON THIS FORM IS TRUE, CORRECT AND COMPLETE. AWAITING
Signature Date TIN / /
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE NOTES. PLEASE REVIEW
THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER OR SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
