As filed with the Securities and Exchange Commission on August 3, 1999
Registration No. 333-83207
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
FALCON PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 2599 43-0730877
(State or Other Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Classification Identification Number)
Incorporation or Code Number
Organization)
9387 Dielman Industrial Drive, St. Louis, Missouri 63132
(314) 991-9200
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Michael J. Dreller
Chief Financial Officer
9387 Dielman Industrial Drive, St. Louis, Missouri 63132
(314) 991-9200
Fax: (314) 991-9295
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
Copies to:
Robert H. Wexler, Esq.
Gallop, Johnson & Neuman, L.C.
101 South Hanley Road, 16th Floor
St. Louis, Missouri 63105
(314) 862-1200
Fax (314) 862-1219
--------------------------
Approximate Date of Commencement of Proposed Offer to the Public. As
soon as practicable after this registration statement becomes effective.
If the securities being registered are being offered in connection with
the formation of a holding company and there is compliance with General
Instruction G, check the following box. |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
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 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>
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Falcon Products, Inc.
Offer to Exchange
11 3/8% Senior Subordinated Notes due 2009, Series B
for any or all outstanding
11 3/8% Senior Subordinated Notes due 2009, Series A
of
Falcon Products, Inc.
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The Exchange Offer will expire at 12:00 midnight, New York City time,
on August 30, 1999, unless extended.
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The Company:
- We are a leading supplier of furniture and related products for the
office, food service, hospitality (including gaming) and national
accounts (the 100 largest restaurant chains in the United States)
segments of the commercial furniture market. We design, manufacture and
market an extensive line of products, including wood, metal and rattan
chairs, banquet and conference tables, table tops, table bases, booths,
casegoods and other related products.
The Offering:
- Offered Securities: the securities offered by this prospectus are
senior subordinated notes, which are being issued in exchange for
senior subordinated notes sold by us in our June 1999 private
placement. The New Notes are substantially identical to the Original
Notes and are governed by the same indenture governing the Original
Notes.
- Registration Rights: you will not have any exchange or registration
rights in connection with the New Notes
- Expiration of Offering: the exchange offer expires at 12:00 midnight,
New York City time, on August 30, 1999, unless extended.
The Acquisition of Shelby Williams Industries, Inc.
- The Stock Tender Offer: on May 12, 1999, Falcon made an offer to
purchase all of the outstanding shares of Shelby Williams common stock.
At the expiration of the stock tender offer, shares representing
approximately 98% of the Shelby Williams common stock had been
tendered. Shortly thereafter, Falcon accepted such shares for payment.
- The Merger: on June 18, 1999, Falcon's recently formed, wholly owned
subsidiary merged into Shelby Williams. As a result, Shelby Williams
became a wholly owned subsidiary of Falcon.
- The Purchase Price: the aggregate purchase price for the acquisition of
Shelby Williams (including transaction costs) was approximately $149.3
million.
The New Notes:
- Interest Payment Dates: each June 15 and December 15, beginning on
December 15, 1999.
- Redemption: the New Notes are not redeemable by us until June 15, 2004,
except we may redeem up to 35% of the New Notes prior to June 15, 2002,
with the proceeds of a public equity offering. We are required to
redeem a portion of the New Notes at 101% of their principal amount
under certain circumstances that are described in the section
"Description of New Notes" under the heading "Repurchase at the Option
of Holders."
- Ranking of the New Notes: except as described in the section
"Description of New Notes" under the heading "Subordination," the New
Notes will be general, unsecured obligations:
- subordinated to all of our existing and future senior debt;
- equal in right of payment with our other existing and future
senior subordinated debt; and
- effectively junior to all existing and future debt of our subsidi-
aries that are not guarantors of the New Notes.
- Guarantees: substantially simultaneous with the completion of this
offering, all of our domestic subsidiaries (including Shelby Williams
and its domestic subsidiaries) have unconditionally guaranteed the New
Notes on a senior subordinated basis. Our foreign subsidiaries and any
subsidiaries we later designate as "unrestricted" under the Indenture
will not guarantee the New Notes.
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See "Risk Factors," beginning on page 18, for a discussion of certain
factors that should be considered by holders in connection with a decision to
tender Original Notes in the exchange offer.
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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 ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is August 3, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
Notice to New Hampshire Residents..........................................ii
Special Note Regarding Forward-Looking Statements.........................iii
Prospectus Summary..........................................................1
Risk Factors...............................................................18
Use of Proceeds............................................................27
Capitalization.............................................................27
Selected Historical Consolidated Financial Data............................28
Unaudited Pro Forma Combined Financial Data................................30
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................38
The Exchange Offer.........................................................49
Business...................................................................58
Management.................................................................72
Security Ownership.........................................................74
Certain Transactions.......................................................76
Description of the Senior Secured Credit Facilities........................77
Description of New Notes...................................................80
Certain United States Federal Income Tax Consequences.....................118
Plan of Distribution......................................................122
Legal Matters.............................................................122
Experts...................................................................123
Where You Can Find More Information.......................................123
-------------------
NOTICE TO NEW HAMPSHIRE RESIDENTS
Neither the fact that a registration statement or an application for a
license has been filed with the State of New Hampshire nor the fact that a
security is effectively registered or a person is licensed in the State of New
Hampshire constitutes a finding by the Secretary of State that any document
filed under RSA 421-B is true, complete and not misleading. Neither any such
fact nor the fact that an exemption or exception is available for a security or
a transaction means that the Secretary of State has passed in any way upon the
merits or qualifications of, or recommended or given approval to, any person,
security or transaction. It is unlawful to make, or cause to be made, to any
prospective purchaser, customer or client any representation inconsistent with
the provisions of this paragraph.
<PAGE>
-------------------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended. The words "believe," "estimate," "anticipate,"
"project," "intend," "expect" and similar expressions are intended to identify
forward-looking statements. All forward-looking statements involve certain risks
and uncertainties. Factors that may cause actual results to differ materially
from those contemplated by such forward-looking statements include, among other
things, the following possibilities:
- expected cost savings from our acquisition of Shelby Williams cannot be
fully realized or realized within the expected time;
- revenues following the acquisition are lower than expected;
- competitive pressures in the industry increase significantly;
- costs or difficulties related to the integration of the businesses of
Falcon and Shelby Williams are greater than expected;
- changes in the interest rate environment generally;
- general economic conditions, either internationally, nationally or in
the states in which the combined company will be doing business, are
less favorable than expected; and
- conditions in the securities market may be less favorable than
expected.
You are cautioned not to place undue reliance on forward-looking
statements as these speak only as of the date of this prospectus. All future
written and oral forward-looking statements made by us or on our behalf are also
subject to these factors. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in or incorporated into this
prospectus might not occur. For a further discussion of these and other risks
related to our business, see the section entitled "Risk Factors."
<PAGE>
PROSPECTUS SUMMARY
This summary may not contain all the information that may be important
to you. You should read the entire prospectus, including the financial
statements and other financial data, before making an investment decision to
tender Original Notes. Unless the context otherwise requires:
- "We," "our," "us" or the "Company" refers to Falcon Products, Inc. and
its subsidiaries on a pro forma combined basis after giving effect to
the acquisition of Shelby Williams by Falcon;
- "Falcon" refers to Falcon Products, Inc. and its subsidiaries prior to
the acquisition of Shelby Williams by Falcon;
- "Shelby Williams" refers to Shelby Williams Industries, Inc. and its
subsidiaries prior to the acquisition of Shelby Williams by Falcon; and
- "New Notes" refers to the Company's 113/8 Senior Subordinated Notes due
2009, Series B.
- "Original Notes" refers to the Company's 113/8 Senior Subordinated
Notes due 2009, Series A.
For purposes of the financial and other information set forth in this
prospectus, references to a fiscal year relate to (1) the 52- or 53-week period
ending on the Saturday closest to October 31 for Falcon or (2) the calendar year
ending December 31 for Shelby Williams. The pro forma combined financial data
included in this prospectus has been presented for the fiscal year ended October
31, 1998 and the twenty-six weeks ended May 1, 1999. The historical consolidated
statements of operations of Shelby Williams for the year ended October 31, 1998
and the twenty-six weeks ended May 1, 1999 reflect adjustments to the fiscal
year ended December 31, 1998 and the fiscal quarter ended March 31, 1999
historical financial data of Shelby Williams to conform such financial data to
the fiscal year end and most recent fiscal quarter of Falcon.
THE COMPANY
Overview
Falcon is a leading supplier of furniture and related products for the
office, food service, hospitality (including gaming) and national accounts (the
100 largest restaurant chains in the United States) segments of the commercial
furniture market. Founded in 1959, Falcon believes that it has become a
nationally recognized supplier in this market due to its:
- superior customer service;
- broad range of innovative products;
- vertically integrated manufacturing capabilities;
- strong relationships with its network of distributors and dealers; and
- high-quality products.
Falcon designs, manufactures and distributes an extensive line of
products, including table bases, table tops, metal and wood chairs, booths and
interior decor systems, all made to customer specifications in a variety of
styles and finishes. Falcon's products are marketed under its well-known brand
names, including Falcon(R), Howe(R), Johnson Tables(R), Charlotte(R) and Decor
Concepts(R). Falcon employs a geographically diverse network of direct and
independent sales representatives, independent office furniture dealers and
distributors to distribute its products, and markets its products to restaurant
supply dealers, original equipment manufacturers ("OEMs"), mass merchandisers,
chain restaurants, architectural and design firms and end-users. Major customers
of Falcon include McDonald's, Sam's Club, Burger King, Marriott International
and Price Costco.
On June 18, 1999, Falcon's recently formed, wholly owned subsidiary
merged into Shelby Williams. As a result, Shelby Williams became a wholly owned
subsidiary of Falcon. Shelby Williams is a leading supplier of seating products
for the hospitality (including gaming) and food service segments of the
commercial furniture market. Shelby Williams designs, manufactures and
distributes a broad range of seating products, including wood, metal and rattan
chairs, barstools, sofas and sleeper sofas, and stacking chairs, as well as
banquet-related products, including folding tables, food service carts and
portable dance floors. Shelby Williams' products are marketed under its
well-recognized brand names, including Shelby Williams(R), King Arthur(R),
Thonet(R) and Phillocraft(R). In addition, Shelby Williams designs and
manufactures vinyl wall coverings for the hospitality and home furnishing
segments under the Sellers & Josephson(R) brand name. Shelby Williams primarily
utilizes direct sales representatives and, to a lesser extent, independent
distributors to distribute its products and markets its products to hospitality
and food service chains, interior designers, architectural and design firms,
contract furniture, food service and office furniture dealers. Major customers
of Shelby Williams include Bass Hotels (Holiday Inn), Hilton Hotels, Marriott
International, Sheraton Hotels & Resorts, Mirage Resorts, Circus Circus and MGM
Grand.
Falcon believes that its acquisition of Shelby Williams is advantageous
for many reasons, including:
- Shelby Williams is a leading supplier of seating products, and the
acquisition will solidify the combined company's position as a premier
producer of commercial furniture;
- Shelby Williams has strengths which are complementary to those of
Falcon;
- Shelby Williams has many strong, well-recognized brand names;
- Falcon has significantly increased its size and geographic presence,
better enabling the combined company to serve its customers across the
United States and internationally as its customers expand and grow
their own operations;
- Shelby Williams has an experienced, well-established sales force with
long-standing customer relationships;
- The combined company has an opportunity to realize significant
manufacturing and operating efficiency gains; and
- The combined company has enhanced growth opportunities through the
potential for cross-selling Falcon's products with those of Shelby
Williams, and Falcon has gained access to new channels of distribution.
On a pro forma basis after giving effect to the acquisition of Shelby
Williams, our revenues for fiscal year 1998 and for the twenty-six weeks ended
May 1, 1999 would have been $306.9 million and $157.0 million, respectively, and
EBITDA for fiscal year 1998 and for the twenty-six weeks ended May 1, 1999 would
have been $37.0 million and $18.0 million, respectively. Revenues from our top
ten customers accounted for approximately 16.5% and 15.0% of pro forma revenues
in fiscal year 1998 and in the twenty-six weeks ended May 1, 1999, respectively.
In addition, no single customer accounted for greater than approximately 2.8%
and 2.6% of pro forma revenues in fiscal year 1998 and in the twenty-six weeks
ended May 1, 1999, respectively.
The combination of Falcon and Shelby Williams strengthens our position
as a leading supplier of furniture and related products in the highly fragmented
commercial furniture market. We are a stronger competitor in our markets due to
the combination of Shelby Williams' strong brand names and long-standing
customer relationships with Falcon's vertically integrated manufacturing
capabilities and reputation for reliability, integrity and customer service. In
addition, the acquisition of Shelby Williams gives us the size, market presence
and reputation to make us an attractive acquiror to many of the small,
privately-held companies in the commercial furniture market.
As a result of the acquisition, we have significant opportunities to
leverage and strengthen our distribution capabilities to further penetrate
targeted markets. For example, Shelby Williams' strong relationships with the
architectural and design community and its hospitality segment customers
supplement Falcon's strong relationships with the office furniture dealer
community. We intend to utilize these relationships to aggressively market our
products to increase revenues.
The acquisition also allows us to leverage excess manufacturing
capacity to rationalize the combined company's facilities and increase
company-wide efficiency. We expect that by increasing capacity utilization at
fewer manufacturing facilities we will benefit from reduced per unit costs
generated by spreading fixed manufacturing overhead costs over larger production
volumes. In addition, we will use our excess manufacturing capacity to
manufacture some components which were previously purchased by Shelby Williams
from third-party suppliers. We anticipate that we will benefit from increased
margins due to savings from eliminating the mark-ups currently being paid to
these third-party suppliers, as well as improving operating margins through
increased production volumes. For example, Falcon can utilize excess
manufacturing capacity at its Mimon, Czech Republic facility to produce wood
chairs which Shelby Williams currently imports from Europe from third-party
suppliers.
Industry Overview
We compete primarily in four segments of the commercial furniture
market, which represent only a portion of the overall retail and commercial
furniture market. These four segments are office, food service, hospitality
(including gaming) and national accounts (the 100 largest restaurant chains in
the United States). We estimate the market size of these segments totaled
approximately $4.0 billion in 1998.
<PAGE>
The following table provides an overview of each of the four primary
market segments in which we compete.
Estimated Size
Segment (In millions) Description
- ------- -------------- -----------
Office............. $ 1,400 Tables and seating products with primary
end use markets, including corporate
offices, education, and conference and
training centers. Excludes panel systems,
filing systems and executive desks/
credenzas, which we do not produce.
Food service....... 1,400 Table tops and table bases, metal and wood
chairs, booths, barstools and benches for
use by traditional "mom & pop" restaurants
to institutions serving food as an adjunct
to other core activities (e.g., school and
office cafeterias, prisons, nursing homes,
etc.).
Hospitality........ 700 Focuses on the furniture needs of
independent and chain hotels, motels,
conference resorts and casinos. Products
we manufacture for this segment include
table tops, table bases, metal and wood
chairs, millwork, folding tables, metal
and wood barstools, benches and booths.
These products can be found throughout a
customer's establishment (e.g., lounge,
bar area, restaurant, banquet/conference/
guest rooms).
National accounts.. 450 We define the national accounts segment as
the 100 largest restaurant chains in the
United States. The national accounts
segment includes quick service (i.e., fast
food) chains (e.g., McDonald's and Burger
King), casual dining restaurants (e.g.,
T.G.I. Friday's and Red Lobster) and quick
service lite restaurants (e.g., airport
Pizza Huts and Dunkin' Donuts).
Total.............. $ 3,950
=======
In addition to the four market segments above, approximately 21.5% and
18.0% of our pro forma revenues in fiscal year 1998 and in the twenty-six weeks
ended May 1, 1999, respectively, were derived from the healthcare, university,
OEM and retail segments, as well as vinyl wall covering sales.
Competitive Strengths
We believe that we have the following competitive strengths:
Market Leader. We are a leading supplier of seating and table-related
products in the office, food service, hospitality (including gaming) and
national accounts segments of the commercial furniture market. We believe that,
as a result of consolidation within the segments in which we compete, our
customers and potential new customers want to deal with a smaller number of
larger, established suppliers with the ability to serve them at all of their
locations. Our leading market position will be a competitive advantage in
attracting and retaining these customers.
Diverse Product Lines with Strong Brand Names. We offer a diverse range
of products, including both standard and customized seating and table products,
thereby allowing customers to select the specific products which best fulfill
their needs and can be produced and distributed to meet their timing
requirements. We also enjoy strong name recognition through our well-established
brands, including Falcon(R), Howe(R), Johnson Tables(R), Charlotte(R), Decor
Concepts(R), Shelby Williams(R), King Arthur(R), Thonet(R), Sellers &
Josephson(R) and Phillocrafts(R). We believe that our broad product line, as
well as the strength of our brands, are important factors in maintaining
existing customers and attracting new customers.
Vertically Integrated Manufacturing Capabilities. We are vertically
integrated, which means that we control all aspects of our production process
from design to manufacture to distribution. By being vertically integrated, we
are able to lower our costs by manufacturing the products we sell as compared to
those competitors who may only be resellers or assemblers of products and, as a
result, must purchase certain of their components from third-party suppliers,
incurring a mark-up cost which we do not incur. By being vertically integrated,
we are also able to manufacture certain key materials that are specifically
designed to meet our customer's specifications. In addition, we believe that
being vertically integrated allows us to better serve our customers since we are
not dependent on third-party suppliers to provide needed components.
Accordingly, we are better equipped to respond quickly to changes in customer
orders or to rush a particular order for a valued customer.
Superior Customer Service. Customer service is an essential element of
our marketing and operating philosophy. We are committed to attracting new
customers and retaining existing customers by providing consistently superior
customer service. As part of our customer service program, we employ
approximately 130 dedicated customer service representatives. Using an on-line
computer system, our customer service representatives are able to provide our
customers with up-to-date information on the status of their orders. We intend
to maintain and enhance our high level of customer service to strengthen our
relationships with our customers. We believe that continued high levels of
customer service will further increase sales to existing customers and attract
new ones. We believe that superior customer service is essential to competing in
our targeted market segments.
Diverse and Established Customer Base. Over the past four decades, we
have built a reputation for high-quality products, reliability and superior
customer service. Our customers represent major companies in the various market
segments of the commercial furniture market, including McDonald's, Marriott
International, Sam's Club, Burger King and Hilton Hotels. Revenues from our top
ten customers accounted for approximately 16.5% and 15.0% of pro forma revenues
in fiscal year 1998 and in the twenty-six weeks ended May 1, 1999, respectively.
In addition, no single customer accounted for greater than approximately 2.8%
and 2.6% of pro forma revenues in fiscal year 1998 and in the twenty-six weeks
ended May 1, 1999, respectively.
Strength of Distribution and Sales Network. We distribute our products
through a geographically diverse network of direct and independent sales
representatives, independent office furniture dealers and distributors, and
market our products to hospitality and food service chains, restaurant supply
dealers, mass merchandisers, OEMs and chain restaurants. Shelby Williams' strong
relationships with the architectural and design community and its hospitality
segment customers supplement Falcon's strong relationships with the office
furniture dealer community, giving us strong relationships with the major
distribution channels within the commercial furniture market. In addition,
Shelby Williams' sales force complements that of Falcon's as there is not any
significant overlap between them. To ensure stability and continuity in Shelby
Williams' sales force, we have entered into long-term employment contracts with
Shelby Williams' national sales manager and regional vice presidents of sales as
part of our acquisition of Shelby Williams. We intend to maintain and leverage
the strengths of each company's sales force following the acquisition of Shelby
Williams. Our sales and marketing staff consists of approximately 260 full-time
employees, of which 120 are field sales personnel. In addition, we utilize
approximately 140 independent sales organizations. We maintain 16 showrooms and
sales offices in the United States and have approximately 40 distributors that
market our products internationally.
Diversified Market Segments and Revenue Stability. We market our
products to the office, food service, hospitality (including gaming), national
accounts, university, healthcare and other institutional segments of the
commercial furniture market. Our revenues are balanced among the various
segments, with no segment accounting for a disproportionate percentage of total
revenues. This balance in our revenues provides stability and helps protect us
against economic downturns. In addition, we maintain relative revenue stability
and are not significantly subject to economic cycles due to our diverse customer
base and because a substantial portion of our sales are from refurbishment
projects rather than new construction sales. As a general matter, refurbishment
sales tend to be less cyclical than new construction sales, which are generally
more affected by economic downturns because new construction projects (and
accordingly furniture sales for new construction) are often put on hold or
delayed in economic downturns, as new construction expenditures are often
considered discretionary by customers.
Experienced Management Team with Significant Equity Ownership Interest.
We are led by Franklin A. Jacobs, Chairman and CEO, who founded Falcon in 1959.
Our seasoned and respected management team has built their professional careers
primarily in the commercial furniture industry. These individuals possess a
detailed knowledge of each of our target market segments, and are well respected
in the industry for design, quality and customer service. Their knowledge and
depth of experience enables us to continue to provide innovative and
high-quality products and services.
Our senior management team also has a strong track record of
integrating acquisitions into the organization profitably and efficiently. Since
1992, Falcon's management team has successfully completed the acquisition of
four companies, including Charlotte Company in 1994, Decor Concepts in 1995, The
Chair Source in 1996 and most recently, Howe Furniture Corporation in 1998. Paul
N. Steinfeld, Shelby Williams' Chairman and CEO, and Manfred Steinfeld, a board
member of Shelby Williams, will also help manage the integration of the combined
company. In addition, certain key members of Shelby Williams' senior management
team have entered into long term employment agreements or consulting agreements
with the Company to facilitate the integration of Falcon and Shelby Williams.
Mr. Jacobs beneficially owns approximately 22.0% of the Company's
outstanding common stock. Including Mr. Jacobs' ownership interest, the
Company's directors and executive officers beneficially own approximately 35.6%
of the Company's outstanding common stock. Falcon's senior management team has
been awarded, and we intend to award certain key members of Shelby Williams'
management team, options and other equity rights, subject to certain
performance-based and other vesting provisions.
<PAGE>
Shelby Williams Integration Plan
We have adopted a plan to integrate the operations of Falcon and Shelby
Williams, the principal components of which are:
- eliminating redundant administrative costs and expenses, including such
"public company" costs for Shelby Williams as board of directors' fees,
annual report costs and New York Stock Exchange listing fees;
- realizing cost savings on raw materials and freight from the greater
purchasing power of the combined company;
- consolidating and improving certain functions, including accounting,
tax, information systems, human resources and legal;
- utilizing Falcon's production capabilities to manufacture certain
Shelby Williams products currently purchased from third-party
suppliers;
- improving the combined sales, marketing and distribution
infrastructures of Falcon and Shelby Williams; and
- reducing excess manufacturing capacity by consolidating and improving
the utilization of manufacturing facilities.
As a result of the acquisition, we have excess manufacturing capacity,
creating opportunities to rationalize facilities and increase efficiencies.
Among other things, we anticipate that we can improve capacity utilization by
manufacturing several products which Shelby Williams previously purchased from
third-party suppliers, such as wood chairs, table tops and booths. By increasing
capacity utilization at fewer manufacturing facilities, we expect to decrease
per unit costs resulting from allocating our total fixed manufacturing overhead
costs over greater production volumes. In addition, since Falcon and Shelby
Williams manufacture similar products, opportunities exist to share best
manufacturing practices and techniques to further increase operating
efficiencies.
Business Strategy
We have adopted a comprehensive business strategy which includes the
following:
Capitalize on the Acquisition of Shelby Williams. The fundamental
strategy underlying the Falcon-Shelby Williams combination is to leverage the
strengths of both businesses by adopting the best practices of each across the
Company as a whole and to capitalize on the opportunities inherent in the
combination. We believe that the Falcon-Shelby Williams combination presents
numerous cost savings and revenue enhancement opportunities.
Maintain Customer Service Leadership. Over the past four decades, we
have built a reputation for superior customer service. We intend to aggressively
maintain our leadership position in customer service. We believe that our
superior customer service, as well as our reliability and high-quality products,
are important factors in maintaining existing customers and attracting new
customers.
Maximize Operating Efficiencies. We intend to improve our productivity
through a number of initiatives, including selective upgrades to production,
plant and equipment and optimizing manufacturing capacity. We plan to leverage
our excess manufacturing capacity to improve manufacturing productivity and
increase company-wide efficiency. We expect to recognize significant economic
benefits as a result of savings from eliminating mark-ups paid to third-party
suppliers and improving our operating margins through increased production
volumes.
Grow Through Strategic Acquisitions. Our business strategy is to grow
through strategic acquisitions. We plan to regularly evaluate potential
acquisition opportunities to support and strengthen our business. We have a
strategic acquisition plan which clearly identifies the criteria a potential
acquisition candidate must generally meet in order to be considered a viable
acquisition candidate. Among other criteria, we look for acquisition candidates
that are in our own industry, are profitable, have leading brand names and
well-established sales forces, and can be acquired at purchase prices that
produce earnings accretion. We anticipate realizing cost savings by increasing
production volumes at our existing manufacturing facilities and enhancing
revenues by increasing cross-selling opportunities. We believe that our broad
product line, extensive distribution network and strong brand name recognition
make us an attractive acquiror to many of the small, privately-held commercial
furniture manufacturers in our industry.
It is our intention to spend the short to medium term focusing on
successfully integrating the operations of Falcon and Shelby Williams. As a
result, we do not currently anticipate making any additional acquisitions for a
period of time, but will remain opportunistic as potential acquisitions present
themselves. We are not currently in discussions with any potential acquisition
candidates.
<PAGE>
THE TRANSACTIONS
This exchange offer is being made in conjunction with a series of
transactions, consisting of Falcon's issuance of the Original Notes, Falcon's
entering into the Senior Secured Credit Facilities (as defined below) and the
refinancing of certain existing indebtedness of Falcon and Shelby Williams
(collectively, the "Transactions") to finance its acquisition of Shelby Williams
(the "Acquisition").
The Acquisition
Stock Tender Offer. Pursuant to an Agreement and Plan of Merger dated
May 5, 1999, Falcon and its recently formed, wholly owned subsidiary made an
offer to purchase all of the outstanding shares of common stock of Shelby
Williams at $16.50 per share in cash, upon the terms and subject to the
conditions set forth in the offer to purchase (the "Stock Tender Offer"). At the
expiration of the Stock Tender Offer, which occurred at 12:00 midnight, New York
City time, on June 14, 1999, shares representing approximately 98% of Shelby
Williams common stock had been tendered. Shortly thereafter, Falcon, through its
acquisition subsidiary, accepted for payment these tendered shares.
Merger. On June 18, 1999, Falcon's acquisition subsidiary merged into
Shelby Williams. Shelby Williams remained the surviving company after the merger
as our wholly owned subsidiary.
Purchase Price. The aggregate purchase price for the Acquisition of
Shelby Williams (including transaction costs) was approximately $149.3 million.
In connection with the merger, Paul Steinfeld, Shelby Williams'
Chairman and Chief Executive Officer, and Manfred Steinfeld, Shelby Williams'
founder, agreed to help manage the integration of Falcon and Shelby Williams. In
addition, certain key members of Shelby Williams' senior management team,
including the chief operating officer, national sales manager and regional vice
presidents of sales, entered into long-term employment contracts or consulting
agreements with Falcon.
The Financings
In order to finance the Acquisition of Shelby Williams and to pay
related fees and expenses, Falcon conducted a private placement of the Original
Notes and entered into certain other financing transactions, as described below:
Senior Secured Credit Facilities. Falcon and its subsidiaries entered
into a credit agreement with DLJ Capital Funding, Inc. and certain lenders. The
credit agreement provides for an aggregate of up to $70.0 million under an
amortizing term loan facility and up to $50.0 million under a revolving credit
facility. In connection with the Transactions, we received a total of $70
million under the term loan facility. We did not draw any funds under the
revolving credit facility. The term loan and the revolving credit facility are
sometimes referred to in this prospectus collectively as the "Senior Secured
Credit Facilities." See "Description of the Senior Secured Credit Facilities."
Repayment of Existing Indebtedness. In connection with consummation of
the Acquisition of Shelby Williams, certain existing indebtedness of Falcon in
the aggregate principal amount of approximately $19.2 million, plus accrued and
unpaid interest, and certain existing indebtedness of Shelby Williams in the
aggregate principal amount of approximately $1.0 million, plus accrued and
unpaid interest, was refinanced with the proceeds of the Senior Secured Credit
Facilities.
<PAGE>
THE EXCHANGE OFFER
Expiration Date..................... 12:00 midnight, New York City time, on
August 30, 1999, unless we extend the
exchange offer.
Exchange and Registration Rights.... Pursuant to a registration rights
agreement dated June 14, 1999, the holders
of the Original Notes were granted certain
exchange and registration rights. This
exchange offer is intended to satisfy
these rights. You have the right to
exchange the Original Notes that you hold
for New Notes with substantially identical
terms. Once the exchange offer is
complete, you will no longer be entitled
to any exchange or registration rights
with respect to your Original Notes.
Accrued Interest on the New Notes
and Original Notes................ The New Notes will bear interest from June
17, 1999. Holders of Original Notes which
are accepted for exchange will be deemed
to have waived the right to receive any
payment in respect of interest on such
Original Notes accrued to the date of
issuance of the New Notes.
Conditions to the Exchange Offer.... The exchange offer is conditioned upon
certain customary conditions which we may
waive and upon compliance with securities
laws.
Procedures for Tendering Original
Notes............................ Each holder of Original Notes wishing to
accept the exchange offer must:
- complete, sign and date the letter of
transmittal, or a facsimile of the
letter of transmittal; or
- arrange for the Depository Trust Company
to transmit certain required information
to the exchange agent in connection with
a book-entry transfer.
You must mail or otherwise deliver such
documentation together with the Original
Notes to the exchange agent.
Special Procedures for Beneficial
Holders........................... If you beneficially own Original Notes
registered in the name of a broker,
dealer, commercial bank, trust company or
other nominee and you wish to tender your
Original Notes in the exchange offer, you
should contact such registered holder
promptly and instruct them to tender on
your behalf. If you wish to tender on your
own behalf, you must, before completing
and executing the letter of transmittal
for the exchange offer and delivering your
Original Notes, either arrange to have
your Original Notes registered in your
name or obtain a properly completed bond
power from the registered holder. The
transfer of registered ownership may take
considerable time.
Guaranteed Delivery Procedures...... You must comply with the applicable
procedures for tendering if you wish to
tender your Original Notes and:
- time will not permit your required
documents to reach the exchange agent by
the expiration date of the exchange
offer; or
- you cannot complete the procedure for
book-entry transfer on time; or
- your Original Notes are not immediately
available.
<PAGE>
Withdrawal Rights................... You may withdraw your tender of Original
Notes at any time up to 12:00 midnight,
New York City time, on the date the
exchange offer expires.
Failure to Exchange Will Affect You
Adversely...................... If you are eligible to participate in the
exchange offer and you do not tender your
Original Notes, you will not have further
exchange or registration rights and your
Original Notes will continue to be subject
to some restrictions on transfer.
Accordingly, the liquidity of the Original
Notes will be adversely affected.
Certain Federal Tax
Considerations................. We believe that the exchange of Original
Notes for New Notes pursuant to the
exchange offer will not be a taxable event
for United States federal income tax
purposes. A holder's holding period for
New Notes will include the holding period
for Original Notes. See "Certain United
States Federal Income Tax Consequences."
Exchange Agent...................... IBJ Whitehall Bank & Trust Company is
serving as exchange agent. The Bank of New
York, trustee under the Indenture under
which the New Notes will be issued,
recently announced the signing of a
definitive agreement providing for its
acquisition of IBJ Whitehall Bank & Trust
Company.
Use of Proceeds..................... We will not receive any proceeds from the
exchange offer.
<PAGE>
SUMMARY TERMS OF NEW NOTES
Issuer.............................. Falcon Products, Inc.
Securities Offered.................. The form and terms of the New Notes will
be the same as the form and terms of the
Original Notes except that:
- the New Notes will bear a different
CUSIP number from the Original Notes;
- the New Notes will have been registered
under the Securities Act of 1933 and,
therefore, will not bear legends
restricting their transfer; and
- you will not be entitled to any exchange
or registrations rights with respect to
the New Notes
The New Notes will evidence the same debt
as the Original Notes. They will be
entitled to the benefits of the Indenture
governing the Original Notes and will be
treated under the Indenture as a single
class with the Original Notes.
Maturity............................ June 15, 2009.
Issue Price......................... Par plus accrued interest from June 17,
1999.
Interest............................ Annual rate--11 3/8%.
Payment frequency--every six months on
June 15 and December 15.
First payment--December 15, 1999.
Ranking............................. The New Notes will be general unsecured
obligations of the Company and will rank:
- equally with all of our future senior
subordinated indebtedness;
- senior in right of payment to future
obligations expressly subordinated in
right of payment to the New Notes; and
- junior to all existing and future senior
debt, as defined in the indenture
governing the New Notes (the
"Indenture"). See "Description of New
Notes--Subordination."
Guarantees.......................... The New Notes will be unconditionally
guaranteed by our domestic subsidiaries
(collectively, the "Guarantors"). Our
foreign subsidiaries, and any subsidiaries
we later designate as "unrestricted" under
the Indenture will not be Guarantors.
These guarantees will be general
obligations of each Guarantor (the
"Subsidiary Guarantees") and will be
subordinate in right of payment to all
existing and future senior indebtedness of
the Guarantors. These Subsidiary
Guarantees will rank equal to other
existing and future senior subordinated
indebtedness of the Guarantors and senior
in right of payment to all of the existing
and future obligations of the Guarantors
that are expressly subordinated in right
of payment to the Subsidiary Guarantees.
Optional Redemption................. On or after June 15, 2004, we may redeem
some or all of the New Notes at any time
at the redemption prices listed in the
section "Description of New Notes" under
the heading "Optional Redemption."
Before June 15, 2002, we may redeem up to
35% of the New Notes with the proceeds of
certain public offerings of common stock
in our Company at the price listed in the
section "Description of New Notes" under
the heading "Optional Redemption."
<PAGE>
Mandatory Offer to Repurchase....... If we sell all, or almost all, of our
assets or experience specific kinds of
changes of control, we must offer to
repurchase the New Notes at the prices
listed in the section "Description of New
Notes" under the heading "Repurchase at
the Option of Holders."
Basic Covenants of Indenture........ We will issue the New Notes under an
Indenture with The Bank of New York. The
Indenture, among other things, restricts
our ability and the ability of our
subsidiaries to:
- borrow money;
- pay dividends on stock or purchase
stock;
- allow the imposition of dividend
restrictions on certain subsidiaries;
- sell certain assets;
- create certain liens;
- use assets as security in other
transactions; and
- sell all, or almost all, of our assets
or merge with or into other companies.
For more details, see the section
"Description of New Notes" under the
heading "Certain Covenants."
Exchange Offer; Registration
Rights............................. You have the right to exchange the
Original Notes for notes with
substantially identical terms. This
exchange offer is intended to satisfy that
right. The New Notes will not provide you
with any further exchange or registration
rights.
Resales Without Further
Registration...................... We believe that the New Notes issued
pursuant to the exchange offer in exchange
for Original Notes may be offered for
resale, resold and otherwise transferred
by you without compliance with the
registration and prospectus delivery
provisions of the Securities Act of 1933,
provided that:
- you are acquiring the New Notes issued
in the exchange offer in the ordinary
course of your business;
- you have not engaged in, do not intend
to engage in, and have no arrangement or
understanding with any person to
participate in the distribution of the
New Notes issued to you in the exchange
offer; and
- you are not our "affiliate," as defined
under Rule 405 of the Securities Act.
Each of the participating broker-dealers
that receives New Notes for its own
account in exchange for Original Notes
that were acquired by such broker or
dealer as a result of market-making or
other activities must acknowledge that it
will deliver a prospectus in connection
with the resale of the New Notes. We do
not intend to list the New Notes on any
securities exchange.
Our principal executive offices are located at 9387 Dielman Industrial
Drive, St. Louis, Missouri 63132, and our telephone number is (314) 991-9200.
<PAGE>
RECENT EVENTS
On Monday, June 7, 1999, we were advised of the death of Sam Ferrell,
the Chief Financial Officer of Shelby Williams. Because of circumstances
suggesting that Mr. Ferrell's death could have been self-inflicted, we undertook
a supplemental due diligence review of Shelby Williams' financial books and
records, which review was comprised primarily of interviews with employees of
Shelby Williams responsible for accounting matters and a review of certain
internal accounting controls and procedures. Based on our review, we did not
become aware of any irregularities in the financial books and records of Shelby
Williams.
We recently announced that we will be closing certain of our
manufacturing facilities and transferring production from the closed facilities
into our other existing facilities. To account for the costs associated with
these actions, we have recorded a pre-tax charge of approximately $14.0 million
in our fiscal third quarter ended July 31, 1999. On an after-tax basis, the
charge is equivalent to approximately $8.5 million, or $.97 per share. This one
time charge includes costs associated with asset write-downs and dispositions,
real estate exit costs, employee severance, and other related costs associated
with exiting the closed facilities. These actions mark the beginning of a series
of planned strategic actions we intend to take to integrate the Shelby Williams
acquisition and fully realize the meaningful synergies that are expected.
RISK FACTORS
See the section entitled "Risk Factors" immediately following this
Prospectus Summary for a discussion of certain factors you should consider in
connection with your decision to tender Original Notes in exchange for the New
Notes.
<PAGE>
SUMMARY PRO FORMA AND HISTORICAL CONSOLIDATED FINANCIAL DATA
Below is summary unaudited pro forma financial data for the Company and
summary historical consolidated financial data for each of Falcon and Shelby
Williams. The information in the following tables is qualified by reference to,
and should be read in conjunction with, the sections "Unaudited Pro Forma
Combined Financial Data," "Selected Historical Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the respective consolidated financial statements of Falcon and
Shelby Williams and the related notes thereto, included elsewhere or
incorporated by reference in this prospectus.
EBITDA for any period is calculated as the sum of net income plus the
following to the extent deducted in calculating net income: (1) interest
expense, (2) income tax expense, (3) depreciation expense, (4) amortization
expense and (5) special one-time charges. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a discussion of
such special one-time charges. We consider EBITDA to be a widely accepted
financial indicator of a company's ability to service debt, fund capital
expenditures and expand its business; however, EBITDA is not calculated in the
same way by all companies and is neither a measurement required, nor represents
cash flow from operations as defined, by generally accepted accounting
principles. EBITDA should not be considered by you as an alternative to net
income, as an indicator of operating performance or as an alternative to cash
flow as a measure of liquidity. The calculation of EBITDA for purposes of the
financial information presented herein is calculated differently than for
purposes of the covenants under the Indenture and the Senior Secured Credit
Facilities. See "--The Transactions--The Acquisition," "Description of the
Senior Secured Credit Facilities" and "Description of New Notes."
The Company--Pro Forma
The summary unaudited pro forma financial data for the Company set
forth below has been derived from the unaudited pro forma financial data
included elsewhere in this prospectus and gives effect to the Transactions,
including the Acquisition of all of the outstanding common stock of Shelby
Williams, the issuance of the Original Notes and the initial borrowings under
the Senior Secured Credit Facilities and the other matters described under
"Unaudited Pro Forma Combined Financial Data." The pro forma statement of
operations data and other data give effect to the Transactions as if they had
occurred on November 2, 1997 and the pro forma balance sheet data give effect to
the Transactions as if they had occurred on May 1, 1999. The unaudited pro forma
financial data does not purport to represent what our financial position and
results of operations would have been if the Transactions had actually been
completed as of the dates indicated and is not intended to project our financial
position or results of operations for any future period.
The historical consolidated statements of operations of Shelby Williams
for the year ended October 31, 1998 and the twenty-six weeks ended May 1, 1999
reflect adjustments to the fiscal year ended December 31, 1998 and fiscal
quarter ended March 31, 1999 historical financial data of Shelby Williams to
conform such financial data to the fiscal year end and most recent fiscal
quarter of Falcon.
<PAGE>
<TABLE>
<CAPTION>
The Company--Pro Forma (Continued)
Twenty-six
Fiscal year weeks Latest twelve
ended ended months ended
October 31, May 1, May 1,
1998 1999 1999
----------- --------- -----------
(In thousands)
(Unaudited)
<S> <C> <C> <C>
Statement of Operations Data:
Net sales............................................ $ 306,923 $ 157,013 $ 323,554
Cost of sales........................................ 227,812 116,865 237,011
----------- ----------- ----------
Gross margin......................................... 79,111 40,148 86,543
Selling, general and administrative expenses......... 53,879 26,271 60,004
----------- ----------- ----------
Operating profit..................................... 25,232 13,877 26,539
Interest income (expense), net....................... (17,442) (8,721) (17,442)
Minority interest in consolidated subsidiary......... 64 14 45
----------- ----------- ----------
Earnings before income taxes......................... 7,854 5,170 9,142
Income tax expense................................... 3,506 2,220 3,885
---------- ---------- ----------
Earnings from continuing operations.................. $ 4,348 $ 2,950 $ 5,257
========== ========== ==========
Twenty-six
Fiscal year weeks Latest twelve
ended ended months ended
October 31, May 1, May 1,
1998 1999 1999
----------- ---------- -------------
(In thousands, except ratios)
(Unaudited)
Other Data:
EBITDA............................................... $ 36,972 $ 17,978 $ 38,728
Depreciation and amortization........................ 8,219 4,101 8,668
Capital expenditures................................. 10,566 2,997 7,157
Selected Ratios:
Ratio of EBITDA to interest expense.................................................. 2.2x
Ratio of senior debt to EBITDA....................................................... 1.8x
Ratio of total debt to EBITDA........................................................ 4.4x
Ratio of earnings to fixed charges(1)................................................ 1.5x
As of
May 1, 1999
-------------
(In thousands)
(Unaudited)
Balance Sheet Data:
Cash and cash equivalents............................................................... $ 3,906
Working capital......................................................................... 70,236
Total assets............................................................................ 295,733
Long-term debt (including current portion).............................................. 172,079
Stockholders' equity.................................................................... 72,426
<FN>
(1) For purposes of computing the ratio of earnings to fixed charges, earnings
include net earnings plus fixed charges. Fixed charges consist of interest
expense, a portion of rental expense (deemed by management to be
representative of the interest factor of rental payments) and amortization
of debt issuance costs.
</FN>
</TABLE>
<PAGE>
Falcon--Historical
The following table sets forth certain summary historical consolidated
financial data of Falcon. The statement of operations data and other data for
the fiscal years ended November 2, 1996, November 1, 1997 and October 31, 1998
have been derived from the audited consolidated financial statements of Falcon
included elsewhere in this prospectus. The statement of operations data and
other data for the twenty-six weeks ended May 2, 1998 and May 1, 1999 and the
balance sheet data as of May 1, 1999 have been derived from Falcon's unaudited
consolidated financial statements that have been prepared on the same basis as
Falcon's audited consolidated financial statements and, in the opinion of
Falcon's management, include all adjustments, consisting only of normal
recurring adjustments, which Falcon considers necessary for a fair presentation
of its financial position and results of operations for these interim periods.
The results of operations for the twenty-six weeks ended May 1, 1999 are not
necessarily indicative of the results that may be expected for the entire year
ending October 30, 1999 or for any other interim period.
<TABLE>
<CAPTION>
Twenty-six weeks
Fiscal year ended ended
----------------- ----------------
November 2, November 1, October 31, May 2, May 1,
1996 1997 1998 1998 1999
---------------------------------------- ----------------------
(In thousands) (Unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales.................................... $ 100,702 $ 113,010 $ 143,426 $ 61,711 $ 71,064
Cost of sales, including nonrecurring items.. 69,125 79,507 103,067 44,052 50,490
Special and nonrecurring items............... -- 3,700 271 -- --
---------- ---------- --------- ---------- ---------
Gross margin................................. 31,577 29,803 40,088 17,659 20,574
Selling, general and administrative expenses. 20,469 22,044 29,482 11,813 13,833
---------- ---------- --------- ---------- ---------
Operating profit............................. 11,108 7,759 10,606 5,846 6,741
Interest income (expense), net............... 95 139 (619) 7 (596)
Minority interest in consolidated subsidiary. 89 47 64 34 14
---------- ---------- --------- ---------- ---------
Earnings from continuing operations before
income taxes.............................. 11,292 7,945 10,051 5,887 6,159
Income tax expense........................... 4,291 3,019 3,701 2,267 2,325
---------- ---------- --------- ---------- ---------
Net earnings from continuing operations...... 7,001 4,926 6,350 3,620 3,834
Discontinued operations, net of tax.......... 1,432 938 -- -- --
Gain on sale of discontinued operations,
net of tax................................ -- 6,770 -- -- --
---------- ---------- ---------- ---------- ---------
Net earnings................................. $ 8,433 $ 12,634 $ 6,350 $ 3,620 $ 3,834
========== ========== ========= ========== =========
Other Data (Unaudited):
EBITDA....................................... $ 14,924 $ 15,689 $ 17,880 $ 7,669 $ 8,462
Depreciation and amortization................ 3,816 4,230 3,753 1,823 1,721
Capital expenditures......................... 4,449 3,807 6,594 3,931 1,503
Ratio of Earnings to Fixed Charges(1) 236.1x 109.0x 14.4x 232.6x 10.9x
As of
May 1, 1999
-------------
(In thousands)
(Unaudited)
Balance Sheet Data:
Cash and cash equivalents............................................................... $ 1,162
Working capital......................................................................... 35,286
Total assets............................................................................ 111,731
Long-term debt (including current portion).............................................. 21,328
Stockholders' equity.................................................................... 72,426
<FN>
(1) For purposes of computing the ratio of earnings to fixed charges, earnings
include net earnings plus fixed charges. Fixed charges consist of interest
expense, a portion of rental expense (deemed by management to be
representative of the interest factor of rental payments) and amortization
of debt issuance costs.
</FN>
</TABLE>
<PAGE>
Shelby Williams--Historical
The following table sets forth certain summary historical consolidated
financial data of Shelby Williams. The statement of operations data and other
data for the fiscal years ended December 31, 1996, 1997 and 1998 have been
derived from the audited consolidated financial statements of Shelby Williams
included elsewhere in this prospectus. The statement of operations data and
other data for the three months ended March 31, 1998 and 1999 and the balance
sheet data as of March 31, 1999 have been derived from Shelby Williams'
unaudited consolidated financial statements that have been prepared on the same
basis as Shelby Williams' audited consolidated financial statements and, in the
opinion of Shelby Williams' management as expressed in Shelby Williams'
Quarterly Report on Form 10-Q for the period ending March 31, 1999, include all
adjustments, consisting only of normal recurring adjustments, which Shelby
Williams considers necessary for a fair presentation of its financial position
and results of operations for these interim periods. The results of operations
for the three month period ended March 31, 1999 are not necessarily indicative
of the results that may be expected for the entire year ending December 31, 1999
or for any other interim period.
<TABLE>
<CAPTION>
Fiscal year end Three months ended
----------------------------------------- -----------------------
December 31, December 31, December 31, March 31, March 31,
1996 1997 1998 1998 1999
(In thousands) (Unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales.................................... $ 149,481 $ 157,779 $ 165,937 $ 38,484 $ 43,128
Cost of goods sold........................... 114,998 120,849 126,388 29,929 34,081
--------- --------- --------- --------- ---------
Gross margin................................. 34,483 36,930 39,549 8,555 9,047
Selling, general and administrative expenses. 22,100 22,268 22,994 5,302 5,548
--------- ---------- --------- --------- ---------
Operating profit............................. 12,383 14,662 16,555 3,253 3,499
Interest income (expense), net............... (951) (8) 148 63 61
Miscellaneous income (expense), net.......... 44 89 102 (18) (22)
--------- --------- ---------- --------- ---------
Income from continuing operations before
income taxes.............................. 11,476 14,743 16,805 3,298 3,538
Income tax expense........................... 3,720 5,066 6,191 1,220 1,274
--------- --------- --------- --------- ---------
Income from continuing operations............ 7,756 9,677 10,614 2,078 2,264
Income (loss) from discontinued operations,
net of taxes.............................. 661 915 (48) 36 --
Loss on disposal of discontinued
operations, net of taxes.................. -- -- (7,081) -- --
---------- ---------- --------- ---------- ---------
Net income................................... $ 8,417 $ 10,592 $ 3,485 $ 2,114 $ 2,264
========= ========= ========= ========= =========
Other Data (Unaudited):
EBITDA....................................... $ 14,840 $ 16,960 $ 19,033 $ 3,864 $ 4,180
Depreciation and amortization................ 2,457 2,298 2,478 611 681
Capital expenditures......................... 1,189 3,557 3,919 1,608 623
Ratio of Earnings to Fixed Charges(1) 11.8x 21.5x 35.6x 23.2x 51.5x
As of
March 31, 1999
--------------
(In thousands)
(Unaudited)
Balance Sheet Data:
Cash and cash equivalents............................................................... $ 6,282
Working capital......................................................................... 39,805
Total assets............................................................................ 88,645
Long-term debt (including current portion).............................................. 2,000
Stockholders' equity.................................................................... 65,024
<FN>
(1) For purposes of computing the ratio of earnings to fixed charges, earnings
include net earnings plus fixed charges. Fixed charges consist of interest
expense, a portion of rental expense (deemed by management to be
representative of the interest factor of rental payments) and amortization
of debt issuance costs.
</FN>
</TABLE>
<PAGE>
RISK FACTORS
In addition to the other information set forth or incorporated by
reference in this prospectus, you should carefully consider the following
factors before tendering Original Notes in exchange for the New Notes.
The Substantial Amount of Debt Incurred to Finance Our Acquisition of
Shelby Williams could have a Material Adverse Effect on our Financial Health and
Prevent us from Fulfilling our Obligations under the New Notes
We have a substantial amount of debt. As of May 1, 1999, after giving
pro forma effect to the Transactions:
- our total debt would have been approximately $172.1 million;
- our total stockholders' equity would have been approximately $72.4
million; and
- the sufficiency of our earnings available to cover fixed charges
for the twenty-six weeks ended May 1, 1999 would have been approxi-
mately 1.6 to 1.
Our high level of debt could have important consequences for you and
us. For example, it could:
- make it more difficult for us to obtain additional financing in the
future for working capital, capital expenditures, acquisitions or
other purposes;
- require us to dedicate a large portion of our cash flow to pay
principal and interest on our indebtedness, including the New Notes,
thereby reducing the amount of cash flow available to fund working
capital, capital investments, acquisitions and other business
activities;
- increase our vulnerability to general adverse economic and industry
conditions, including increases in interest rates;
- place us at a competitive disadvantage compared to our competitors
that have proportionately less debt; and
- limit our flexibility in planning for, or reacting to, changes in our
business and the commercial furniture industry generally.
We anticipate that our cash flow from operations, together with
borrowings under the Senior Secured Credit Facilities, will be sufficient to
service our debt obligations as they become due. Our ability to meet these
requirements depends on our future financial performance, which will be affected
by financial, business, economic, competitive and other factors. We will not be
able to control many of these factors, such as economic conditions in the
markets in which we operate and competitive initiatives undertaken by
competitors. We cannot be certain that our cash flow from operations will be
sufficient to allow us to pay principal and interest on our debt, including the
New Notes, and meet our other obligations. If we cannot generate sufficient cash
flow from operations, we may be required to adopt one or more alternative
financing plans, such as refinancing or restructuring all or part of our
existing debt, including the New Notes, selling assets, reducing or delaying
investments in our business or seeking to raise additional debt or equity
capital. We cannot assure you that we will be able to effect any of these
actions on commercially reasonable terms, or at all, or that these actions would
enable us to continue to satisfy our cash requirements. In addition, the terms
of existing or future debt agreements, including the Senior Secured Credit
Facilities and the Indenture, may restrict us from adopting any of these
alternatives.
Covenant Restrictions may Limit our Ability to Operate our Business
The Senior Secured Credit Facilities and the Indenture contain, and
certain of our other indebtedness agreements may contain, covenants that
restrict our ability to make distributions or other payments to our investors
and creditors unless certain financial tests or other criteria are satisfied. We
must also comply with certain specified financial ratios and tests. In some
cases our subsidiaries are subject to similar restrictions which may restrict
their ability to make distributions to us. If we do not comply with these or
other covenants and restrictions contained in the Senior Secured Credit
Facilities or the Indenture, we could default under those agreements and the
debt, together with accrued interest, could then be declared immediately due and
payable. Our ability to comply with these provisions of the Senior Secured
Credit Facilities and the Indenture may be affected by changes in economic or
business conditions or other events beyond our control.
The Senior Secured Credit Facilities contain, and certain other
indebtedness agreements may contain, additional affirmative and negative
covenants, including limitations on our ability to incur additional indebtedness
and to make acquisitions and capital expenditures which could affect our ability
to operate our business. The Indenture for the New Notes restricts, among other
things, our ability to incur additional debt, sell assets, create liens or other
encumbrances, make certain payments and dividends or merge or consolidate, all
of which could affect our ability to operate our business and may limit our
ability to take advantage of potential business opportunities as they arise. A
failure to comply with these covenants and restrictions could result in an event
of default under either the Senior Secured Credit Facilities or the Indenture
which could lead to an acceleration of the related debt and the acceleration of
debt under other debt instruments that may contain cross-acceleration or
cross-default provisions.
Your Right to Receive Payments on the New Notes is Junior to our Bank
and other Unsubordinated Indebtedness and Possibly all of our Future Borrowings,
and the Guarantees of the New Notes are Junior to all the Guarantors' Existing
Senior Indebtedness and Possibly to all of their Future Borrowings
The New Notes are subordinated to all of our existing and future senior
indebtedness, including indebtedness under the Senior Secured Credit Facilities,
other than trade payables and future indebtedness that expressly provides that
it is equal to or subordinated in right of payment to the New Notes. Similarly,
payments by a Guarantor on its Subsidiary Guarantee of the New Notes are
subordinated to all of that Guarantor's existing and future senior indebtedness,
other than trade payables and future indebtedness that expressly provides that
it is equal to or subordinated in right of payment to its guarantee. The New
Notes also are effectively subordinated to all of our and our subsidiaries'
secured indebtedness to the extent of the assets securing such indebtedness. In
addition, if a default occurs with respect to senior indebtedness, such as the
Senior Secured Credit Facilities, the subordination provisions of such senior
indebtedness would likely restrict payments to the holders of the New Notes. If
the indebtedness under the Senior Secured Credit Facilities were to be
accelerated, there can be no assurance that our assets would be sufficient to
repay in full such indebtedness and our other indebtedness, including the New
Notes.
After giving pro forma effect to the Transactions as of May 1, 1999, we
would have had approximately $70.0 million of senior indebtedness and our
Guarantors would have had no senior indebtedness (excluding guarantees under the
Senior Secured Credit Facilities). In addition, approximately $50.0 million
would have been available for borrowing as additional senior indebtedness under
the Senior Secured Credit Facilities. The Indenture permits us and the
Guarantors to borrow substantial additional indebtedness, including senior debt,
in the future.
If we or the Guarantors are declared bankrupt or insolvent, or if there
is a payment default under any senior indebtedness, we are required to pay the
lenders under the Senior Secured Credit Facilities and any other creditors who
are holders of senior indebtedness in full before we pay you. Accordingly, we
may not have enough assets remaining after payments to holders of such senior
indebtedness to pay you. In addition, under certain circumstances, we may not
pay any amount on the New Notes if certain senior indebtedness, including debt
under the Senior Secured Credit Facilities, is not paid when due or any other
default on such senior indebtedness exists.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to us or the Guarantors, holders of the New Notes will
participate on an equal basis with trade creditors and all other holders of
senior subordinated indebtedness of our Company and the Guarantors, as the case
may be. However, because the Indenture requires that amounts otherwise payable
to holders of the New Notes in a bankruptcy or similar proceeding be paid
instead to holders of senior debt until they are paid in full, holders of the
New Notes may receive less, ratably, than holders of trade payables in any such
proceeding. In addition, any acceleration of the indebtedness under the Senior
Secured Credit Facilities will, and acceleration of our other indebtedness may,
constitute an event of default under the Indenture. If an event of default
exists under the Senior Secured Credit Facilities or certain other senior
indebtedness, the Indenture may restrict payments on the New Notes until holders
of such other indebtedness are paid in full or such default is cured or waived
or has otherwise ceased to exist. In any of these cases, we and the Guarantors
may not have sufficient funds to pay all of our creditors and holders of the New
Notes may receive less, ratably, than the holders of trade payables.
Further, the Senior Secured Credit Facilities limit our ability to
purchase New Notes prior to maturity, even though the Indenture requires us to
offer to repurchase New Notes in certain circumstances. If we or the Guarantors
make certain asset sales or if a change of control occurs when we are prohibited
from repurchasing New Notes, we could ask the lenders under the Senior Secured
Credit Facilities if we may repurchase the New Notes or we could attempt to
refinance the borrowings that contain such prohibitions. If we do not obtain
such a consent or repay such borrowings, we would be unable to repurchase the
New Notes. Our failure to repurchase tendered New Notes at a time when such
repurchase is required by the Indenture would constitute an event of default
under the Indenture which, in turn, would constitute a default under the Senior
Secured Credit Facilities. In such circumstances, the subordination provisions
in the Indenture would restrict payments to you.
<PAGE>
Our Assets Are Encumbered to Secure the Senior Secured Credit Facilities
The New Notes are not secured by any of our assets. Our obligations
under the Senior Secured Credit Facilities, however, are secured by a first
priority pledge of and security interest in the stock of all our present and
future domestic subsidiaries and 66% of the stock of all our present and future
foreign subsidiaries, and substantially all of our assets and the assets of our
domestic subsidiaries. If we were to become insolvent or liquidated, or if
payment under the Senior Secured Credit Facilities were accelerated, the lenders
under the Senior Secured Credit Facilities would be entitled to exercise the
remedies available to a secured lender under applicable law. Accordingly, all
secured lenders would be effectively senior to the holders of New Notes in right
of payment to the extent of the assets securing the indebtedness owed to the
secured lenders.
<PAGE>
Our Ability to Repay the New Notes and other Debt Depends on Cash Flow from our
Subsidiaries
We conduct a substantial amount of our business through our
subsidiaries. As a result, we depend, in part, on dividends, loans or advances,
or payments from our subsidiaries to satisfy our financial obligations and make
payments to our investors.
The ability of our subsidiaries to pay dividends and make other
payments to us may be restricted by, among other things:
- their earnings;
- covenants contained in their debt agreements;
- covenants contained in other agreements to which our subsidiaries are
or may become a party;
- business and tax considerations; and
- applicable corporate and other laws and regulations.
Although the Indenture limits the ability of such subsidiaries to enter
into consensual encumbrances and restrictions on their ability to pay dividends
and make other payments, this limitation is subject to a number of significant
exceptions and qualifications.
Not all Subsidiaries are Guarantors; Assets of the Non-Guarantor Subsidiaries
may not be Available to make Payments on the New Notes
Our present and future foreign subsidiaries will not be Guarantors of
the New Notes. Payments on the New Notes are only required to be made by us and
the Guarantors. As a result, no payments are required to be made from assets of
subsidiaries which do not guarantee the New Notes unless those assets are
transferred, by dividend or otherwise, to us or a Guarantor.
In the event of a bankruptcy, liquidation or reorganization of any of
the non-guarantor restricted subsidiaries, holders of their indebtedness,
including their trade creditors, will generally be entitled to payment of their
claims from the assets of those subsidiaries before any assets are made
available for distribution to us. After giving pro forma effect to the
Transactions as of May 1, 1999, the total liabilities, including trade payables,
of our non-guarantor restricted subsidiaries would have been approximately $10.3
million.
Our non-guarantor restricted subsidiaries generated approximately 2.5%
of our pro forma combined revenues in fiscal year 1998. Our non-guarantor
restricted subsidiaries generated approximately 2.1% of our pro forma combined
revenues in the twenty-six weeks ended May 1, 1999, and held approximately 6.1%
of our pro forma combined assets as of May 1, 1999.
We may not be able to Purchase the New Notes upon a Change of Control as
Required by the Indenture
Upon the occurrence of specific change of control events described in
the Indenture, we will be required to offer to purchase all outstanding New
Notes from the holders thereof at 101% of their principal amount, plus accrued
interest to the date of repurchase. However, a change of control will also
constitute an event of default under the Senior Secured Credit Facilities. A
default under the Senior Secured Credit Facilities would result in an event of
default under the Indenture if the lenders were to accelerate the debt under the
Senior Secured Credit Facilities, in which case the subordination provisions of
the New Notes would require payment in full of the Senior Secured Credit
Facilities before repurchase of the New Notes. Any future credit agreements or
other agreements to which we become a party may contain similar restrictions and
provisions. In the event a change of control occurs at a time when such other
agreements prohibit us from purchasing the New Notes, the terms of the New Notes
permit us to seek the consent of our lenders to purchase the New Notes or we
could attempt to refinance the borrowings that contain such prohibition. If we
do not obtain such a consent or repay such borrowings, we will remain prohibited
from purchasing the New Notes. Our failure to purchase the tendered New Notes
would constitute an event of default under the Indenture, which would result in
an event of default under the Senior Secured Credit Facilities.
The source of funds for any purchase of the New Notes would be our
available cash or cash generated from other sources, including borrowings, sales
of assets, sales of equity or funds provided by an existing or new controlling
person. We cannot assure you that any of these sources will be available. Upon
the occurrence of a change of control event, we may seek to refinance the
indebtedness outstanding under the Senior Secured Credit Facilities and the New
Notes. However, it is possible that we will not be able to complete such
refinancing on commercially reasonable terms or at all. In such event, we would
not have the funds necessary to finance the required change of control offer.
The provisions relating to a change of control included in the Indenture may
increase the difficulty of a potential acquiror obtaining control of the
Company.
<PAGE>
Risks Related to the Integration of Shelby Williams
On June 18, 1999, Falcon's recently formed, wholly owned subsidiary
merged into Shelby Williams. As a result, Shelby Williams became a wholly owned
subsidiary of Falcon. Prior to this merger, Falcon and Shelby Williams operated
independently, and our success as a combined company will depend in large
measure on our ability to successfully integrate the operations of these
companies. The combination of Falcon and Shelby Williams will entail the
reorganization of certain functions to achieve cost savings and to realize the
full potential of the business opportunities management believes are available
to us. We can give no assurance, however, that we will be able to successfully
integrate Shelby Williams or achieve such cost savings or that we will not
encounter delays or incur unanticipated costs in such integration.
We may not be Successful in Implementing our Business Strategy
Our strategic objectives are to steadily grow our business and improve
our operations and cost structure. In order to achieve these objectives, our
business strategy consists of the following key elements:
- capitalize on the Acquisition of Shelby Williams;
- maintain customer service leadership;
- maximize operating efficiencies; and
- grow through strategic acquisitions.
We can give no assurance that the implementation of our business
strategy will be successful or will improve operating results. Other conditions
may exist, such as unforeseen costs and expenses or an economic downturn, that
may offset any improved operating results that are attributable to such business
strategy. In addition, after gaining experience in implementing our business
strategy, we may decide to alter or discontinue certain aspects of our strategy.
Any failure to implement our business strategy may adversely affect our ability
to service our indebtedness, including the New Notes.
Further, in order to expand our markets and to complement our product
portfolio, our business strategy includes making additional acquisitions. From
time to time we investigate opportunities for acquisitions. We can give no
assurance, however, that we will be able to identify suitable acquisition
candidates, that future acquisitions can be consummated on acceptable terms or
that any acquired companies can be successfully integrated into our operations.
Our ability to make future acquisitions may also be constrained by our ability
to obtain financing and the restrictions set forth in the Indenture and the
Senior Secured Credit Facilities. We can give no assurance that businesses
acquired in the future will achieve sales and profitability that justify the
investment in such businesses. In addition, to the extent that consolidation
becomes more prevalent in the commercial furniture industry, the prices for
attractive acquisition candidates may increase to unacceptable levels.
Our operations and those of any new acquisitions may require additional
personnel, assets and cash expenditures. We can give no assurance that we will
be able to successfully expand and operate such acquisitions profitably. We may
not be able to anticipate and respond effectively to all of the changing demands
that our expanding operations will have on our management information and
operating systems. In addition, we may experience delays, disruptions and
unanticipated expenses in connection with any acquisitions. Our failure to meet
challenges of any such expansion could have a material adverse effect on our
business, financial condition and results of operations.
Risks Related to Pro Forma Financial Data and Limited Relevance of Historical
Financial Data
The unaudited pro forma combined financial data set forth in this
prospectus is based upon a number of assumptions and estimates related to, among
other things, the integration of Shelby Williams. Any cost savings anticipated
by management are inherently subject to significant business, economic and
competitive uncertainties and contingencies, any of which are beyond our
control, and are based upon assumptions with respect to future business
decisions that are subject to change. Such uncertainties and contingencies
include the risks described herein including, among others, the risks related to
the Acquisition and integration of Shelby Williams. Any additional costs or
expenses which may result from such risks are not taken into account in the
presentation of the unaudited pro forma combined financial data. It can be
expected that some or all of the assumptions of the unaudited pro forma combined
financial data, and some or all of the assumptions underlying the other
estimates, will not materialize.
As a result of the Acquisition of Shelby Williams, the historical
consolidated financial data of Falcon and Shelby Williams presented in this
prospectus is of limited relevance in understanding what our results of
operations, financial position or cash flows would have been for the historical
periods presented had the Acquisition of Shelby Williams been completed at the
beginning of the period.
Limitations of Market Share Information
Within the commercial furniture market, we compete primarily in the
office, food service, hospitality (including gaming) and national accounts
segments. Quantitative industry data on these four market segments is limited
because the commercial furniture market is highly fragmented and includes
hundreds of producers. We are not aware of any industry group that exists which
independently monitors these relatively small market segments. The Business and
Institutional Furniture Manufacturer's Association ("BIFMA") does, however,
provide information for the United States office furniture market, the largest
part of the commercial furniture market. Of this market, we estimate that the
segments in which we compete represent approximately 10% of the total United
States office furniture market as calculated by BIFMA. Although the BIFMA
research is narrowly focused, we believe it is the best available data to
evaluate general trends in the industry as a whole.
Because each segment has relatively few large industry leaders, and
these leaders tend to specialize within only one or two of the four market
segments in which we compete, we face difficulty providing any more precise
information regarding our competitive market share than that which is provided
in this prospectus. Moreover, market data used throughout this prospectus,
including information relating to our relative position in the commercial
furniture industry, is based upon the good faith estimates of management, which
estimates are based upon their review and knowledge of internal surveys,
independent industry publications and other publicly available information.
Although we believe that these sources are reliable, the accuracy and
completeness of such information is not guaranteed and has not been
independently verified.
Competition
The office, food service, hospitality (including gaming), national
accounts, university, healthcare and other institutional segments of the
commercial furniture industry are fragmented and highly competitive with respect
to each of the products we sell. We believe that the principal bases of
competition are design, quality, customer service, product pricing and speed of
delivery. We compete for sales of each of our products with numerous domestic
and foreign manufacturers, many of which have financial and other resources
greater than we do. We can give no assurance that our competitors will not offer
a greater range of high-quality products, or that new entrants with greater
financial resources than us will not enter the market, or that results of
operations will not be adversely affected by increased competition.
We may be Adversely Impacted by Work Stoppages and other Labor Matters
Approximately 2,300 of our employees are unionized. Of these,
approximately 1,100 unionized employees are represented by separate bargaining
agreements with contracts expiring in November 1999 and November 2000. Although
we have experienced only one work stoppage or labor strike, we can give no
assurance that we will not encounter strikes, slowdowns, or other types of
conflicts with labor unions or our other employees in the future. In the event
that we experience strikes or other types of conflicts with our employees, such
strikes or other conflicts would adversely impact our business.
In addition, on several occasions, attempts were made to unionize more
of our manufacturing facilities. We can give no assurance that further
unionization efforts will not be made at our manufacturing facilities in the
future, nor can we give assurance whether such unionization efforts will be
successful. In the event that such unionization efforts are successful, our
business could be adversely effected.
Environmental Matters
We are subject to numerous environmental laws and regulations in the
various jurisdictions in which we operate that (1) govern operations that may
have adverse environmental effects, such as discharges into air and water, as
well as handling and disposal practices for solid and hazardous wastes, and (2)
impose liability for response costs and certain damages resulting from past and
current spills, disposals or other releases of hazardous materials. Our
operations may result in noncompliance with or liability for remediation under
the environmental laws. Environmental laws have changed rapidly in recent years,
and we may be subject to more stringent environmental laws in the future.
Although environmental matters have not to date had a material adverse effect on
the results of operations or financial condition of either Falcon or Shelby
Williams, we can give no assurance that such matters will not have a material
adverse effect on our results of operations or financial condition or that more
stringent environmental laws will not be enacted which could have a material
adverse effect on our results of operations or financial condition.
We may be Adversely Effected if our Year 2000 Remediation Efforts are not
Successful
Our business could be adversely impacted by information technology
issues related to the year 2000. We use software and related computer
technologies essential to our operations that use two digits rather than four to
specify the year, which could result in a date recognition problem with the
transition to the year 2000. We have established a plan to identify and
remediate potential year 2000 problems in our business information systems,
infrastructure and production and manufacturing sites. We have substantially
completed an inventory of potentially date-sensitive systems, and we are
currently focused on the remediation and testing phases of our year 2000
program. We have also begun surveying our suppliers and service providers for
year 2000 compliance.
We currently believe that the most reasonably likely worst case
scenario is that there will be some localized disruptions of systems that will
affect individual business processes, facilities or suppliers for a short time
rather than systemic or long-term problems affecting our business operations as
a whole. Our contingency planning will continue to identify systems, or other
aspects of our business or that of our suppliers, that we believe would be most
likely to experience year 2000 problems, as well as those business operations in
which a localized disruption could have the potential for causing a wider
problem by interrupting the flow of products, materials or data to other
operations. Because there is uncertainty as to which activities may be affected
and the exact nature of the problems that may arise, our contingency planning
will focus on minimizing the scope and duration of any disruptions by having
sufficient personnel, inventory and other resources in place to permit a
flexible, real-time response to specific problems as they may arise at
individual locations around the world.
There is still uncertainty about the broader scope of the year 2000
issue as it may affect us and third parties, including our suppliers and
customers, that are critical to our operations. For example, lack of readiness
by electrical and water utilities, financial institutions, governmental agencies
or other providers of general infrastructure could, in some geographic areas,
pose significant impediments to our ability to carry on our normal operations in
the area or areas so affected. In the event that we are unable to complete our
remedial actions and are unable to implement adequate contingency plans in the
event that problems are encountered, there could be a material adverse effect on
our business, results of operations or financial condition. For more information
regarding our year 2000 program, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Readiness."
An Active Trading Market may not Develop for the New Notes
There is not an established trading market for the New Notes. We do not
intend to apply for listing of the New Notes on any United States or other
securities exchange or for quotation through any inter-dealer automated
securities market. The liquidity of any market for the New Notes will depend
upon many factors including:
- the number of holders of the New Notes;
- our results of operations and financial condition;
- the market for similar securities; and
- the interest of securities dealers in making a market in the New
Notes.
There can be no assurance as to the development or liquidity of any
market which may develop for the New Notes. If a trading market does not develop
or is not maintained, you may experience difficulty in reselling the New Notes,
or you may be unable to sell them at all.
Historically, the market for non-investment grade debt has been subject
to disruptions that have caused volatility in prices. It is possible that the
market for the New Notes will be subject to disruptions. Any such disruptions
may have a negative effect on you as a holder of the New Notes regardless of our
prospects and financial performance.
If You Fail to Exchange Your Original Notes, Your Original Notes will Remain
subject to Restrictions on Transfer
Holders of Original Notes who do not exchange their Original Notes for
New Notes pursuant to the exchange offer will continue to be subject to the
restrictions on transfer of the Original Notes described in the legend on those
notes. The restrictions result from the issuance of the Original Notes in
reliance on exemptions from registration under the Securities Act and applicable
state securities laws. In general, the Original Notes may not be transferred or
resold except in a transaction registered in accordance with, or exempt from,
these registration requirements. If we complete this exchange offer, we will not
be required to register the Original Notes, and we do not anticipate that we
will register the Original Notes, under the Securities Act. Additionally, to the
extent that Original Notes are tendered and accepted in the exchange offer, the
aggregate principal amount of the Original Notes outstanding will decrease, with
a resulting decrease in the liquidity of the market for the Original Notes.
<PAGE>
USE OF PROCEEDS
This exchange offer is intended to satisfy certain of our obligations
under the exchange and registration rights agreement entered into in connection
with the offering of the Original Notes. We will not receive any proceeds from
the exchange offer. In consideration for issuing the New Notes, we will receive
Original Notes with like original principal amount at maturity. The form and
terms of the Original Notes are the same as the form and terms of the New Notes,
except as otherwise described in this prospectus. The Original Notes surrendered
in exchange for New Notes will be retired and canceled and cannot be reissued.
Accordingly, the issuance of the New Notes will not result in any increase in
our outstanding debt.
We received net proceeds totaling approximately 96.0 million from the
private placement of the Original Notes. Discounts and commissions and other
expenses payable by us totaled approximately 4.0 million. The net proceeds were
used to complete the Stock Tender Offer.
CAPITALIZATION
The following table sets forth Falcon's cash position and total
capitalization as of May 1, 1999 (1) on an actual, historical basis; and (2) as
adjusted, to give pro forma effect to the Transactions. You should read this
information in conjunction with the "Use of Proceeds," "Selected Historical
Consolidated Financial Data," "Unaudited Pro Forma Combined Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" sections and the respective consolidated financial statements of
Falcon and Shelby Williams and the related notes thereto, included elsewhere or
incorporated by reference in this prospectus.
As of May 1, 1999
Actual As Adjusted
(In thousands)
(Unaudited)
Cash and cash equivalents........................... $ 1,162 $ 3,906
========= =========
Long-term debt, including current portion:
Existing revolving credit facility............. $ 19,249 $ --
Existing notes payable to a foreign bank....... 1,806 1,806
Capital lease obligations...................... 273 273
New Term Loan due 2005......................... -- 70,000
New Revolving Credit Facility.................. -- --
Original Notes................................. -- 100,000
--------- ---------
Total long-term debt........................... 21,328 172,079
--------- ---------
Minority interest in consolidated subsidiary........ 796 796
Total stockholders' equity.......................... 72,426 72,426
--------- ---------
Total capitalization........................... $ 94,550 $ 245,301
========= =========
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Falcon
You should read Falcon's selected historical consolidated financial
data set forth below in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," the consolidated financial
statements and the notes thereto, and the other financial information included
or incorporated by reference herein. The selected historical consolidated
financial data for the fiscal years ended October 29, 1994, October 28, 1995,
November 2, 1996, November 1, 1997 and October 31, 1998 and have been derived
from Falcon's audited consolidated financial statements. The selected
consolidated financial data for the twenty-six weeks ended May 2, 1998 and May
1, 1999 have been derived from Falcon's unaudited consolidated financial
statements and, in the opinion of Falcon's management, include all adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation of its results of operations for such periods and financial
condition as for the dates presented. The results of operations for any interim
period are not necessarily indicative of the results of operations for a full
year.
<TABLE>
<CAPTION>
Twenty-six
Fiscal year ended weeks
---------------------------------------------------------- -----------------
October 29, October 28, November 2, November 1, October 31, May 2, May 1,
1994 1995 1996 1997 1998 1998 1999
(In thousands, except per share data) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales............................... $ 67,957 $ 79,647 $100,702 $113,010 $143,426 $ 61,711 $ 71,064
Cost of sales, including nonrecurring 45,318 52,883 69,125 79,507 103,067 44,052 50,490
items...................................
Special and nonrecurring items.......... -- -- -- 3,700 271 -- --
-------- -------- -------- -------- -------- -------- --------
Gross margin............................ 22,639 26,764 31,577 29,803 40,088 17,659 20,574
Selling, general and administrative
expenses............................. 14,354 16,992 20,469 22,044 29,482 11,813 13,833
-------- -------- -------- -------- -------- -------- --------
Operating profit........................ 8,285 9,772 11,108 7,759 10,606 5,846 6,741
Interest income (expense), net.......... 145 141 95 139 (619) 7 (596)
Minority interest in consolidated
subsidiary........................... 4 (44) 89 47 64 34 14
-------- --------- -------- -------- -------- -------- --------
Earnings from continuing operations
before income taxes.................. 8,434 9,869 11,292 7,945 10,051 5,887 6,159
Income tax expense...................... 3,121 3,693 4,291 3,019 3,701 2,267 2,325
-------- -------- -------- -------- -------- -------- --------
Net earnings from continuing operations. 5,313 6,176 7,001 4,926 6,350 3,620 3,834
Discontinued operations, net of tax..... 864 1,281 1,432 938 -- -- --
Gain on sale of discontinued
operations, net of tax ................. -- -- -- 6,770 -- -- --
-------- -------- -------- -------- -------- -------- --------
Net earnings............................ $ 6,177 $ 7,457 $ 8,433 $ 12,634 $ 6,350 $ 3,620 $ 3,834
======== ======== ======== ======== ======== ======== ========
Ratio of earnings to fixed charges(1)... 287.2x 310.3x 236.1x 109.0x 14.4x 232.6x 10.9x
Earnings Per Share Data--Diluted(2):
Continuing operations................... $ 0.55 $ 0.64 $ 0.71 $ 0.50 $ 0.68 $ 0.38 $ 0.43
Discontinued operations................. 0.09 0.13 0.15 0.09 -- -- --
Gain on sale of discontinued operations. -- -- -- 0.69 -- -- --
------- ------- ------- ------- ------- ------- -------
Net earnings per share.................. $ 0.64 $ 0.77 $ 0.86 $ 1.28 $ 0.68 $ 0.38 $ 0.43
======== ======= ======= ======= ======= ======= =======
As of As of
----------------------------------------------------------- -----------------
October 29, October 28, November 2, November 1, October 31, May 2, May 1,
1994 1995 1996 1997 1998 1998 1999
(In thousands) (Unaudited)
Balance Sheet Data:
Cash and cash equivalents............... $ 7,312 $ 6,970 $ 5,714 $ 16,294 $ 5,186 $ 2,057 $ 1,162
Working capital......................... 25,658 29,927 34,531 38,691 35,756 33,109 35,286
Property, plant and equipment, net...... 18,467 21,529 24,485 25,211 27,498 28,915 28,354
Total assets............................ 64,905 74,884 84,388 99,357 111,974 108,769 111,731
Long-term debt (including current 1,787 1,889 1,405 1,794 18,815 19,189 21,328
portion)................................
Stockholders' equity.................... 50,556 58,307 68,476 73,264 71,946 70,427 72,426
<PAGE>
<FN>
(1) For purposes of computing the ratio of earnings to fixed charges, earnings
include net earnings plus fixed charges. Fixed charges consist of interest
expense, a portion of rental expense (deemed by management to be
representative of the interest factor of rental payments) and amortization
of debt issuance costs.
(2) Per share data reflects adjustments related to the December 1995 10% stock
dividend.
</FN>
</TABLE>
<PAGE>
Shelby Williams
You should read Shelby Williams' selected historical consolidated
financial data set forth below in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the consolidated
financial statements and the notes thereto, and the other financial information
included or incorporated by reference herein. The selected historical
consolidated financial data for the years ended December 31, 1994, 1995, 1996,
1997 and 1998 have been derived from Shelby Williams' audited consolidated
financial statements. Shelby Williams' selected consolidated financial data for
the quarters ended March 31, 1998 and 1999 have been derived from Shelby
William's unaudited consolidated financial statements and, in the opinion of
Shelby Williams' management, as expressed in Shelby Williams' Quarterly Report
on Form 10-Q for the period ending March 31, 1999, include all adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation of its results of operations for such periods and financial
condition as of the dates presented. The results of operations for any interim
period are not necessarily indicative of the results of operations for a full
year.
<TABLE>
<CAPTION>
Three months
Fiscal years ended December 31, ended March 31,
-------------------------------------------- ---------------
1994 1995 1996 1997 1998 1998 1999
(In thousands, except per share data) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales.................................. $135,011 $144,525 $149,481 $157,779 $165,937 $38,484 $43,128
Cost of goods sold......................... 107,635 112,412 114,998 120,849 126,388 29,929 34,081
-------- -------- -------- -------- -------- ------- -------
Gross margin............................... 27,376 32,113 34,483 36,930 39,549 8,555 9,047
Restructuring charge....................... 5,575 -- -- -- -- -- --
Selling, general and administrative expenses 21,683 22,301 22,100 22,268 22,994 5,302 5,548
-------- -------- -------- -------- -------- ------- -------
Operating profit........................... 118 9,812 12,383 14,662 16,555 3,253 3,499
Interest expense........................... 1,207 1,257 969 622 391 125 46
Interest income............................ -- (9) (18) (614) (539) (188) (107)
Miscellaneous expense (income)............. 106 37 (44) (89) (102) 18 22
-------- -------- -------- -------- -------- ------- -------
Income (loss) from continuing operations
before income taxes........................ (1,195) 8,527 11,476 14,743 16,805 3,298 3,538
Income tax (benefit)....................... (575) 2,330 3,720 5,066 6,191 1,220 1,274
--------- -------- -------- -------- -------- ------- -------
Income (loss) from continuing operations... (620) 6,197 7,756 9,677 10,614 2,078 2,264
Discontinued operations, net of tax........ 985 583 661 915 (7,129) 36 --
-------- -------- -------- -------- -------- ------- ------
Net income................................. $ 365 $ 6,780 $ 8,417 $ 10,592 $ 3,485 $ 2,114 $ 2,264
======== ======== ======== ======== ======== ======= =======
Ratio of earnings to fixed charges(1) 0.1x 7.3x 11.8x 21.5x 35.6x 23.2x 51.5x
Per Share Data--Diluted:
Income (loss) from continuing operations... $ (0.07) $ 0.69 $ 0.88 $ 1.05 $ 1.17 $ 0.22 $ 0.26
Income (loss) from discontinued operations,
net of taxes............................... 0.11 0.06 0.07 0.10 (0.01) 0.01 --
Loss on disposal of discontinued
operations, net of taxes................... -- -- -- -- (0.78) -- --
-------- -------- -------- -------- ------- ------- ------
Net income................................. $ 0.04 $ 0.75 $ 0.95 $ 1.15 $ 0.38 $ 0.23 $ 0.26
======== ======== ======== ======== ======== ======= =======
As of December 31, As of March 31,
------------------------------------------- ---------------
1994 1995 1996 1997 1998 1998 1999
(In thousands) (Unaudited)
Balance Sheet Data:
Cash and cash equivalents.................. $ 1,633 $ 2,376 $1,039 $11,124 $ 6,355 $12,582 $ 6,282
Working capital............................ 28,092 32,016 37,606 48,494 39,164 45,233 39,805
Property, plant and equipment, net......... 26,989 26,547 23,476 24,611 25,985 27,895 25,926
Total assets............................... 86,306 87,613 83,213 97,238 89,633 100,180 88,645
Long-term debt (including current portion). 8,944 8,895 8,000 7,000 3,000 6,000 2,000
Stockholders' equity....................... 48,658 51,724 55,970 71,772 64,695 70,505 65,024
<FN>
(1) For purposes of computing the ratio of earnings to fixed charges, earnings
include net earnings plus fixed charges. Fixed charges consist of interest
expense, a portion of rental expense (deemed by management to be
representative of the interest factor of rental payments) and amortization
of debt issuance costs.
</FN>
</TABLE>
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following unaudited pro forma combined financial data presents the
pro forma combined balance sheet of the Company as of May 1, 1999 as if the
Transactions had occurred on May 1, 1999, and presents the pro forma combined
statements of operations data of the Company for the periods presented as if the
Transactions had occurred on November 2, 1997. See "Prospectus Summary--The
Transactions." The unaudited pro forma combined financial data is based on the
historical consolidated financial statements of Falcon and the adjusted
historical consolidated financial statements of Shelby Williams, and on the
assumptions and adjustments described in the notes to such unaudited pro forma
combined financial data, including assumptions relating to the allocation of the
consideration paid for Shelby Williams to the assets and liabilities of Shelby
Williams based on preliminary estimates of their respective fair values. The
actual allocation of such consideration may differ from that reflected in the
unaudited pro forma combined financial data. Amounts allocated will be based
upon the estimated fair values at the time of the Acquisition of Shelby Williams
which could vary significantly from the amounts assumed. In addition, the
interest rates on the borrowings under the Senior Secured Credit Facilities, and
the estimated transaction fees and expenses, are assumed solely for the purpose
of presenting the unaudited pro forma combined financial data set forth below.
The actual interest rates on the borrowings under the Senior Credit Facilities
and actual transaction fees and expenses may differ from assumptions set forth
below.
The consolidated statements of operations of Shelby Williams for the
year ended October 31, 1998 and the twenty-six weeks ended May 1, 1999 reflect
adjustments to the fiscal year ended December 31, 1998 and the fiscal quarter
ended March 31, 1999 historical financial data of Shelby Williams to conform
such financial data to the fiscal year end and most recent fiscal quarter of
Falcon. As a result, the consolidated statement of operations of Shelby Williams
for the year ended October 31, 1998 was derived by adding the monthly activity
for November and December 1997 to, and subtracting the monthly activity for
November and December 1998 from, the audited consolidated statement of
operations of Shelby Williams for the fiscal year ended December 31, 1998.
Likewise, the consolidated statement of operations of Shelby Williams for the
twenty-six weeks ended May 1, 1999 was derived by adding the monthly activity
for November 1998, December 1998 and April 1999 to the unaudited consolidated
statement of operations of Shelby Williams for the fiscal quarter ended March
31, 1999. The consolidated statement of operations for the latest twelve months
ended May 1, 1999 and the consolidated balance sheet of Shelby Williams as of
May 1, 1999 were derived from unaudited monthly financial statements. Such
monthly statements do not reflect all adjustments which are customarily made at
the end of each fiscal quarter. We believe that the effect of such adjustments,
if made, would not be material.
In connection with the Acquisition of Shelby Williams, we have
identified estimated annual cost savings on a pro forma basis of approximately
$0.4 million related to duplicate public company costs, which cost savings are
reflected in the unaudited pro forma financial data as adjustments to selling,
general and administrative expenses. Management expects that the Company will
begin to realize a portion of the benefit of the cost savings described above in
the fiscal quarter after the closing of the Acquisition. Management also
believes that the Company will be able to realize additional cost savings as a
result of the Acquisition which have not been included in the pro forma combined
financial data. A significant portion of the benefit of such cost savings is not
expected to be realized until the end of fiscal year 2003. Such additional cost
savings do not qualify as pro forma adjustments under Regulation S-X promulgated
under the Securities Act.
We completed the Transactions in the third fiscal quarter of 1999. We
do not expect to record any material charges in connection with the refinancing
of existing indebtedness.
The unaudited pro forma combined financial data do not purport to
represent what our financial position and results of operations would have been
if the Transactions had actually been completed as of the dates indicated and
are not intended to project our financial position or results of operations for
any future period.
The unaudited pro forma combined financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the respective historical consolidated financial
statements of Falcon and Shelby Williams and the related notes thereto included
elsewhere or incorporated by reference in this prospectus.
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
As of May 1, 1999
Historical Historical Pro forma Pro forma
Falcon Shelby Williams adjustments combined
---------- --------------- ----------- ----------
(In thousands)
ASSETS
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents.............. $ 1,162 $ 8,793 $ (6,049)(1) $ 3,906
Accounts receivable.................... 20,567 24,839 -- 45,406
Inventories............................ 27,761 23,445 10,738(9) 61,944
Prepayments and other current assets... 3,421 4,421 -- 7,842
---------- ---------- ---------- ----------
Total current assets............... 52,911 61,498 4,689 119,098
Property, plant and equipment, net......... 28,354 25,918 -- 54,272
Goodwill, net.............................. 24,749 148 84,095(2) 108,992
Deferred financing fees.................... -- -- 6,500(4) 6,500
Other intangible assets, net............... 5,717 1,154 -- 6,871
---------- ---------- ---------- ----------
Total assets....................... $ 111,731 $ 88,718 $ 95,284 $ 295,733
========== ========== ==========- ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................... $ 8,561 $ 7,331 $ -- $ 15,892
Customer deposits on orders in process. 1,967 7,037 -- 9,004
Accrued liabilities.................... 5,018 6,572 10,000(5) 21,887
297(3)
Current maturities of long-term debt... 2,079 1,000 (1,000)(6) 2,079
---------- ---------- ---------- ----------
Total current liabilities.......... 17,625 21,940 9,297 48,862
Deferred income taxes...................... 876 2,014 -- 2,890
Minority interest in consolidated subsidiary 796 -- -- 796
Long-term debt............................. 19,249 -- 170,000(7) 170,000
(19,249)(6)
Other...................................... 759 -- -- 759
---------- ---------- ---------- ----------
Total liabilities.................. 39,305 23,954 160,048 223,307
---------- ---------- ---------- ----------
Stockholders' Equity:
Common stock........................... 198 593 (593)(8) 198
Additional paid-in-capital............. 47,376 10,135 (10,135)(8) 47,376
Treasury stock, at cost................ (15,685) (24,184) 24,184(8) (15,685)
Cumulative translation adjustments..... (196) -- -- (196)
Retained earnings...................... 40,733 78,220 (78,220)(8) 40,733
---------- ---------- ---------- ----------
Total stockholders' equity......... 72,426 64,764 (64,764) 72,426
---------- ---------- ---------- ----------
Total liabilities and stockholders'
equity........................... $ 111,731 $ 88,718 $ 95,284 $ 295,733
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma combined
financial statements.
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(In thousands)
The unaudited pro forma combined balance sheet as of May 1, 1999 has
been prepared as if the Transactions had occurred as of May 1, 1999. The
following adjustments were recorded:
(1) The following table sets forth the estimated sources and uses of
funds in connection with the Transactions:
Sources of funds:
Initial borrowings under the Senior Secured
Credit Facilities:
Revolving Credit Facility................... $ --
Term Loan................................... 70,000
Original Notes................................. 100,000
Cash on hand................................... 6,049
---------
Total sources of funds.................... $ 176,049
=========
Uses of funds:
Purchase price................................. $ 149,300
Refinancing of existing debt................... 20,249
Debt issuance costs............................ 6,500
---------
Total uses of funds....................... $ 176,049
=========
(2) The following table sets forth the purchase price for the
Acquisition of Shelby Williams and the preliminary allocation as of May 1, 1999:
Acquisition costs of Shelby Williams:
Purchase price of 100% of outstanding
common stock.................................... $ 144,563
Purchase price to acquire outstanding options*.... 737
Plus: Transaction costs........................... 4,000
---------
Total purchase price......................... $ 149,300
=========
Preliminary Allocation:
Cash and cash equivalents......................... $ 8,793
Accounts receivable, net.......................... 24,839
Inventories....................................... 34,183
Prepaid and other current assets.................. 4,421
Property, plant and equipment..................... 25,918
Other assets...................................... 1,302
Accounts payable and other current liabilities.... (32,237)
Other long-term liabilities....................... (2,014)
----------
Subtotal (fair value of net assets acquired)...... 65,205
Goodwill (excess of purchase price over fair
value of net assets acquired)................... 84,095
---------
Total purchase price......................... $ 149,300
=========
- -------------------------
*All outstanding options were purchased by Shelby Williams directly
from the optionees at a price equal to the excess, if any, of the per share
purchase price offered in the Stock Tender Offer over the exercise price of the
option in question, multiplied by the number of shares covered by the option.
We are currently in the process of allocating the purchase price among
the tangible and intangible assets to be acquired and the liabilities to be
assumed. The final purchase price and its allocation will be based on
independent appraisals, discounted cash flows, quoted market prices and
estimates by management which are expected to be completed within one year
following the Acquisition. Upon completion of the purchase price allocation
process, to the extent the purchase price exceeds the fair value of the net
identifiable tangible and intangible assets acquired, such excess will be
allocated to goodwill and amortized over approximately forty years.
<PAGE>
(3) Represents the addition of deferred taxes, at an effective tax rate
of 38.0%, at Shelby Williams due to the adjustment of assets and liabilities to
equal fair value.
(4) Represents the portion of estimated transaction fees and expenses
attributable to the Senior Secured Credit Facilities, the Original Notes and the
New Notes which will be recorded as deferred financing costs and amortized over
the life of the debt to be issued.
(5) Represents the accrual of additional costs and expenses associated
with the Acquisition of Shelby Williams, primarily related to facility
rationalization and other integration costs.
(6) Represents the repayment of revolving credit borrowings and other
debt under the existing credit facilities.
(7) Represents the issuance of the Original Notes and the long-term
portion of the term loan under the Senior Secured Credit Facilities.
(8) Represents the elimination of the historical stockholders' equity
of Shelby Williams as required by purchase accounting.
(9) Represents the inventory write-up at Shelby Williams relating to
inventory costing. Shelby Williams' inventory is stated at last-in, first-out
(LIFO) cost. This adjustment costs inventory at first-in, first-out (FIFO),
which approximates fair market value.
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Last twelve months ended May 1, 1999
Historical Historical Pro forma Pro forma
Falcon Shelby Williams (1) adjustments combined
---------- ------------------- ----------- ---------
(In thousands, except per share data and ratios)
<S> <C> <C> <C> <C>
Net sales....................................... $ 152,814 $ 171,788 $ (1,048)(8) $ 323,554
Cost of sales................................... 106,297 131,762 (1,048)(8) 237,011
---------- ---------- ---------- ----------
Gross margin.................................... 46,517 40,026 -- 86,543
Selling, general and administrative expenses.... 35,031 23,248 2,102(2) 60,004
(377)(7)
---------- ---------- ---------- ----------
Operating profit................................ 11,486 16,778 (1,725) 26,539
Interest income (expense)....................... (1,208) 155 (15,572)(3) (17,442)
(817)(4)
Minority interest in consolidated subsidiary.... 45 -- -- 45
---------- ---------- ---------- ----------
Earnings before income taxes.................... 10,323 16,933 (18,114) 9,142
Income tax expense.............................. 3,758 6,211 (6,084)(5) 3,885
---------- ---------- ---------- ----------
Earnings from continuing operations............. $ 6,565 $ 10,722 $ (12,030) $ 5,257
========== ========== ========== ==========
Earnings Per Share Data:
Earnings per share--Basic........................ $ 0.73 $ 0.58
========= ==========
Earnings per share--Diluted...................... $ 0.72 $ 0.58
========= ==========
Weighted average shares outstanding--Basic....... 9,032 9,032
========= ==========
Weighted average shares outstanding--Diluted..... 9,144 9,144
========= ==========
Other Data:
EBITDA(6)....................................... $ 19,008 $ 19,343 $ 377 $ 38,728
Depreciation and amortization................... 4,001 2,565 2,102 8,668
Capital expenditures............................ 4,166 2,991 -- 7,157
Selected Ratios:
Ratio of EBITDA to interest expense............. 2.2x
Ratio of senior debt to EBITDA.................. 1.8x
Ratio of total debt to EBITDA................... 4.4x
Ratio of earnings to fixed charges(9)........... 1.5x
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma combined
financial statements.
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Twenty-six weeks ended May 1, 1999
Historical Historical Pro forma Pro forma
Falcon Shelby Williams(1) adjustments combined
---------- ------------------ ----------- ---------
(In thousands, except per share data and ratios)
<S> <C> <C> <C> <C>
Net sales....................................... $ 71,064 $ 86,447 $ (498)(8) $ 157,013
Cost of sales................................... 50,490 66,873 (498)(8) 116,865
---------- ---------- ---------- ----------
Gross margin.................................... 20,574 19,574 -- 40,148
Selling, general and administrative expenses.... 13,833 11,576 1,051(2) 26,271
(189)(7)
---------- ---------- ---------- ----------
Operating profit................................ 6,741 7,998 (862) 13,877
Interest income (expense)....................... (596) 101 (7,818)(3) (8,721)
(408)(4)
Minority interest in consolidated subsidiary.... 14 -- -- 14
---------- ---------- ---------- ----------
Earnings before income taxes.................... 6,159 8,099 (9,088) 5,170
Income tax expense.............................. 2,325 2,949 (3,054)(5) 2,220
---------- ---------- ---------- ----------
Earnings from continuing operations............. $ 3,834 $ 5,150 $ (6,034) $ 2,950
========== ========== ========== ==========
Earnings Per Share Data:
Earnings per share--Basic........................ $ 0.43 $ 0.33
========= ==========
Earnings per share--Diluted...................... $ 0.43 $ 0.33
========= ==========
Weighted average shares outstanding--Basic....... 8,951 8,951
========= ==========
Weighted average shares outstanding--Diluted..... 9,000 9,000
========= ==========
Other Data:
EBITDA(6)....................................... $ 8,462 $ 9,327 $ 189 $ 17,978
Depreciation and amortization................... 1,721 1,329 1,051 4,101
Capital expenditures............................ 1,503 1,494 -- 2,997
Selected Ratios:
Ratio of EBITDA to interest expense............. 2.1x
Ratio of earnings to fixed charges(9)........... 1.6x
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma combined
financial statements.
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Fiscal year ended October 31, 1998
Historical Historical Pro forma Pro forma
Falcon Shelby Williams(1) adjustments combined
---------- ------------------ ----------- ---------
(In thousands, except per share data and ratios)
<S> <C> <C> <C> <C>
Net sales....................................... $ 143,426 $ 164,513 $ (1,016)(8) $ 306,923
Cost of sales................................... 103,338 125,490 (1,016)(8) 227,812
---------- ---------- ---------- ----------
Gross margin.................................... 40,088 39,023 -- 79,111
Selling, general and administrative expenses.... 29,482 22,672 2,102(2) 53,879
(377)(7)
Operating profit................................ 10,606 16,351 (1,725) 25,232
Interest income (expense)....................... (619) 195 (16,201)(3) (17,442)
(817)(4)
Minority interest in consolidated subsidiary.... 64 -- -- 64
---------- ---------- ---------- ----------
Earnings before income taxes.................... 10,051 16,546 (18,743) 7,854
Income tax expense.............................. 3,701 6,129 (6,324)(5) 3,506
---------- ---------- ---------- ----------
Earnings from continuing operations............. $ 6,350 $ 10,417 $ (12,419) $ 4,348
========== ========== ========== ==========
Earnings Per Share Data:
Earnings per share--Basic........................ $ 0.69 $ 0.48
========= ==========
Earnings per share--Diluted...................... $ 0.68 $ 0.47
========= ==========
Weighted average shares outstanding--Basic....... 9,156 9,156
========= ==========
Weighted average shares outstanding--Diluted..... 9,282 9,282
========= ==========
Other Data:
EBITDA(6)....................................... $ 17,880 $ 18,715 $ 377 $ 36,972
Depreciation and amortization................... 3,753 2,364 2,102 8,219
Capital expenditures............................ 6,594 3,972 -- 10,566
Selected Ratios:
Ratio of EBITDA to interest expense............. 2.1x
Ratio of senior debt to EBITDA.................. 1.9x
Ratio of total debt to EBITDA................... 4.6x
Ratio of earnings to fixed charges(9)........... 1.4x
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma combined
financial statements.
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(In thousands)
The unaudited pro forma combined statements of operations have been
prepared as if the Transactions had occurred on November 2, 1997. The following
adjustments were recorded:
(1) Represents results of continuing operations.
(2) Represents the amortization of goodwill associated with the
Acquisition of Shelby Williams over forty years ($2,102 for the
latest twelve months ended May 1, 1999, $1,051 for the twenty-six
weeks ended May 1, 1999 and $2,102 for the fiscal year ended
October 31, 1998).
(3) Represents interest expense based on pro forma debt of $170,000,
comprised of $100,000 of New Notes and $70,000 of senior debt at a
blended interest rate of 9.8%. The effect of a 0.125% increase in
interest rates would result in an increase in interest expense of
$213 for the latest twelve months ended May 1, 1999, $106 for the
twenty-six weeks ended May 1, 1999 and $213 for the fiscal year
ended October 31, 1998.
(4) Represents the amortization of debt issuance costs associated with
the Transactions ($817 for the latest twelve months ended May 1,
1999, $408 for the twenty-six weeks ended May 1, 1999 and $817 for
the fiscal year ended October 31, 1998) over a period of six years
to the extent such deferred costs and fees relate to the Senior
Secured Credit Facilities and over ten years to the extent such
deferred costs and fees relate to the New Notes.
(5) Represents the tax effect of the adjustments at an effective tax
rate of approximately 38% (excluding goodwill amortization).
(6) EBITDA for any period is calculated as the sum of net income plus
the following to the extent deducted in calculating net income: (a)
interest expense, (b) income tax expense, (c) depreciation expense,
(d) amortization expense and (e) special one-time charges. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of such special one-time
charges. We consider EBITDA to be a widely accepted financial
indicator of a company's ability to service debt, fund capital
expenditures and expand its business; however, EBITDA is not
calculated in the same way by all companies and is neither a
measurement required, nor represents cash flow from operations as
defined, by generally accepted accounting principles. EBITDA should
not be considered by an investor as an alternative to net income,
as an indicator of operating performance or as an alternative to
cash flow as a measure of liquidity. The calculation of EBITDA for
purposes of the financial information presented herein is
calculated differently than for purposes of the covenants under the
Indenture and the Senior Secured Credit Facilities. See "Prospectus
Summary--The Transactions--The Acquisition," "Description of the
Senior Secured Credit Facilities" and "Description of New Notes."
(7) Represents the annualized costs savings associated with combining
two public companies by eliminating duplicate costs (estimated to
be approximately $377 for the latest twelve months ended May 1,
1999, $188 for the twenty-six weeks ended May 1, 1999 and $377 for
the fiscal year ended October 31, 1998).
(8) Represents the elimination of intercompany sales between Falcon and
Shelby Williams and the related cost of sales.
(9) For purposes of computing the ratio of earnings to fixed charges,
earnings include net earnings plus fixed charges. Fixed charges
consist of interest expense, a portion of rental expense (deemed by
management to be representative of the interest factor of rental
payments) and amortization of debt issuance costs.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
On June 18, 1999, Falcon's recently formed, wholly owned subsidiary
merged into Shelby Williams. As a result, Shelby Williams became a wholly owned
subsidiary of Falcon. Prior to this merger, Falcon and Shelby Williams operated
independently, and our success will depend in part on our ability to integrate
the operations of these entities. The integration of the operations of Falcon
and Shelby Williams will entail the reorganization of certain functions to
achieve the cost savings outlined in our business strategy and to realize the
full potential of the business opportunities available to the combined company.
We can give no assurance that we will be able to successfully integrate these
businesses or that we will not encounter delays or incur unanticipated costs in
such integration.
We have adopted a plan to integrate Falcon and Shelby Williams, the
principal components of which are (1) eliminating redundant administrative costs
and expenses, and (2) reducing our excess manufacturing capacity by
consolidating and improving the utilization of manufacturing facilities. The
fundamental strategy underlying the Falcon-Shelby Williams combination is to
leverage the strengths of both businesses by adopting the best practices of each
across the Company as a whole and to capitalize on the opportunities inherent in
the combination.
In addition to the improvement in our financial performance expected to
result from the integration plan, we intend to expand our product lines and
increase our sales through cross-selling opportunities, to maximize
manufacturing and operating efficiencies, and to maintain our reputation for
providing superior customer service and manufacturing high-quality products. We
expect that the implementation of these elements of our business strategy will
result in additional cost savings and enhanced revenues.
Purchase Accounting Effects. The Acquisition of Shelby Williams common
stock in the Stock Tender Offer and the subsequent merger has been accounted for
using the purchase method of accounting. The results of operations of Shelby
Williams will be included in our financial statements from the closing date of
the Acquisition. As a result, the Acquisition will prospectively affect our
results of operations in certain significant respects. The aggregate equity
purchase price for the Acquisition is estimated to be $149.3 million. The
preliminary estimate of the excess of the purchase price over the fair value of
net tangible assets acquired is approximately $84.1 million. The excess purchase
price will be allocated to the tangible and intangible assets acquired by us
based upon their respective fair values as of the Acquisition date based upon
valuations that are not yet available.
<PAGE>
Results of Operations--Falcon
During the last several years, Falcon has devoted substantial resources
to its sales and marketing efforts, developed new markets and distribution
networks for its products and implemented an aggressive program of new product
introductions. Falcon has devoted significant resources to developing and
enlarging Falcon's direct factory sales force.
The following table presents certain information relating to the
continuing operations of Falcon, expressed as a percentage of net sales:
<TABLE>
<CAPTION>
Twenty-six weeks
Fiscal year ended ended
--------------------------------------- --------------------
November 2, November 1, October 31, May 2, May 1,
1996 1997 1998 1998 1999
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating Results as a Percentage of
Net Sales:
Net sales......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales, including nonrecurring items....... 68.6 70.3 71.8 71.4 71.0
Special and nonrecurring items.................... -- 3.3 0.2 -- --
----- ----- ------ --- ---
Gross margin...................................... 31.4 26.4 28.0 28.6 29.0
Selling, general and administrative expenses...... 20.3 19.5 20.6 19.1 19.5
------ ----- ----- ----- -----
Operating profit.................................. 11.1 6.9 7.4 9.5 9.5
Interest income (expense), net.................... 0.1 0.1 (0.4) 0.1 (0.8)
Minority interest in consolidated subsidiary...... 0.1 -- -- -- --
------ ----- ----- ----- -----
Earnings from continuing operations before
income taxes................................... 11.3 7.0 7.0 9.6 8.7
Income tax expense................................ 4.3 2.6 2.6 3.7 3.3
------ --- --- --- ---
Net earnings from continuing operations........... 7.0% 4.4% 4.4% 5.9% 5.4%
====== ====== ====== ====== ======
Supplemental Information--Before Special
and Nonrecurring Items:
Gross margin...................................... 31.4% 29.7% 30.4% 28.6% 29.0%
Operating profit.................................. 11.1 10.1 9.8 9.5 9.5
Earnings from continuing operations before
income taxes................................... 11.3 10.2 9.5 9.6 8.7
Net earnings from continuing operations........... 7.0 6.4 6.0 5.9 5.4
</TABLE>
Comparison of Twenty-Six Weeks Ending May 2, 1998 and May 1, 1999
Net Earnings. Net earnings were $3.8 million or $0.43 per share for the
twenty-six weeks ended May 1, 1999, compared to $3.6 million or $0.38 per share
for the same period in 1998, an increase in net earnings of 5.9% and an increase
in earnings per share of 13.2%.
Net Sales. Net sales for the twenty-six weeks ended May 1, 1999 were
$71.1 million, an increase of 15.2% over net sales of $61.7 million recorded for
the same period of 1998. Net sales increased due to growth in the national
accounts and office markets and the Howe acquisition which were partially offset
by lower casegoods sales. This was following Falcon's previous decision to exit
the hotel casegoods market.
Costs and Expenses. Cost of sales was $50.5 million for the twenty-six
weeks ended May 1, 1999, an increase of 14.6% from $44.1 million for the same
period in 1998. The overall increase is primarily related to the increased sales
volume. Gross margin increased to $20.6 million for the twenty-six weeks ended
May 1, 1999, a 16.5% increase from $17.7 million for the same period in 1998.
Gross margin as a percentage of net sales increased to 29.0% in 1999 from 28.6%
in 1998. The higher gross margin percentage in the twenty-six weeks ended May 1,
1999 was due primarily to the increased Howe sales and lower sales of casegoods,
which was partially offset by operating inefficiencies in the City of Industry,
California and Tijuana, Mexico facilities.
Selling, general and administrative expenses were $13.8 million for the
twenty-six weeks ended May 1, 1999, compared to $11.8 million for the same
period in 1998, a 17.1% increase. The overall increase is primarily due to the
Howe acquisition and increased selling costs, customer support costs, and
increased marketing expenditures related to the higher sales volume. Selling,
general and administrative expenses as a percentage of net sales increased to
19.5% in the twenty-six weeks ended May 1, 1999, as compared to 19.1% in the
same period of 1998. The increase in expense rate is primarily due to additional
management bonus program expense and increased telephone costs.
Net interest expense was $0.6 million for the twenty-six weeks ended
May 1, 1999, versus net interest income of $7,000 for the same period in 1998.
Financing costs associated with the Howe acquisition caused the change from
interest income to interest expense. Income tax expense was $2.3 million for the
twenty-six weeks ended May 1, 1999 and May 2, 1998, respectively.
Comparison of Fiscal Years 1996, 1997 and 1998
Net Earnings. 1998 net earnings from continuing operations increased to
$6.4 million, or $0.68 per share, from $4.9 million, or $0.50 per share in 1997,
an increase in earnings and earnings per share of 28.9% and 36.0%, respectively.
In 1998, net earnings were $6.4 million, compared to $12.6 million in 1997, a
decrease of 49.7%. Net earnings per share were $0.68 in 1998, compared with
$1.28 in 1997, a 46.9% decrease. The decrease was primarily due to the gain
recognized from the sale of the William Hodges division in 1997.
Excluding the special and nonrecurring items reported in both 1998 and
1997, net earnings from continuing operations were $8.6 million, or $0.92 per
share, compared to $7.2 million, or $0.73 per share, in 1997; an increase in
earnings of 18.8% and an increase in earnings per share of 26.0%.
Net earnings totaled $12.6 million in 1997, compared to $8.4 million in
1996, an increase of 49.8%. Earnings per share reached $1.28 in 1997, compared
with $0.86 in 1996, a 48.8% increase. The increase is due primarily to an
after-tax gain on the sale of the William Hodges division of $6.8 million, or
$0.69 per share, offset partially by an after-tax charge of $2.3 million, or
$0.23 per share, for costs associated with the strategic initiatives undertaken
in 1997. Excluding the one-time gain on the sale and the restructuring charge
for the strategic initiatives, 1997 net earnings were $7.2 million, or $0.73 per
share, compared to $7.0 million, or $0.71 per share, in 1996; increases of 3.1%
and 1.4%, respectively.
Net Sales. In 1998, net sales from continuing operations were $143.4
million, an increase of 26.9% over 1997 net sales of $113.0 million. The sales
increase over the prior year is primarily the result of acquiring Howe Furniture
Corporation and increasing sales to the hospitality market.
Net sales from continuing operations in 1997 were $113.0 million, an
increase of 12.2% over 1996 net sales of $100.7 million. The sales increase over
the prior year primarily resulted from increased sales to the hospitality
market, from strong sales of office furniture products through Falcon's Flight
network of office furniture dealers and directly to end-users and from the
acquisition of The Chair Source in late 1996. The 1997 fiscal year included 52
weeks compared with 53 weeks in 1996, which partially offset the increase in
sales.
A decline in sales from Falcon's food service market unfavorably
affected sales as several of our major customers in this market segment opened
significantly fewer new stores in 1997 than in 1996.
Falcon's continued concentration of resources on sales and marketing
programs and new product introductions favorably affected its strong sales
results for both 1998 and 1997. During 1997, Falcon increased the number of
direct sales representatives that are selling its products from 40 to 48
representatives and during 1998, to further increase the effectiveness of direct
sales representatives, efforts were redirected to have a more specialized market
focus.
Costs and Expenses. Falcon's fiscal year 1998 and 1997 reported
operating results each included special and nonrecurring items associated with
various strategic initiatives Falcon has undertaken making direct comparisons of
reported results difficult.
During 1998, Falcon recorded a $4.7 million pre-tax charge, $2.9
million after-tax or $0.32 per share, related to management's decision to
discontinue Falcon's hotel casegoods line of business. The charge entails the
writedown of assets, including inventories, equipment and goodwill, associated
with the product line located in the Tijuana, Mexico facility. Cost of sales
includes a $3.3 million pre-tax charge to write-down the carrying value of
inventory. Falcon reported remaining components of the charge in special and
nonrecurring items on the consolidated statement of earnings.
Also during 1998, Falcon recorded a $1.3 million pre-tax gain, $0.8
million after-tax or $0.09 per share, on the sale of Falcon's corporate
headquarters building. Falcon reported the gain in special and nonrecurring
items on the consolidated statement of earnings.
During 1997, Falcon recorded a pre-tax charge of $3.7 million, $2.3
million after-tax or $0.23 per share, for charges associated with the announced
consolidation of Falcon's manufacturing operations at its Anaheim, California
and Belding, Michigan facilities into its City of Industry, California facility
and the elimination of several duplicative and nonperforming wood seating
product lines. Falcon reported these charges in special and nonrecurring items
on the consolidated statement of earnings.
During the fourth quarter of 1998, Falcon recorded additional pre-tax
charges of $0.2 million, $0.1 million after-tax or $0.01 per share, related to
the consolidation of Falcon's manufacturing facilities that was announced in
1997. Falcon reported these charges in special and nonrecurring items on the
consolidated statement of earnings.
In 1998, Falcon's gross margin increased to $40.1 million from $29.8
million in 1997, a 34.5% increase which was primarily due to increased sales
volume. Gross margin as a percent of sales, excluding the special and
nonrecurring items, increased to 30.4% in 1998 from 29.7% in 1997. The increase
was primarily due to product mix and incremental sales from the Howe
acquisition, which maintained a higher gross margin percentage than Falcon's
historical business. In addition, during the first half of 1998, Falcon
consolidated the Belding, Michigan and Anaheim, California facilities into the
City of Industry, California facility to benefit from economies of scale and
further reduce its fixed overhead costs. During the fourth quarter of 1998,
Falcon began to exit the hotel casegoods market which began to have a favorable
impact on the gross margin percentage during the quarter.
Falcon's gross margin decreased to $29.8 million in 1997 from $31.6
million in 1996, a 5.6% decrease primarily due to the special and nonrecurring
items reported in 1997. Gross margin as a percentage of sales, excluding the
special and nonrecurring items, was 29.7%, a decrease from 31.4% in 1996. The
decrease was primarily due to costs associated with the development of casegood
products manufactured at Falcon's Tijuana, Mexico and Czech Republic plants.
Demand for Falcon's lodging product exceeded capacity of the Tijuana plant
causing Falcon to outsource certain product components at a higher cost. Falcon
has since more than doubled the capacity of the Tijuana facility.
Selling, general and administrative expenses were $29.5 million, $22.0
million and $20.5 million in 1998, 1997 and 1996, respectively. The overall
increase is principally related to the aforementioned acquisitions, higher level
of business and increased sales and marketing programs including salaries,
commissions, travel and literature. As a percentage of net sales, the expense
rate was 20.6% in 1998, 19.5% in 1997 and 20.3% in 1996. The increase in the
expense rate in 1998 is primarily due to the Howe acquisition which previously
maintained a higher expense rate than Falcon.
The decrease in the expense rate in 1997 is primarily due to
efficiencies of higher sales volume, the impact of cost reduction programs, and
lower expenses under Falcon's management bonus program.
Interest and Taxes. Net interest expense was $619,000 in 1998, compared
to net interest income of $139,000 in 1997 and $95,000 in 1996. The interest
expense in 1998 was due to outstanding borrowings as a result of the Howe
acquisition, while the increase in interest income during 1997 was due primarily
to interest received on the proceeds from the sale of the William Hodges
division in late 1997.
Income tax expense was $3.7 million, $3.0 million and $4.3 million in
1998, 1997 and 1996, respectively. The effective income tax rate was 36.8% in
1998, and 38.0% in 1997 and 1996.
Results of Operations--Shelby Williams
The following table presents certain information relating to the
continuing operations of Shelby Williams, expressed as a percentage of net sales
for the last three years:
<TABLE>
<CAPTION>
Fiscal year ended Three months
December 31, ended March 31,
------------------------ ---------------
1996 1997 1998 1998 1999
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating Results as a Percentage of
Net Sales:
Net sales.............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold..................... 76.9 76.6 76.2 77.8 79.0
------ ----- ---- ----- -----
Gross margin........................... 23.1 23.4 23.8 22.2 21.0
Selling, general and administrative
expenses............................. 14.8 14.1 13.8 13.8 12.9
------ ----- ----- ----- -----
Operating profit....................... 8.3 9.3 10.0 8.4 8.1
Interest income (expense), net......... (0.6) -- 0.1 0.2 0.1
------ ----- ----- ------ ------
Income from continuing operations
before income taxes.................. 7.7 9.3 10.1 8.6 8.2
Income tax expense..................... 2.5 3.2 3.7 3.2 3.0
------ ------ ------ ------ ------
Income from continuing operations...... 5.2% 6.1% 6.4% 5.4% 5.2%
====== ====== ====== ====== ======
</TABLE>
Comparison of Fiscal Quarters Ending March 31, 1998 and 1999
Net income. Net income was $2.3 million in the first quarter of 1999,
and $2.1 million in 1998. Net income per share was $0.26 in 1999, and $0.23 in
1998, an increase of 13.0%.
Net Sales. Net sales for the first quarter of 1999 were $43.1 million,
an increase of 12.1% over the 1998 first quarter net sales of $38.5 million. The
increase was primarily due to continued strong demand in the hotel and food
service market which was partially offset by reduced sales in the healthcare and
university market.
Costs and Expenses. Cost of goods sold was $34.1 million for the 1999
first quarter, an increase of 13.9% from $29.9 million in the first quarter of
1999. The overall increase was primarily due to increased sales volume. The
gross margin increased to $9.0 million for the first quarter of 1999, an
increase of 5.8% from $8.6 million in the same quarter of 1998. Gross margin as
a percentage of net sales decreased to 21.0% in 1999 from 22.2% in 1998. The
lower gross margin percentage during the first quarter of 1999 was due primarily
to increased sales of upholstered products, which carry lower gross margins, in
addition to lower sales in the healthcare and university market.
Selling, general and administrative expenses were $5.5 million in the
first quarter of 1999, compared to $5.3 million in the first quarter of 1998, a
4.6% increase. As a percentage of net sales, selling, general and administrative
expense decreased to 12.9% in 1999 from 13.8% in 1998. This decrease was
primarily due to higher sales volume and continued scrutiny of related expenses.
Comparison of Fiscal Years Ending 1997 and 1998
Gross Profit. Gross profit increased 7.1% to $39.5 million in 1998 from
$36.9 million in 1997. The gross profit margin increased to 23.8% in 1998,
compared to 23.4% in 1997, reflecting higher factory utilization rates and
improved productivity resulting from recent investments in automated machinery.
Net Sales. Net sales increased 5.2% to $165.9 million in 1998 from
$157.8 million for 1997. This increase was due almost entirely to volume
increases. Volume growth was primarily attributable to continued robust activity
in the hospitality and food service markets. Shelby Williams' products sold in
these markets include virtually all of its hotel and food service furniture,
which amounted to $126.7 million in 1998, or a 7.7% increase from the prior
year, and most of its wallcoverings, which increased 3.5% to $15.7 million.
Reflecting consolidation within the healthcare industry in 1998, sales of
healthcare and university furniture declined 5.6% to $23.5 million.
Even though there were ongoing economic difficulties in the export
markets served by Shelby Williams, its overall business remains strong. In 1998,
export sales decreased $2.7 million, or 16.1%, from 1997. Shelby Williams'
position as market leader abroad leaves management confident that it will garner
a significant share of export business as the international situation
normalizes, although there can be no assurance in this regard. Shelby Williams'
backlog of unshipped orders at December 31, 1998 increased 7.5%, to a year-end
record of $34.2 million, compared to $31.8 million a year earlier.
Costs and Expenses. Selling, general and administrative expenses
increased 3.3% to $23.0 million in 1998 from $22.3 million in 1997. As a
percentage of net sales, selling, general and administrative expenses decreased
to 13.9% in 1998 from 14.1% in 1997, principally due to function of volume.
As a result of the factors described above, operating profit increased
12.9% to $16.6 million in 1998 from $14.7 million in 1997. The operating margin
improved to 10.0% in 1998 compared to 9.3% in 1997.
Net interest income of $0.1 million in 1998, contrasted to net interest
expense of almost nil in 1997, reflects the reduction in outstanding
indebtedness to $3.0 million at December 31, 1998 from $7.0 million at December
31, 1997.
The effective tax rate increased to 36.8% in 1998 from 34.4% in 1997
primarily due to increased state income taxes resulting, in part, from the
effect of reduced export sales and loss of federal income tax benefits also
related to export sales.
As a result of the foregoing, income from continuing operations
increased 9.7% to $10.6 million in 1998, or $1.17 per share, compared to $9.7
million, or $1.05 per share in 1997.
During the second quarter of 1998, Shelby Williams recorded a loss on
the disposition of the discontinued operations of $9.7 million, or $7.1 million
after taxes. These operations did not make a contribution to profits in 1998,
and management believed they offered limited upside potential. The losses
recorded on the disposition of these operations were not materially different
from those incurred on the actual amounts realized in the sale and liquidation
process. See Note to Shelby Williams' Consolidated Financial Statements
captioned "Discontinued Operations 1997 Compared to 1996." This comparison
reflects restatement for operations discontinued in 1998.
Comparison of Fiscal Years Ending 1996 and 1997
Gross Profit. Gross profit increased 7.1% to $36.9 million in 1997 from
$34.5 million in 1996. The gross profit margin increased to 23.4% in 1997,
compared to 23.1% in 1996, reflecting higher capacity utilization and favorable
product mix.
Net Sales. Net sales increased 5.6% to $157.8 million in 1997 from
$149.5 million in 1996. Shelby Williams divested its contemporary upholstered
seating product line, Preview, and a related manufacturing facility in August
1996. See Note to Shelby Williams' Consolidated Financial Statements captioned
"Restructuring Charge." Excluding Preview, net sales increased 9.9% to $157.8
million in 1997 from $143.6 million in 1996. Approximately 2% of this increase
was due to increased pricing and favorable product mix with the remainder
attributable to volume increases. Efforts to strengthen foreign marketing
capability resulted in increased export sales for 1997 to $16.9 million,
compared to $14.5 million in 1996. The demand for hotel rooms across the United
States remained strong in 1997. As a result, lodging companies continued to
build new hotels and refurbish older ones in order to remain competitive. New
construction and refurbishing of hotels provide a market for Shelby Williams'
products, allowing it to benefit from this major industry expansion. Sales of
these products increased from 1996 to 1997 by 3.8%, or 9.4% excluding Preview,
to $117.7 million for hotel and food service furniture, and 9.3% to $15.2
million for wall coverings. Sales of healthcare and university furniture also
increased from 1996, amounting to $24.9 million for 1997, or an increase of
12.3%. At December 31, 1997, Shelby Williams' backlog of unshipped orders was
approximately $31.8 million, compared to $30.7 million at December 31, 1996.
Costs and Expenses. Selling, general and administrative expenses were
$22.3 million in 1997 and $22.1 million in 1996. As a percentage of net sales,
selling, general and administrative expenses decreased to 14.1% in 1997 from
14.8% in 1996. This decrease as a percentage of net sales was a function of
volume and reflects the high selling, general and administrative expenses of
Preview.
As a result of the factors described above, operating profit increased
18.4% to $14.7 million in 1997 from $12.4 million in 1996. The operating margin
improved to 9.3% in 1997 compared to 8.3% in 1996. Excluding Preview, operating
profits in 1997 and 1996 were $14.7 million and $12.2 million, respectively, and
as a percentage of sales, were 9.3% and 8.5%, respectively.
Net interest expense in 1996 of $1.0 million was reduced to almost nil
in 1997 as a result of reduced debt and increased cash equivalents.
The effective tax rate increased to 34.4% in 1997 from 32.4% in 1996
due to the absence of tax credits which were no longer available.
As a result of the foregoing, income from continuing operations for
1997 was $9.7 million, a 24.8% increase over $7.8 million for 1996. Income per
share from continuing operations increased 19.3% to $1.05 from $0.88 on 4.5%
more average shares outstanding.
Pro Forma Liquidity and Capital Resources
Our primary liquidity requirements are to pay our debt (including our
interest expense) under the Senior Secured Credit Facilities and the New Notes,
and to provide working capital, product development and other capital
expenditures, and possibly to fund acquisitions. Falcon historically funded
these requirements through internally generated cash flow. Shelby Williams
historically funded its requirements through internally generated cash flow and
short-term bank borrowings. As of May 1, 1999, on a pro forma basis after giving
effect to the Transactions, our consolidated indebtedness would have been $172.1
million, consisting of $70.0 million under the term loan facility, $100.0
million in New Notes and $2.1 million in other indebtedness.
Capital expenditures were $3.0 million for the first twenty-six weeks
of fiscal year 1999 compared to $6.4 million for the same period in 1998.
Capital expenditures for fiscal year 1998 were $10.6 million compared to $7.4
million for the same period in 1997.
We have budgeted total capital expenditures for fiscal 1999 and 2000 of
approximately $7.9 million and $9.1 million, respectively. We estimate that,
upon completion of our integration of Shelby Williams into Falcon, the annual
capital expenditures required to maintain our facilities will be between $9.6
million and $10.7 million per year. Our ability to make capital expenditures is
subject to certain restrictions under the Senior Secured Credit Facilities. See
"Description of the Senior Secured Credit Facilities."
We expect to incur approximately $7.5 million of non-recurring cash
costs to integrate Shelby Williams into Falcon by reducing excess manufacturing
capacity through consolidating and improving the utilization of manufacturing
facilities.
Our principal source of cash to fund our liquidity needs will be net
cash from operating activities and borrowings under the Senior Secured Credit
Facilities. The Senior Secured Credit Facilities are comprised of a six-year
revolving credit facility of up to $50.0 million and a six year term loan in the
principal amount of $70.0 million, each subject to fluctuating rates of
interest. The Senior Secured Credit Facilities are subject to certain financial
and operational covenants and other restrictions, including among others, a
requirement to maintain certain financial ratios and limitations on our
liability to incur additional indebtedness. See "Description of the Senior
Secured Credit Facilities."
As of May 1, 1999, on a pro forma basis after giving effect to the
Transactions, the Revolving Credit Facility would have provided $50.0 million of
additional borrowings available to be drawn, subject to the satisfaction of
customary conditions. We may use amounts available under the Revolving Credit
Facility for working capital and general corporate purposes (including to fund
possible acquisitions), subject to certain limitations under the Senior Secured
Credit Facilities. Assuming the successful implementation of our integration
plan, we believe that these funds will be sufficient to meet our current and
future financial obligations, including the payment of principal and interest on
the New Notes, working capital, capital expenditures and other obligations. We
can give no assurance, however, that this will be the case. Our future operating
performance and ability to service or refinance the New Notes and to repay,
extend or refinance the Senior Secured Credit Facilities will be subject to
future economic conditions and to financial, business and other factors, many of
which are beyond our control. See "Risk Factors."
Recently Issued Accounting Standards
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 establishes the
accounting guidance for the capitalization of certain internal-use software
costs once certain criteria are met. This accounting standard will be effective
for the Company beginning November 1, 1999. The adoption of SOP 98-1 is not
expected to have a material impact on the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activity." SFAS No. 133
provides comprehensive and consistent standards for the recognition and
measurement of derivative and hedging activities. It requires that derivatives
be recorded on the consolidated balance sheets at fair value and establishes
criteria for hedges of changes in the fair value of assets, liabilities or firm
commitments, hedges of variable cash flows of forecasted transactions and hedges
of foreign currency exposures of net investments in foreign operations. Changes
in the fair value of derivatives that do not meet the criteria for hedges would
be recognized in the consolidated statement of earnings. This statement will be
effective for the Company beginning November 1, 2000. The adoption of SFAS No.
133 is not expected to have a material impact on the Company.
Inflation
We do not believe that inflation has had a material effect on past
results of operations of either Falcon or Shelby Williams.
Year 2000 Readiness Disclosure
Falcon. The year 2000 issue refers to the inability of a date-sensitive
computer program to recognize a two-digit date field designated "00" as the year
2000. Mistaking "00" for 1900 could result in a system failure or
miscalculations causing disruptions to operations, including manufacturing, a
temporary inability to process transactions, send invoices or engage in other
normal business activities. This is a significant issue for most, if not all
companies, with far reaching implications, some of which cannot be anticipated
or predicted with any degree of certainty.
During 1998, Falcon began the process of addressing its year 2000
issues. The process includes six steps: (1) plan, (2) inventory, (3) assess, (4)
remediate, (5) test and (6) develop contingency plans. The planning phase was
completed during 1998 and resulted in the year 2000 issues being managed around
four functional areas. The functional areas that were identified are business
applications, supply chain, information technology (IT) technical infrastructure
and customer issues.
Falcon inventoried and assessed its business applications during 1998.
At that time, Falcon determined that its current main application software,
Computer Associates PRMS package, was not year 2000 compliant. A year 2000
compliant software upgrade version is available and in-house. Based upon the
complexity, number of modifications and custom programming, the installation of
the upgrade is a major project. The total number of hours required to implement
and test the upgrade is estimated to be approximately 4,000 man hours. It is
currently estimated that this project will be completed by September 1999.
Falcon has identified those companies in the supply chain which provide
materials, products or services that are critical to Falcon's operations.
Critical suppliers' year 2000 issues are being assessed through the use of
questionnaires and other inquiries.
The IT technical infrastructure area is primarily comprised of desktop
computer workstations and software, computer networking infrastructure, host
server systems and telecommunication systems. The inventory and assessment of
known long lead-time items has been completed. Major projects are identified and
are scheduled for completion during 1999. An exhaustive and comprehensive
follow-up investigation of this area is underway to assure no critical
components have been overlooked.
Falcon has been working with customers to address their year 2000
concerns regarding Falcon's ability to operate. Any plans to address the ability
of our significant customers to accept our products after December 31, 1999,
will be determined as contingency plans are developed.
Falcon intends to perform integrated year 2000 testing of critical
systems in all functional areas during the second quarter of 1999. Given the
nature of Falcon's manufacturing and other operations, full-scale integrated
testing may not be practical in some areas and, therefore, may be limited in
scope to avoid significant disruption of Falcon's operations. Statements of
compliance from vendors and other compliance evidence are expected to mitigate
the risk of not performing integrated testing in those areas.
<PAGE>
The development of contingency arrangements for all functional areas is
early in the planning stage. Plans will include procedures that attempt to
minimize the impact of any unremediated and unresolved year 2000 issues on
Falcon's operations and financial position. Initial plans are expected to be
complete by mid-1999 and will continue to be refined as developments warrant.
As of May 1, 1999, Falcon has incurred approximately $0.2 million in
costs related to year 2000 work. Additional costs to evaluate and remediate the
remaining issues are currently estimated to be in the range of $0.1-$0.5 million
and will be expensed as incurred during 1999.
Based on the status of Falcon's work to address its year 2000 issues,
management does not expect the year 2000 issue to pose significant operational
problems for Falcon. However, if the software upgrade is delayed or the
remediation of other issues is not completed timely, the year 2000 could have a
material adverse effect on Falcon, depending on the nature and extent of any
remaining non-compliance. Furthermore, if Falcon's customers and suppliers fail
to rectify year 2000 issues in their own systems, the resultant effect on Falcon
may be material. Management anticipates that the most reasonably likely
worst-case scenario would involve a temporary shutdown of certain operations.
Through the development of contingency plans, Falcon expects to mitigate the
effect that any such temporary shutdowns would have on Falcon or third parties.
The estimated costs and date of completion of year 2000 remediation are
based on management's best estimates, which were derived from numerous
assumptions about future events. These assumptions include the availability of
certain resources, third-party modification plans and other factors. There can
be no guarantee that these estimates will be achieved and actual results could
differ materially. Specific factors that might cause material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to identify and correct all relevant computer codes,
and the cost and availability of replacements for devices with embedded chips.
Shelby Williams. Shelby Williams does not have a significant amount of
date-dependent software programs in its centralized information systems. Other
systems, such as computer controlled machinery and even telephones may have year
2000 problems with their computer chips. Shelby Williams' manufacturing
operations are not significantly dependent on computer controlled machinery.
Shelby Williams has inventoried all computer controlled equipment and assessed
the exposure of each system to ensure all computer controlled equipment is year
2000 compliant. Based upon this review, Shelby Williams believes that all
critical equipment is compliant.
Shelby Williams has completed an assessment of its centralized
information system and has modified or replaced portions of its software so that
its computer systems will function properly with respect to dates in the year
2000 and thereafter. The project, according to plan, has been completed. The
year 2000 project cost was approximately $0.2 million of which approximately
$0.1 million was capitalized and the remainder expensed.
Shelby Williams believes that with modifications to existing software
which have been completed and conversions to new software which have been made,
the year 2000 issue will not pose significant operational problems for its
computer systems. However, actual results could differ from those anticipated
and have a material impact on operations. In addition, disruptions in the
general economy resulting from year 2000 issues could also materially adversely
affect Shelby Williams. The amount of potential lost revenue and additional cost
cannot be reasonably estimated at this time. Shelby Williams has contingency
plans for certain critical applications. These contingency plans involve, among
other actions, manual workarounds and adjusting staffing strategies.
Shelby Williams' centralized information systems do not interface with
third-party systems. Shelby Williams has queried its significant suppliers, all
of whose products are available from alternative sources. To date, Shelby
Williams is not aware of any supplier with a year 2000 issue that would
materially impact Shelby Williams' results of operations, liquidity, or capital
resources. However, there is no assurance that its suppliers will be year
2000-compliant. The inability of suppliers to complete their year 2000
resolution process in a timely fashion could materially impact Shelby Williams,
the effect of which is not determinable.
European Monetary Union
On January 1, 1999, eleven member countries of the European Union
adopted the Euro as their common legal currency. Effective that date, conversion
rates between the existing sovereign currency (legacy currency) of each of these
participating countries and the Euro will be irrevocably fixed, and the Euro
will be available for non-cash transactions. The legacy currencies of these
countries will remain legal tender during a transition period from January 1,
1999 to January 1, 2002. During this transition period, parties may pay for
goods and services using either the Euro or the relevant legacy currency.
Currency conversion will be performed using a method whereby one legacy currency
is converted to the Euro and then to the second legacy currency. The conversion
to the Euro will be completed in July 2002 when the legacy currencies of the
participating member countries cease to be legal tender.
While the conversion to the Euro is expected to increase cross-border
price transparency, and therefore stimulate cross-border competition within the
single currency zone created by the participating countries, the effect on the
price of raw materials that the Company purchases is expected to generally
offset the effect on the finished products it sells. In addition, the conversion
to the Euro is expected to have the positive effect of eliminating currency risk
in cross-border sales.
The Company will have a team in place to identify issues arising from
the implementation of the Euro, plan for the changeover, and communicate with
customers, suppliers, and employees. Information systems will be updated to
allow the method of currency conversion to the requisite number of decimal
places in a timely fashion. If the updates are not ready, currency conversion
will be accomplished manually or through outsourcing until the updates are
installed. The cost of the technological updates or any interim measures is not
expected to be material.
For the reasons stated above, management does not expect the
introduction of the Euro to have a material effect on the Company's business,
financial condition, or results of operations. If cross-border price
transparency causes the markets from which the Company purchases raw materials
or to which it sells finished products to behave differently than management
expects, the introduction of the Euro could have a material effect on the
Company.
<PAGE>
THE EXCHANGE OFFER
General
We sold the Original Notes on June 17, 1999 in a transaction exempt
from the registration requirements of the Securities Act of 1933 as amended (the
"Securities Act"). The initial purchaser of the Original Notes subsequently
resold such notes to qualified institutional buyers in reliance on Rule 144A
under the Securities Act.
In connection with the sale of Original Notes to the initial purchaser
pursuant to the Purchase Agreement, dated June 14, 1999, among us and Donaldson,
Lufkin & Jenrette Securities Corporation, the holders of the Original Notes
became entitled to the benefits of the exchange and registration rights
agreement dated June 14, 1999 among us and the initial purchaser.
Under the registration rights agreement, we became obligated to file a
registration statement in connection with an exchange offer within 75 days after
the issue date and cause the exchange offer registration statement to become
effective within 150 days after the issue date. The exchange offer being made by
this prospectus, if consummated within the required time periods, will satisfy
our obligations under the registration rights agreement. This prospectus,
together with the letter of transmittal, is being sent to all beneficial holders
known to us.
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this
prospectus and in the accompanying letter of transmittal, we will accept all
Original Notes properly tendered and not withdrawn on or prior to the expiration
date. We will issue $1,000 principal amount of New Notes in exchange for each
$1,000 principal amount of outstanding Original Notes accepted in the exchange
offer. Holders may tender some or all of their Original Notes pursuant to the
exchange offer.
Based on no-action letters issued by the staff of the Securities and
Exchange Commission to third parties, we believe that holders of the New Notes
issued in exchange for Original Notes may offer for resale, resell and otherwise
transfer the New Notes, other than any holder that is an affiliate of ours
within the meaning of Rule 405 under the Securities Act, without compliance with
the registration and prospectus delivery provisions of the Securities Act. This
is true as long as the New Notes are acquired in the ordinary course of the
holder's business, the holder has no arrangement or understanding with any
person to participate in the distribution of the New Notes and neither the
holder nor any other person is engaging in or intends to engage in a
distribution of the New Notes. A broker-dealer that acquired Original Notes
directly from us cannot exchange the Original Notes in the exchange offer. Any
holder who tenders in the exchange offer for the purpose of participating in a
distribution of the New Notes cannot rely on the no-action letters of the staff
of the Securities and Exchange Commission and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any resale transaction.
Each broker-dealer that receives New Notes for its own account in
exchange for Original Notes, where Original Notes were acquired by such
broker-dealer as a result of market-making or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. See "Plan of Distribution" for additional information.
We shall be deemed to have accepted validly tendered Original Notes
when, as and if we have given oral or written notice of the acceptance of such
notes to the exchange agent. The exchange agent will act as agent for the
tendering holders of Original Notes for the purposes of receiving the New Notes
from the issuer and delivering New Notes to such holders.
If any tendered Original Notes are not accepted for exchange because of
an invalid tender or the occurrence of the conditions set forth under "--
Conditions" without waiver by us, certificates for any such unaccepted Original
Notes will be returned, without expense, to the tendering holder of any such
Original Notes as promptly as practicable after the expiration date.
Holders of Original Notes who tender in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the letter of transmittal, transfer taxes with respect to the exchange of
Original Notes, pursuant to the exchange offer. We will pay all charges and
expenses, other than certain applicable taxes in connection with the exchange
offer. See "--Fees and Expenses."
Shelf Registration Statement
If (1) applicable law or interpretations of the staff of the Securities
and Exchange Commission are changed so that the New Notes received by holders
who make all of the necessary representations in the letter of transmittal are
not or would not be, upon receipt, transferable by each such holder without
restriction under the Securities Act, or (2) any holder of Original Notes which
are Transfer Restricted Securities notifies the Company prior to the 20th
business day following the consummation of the exchange offer that (a) it is
prohibited by law or SEC policy from participating in the exchange offer, (b) it
may not resell the New Notes acquired by it in the exchange offer to the public
without delivering a prospectus, and the prospectus contained in the exchange
offer registration statement is not appropriate or available for such resales by
it, or (c) it is a broker-dealer and holds Original Notes acquired directly from
the Company or any of the Company's affiliates, we will, at our cost:
File a shelf registration statement covering resales of the Original
Notes,
Use our reasonable best efforts to cause the shelf registration
statement to be filed under the Securities Act at the earliest possible
time, but no later than 30 days after the time such obligation to file
arises, and
Use our reasonable best efforts to keep effective the shelf
registration statement until the earlier of two years after the date as
of which the Securities and Exchange Commission declares such shelf
registration statement effective or the shelf registration otherwise
becomes effective, or such shorter period as will terminate when all
Transfer Restricted Securities covered thereby have been sold pursuant
thereto.
"Transfer Restricted Securities" means each Original Note or New Note
until the earliest on the date of which (1) such note is exchanged in the
exchange offer and entitled to be resold to the public by the Holder thereof
without complying with the prospectus delivery requirements of the Securities
Act, (2) such note has been disposed of in accordance with the shelf
registration statement, (3) such note is disposed of by a broker-dealer pursuant
to the "Plan of Distribution" contemplated herein (including delivery of the
prospectus contained therein) or (4) such note is distributed to the public
pursuant to Rule 144 under the Securities Act.
We will, if and when we file the shelf registration statement, provide
to each holder of the Original Notes copies of the prospectus which is a part of
the shelf registration statement, notify each holder when the shelf registration
statement has become effective and take other actions as are required to permit
unrestricted resales of the Original Notes. A holder that sells Original Notes
pursuant to the shelf registration statement generally must be named as a
selling security-holder in the related prospectus and must deliver a prospectus
to purchasers, a seller will be subject to civil liability provisions under the
Securities Act in connection with these sales. A seller of the Original Notes
also will be bound by applicable provisions of the registration rights
agreement, including indemnification obligations. In addition, each holder of
Original Notes must deliver information to be used in connection with the shelf
registration statement and provide comments on the shelf registration statement
in order to have its Original Notes included in the shelf registration statement
and benefit from the provisions regarding any liquidated damages in the
registration rights agreement.
Liquidated Damages
If we are required to file the shelf registration statement and either
(1) if the exchange offer is not consummated on or before the 30th
business day after this registration statement is declared effective;
(2) if obligated to file the shelf registration statement and the
Company and the Guarantors fail to file the shelf registration statement with
the SEC on or prior to the 30th day after such filing obligation arises;
(3) if obligated to file a shelf registration statement and the shelf
registration statement is not declared effective on or prior to the 60th day
after the obligation to file a shelf registration statement arises; or
(4) if the exchange offer registration statement or the shelf
registration statement, as the case may be, is declared effective but thereafter
ceases to be effective or useable in connection with resales of the Transfer
Restricted Securities, for such time of non-effectiveness or non-usability
(each, a "Registration Default"),
then the Company and the Guarantors agree to pay to each holder of Transfer
Restricted Securities affected thereby liquidated damages ("Liquidated Damages")
in an amount equal to $0.05 per week per $1,000 in principal amount of Transfer
Restricted Securities held by such holder for each week or portion thereof that
the Registration Default continues for the first 90-day period immediately
following the occurrence of such Registration Default. The amount of the
Liquidated Damages shall increase by an additional $0.05 per week per $1,000 in
principal amount of Transfer Restricted Securities with respect to each
subsequent 90 day period until all Registration Defaults have been cured, up to
a maximum amount of Liquidated Damages of $0.50 per week per $1,000 in principal
amount of Transfer Restricted Securities. The Company and the Guarantors shall
not be required to pay Liquidated Damages for more than one Registration Default
at any given time. Following the cure of all Registration Defaults, the accrual
of Liquidated Damages will cease.
All accrued Liquidated Damages shall be paid by the Company or the
Guarantors to holders entitled thereto in the same manner in which interest is
payable to holders under the Indenture.
The sole remedy available to the holders of the Original Notes will be
the as described above. Any amounts of additional interest due as described
above will be payable in cash on the same interest payments dates as the
Original Notes.
Expiration Date; Extensions; Amendment
The term "expiration date" means 12:00 midnight, New York City time, on
August 30, 1999, unless we extend the exchange offer, in which case the term
"expiration date" means the latest date to which the exchange offer is extended.
In order to extend the expiration date, we will notify the exchange
agent of any extension by oral or written notice and will issue a public
announcement of the extension, each prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date.
We reserve the right
(a) to delay accepting of any Original Notes, to extend the
exchange offer or to terminate the exchange offer and not accept
Original Notes not previously accepted if any of the conditions set
forth under "--Conditions" shall have occurred and shall not have been
waived by us, if permitted to be waived by us, by giving oral or
written notice of such delay, extension or termination to the exchange
agent, or
(b) to amend the terms of the exchange offer in any manner deemed
by us to be advantageous to the holders of the Original Notes.
Any delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice. If the exchange
offer is amended in a manner determined by us to constitute a material change,
we promptly will disclose such amendment in a manner reasonably calculated to
inform the holders of the Original Notes of such amendment. Depending upon the
significance of the amendment, we may extend the exchange offer if it otherwise
would expire during such extension period.
Without limiting the manner in which we may choose to make a public
announcement of any extension, amendment or termination of the exchange offer,
we will not be obligated to publish, advertise, or otherwise communicate any
such announcement, other than by making a timely release to an appropriate news
agency.
Procedures for Tendering
To tender in the exchange offer, a holder must complete, sign and date
the letter of transmittal, or a facsimile of the letter of transmittal, have the
signatures on the letter of transmittal guaranteed if required by instruction 3
of the letter of transmittal, and mail or otherwise delivery such letter of
transmittal or such facsimile in connection with a book entry transfer, together
with the Original Notes and any other required documents. To be validly
tendered, such documents must reach the exchange agent by or before 12:00
midnight New York City time, on the expiration date. Delivery of the Original
Notes may be made by book-entry transfer in accordance with the procedures
described below. Confirmation of such book-entry transfer must be received by
the exchange agent on or prior to the expiration date.
The tender by a holder of Original Notes will constitute an agreement
between such holder and us in accordance with the terms and subject to the
conditions set forth in this prospectus and in the letter of transmittal.
Delivery of all documents must be made to the exchange agent at its
address set forth below. Holders may also request their respective brokers,
dealers, commercial banks, trust companies or nominees to effect such tender for
such holders.
The method of delivery of Original Notes and the letter of transmittal
and all other required documents to the exchange agent is at the election and
risk of the holders. Instead of delivery by mail, it is recommended that holders
use an overnight or hand delivery service. In all cases, sufficient time should
be allowed to assure timely delivery to the exchange agent by or before 12:00
midnight New York City time, on the expiration date. No letter of transmittal or
Original Notes should be sent to us.
Only a holder of Original Notes may tender Original Notes in the
exchange offer. The term "holder" with respect to the exchange offer means any
person in whose name Original Notes are registered on our books or any other
person who has obtained a properly completed bond power from the registered
holder.
Any beneficial holder whose Original Notes are registered in the name
of its broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact such registered holder promptly and instruct
such registered holder to tender on its behalf. If such beneficial holder wishes
to tender on its own behalf, such registered holder must, prior to completing
and executing the letter of transmittal and delivering its Original Notes,
either make appropriate arrangements to register ownership of the Original Notes
in such holder's name or obtain a properly completed bond power from the
registered holder. The transfer of record ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed by a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc. or a commercial bank or
trust company having an office or correspondent in the United States referred to
as an "eligible institution", unless the Original Notes are tendered: (a) by a
registered holder who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the letter of transmittal;
or (b) for the account of an eligible institution. In the event that signatures
on a letter of transmittal or a notice of withdrawal, are required to be
guaranteed, such guarantee must be by an eligible institution.
If the letter of transmittal is signed by a person other than the
registered holder of any Original Notes listed therein, such Original Notes must
be endorsed or accompanied by appropriate bond powers and a proxy which
authorizes such person to tender the Original Notes on behalf of the registered
holder, in each case signed as the name of the registered holder or holders
appears on the Original Notes.
If the letter of transmittal or any Original Notes or bond powers 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 us,
evidence satisfactory to us of their authority so to act must be submitted with
the letter of transmittal.
All questions as to the validity, form, eligibility, including time of
receipt, and withdrawal of the tendered Original Notes will be determined by us
in our sole discretion, which determination will be final and binding. We
reserve the absolute right to reject any and all Original Notes not properly
tendered or any Original Notes our acceptance of which, in the opinion of
counsel for us, would be unlawful. We also reserve the right to waive any
irregularities or conditions of tender as to particular Original Notes. Our
interpretation of the terms and conditions of the exchange offer, including the
instructions in the letter of transmittal, will be final and binding on all
parties. Unless waived, any defects or irregularities In connection with tenders
of Original Notes must be cured within such time as we shall determine. None of
us, the exchange agent or any other person shall be under any duty to give
notification of defects or irregularities with respect to tenders of Original
Notes, nor shall any of them incur any liability for failure to give such
notification. Tenders of Original Notes will not be deemed to have been made
until such irregularities have been cured or waived. Any Original Notes received
by the exchange agent that are not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned without cost to
such holder by the exchange agent to the tendering holders of Original Notes,
unless otherwise provided in the letter of transmittal, as soon as practicable
following the expiration date.
In addition, we reserve the right in our sole discretion to:
(a) purchase or make offers for any Original Notes that remain
outstanding subsequent to the expiration date or, as set forth
under "- Conditions," to terminate the exchange offer in
accordance with the terms of the registration rights agreements
and
(b) to the extent permitted by applicable law, purchase Original
Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers may differ
from the terms of the exchange offer.
By tendering Original Notes pursuant to the exchange offer, each holder
will represent to us that, among other things,
(a) the New Notes acquired pursuant to the exchange offer are being
obtained in the ordinary course of business of such holder,
(b) such holder is not engaged in and does not intend to engage in a
distribution of the New Notes,
(c) such holder has no arrangement or understanding with any person to
participate in the distribution of such New Notes, and
(d) such holder is not our "affiliate," as defined under Rule 405 of
the Securities Act, or, if such holder is such an affiliate, will
comply with the registration and prospectus delivery requirements
of the Securities Act to the extent applicable.
Book-Entry Transfer
We understand that the exchange agent will make a request promptly
after the date of this prospectus to establish accounts with respect to the
Original Notes at the Depository Trust Company for the purpose of facilitating
the exchange offer, and subject to the establishment of such accounts, any
financial institution that is a participant in the Depository Trust Company's
system may make book-entry delivery of Original Notes by causing the Depository
Trust Company to transfer such Original Notes into the exchange agent's account
with respect to the Original Notes in accordance with the Depository Trust
Company's procedures for such transfer. Although delivery of the Original Notes
may be effected through book-entry transfer into the exchange agent's account at
the Depository Trust Company, an appropriate letter of transmittal properly
completed and duly executed with any required signature guarantee, and all other
required documents must in each case be transmitted to and received or confirmed
by the exchange agent at its address set forth below on or prior to the
expiration date, or, if the guaranteed delivery procedures described below are
complied with, within the time period provided under such procedures. Delivery
of documents to Depository Trust Company does not constitute delivery to the
exchange agent.
Guaranteed Delivery Procedures
Holders who wish to tender their Original Notes and
(a) whose Original Notes are not immediately available; or
(b) who cannot deliver their Original Notes, the letter of
transmittal or any other required documents to the exchange agent on or
prior to the expiration date, may effect a tender if
(1) the tender is made through an eligible institution;
(2) on or prior to the expiration date, the exchange agent
receives from such eligible institution a properly completed and
duly executed Notice of Guaranteed Delivery, by facsimile
transmission, mail or hand delivery, setting forth the name and
address of the holder of the Original Notes, the certificate
number or numbers of such Original Notes and the principal
amount of Original Notes tendered stating that the tender is
being made thereby, and guaranteeing that, within three business
days after the expiration date, the letter of transmittal, or
facsimile thereof, together with the certificate(s) representing
the Original Notes to be tendered in proper form for transfer
and any other documents required by the letter of transmittal
will be deposited by the eligible institution with the exchange
agent; and
(3) such properly completed and executed letter of
transmittal (or facsimile thereof) together with the
certificate(s) representing all tendered Original Notes in
proper form for transfer and all other documents required by the
letter of transmittal are received by the exchange agent within
three business days after the expiration date.
Withdrawal of Tenders
Except as otherwise provided in this prospectus, tenders of Original
Notes may be withdrawn at any time by or prior to 12:00 midnight, New York City
time, on the expiration date, unless previously accepted for exchange.
To withdraw a tender of Original Notes in the exchange offer, a written
or facsimile transmission notice of withdrawal must be received by the exchange
agent at its address set forth in this prospectus by 12:00 midnight, New York
City time, on the expiration date. Any such notice of withdrawal must
(a) specify the name of the depositor, who is the person having
deposited the Original Notes to be withdrawn,
(b) identify the Original Notes to be withdrawn, including the
certificate number or numbers and principal amount of such Original
Notes or, in the case of Original Notes transferred by book-entry
transfer, the name and number of the account at Depository Trust
Company to be credited,
(c) be signed by the holder in the same manner as the original
signature on the letter of transmittal by which such Original Notes
were tendered, including any required signature guarantees, or be
accompanied by documents of transfer sufficient to have the trustee
with respect to the Original Notes register the transfer of such
Original Notes into the name of the depositor withdrawing the tender,
and
(d) specify the name in which any such Original Notes are being
registered if different from that of the depositor.
All questions as to the validity, form and eligibility, including time
of receipt, of such withdrawal notices will be determined by us, and our
determination shall be final and binding on all parties. Any Original Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
exchange offer and no New Notes will be issued with respect to the Original
Notes withdrawn unless the Original Notes so withdrawn are validly retendered.
Any Original Notes which have been tendered but which are not accepted for
exchange will be returned to its holder without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the exchange
offer. Properly withdrawn Original Notes may be retendered by following one of
the procedures described above under "Procedures for Tendering" at any time
on or prior to the expiration date.
Conditions
Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or exchange, any New Notes for any Original
Notes, and may terminate or amend the exchange offer on or before the expiration
date, if the exchange offer violates any applicable law or interpretation by the
staff of the Commission.
If we determine in our reasonable discretion that the foregoing
condition exists, we may (1) refuse to accept any Original Notes and return all
tendered Original Notes to the tendering holders, (2) extend the exchange offer
and retain all Original Notes tendered prior to the expiration of the exchange
offer, subject, however, to the rights of holders who tendered such Original
Notes to withdraw their tendered Original Notes, or (3) waive such condition, if
permissible, with respect to the exchange offer and accept all properly tendered
Original Notes which have not been withdrawn. If such waiver constitutes a
material change to the exchange offer, we will promptly disclose such waiver by
means of a prospectus supplement that will be distributed to the holders, and we
will extend the exchange offer as required by applicable law.
Pursuant to the registration rights agreement, if the exchange offer is
not consummated prior to the exchange offer termination date, as defined below,
we are required to cause to be filed with the Securities and Exchange Commission
a shelf registration statement with respect to the Original Notes as promptly as
practicable after the exchange offer termination date, and thereafter use its
best efforts to have the shelf registration statement declared effective.
"exchange offer termination date" means the date on which the earliest
of any of the following events occurs:
(a) applicable interpretations of the staff of the Securities and
Exchange Commission do not permit us to effect the exchange
offer,
(b) any holder of Original Notes or New Notes notifies us that either
(1) such holder is not eligible to participate in the exchange
offer, or
(2) such holder participates in the exchange offer and does not
receive freely transferable New Notes in exchange for tendered
Original Notes.
Exchange Agent
IBJ Whitehall Bank & Trust Company has been appointed as exchange agent
for the exchange offer. The Bank of New York, trustee under the Indenture under
which the New Notes will be issued, recently announced the signing of a
definitive agreement providing for its acquisition of IBJ Whitehall Bank & Trust
Company. Questions and requests for assistance and requests for additional
copies of this prospectus or of the letter of transmittal should be directed to
Reorganization Operations addressed as follows:
For information by Telephone:
(212) 858-2103
By Hand or Overnight Delivery Service.
One State Street
New York, New York 10004
Attn: Securities Processing Window
Subcellar One, (SC-1)
By Facsimile Transmission:
(212) 858-2611
(Telephone Confirmation)
(212) 858-2103
Fees and Expenses
We have agreed to bear the expenses of the exchange offer pursuant to
the exchange and registration rights agreement. We have not retained any
dealer-manager in connection with the exchange offer and will not make any
payments to brokers, dealers or others soliciting acceptances of the exchange
offer. We, however, will pay the exchange agent reasonable and customary fees
for its services and will reimburse it for its reasonable out-of-pocket expenses
in connection with providing the services.
The cash expenses to be incurred in connection with the exchange offer
will be paid by us. Such expenses include fees and expenses of IBJ Whitehall
Bank & Trust Company as exchange agent, accounting and legal fees and printing
costs, among others.
Accounting Treatment
The New Notes will be recorded at the same carrying value as the
Original Notes as reflected in our accounting records on the date of exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by us.
The expenses of the exchange offer and the unamortized expenses related to the
issuance of the Original Notes will be amortized over the term of the New Notes.
Consequences of Failure to Exchange
Holders of Original Notes who are eligible to participate in the
exchange offer but who do not tender their Original Notes will not have any
further registration rights, and their Original Notes will continue to be
subject to restrictions on transfer. Accordingly, such Original Notes may be
resold only:
- to us, upon redemption of the Original Notes or otherwise;
- so long as the Original Notes are eligible for resale pursuant to
Rule 144A under the Securities Act to a person inside the United
States whom the seller reasonably believes is a qualified
institutional buyer within the meaning of Rule 144A in a
transaction meeting the requirements of Rule 144A;
- in accordance with Rule 144 under the Securities Act, or under
another exemption from the registration requirements of the
Securities Act, and based upon an opinion of counsel reasonably
acceptable to us;
- outside the United States to a foreign person in a transaction
meeting the requirements of Rule 904 under the Securities Act; or
- under an effective registration statement under the Securities
Act;
in each case in accordance with any applicable securities laws of any state of
the United States.
Regulatory Approvals
We do not believe that the receipt of any material federal or state
regulatory approval will be necessary in connection with the exchange offer,
other than the effectiveness of the exchange offer registration statement under
the Securities Act.
Other
Participation in the exchange offer is voluntary and holders of
Original Notes should carefully consider whether to accept the terms and
condition of this exchange offer. Holders of the Original Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take with respect to the exchange offer.
BUSINESS
Overview
Falcon is a leading supplier of furniture and related products for the
office, food service, hospitality (including gaming) and national accounts (the
100 largest restaurant chains in the United States) segments of the commercial
furniture market. Founded in 1959, Falcon believes that it has become a
nationally recognized supplier in this market due to its:
- superior customer service;
- broad range of innovative products;
- vertically integrated manufacturing capabilities;
- strong relationships with its network of distributors and dealers;
and
- high-quality products.
Falcon designs, manufactures and distributes an extensive line of
products, including table bases, table tops, metal and wood chairs, booths and
interior decor systems, all made to customer specifications in a variety of
styles and finishes. Falcon's products are marketed under its well-known brand
names, including Falcon(R), Howe(R), Johnson Tables(R), Charlotte(R) and Decor
Concepts(R). Falcon employs a geographically diverse network of direct and
independent sales representatives, independent office furniture dealers and
distributors to distribute its products, and markets its products to restaurant
supply dealers, original equipment manufacturers ("OEMs"), mass merchandisers,
chain restaurants, architectural and design firms and end-users. Major customers
of Falcon include McDonald's, Sam's Club, Burger King, Marriott International
and Price Costco.
On June 18, 1999, Falcon's recently formed, wholly owned subsidiary
merged into Shelby Williams. As a result, Shelby Williams became a wholly owned
subsidiary of Falcon. Shelby Williams is a leading supplier of seating products
for the hospitality (including gaming) and food service segments of the
commercial furniture market. Shelby Williams designs, manufactures and
distributes a broad range of seating products, including wood, metal and rattan
chairs, barstools, sofas and sleeper sofas, and stacking chairs, as well as
banquet-related products, including folding tables, food service carts and
portable dance floors. Shelby Williams' products are marketed under its
well-recognized brand names, including Shelby Williams(R), King Arthur(R),
Thonet(R) and Phillocraft(R). In addition, Shelby Williams designs and
manufactures vinyl wall coverings for the hospitality and home furnishing
segments under the Sellers & Josephson(R) brand name. Shelby Williams primarily
utilizes direct sales representatives and, to a lesser extent, independent
distributors to distribute its products and markets its products to hospitality
and food service chains, interior designers, architectural and design firms,
contract furniture, food service and office furniture dealers. Major customers
of Shelby Williams include Bass Hotels (Holiday Inn), Hilton Hotels, Marriott
International, Sheraton Hotels & Resorts, Mirage Resorts, Circus Circus and MGM
Grand.
Falcon believes that its Acquisition of Shelby Williams is advantageous
for many reasons, including:
- Shelby Williams is a leading supplier of seating products, and the
Acquisition will solidify the combined company's position as a premier
producer of commercial furniture;
- Shelby Williams has strengths which are complementary to those of
Falcon;
- Shelby Williams has many strong, well-recognized brand names;
- Falcon has significantly increased its size and geographic presence,
better enabling the combined company to serve its customers across the
United States and internationally as its customers expand and grow
their own operations;
- Shelby Williams has an experienced, well-established sales force with
long-standing customer relationships;
- The combined company has an opportunity to realize significant
manufacturing and operating efficiency gains; and
- The combined company has enhanced growth opportunities through the
potential for cross-selling Falcon's products with those of Shelby
Williams, and Falcon has gained access to new channels of
distribution.
On a pro forma basis after giving effect to the Acquisition of Shelby
Williams, our revenues for fiscal year 1998 and for the twenty-six weeks ended
May 1, 1999 would have been $306.9 million and $157.0 million, respectively, and
EBITDA for fiscal year 1998 and for the twenty-six weeks ended May 1, 1999 would
have been $37.0 million and $18.0 million, respectively. Revenues from our top
ten customers accounted for approximately 16.5% and 15.0% of pro forma revenues
in fiscal year 1998 and in the twenty-six weeks ended May 1, 1999, respectively.
In addition, no single customer accounted for greater than approximately 2.8%
and 2.6% of pro forma revenues in fiscal year 1998 and in the twenty-six weeks
ended May 1, 1999, respectively.
The combination of Falcon and Shelby Williams strengthens our position
as a leading supplier of furniture and related products in the highly fragmented
commercial furniture market. We are a stronger competitor in our markets due to
the combination of Shelby Williams' strong brand names and long-standing
customer relationships with Falcon's vertically integrated manufacturing
capabilities and reputation for reliability, integrity and customer service. In
addition, the Acquisition of Shelby Williams gives us the size, market presence
and reputation to make us an attractive acquiror to many of the small,
privately-held companies in the commercial furniture market.
As a result of the Acquisition, we have significant opportunities to
leverage and strengthen our distribution capabilities to further penetrate
targeted markets. For example, Shelby Williams' strong relationships with the
architectural and design community and its hospitality segment customers
supplement Falcon's strong relationships with the office furniture dealer
community. We intend to utilize these relationships to aggressively market our
products to increase revenues.
The Acquisition also allows us to leverage excess manufacturing
capacity to rationalize the combined company's facilities and increase
company-wide efficiency. We expect that by increasing capacity utilization at
fewer manufacturing facilities we will benefit from reduced per unit costs
generated by spreading fixed manufacturing overhead costs over larger production
volumes. In addition, we will use our excess manufacturing capacity to
manufacture some components which were previously purchased by Shelby Williams
from third-party suppliers. We anticipate that we will benefit from increased
margins due to savings from eliminating the mark-ups currently being paid to
these third-party suppliers, as well as improving operating margins through
increased production volumes. For example, Falcon can utilize excess
manufacturing capacity at its Mimon, Czech Republic facility to produce wood
chairs which Shelby Williams currently imports from Europe from third-party
suppliers.
Industry Overview
We compete primarily in four segments of the commercial furniture
market, which represent only a portion of the overall retail and commercial
furniture market. These four segments are office, food service, hospitality
(including gaming) and national accounts (the 100 largest restaurant chains in
the United States). We estimate the market size of these segments totaled
approximately $4.0 billion in 1998.
The following table provides an overview of each of the four primary
market segments in which we compete.
Segment Estimated Size Description
(In millions)
Office................ $ 1,400 Tables and seating products with primary
end use markets, including corporate
offices, education, and conference and
training centers. Excludes panel systems,
filing systems and executive desks/
credenzas, which we do not produce.
Food service.......... 1,400 Table tops and table bases, metal and wood
chairs, booths, barstools and benches for
use by traditional "mom & pop" restaurants
to institutions serving food as an adjunct
to other core activities (e.g., school and
office cafeterias, prisons, nursing homes,
etc.).
Hospitality........... 700 Focuses on the furniture needs of
independent and chain hotels, motels,
conference resorts and casinos. Products
we manufacture for this segment include
table tops, table bases, metal and wood
chairs, millwork, folding tables, metal
and wood barstools, benches and booths.
These products can be found throughout a
customer's establishment (e.g., lounge,
bar area, restaurant, banquet/conference/
guest rooms).
National accounts..... 450 We define the national accounts segment as
the 100 largest restaurant chains in the
United States. The national accounts
segment includes quick service (i.e., fast
food) chains (e.g., McDonald's and Burger
King), casual dining restaurants (e.g.,
T.G.I. Friday's and Red Lobster) and quick
service lite restaurants (e.g., airport
Pizza Huts and Dunkin' Donuts).
Total................. $ 3,950
=======
In addition to the four market segments above, approximately 21.5% and
18.0% of our pro forma revenues in fiscal year 1998 and in the twenty-six weeks
ended May 1, 1999, respectively, were derived from the healthcare, university,
OEM and retail segments, as well as vinyl wall covering sales.
Competitive Strengths
We believe that we have the following competitive strengths:
Market Leader. We are a leading supplier of seating and table-related
products in the office, food service, hospitality (including gaming) and
national accounts segments of the commercial furniture market. We believe that,
as a result of consolidation within the segments in which we compete, our
customers and potential new customers want to deal with a smaller number of
larger, established suppliers with the ability to serve them at all of their
locations. Our leading market position will be a competitive advantage in
attracting and retaining these customers.
Diverse Product Lines with Strong Brand Names. We offer a diverse range
of products, including both standard and customized seating and table products,
thereby allowing customers to select the specific products which best fulfill
their needs and can be produced and distributed to meet their timing
requirements. We also enjoy strong name recognition through our well-established
brands, including Falcon(R), Howe(R), Johnson Tables(R), Charlotte(R), Decor
Concepts(R), Shelby Williams(R), King Arthur(R), Thonet(R), Sellers &
Josephson(R) and Phillocrafts(R). We believe that our broad product line, as
well as the strength of our brands, are important factors in maintaining
existing customers and attracting new customers.
Vertically Integrated Manufacturing Capabilities. We are vertically
integrated, which means that we control all aspects of our production process
from design to manufacture to distribution. By being vertically integrated, we
are able to lower our costs by manufacturing the products we sell as compared to
those competitors who may only be resellers or assemblers of products and, as a
result, must purchase certain of their components from third-party suppliers,
incurring a mark-up cost which we do not incur. By being vertically integrated,
we are also able to manufacture certain key materials that are specifically
designed to meet our customer's specifications. In addition, we believe that
being vertically integrated allows us to better serve our customers since we are
not dependent on third-party suppliers to provide needed components.
Accordingly, we are better equipped to respond quickly to changes in customer
orders or to rush a particular order for a valued customer.
Superior Customer Service. Customer service is an essential element of
our marketing and operating philosophy. We are committed to attracting new
customers and retaining existing customers by providing consistently superior
customer service. As part of our customer service program, we employ
approximately 130 dedicated customer service representatives. Using an on-line
computer system, our customer service representatives are able to provide our
customers with up-to-date information on the status of their orders. We intend
to maintain and enhance our high level of customer service to strengthen our
relationships with our customers. We believe that continued high levels of
customer service will further increase sales to existing customers and attract
new ones. We believe that superior customer service is essential to competing in
our targeted market segments.
Diverse and Established Customer Base. Over the past four decades, we
have built a reputation for high-quality products, reliability and superior
customer service. Our customers represent major companies in the various market
segments of the commercial furniture market, including McDonald's, Marriott
International, Sam's Club, Burger King and Hilton Hotels. Revenues from our top
ten customers accounted for approximately 16.5% and 15.0% of pro forma revenues
in fiscal year 1998 and in the twenty-six weeks ended May 1, 1999, respectively.
In addition, no single customer accounted for greater than approximately 2.8%
and 2.6% of pro forma revenues in fiscal year 1998 and in the twenty-six weeks
ended May 1, 1999, respectively.
Strength of Distribution and Sales Network. We distribute our products
through a geographically diverse network of direct and independent sales
representatives, independent office furniture dealers and distributors, and
market our products to hospitality and food service chains, restaurant supply
dealers, mass merchandisers, OEMs and chain restaurants. Shelby Williams' strong
relationships with the architectural and design community and its hospitality
segment customers supplement Falcon's strong relationships with the office
furniture dealer community, giving us strong relationships with the major
distribution channels within the commercial furniture market. In addition,
Shelby Williams' sales force complements that of Falcon's as there is not any
significant overlap between them. To ensure stability and continuity in Shelby
Williams' sales force, we have entered into long-term employment contracts with
Shelby Williams' national sales manager and regional vice presidents of sales as
part of our Acquisition of Shelby Williams. We intend to maintain and leverage
the strengths of each company's sales force following the Acquisition of Shelby
Williams. Our sales and marketing staff consists of approximately 260 full-time
employees, of which 120 are field sales personnel. In addition, we utilize
approximately 140 independent sales organizations. We maintain 16 showrooms and
sales offices in the United States and have approximately 40 distributors that
market our products internationally.
Diversified Market Segments and Revenue Stability. We market our
products to the office, food service, hospitality (including gaming), national
accounts, university, healthcare and other institutional segments of the
commercial furniture market. Our revenues are balanced among the various
segments, with no segment accounting for a disproportionate percentage of total
revenues. This balance in our revenues provides stability and helps protect us
against economic downturns. In addition, we maintain relative revenue stability
and are not significantly subject to economic cycles due to our diverse customer
base and because a substantial portion of our sales are from refurbishment
projects rather than new construction sales. As a general matter, refurbishment
sales tend to be less cyclical than new construction sales, which are generally
more affected by economic downturns because new construction projects (and
accordingly furniture sales for new construction) are often put on hold or
delayed in economic downturns, as new construction expenditures are often
considered discretionary by customers.
Experienced Management Team with Significant Equity Ownership Interest.
We are led by Franklin A. Jacobs, Chairman and CEO, who founded Falcon in 1959.
Our seasoned and respected management team has built their professional careers
primarily in the commercial furniture industry. These individuals possess a
detailed knowledge of each of our target market segments, and are well respected
in the industry for design, quality and customer service. Their knowledge and
depth of experience enables us to continue to provide innovative and
high-quality products and services.
Our senior management team also has a strong track record of
integrating acquisitions into the organization profitably and efficiently. Since
1992, Falcon's management team has successfully completed the acquisition of
four companies, including Charlotte Company in 1994, Decor Concepts in 1995, The
Chair Source in 1996 and most recently, Howe Furniture Corporation in 1998. Paul
N. Steinfeld, Shelby Williams' Chairman and CEO, and Manfred Steinfeld, a board
member of Shelby Williams, will also help manage the integration of the combined
company. In addition, certain key members of Shelby Williams' senior management
team have entered into long term employment agreements or consulting agreements
with the Company to facilitate the integration of Falcon and Shelby Williams.
Mr. Jacobs beneficially owns approximately 22.0% of the Company's
outstanding common stock. Including Mr. Jacobs' ownership interest, the
Company's directors and executive officers beneficially own approximately 35.6%
of the Company's outstanding common stock. Falcon's senior management team has
been awarded, and we intend to award certain key members of Shelby Williams'
management team, options and other equity rights, subject to certain
performance-based and other vesting provisions.
Shelby Williams Integration Plan
We have adopted a plan to integrate the operations of Falcon and Shelby
Williams, the principal components of which are:
- eliminating redundant administrative costs and expenses, including such
"public company" costs for Shelby Williams as board of directors'
salaries, annual report costs and New York Stock Exchange listing fees;
- realizing cost savings on raw materials and freight from the greater
purchasing power of the combined company;
- consolidating and improving certain functions, including accounting,
tax, information systems, human resources and legal;
- utilizing Falcon's production capabilities to manufacture certain
Shelby Williams products currently purchased from third-party
suppliers;
- improving the combined sales, marketing and distribution
infrastructures of Falcon and Shelby Williams; and
- reducing excess manufacturing capacity by consolidating and improving
the utilization of manufacturing facilities.
As a result of the Acquisition, we have excess manufacturing capacity,
creating opportunities to rationalize facilities and increase efficiencies.
Among other things, we anticipate that we can improve capacity utilization by
manufacturing several products which Shelby Williams previously purchased from
third-party suppliers, such as wood chairs, table tops and booths. By increasing
capacity utilization at fewer manufacturing facilities, we expect to decrease
per unit costs resulting from allocating our total fixed manufacturing overhead
costs over greater production volumes. In addition, since Falcon and Shelby
Williams manufacture similar products, opportunities exist to share best
manufacturing practices and techniques to further increase operating
efficiencies.
Business Strategy
We have adopted a comprehensive business strategy which includes the
following:
Capitalize on the Acquisition of Shelby Williams. The fundamental
strategy underlying the Falcon-Shelby Williams combination is to leverage the
strengths of both businesses by adopting the best practices of each across the
Company as a whole and to capitalize on the opportunities inherent in the
combination. We believe that the Falcon-Shelby Williams combination presents
numerous cost savings and revenue enhancement opportunities.
Maintain Customer Service Leadership. Over the past four decades, we
have built a reputation for superior customer service. We intend to aggressively
maintain our leadership position in customer service. We believe that our
superior customer service, as well as our reliability and high-quality products,
are important factors in maintaining existing customers and attracting new
customers.
Maximize Operating Efficiencies. We intend to improve our productivity
through a number of initiatives, including selective upgrades to production,
plant and equipment and optimizing manufacturing capacity. We plan to leverage
our excess manufacturing capacity to improve manufacturing productivity and
increase company-wide efficiency. We expect to recognize significant economic
benefits as a result of savings from eliminating mark-ups paid to third-party
suppliers and improving our operating margins through increased production
volumes.
Grow Through Strategic Acquisitions. Our business strategy is to grow
through strategic acquisitions. We plan to regularly evaluate potential
acquisition opportunities to support and strengthen our business. We have a
strategic acquisition plan which clearly identifies the criteria a potential
acquisition candidate must generally meet in order to be considered a viable
acquisition candidate. Among other criteria, we look for acquisition candidates
that are in our own industry, are profitable, have leading brand names and
well-established sales forces, and can be acquired at purchase prices that
produce earnings accretion. We anticipate realizing cost savings by increasing
production volumes at our existing manufacturing facilities and enhancing
revenues by increasing cross-selling opportunities. We believe that our broad
product line, extensive distribution network and strong brand name recognition
make us an attractive acquiror to many of the small, privately-held commercial
furniture manufacturers in our industry.
It is our intention to spend the short to medium term focusing on
successfully integrating the operations of Falcon and Shelby Williams. As a
result, we do not currently anticipate making any additional acquisitions for a
period of time, but will remain opportunistic as potential acquisitions present
themselves. We are not currently in discussions with any potential acquisition
candidates.
Products
Our principal products consist of an extensive line of furniture and
related products, including wood, metal and rattan chairs, banquet and
conference tables, table tops, table bases, booths, casegoods and other related
products.
Seating. We design and manufacture a wide variety of seating products,
primarily for:
- dining, gaming, guest room, conference and banquet facilities;
- healthcare institutions and universities; and
- other institutional uses.
We market our seating products under the Falcon(R), Charlotte(R), Decor
Concepts(R), Shelby Williams(R) and Thonet(R) brand names.
Metal. Our metal stacking chairs are available in a wide variety of
styles and are used primarily in multi-use function rooms, where it is necessary
to store chairs for events such as training courses and banquets. Metal chairs
may be upholstered in one of our standard catalog vinyls or fabrics or in
customer-furnished or customer-specified materials and may be plated or powder
coat painted in a standard catalog finish or in a customer-designated custom
finish.
Wood and Rattan. Our wood chairs are manufactured in hardwoods, such as
maple, oak and beech, and are available in a wide variety of finishes,
upholstered fabric and vinyl coverings. Products are made of solid wood or a
combination of woods, and many are constructed with bentwood components, which
provide extended durability. Our wood chair products are finished on
conveyorized lines which incorporate forced drying cycles. Wood chairs are
finished with one of our standard colors or the customer may specify or supply
its choice of finish material. Sealer coats and final conversion varnish coats
are applied to our wood chairs by means of state-of-the-art, electrostatic
finishing systems which insure uniform application, resulting in a durable
chip-resistant finish. To fully complement our seating line, we market a wide
collection of wicker and rattan seating products.
Banquet and Conference Tables. We design and manufacture banquet and
conference tables, which along with our metal stacking chairs are used primarily
in multi-use function rooms. Our tables are constructed from the table tops and
bases that we manufacture as separate components and then either assembled for
sale to our customers as a complete table unit or sold to other furniture
manufacturers as separate components for their assembly operations. We market
our banquet and conference tables under the Falcon(R), King Arthur(R), Johnson
Tables(R) and Howe(R) brand names.
Table Tops. We manufacture table tops in a number of standard sizes and
shapes and in a variety of finishes, including wood veneers, fiberglass,
high-pressure laminate patterns and solid wood. Edge treatments for the table
tops are available in vinyl, laminate, wood or metal. Wood edge, veneer and
butcher block tops are stained with one of our standard color finishes and
sealed and sprayed with a durable catalyzed top coat. We also have the
capability of manufacturing custom table tops in a wide variety of
customer-specified sizes, shapes and finishes. We typically sell table tops with
a base we produce separately. Our table tops are marketed under the Falcon(R),
Howe(R), Johnson Tables(R) and Shelby Williams(R) brand names.
Table Bases. Our table bases are produced in a variety of sizes, styles
and finishes and are used by restaurants, hotels, offices, cafeterias,
hospitals, airports, universities, country clubs and other commercial locations
where food is served. More than 35 styles of table bases are finished to order
in one of our standard catalog powder coat paint finishes or designer plated
finishes and also may be painted to match a customer's custom finish
requirements. We market our table bases under the Falcon(R), Howe(R), Johnson
Tables(R) and Shelby Williams(R) brand names.
Booths. Booths are available in standard catalog styles or
customer-specified styles, some of which are suitable for outdoor applications.
We manufacture booths in wood, metal or fiberglass, and our booths may be
upholstered in one of our standard catalog vinyls or fabrics or in
customer-designated or supplied coverings. Exposed wood is color matched to
customer specifications and top coated with the same durable catalyzed finish
used on our table tops and other wood products. We market our booths under the
Falcon(R) and Shelby Williams(R) brand names.
Casegoods. The combination of our broad line of furniture products and
our vertical manufacturing capabilities enable us to offer a complete commercial
interior decor package to our customers with significant design flexibility and
short lead times. We integrate certain of our products into complete interior
decor systems, including all furniture, booths, walls, wood trim and casegood
components. These casegood components include such products as counters, bars,
divider walls, planter units, salad bars and stands, which we produce in a
variety of high-pressure laminates. We then deliver these products to the
customer site and install them using our own employees or subcontractors we have
trained. We market these products under the Falcon(R) and Decor Concepts(R)
brand names.
Other Products. In addition to our other products, we also manufacture
portable dance floors and platforms, food service carts, cutting room tables, as
well as a full range of vinyl wall coverings. We market these products under the
Sellers & Josephson2(R), King Arthur(R) and Phillocraft(R) brand names.
Marketing and Distribution
Falcon
Domestic Sales. Falcon sells its furniture products throughout the
United States to a wide variety of customers, including restaurant supply
dealers, architectural design firms, office furniture dealers, mass
merchandisers, OEMs and chain restaurants. Falcon markets these products through
a combination of direct factory sales representatives employed by Falcon and
independent manufacturer's representatives organizations. Most sales
representatives are assigned to geographical territories. The efforts of these
factory and independent sales representatives are directed by Falcon's Vice
President--Sales and Marketing, other vice presidents who focus on individual
markets, and regional sales managers.
Each factory and independent sales representative is assigned a
territory in which to promote and sell Falcon's products and to ensure customer
satisfaction. Falcon determines the prices at which its products will be sold.
Falcon's independent sales representatives are commissioned and do not carry
competing lines.
Falcon assists its representatives in various ways, including:
- conducting extensive training programs to better educate its sales
representatives with respect to the design, manufacture, variety and
decor applications of its products;
- providing restaurant supply and office furniture dealers, mass
merchandisers, architectural designers, OEMs and other customers with
catalog materials, samples and brochures;
- maintaining a customer service department that ensures that it
promptly responds to the needs and orders of its customers;
- exhibiting its products at national and regional furniture shows and
at three showrooms in the Merchandise Mart in Chicago;
- maintaining regular contact with key customers; and
- conducting ongoing surveys to determine customer satisfaction.
Flight. Falcon's office and other furniture products are also marketed
through its "Flight" network of over 400 independent office furniture dealers.
Flight dealers distribute Falcon's furniture products to a wide variety of
commercial users and office furniture retailers and provide Falcon with access
to incremental sales opportunities. The Flight network is designed to both
distribute Falcon's office furniture products and cross-sell its food service
furniture products. Falcon utilizes its direct factory sales force and
independent sales representatives, under the supervision of Falcon's Vice
President--Contract, to call upon existing and prospective Flight dealers.
International Sales. Certain of Falcon's products are marketed
throughout Europe through an exclusive distribution agreement with a European
distributor. The Falcon Mimon a/s subsidiary located in Mimon, Czech Republic
also markets wood chair frames directly. Falcon's Howe Europe a/s subsidiary
located in Middelfart, Denmark markets, assembles and distributes tables and
chairs to the European contract office market for training, conferencing,
meeting and executive dining applications. Falcon holds the European
distribution rights to the award-winning 40/4(TM) chair through an exclusive
licensing agreement with David Rowland, the chair's designer. The manufacturing
capabilities of Falcon Mimon, Howe Europe and our extensive distribution network
allow us to take advantage of opportunities in Europe.
Distribution of Falcon's products in Asia and the Pacific Rim is
achieved through exclusive distribution arrangements in Japan, Hong Kong and
South Korea. Falcon plans to augment existing distribution agreements during
1999 with additional distribution arrangements in other countries in the Pacific
Rim. The Falcon Products (Shenzhen) Limited subsidiary located in Shenzhen, The
People's Republic of China markets table tops and millwork to support national
accounts customers throughout the Asia Pacific region. Falcon's international
sales efforts are supported by dedicated customer service personnel. During
fiscal years 1996, 1997 and 1998, and for the twenty-six weeks ended May 1,
1999, foreign operations and export sales were $10.9 million, $9.3 million,
$13.5 million, and $7.7 million respectively. Of these amounts, $3.8 million,
$3.9 million, $8.7 million and $4.8 million of sales in fiscal years 1996, 1997
and 1998, and for the twenty-six weeks ended May 1, 1999, respectively, were
made directly from the Falcon Mimon, Howe Europe, and Falcon Products (Shenzhen)
locations.
National Accounts. Falcon's national accounts program targets the major
restaurant chains in the United States. Falcon maintains a separate national
accounts sales force consisting of both employee sales representatives and
independent sales representatives that are directed by Falcon's Vice President--
Food Service and regional sales managers. Falcon believes that its vertically
integrated manufacturing capabilities allow it to better serve these customers
than most of our competitors and that our design, installation and service
capabilities are particularly suited for many of these customers. The national
accounts sales force develops original design concepts, including seating
layouts and product specifications for each customer based on the customer's
requirements. Falcon's national accounts sales force is supported by its own
customer service team, quotation and design staff and product engineers, located
at our Newport, Tennessee and City of Industry, California manufacturing
facilities.
Shelby Williams
Shelby Williams sells its products both domestically and
internationally to a wide variety of customers, including hospitality and food
service chains or their buying agencies, and other customers through interior
designers, architectural and design firms, contract furniture, food service and
furniture dealers. Shelby Williams primarily utilizes direct sales
representatives and, to a lesser extent, independent distributors to distribute
its products.
Shelby Williams also markets its products through advertising in major
trade publications and illustrating the Shelby Williams' products in its
catalogs. Shelby Williams publishes four extensive catalogs displaying its
products and distributes catalogs to architects, designers and dealers. Catalogs
are periodically supplemented as new products are introduced. Customers may
order standard products directly from these catalogs or request changes to meet
their design specifications.
Shelby Williams' sales and marketing staff consists of approximately
100 full-time employees, of which approximately 70 are field sales personnel.
This dedicated sales force is an integral component of the Shelby Williams'
customer service and support strategy. Shelby Williams' sales personnel sell
products and services to customers within an assigned territory and promote
customer satisfaction with periodic service calls in addition to scheduled
follow-up visits.
Shelby Williams also markets its products through 13 showrooms and
sales offices in the United States and approximately 40 distributors
internationally. Many of these distributors are concentrated in Europe and Asia.
In addition, Shelby Williams utilizes its local facilities and existing
distribution channels to assemble and distribute products in the United States
imported from European sources. Shelby Williams also exhibits at major national
and international trade shows.
Product Design and Development
Our design and engineering group works with sales and marketing
personnel to support our complete decor systems initiatives with our national
accounts customers. Our engineering staff utilizes a computer aided design
system to provide layout and configuration advice to customers who are
integrating our furniture products into their facilities and to design casegoods
and other components. The design and engineering group also assists our product
design engineers in the development of new products.
Our product development team, which is comprised of sales, marketing,
purchasing, engineering and financial personnel, strives to produce customer
satisfaction and competitively priced products by constantly improving our
product lines. The product development team has a formalized charter and a plan
that not only will account for new product introductions, but has identified
market trends and includes product development capabilities to accommodate these
trends. We have four full-time product design engineers who report to the
product development team and who are responsible for the design of new products.
On occasion, we also purchase product designs from outside sources to supplement
our internal design capabilities.
Manufacturing
Falcon
Falcon's manufacturing operations primarily consist of wood bending,
wood working and finishing, assembly, metal forming, bending and fabrication,
electrostatic wood and metal finishing, robotic welding and upholstering. Falcon
is a vertically integrated manufacturer, which allows it to control all aspects
of its production process and maintain quality control. Each manufacturing
facility produces a specified product or group of products and has virtually
complete production capability, subcontracting only a portion of certain
production processes from third-party suppliers or insourcing the manufacturing
of certain products from Falcon's other facilities. For example, Falcon's
Lewisville, Arkansas facility produces approximately 10% of the facility's wood
chairs, with the balance assembled from machined parts imported from Falcon
Mimon or other European suppliers. In addition, Falcon has a fully operational
modern information system at all of its manufacturing facilities. These systems
perform detailed and timely cost analysis of production by product and facility,
which assists Falcon in controlling its manufacturing processes and in better
serving its customers.
Falcon's manufacturing facilities are strategically located throughout
the United States and internationally to meet the requirements of its customers
and its distribution network. Falcon's products are manufactured at its
facilities in the United States in Newport, Tennessee, Belmont, Mississippi,
Lewisville, Arkansas and City of Industry and Azusa, California, and
internationally in Mimon, Czech Republic, Juarez and Tijuana, Mexico, Shenzhen,
The People's Republic of China and Middelfart, Denmark.
Shelby Williams
Shelby Williams' manufacturing operations primarily consist of wood
bending, wood working and finishing, assembly, metal forming and fabrication,
electrostatic wood and metal finishing. Shelby Williams also prints and
laminates vinyl wall coverings. For certain chair styles, Shelby Williams
purchases components manufactured by other companies. These components, which
are manufactured to Shelby Williams' specifications, are assembled, finished and
upholstered by Shelby Williams. All outsourced components are available
domestically except for rattan, which is indigenous to the Philippines and
Indonesia. For many of its standard product offerings, Shelby Williams optimizes
its production costs by sourcing the components produced at its Zacatecas,
Mexico facility.
Shelby Williams has six domestic facilities and one facility in Mexico.
All manufacturing operations emphasize quality control during the various
production processes. To provide consistency and speed to the finishing process,
Shelby Williams utilizes conveyorized paint lines with spray booths and drying
ovens positioned to allow proper drying times between finishing steps. In
addition, Shelby Williams has electrostatic wood-finishing systems which provide
superior finishing qualities and are advantageous from an environmental
standpoint. Shelby Williams has invested in powder-coating lines which provide
similar advantages for the metal products, and expects to continue to invest in
automated machinery and equipment, including a state-of-the-art aluminum
production facility and a new wood-finishing system.
Raw Materials
We manufacture most of our products to customer order from basic raw
materials. We utilize a variety of raw materials in the manufacture of our
products, including rough lumber, plywood, rattan laminates, particle board,
metal tubing, steel wire, scrap iron and various plastic components and other
frame components, from cushioning, vinyl and textiles, all of which we believe
are in abundant supply and available from a variety of sources. We have no
long-term supply contracts with any of our suppliers and we have experienced no
significant problems in obtaining raw materials for our operations at
commercially reasonable terms should the need arise.
Certain products we sell, including unfinished wood chair frames and
frame components and tubular steel stacking chair components, are purchased by
us from other sources. We have not experienced difficulty in obtaining suppliers
to manufacture these products, and we believe that alternative arrangements
could be made to obtain these products at commercially reasonable terms should
the need arise.
Competition
The office, food service, hospitality (including gaming), national
accounts, university, healthcare and other institutional segments of the
commercial furniture industry are fragmented and highly competitive with respect
to each of the products we sell. We compete primarily on the basis of design,
quality, customer service, product pricing and speed of delivery. We believe
that our competitive strengths are our vertically integrated manufacturing, our
emphasis on customer service and support, our reputation for quality and
responsiveness to our customers, the one-stop shopping advantage made possible
by the wide variety of products and our ability to design, manufacture and
install turnkey interior decor systems. We compete for sales for each of our
products with numerous domestic and foreign manufacturers, many of which have
greater financial and other resources. We can give no assurance that our
competitors will not offer a greater range of high-quality products, or that new
entrants with greater financial resources than us will not enter the market, or
that our results of operations will not be adversely affected by increased
competition.
<PAGE>
<TABLE>
<CAPTION>
Facilities
The tables below summarize certain information about the Company's
facilities.
Falcon Facilities
Approximate Lease/Ownership
Location Square Footage Use Terms
- -------- -------------- --------- ---------------
<S> <C> <C> <C>
Domestic:
St. Louis, Missouri................... 60,000 Principal executive offices Leased, expiring July 2015.
Newport, Tennessee.................... 370,000 Production of table bases, Leased, (1) for 300,000 square
table tops, millwork, feet expiring in December 2001,
casegoods, and booths with two five-year renewal options
and (2) for 70,000 expiring in
June 2001, with one five-year
renewal option.
Belmont, Mississippi.................. 227,000 Production of metal chairs Own 176,000 square feet in
and fiberglass seating four contiguous buildings;
Leased 51,000 square feet,
expiring in November 2003.
City of Industry, California.......... 179,000 Production of table bases, Leased, expiring in April
table tops, millwork, 2006, with two five-year
casegoods, metal chairs renewal options.
and fully upholstered
seating
Lewisville, Arkansas.................. 159,000 Production of wood chairs Leased, expiring in February
2004 with four five-year renewal
options.
Azusa, California..................... 34,000 Production of fiberglass Leased, expiring in October
booths 1999.
Foreign:
Mimon, Czech Republic................. 700,000 Production of wood chairs Owned.
Tijuana, Mexico....................... 89,000 Production of wood chairs, Leased, expiring in December
fully upholstered 1999, with three one-year
seating and casegoods renewal options.
Juarez, Mexico........................ 51,000 Production of iron castings Owned.
for table bases
Middelfart, Denmark................... 25,000 Production of tables and Leased, month-to-month.
chairs
Shenzhen, The People's Republic of 15,000 Production of table tops Leased, expiring July 31,
China................................. and millwork 1999, with an annual renewal
option.
Shelby Williams Facilities
Approximate Lease/Ownership
Location Square Footage Use Terms
- -------- -------------- --------- ---------------
Domestic:
Chicago, Illinois.................... 7,000 Principal executive offices Leased, expiring July 2000.
Morristown, Tennessee................. 744,000 Production of wood and metal Owned.
chairs and rattan/wicker
products
Canton, Mississippi.................. 406,000 Production of wood chairs Approximately 238,100 square
feet owned and 167,900 square
feet leased, expiring
from May 2000 to January 2009.
Statesville, North Carolina........... 327,000 Production of wood and metal Owned.
chairs
Englewood, New Jersey................. 68,000 Production of wall coverings Leased, expiring December
2003, with option to
renew for 10 additional
years.
Carlstadt, New Jersey................. 35,000 Production of wall coverings Leased, expiring April 2004.
Foreign:
Zacatecas, Mexico..................... 90,000 Production of wood chairs Owned.
</TABLE>
The Company also has showrooms and sales offices in ten United States
cities, including Atlanta, Chicago, Dallas, Los Angeles, New York, Plantation,
Florida and Houston.
The Company believes its facilities are in good condition and are
adequate for the purposes for which they are currently used. The capacity of the
Company's current facilities is considered to be adequate to meet the current
needs and anticipated increases in sales volume for the foreseeable future.
Employees and Labor Relations
As of May 1, 1999, we employed approximately 3,800 full-time employees,
2,300 of whom are subject to collective bargaining agreements. Approximately 300
persons were employed in sales, 100 persons in administration, and 3,400 persons
in manufacturing. We believe that our relations with our employees are good.
Intellectual Property Rights
Falcon. Falcon has registered the Falcon(R), Johnson Tables(R),
Charlotte(R), Flight(R), Genesis(R), Howe(R), Diffrient(R), Mios(R), Storm(R),
Tutor(R) and Tempest(R) trademarks, in addition to other trademarks, with the
United States Patent and Trademark Office. Management believes that Falcon's
trademark position is adequately protected in all markets in which it does
business. Falcon has received mechanical patents on certain of its furniture
mechanisms and components.
Shelby Williams. Shelby Williams sells its hospitality and food service
products under the registered trademarks Shelby Williams(R), King Arthur(R) and
Sterno(R) (licensed in perpetuity) and its healthcare, dormitory and other
institutional furniture under the registered trademark Thonet(R). Shelby
Williams markets cutting room tables and accessories under the registered
trademark Phillocraft(R) and wall coverings under the registered trademark
Sellers & Josephson(R).
We believe that while our patents and trademarks have value, we are not
dependent upon patents, trademarks, service marks or copyrights.
Environmental Matters
We are subject to numerous environmental laws and regulations in the
various jurisdictions in which we operate that (a) govern operations that may
have adverse environmental effects, such as discharges into air and water, as
well as handling and disposal practices for solid and hazardous wastes, and (b)
impose liability for response costs and certain damages resulting from past and
current spills, disposals or other releases of hazardous materials. Our
operations may result in noncompliance with or liability for remediation
pursuant to environmental laws. Environmental laws have changed rapidly in
recent years, and we may be subject to more stringent environmental laws in the
future. Although environmental matters have not to date had a material adverse
effect on the results of operations or financial condition of either Falcon or
Shelby Williams, we can give no assurance that such matters will not have a
material adverse effect on our results of operations or financial condition or
that more stringent environmental laws will not be enacted which could have a
material adverse effect on our results of operations or financial condition.
In February 1997, the King Arthur division of Shelby Williams received
a complaint, addressed to King Arthur, Inc., in a case pending in the Superior
Court of New Jersey, Camden County, Law Division, entitled Pennsauken Solid
Waste Management Authority, et al., vs. Ward Sand & Material Co., Inc. and a
large number of other defendants. The complaint, which identifies King Arthur,
Inc. as one of the defendants, alleges, among other things, that during the
operation of a landfill from the 1960's to 1984, the defendants improperly
generated, transported and/or disposed of certain hazardous waste materials, and
that defendants are jointly and severally liable to plaintiffs for all costs and
damages incurred by plaintiffs for remediation of the landfill and any
surrounding areas which are found to be contaminated. The complaint does not
specify any dollar amount of damages. Shelby Williams acquired certain assets of
King Arthur, Inc. in 1986. We believe, based on our present knowledge, that we
have valid defenses to the allegations in the complaint, and that our liability,
if any, is not material. We have put our insurers on notice of the complaint.
Legal Proceedings
From time to time, we are subject to legal proceedings and other claims
arising in the ordinary course of business. We maintain insurance coverage
against potential claims in amounts which we believe to be adequate. There are
no material pending legal proceedings, other than routine litigation incidental
to the business, to which we are a party or of which any of our property is the
subject.
In April 1999, the Internal Revenue Service issued a proposed
adjustment regarding an accumulated earnings tax liability of Shelby Williams in
the aggregate amount of approximately $4.7 million for the fiscal years
1995-1997. We are contesting the proposed adjustment. We have reviewed the
position of the IRS and believe it is highly unlikely that the IRS will succeed
in sustaining either all or a material portion of such an adjustment. Shelby
Williams has not accrued any amounts on its historical consolidated balance
sheet in regard to this matter.
MANAGEMENT
Directors and Executive Officers
The following table sets forth information concerning our directors and
executive officers:
Name Age Position
- ---- --- --------
Franklin A. Jacobs.. 66 Chairman of the Board of Directors and Chief
Executive Officer
Darryl C. Rosser.... 47 President, Chief Operating Officer and Director
Michael J. Dreller.. 37 Vice President--Finance, Chief Financial Officer,
Secretary and Treasurer
Richard J. Hnatek... 54 Senior Vice President--International Sales/New
Chain Development
Jackson H. Spidell.. 44 Vice President--Operations
Michael J. Kula..... 49 Vice President--Corporate Technology & Development
Stephen E. Cohen.... 30 Vice President--Sales and Marketing
Raynor E. Baldwin... 59 Director
Melvin F. Brown..... 63 Director
Donald P. Gallop.... 66 Director
James L. Hoagland... 76 Director
S. Lee Kling........ 70 Director
Lee M. Liberman..... 77 Director
James Schneider..... 67 Director
Franklin A. Jacobs has been our Chairman of the Board and Chief
Executive Officer since 1971, and was our President from inception to May 1981
and from January 1984 to December 1995.
Darryl C. Rosser has been our President and Chief Operating Officer
since December 1995. From May 1995 to December 1995, Mr. Rosser served as our
Executive Vice President--Operations, and from December 1993 to May 1993, Mr.
Rosser served as our Senior Vice President--Operations.
Michael J. Dreller has been our Vice President--Finance, Chief
Financial Officer, Secretary and Treasurer since January 1996. Mr. Dreller
previously was our corporate controller from 1993 to September 1995. Prior to
rejoining the Company, Mr. Dreller was the Vice President and Chief Financial
Officer of JDI Group, Inc., a distributor of residential furniture, from
September 1995 to December 1995.
Richard Hnatek has been our Senior Vice President--International
Sales/New Chain Development since August 1998, and from December 1993 to August
1998 he served as our Senior Vice President--Sales.
Jackson H. Spidell has been our Vice President--Operations since
November 1998. Prior to joining the Company, Mr. Spidell acted as a Director of
West Michigan Manufacturing Operations for Herman Miller, Inc., a manufacturer
of office furniture.
Michael J. Kula has been our Vice President--Corporate Technology &
Development since November 1998 and served as our Vice President--Operations
from July 1996 to November 1998. Prior to joining the Company, Mr. Kula was the
Senior Vice President--Operations of the Gunlocke Company, a subsidiary of HON
Industries, Inc., a manufacturer of office furniture, from January 1994 to July
1996.
Stephen E. Cohen has been our Vice President--Sales and Marketing since
August 1998. Mr. Cohen served as Vice President--Sales from November 1996 to
August 1998, served as our Vice President--Sales Western Region from October
1995 to November 1996, and served as our Vice President--Sales Midwestern Region
from March 1995 to October 1995.
Raynor E. Baldwin has been our director since 1977. Mr. Baldwin is
President of Woodsmiths, Incorporated, a manufacturer of table tops.
Melvin F. Brown has been our director since 1997. Mr. Brown has been
the Chairman Emeritus of Deutsche Financial Services, a commercial finance
company, since June 1998. From January 1997 to June 1998, Mr. Brown served as
Vice Chairman of Deutsche Financial Services. From May 1995 to June 1998, acted
as the President and Chief Executive Officer of Deutsche Financial Services.
Prior thereto, Mr. Brown acted as the President of ITT Commercial Finance
Corporation.
Donald P. Gallop has been our director since 1963. Mr. Gallop is an
attorney-at-law and Chairman of the law firm of Gallop, Johnson & Neuman, L.C.
Mr. Gallop is also a Director of Data Research Associates, Inc.
<PAGE>
James L. Hoagland has been our director since 1990. Mr. Hoagland has
been retired since September 1989. Prior to September 1989, Mr. Hoagland served
as the President and Chief Executive Officer of Graybar Electric Company, Inc.,
a distributor of electrical and telecommunications equipment.
S. Lee Kling has been our director since 1969. Mr. Kling is Chairman of
the Board of Kling Rechter & Co., L.P., a merchant banking company and a
Director of Bernard Chaus, Inc., Electro Rent Corporation, Hanover Direct, Inc.,
Lewis Galoob Toys, Inc., National Beverage Corp., Top Air Manufacturing, Inc.
and Union Planters Corporation.
Lee M. Liberman has been our director since 1985. Mr. Liberman is
Chairman Emeritus and consultant to Laclede Gas Company, a retail natural gas
distribution public utility.
James Schneider has been our director since 1989. Mr. Schneider is a
broker for International Monetary Market,
Chicago Mercantile Exchange.
<PAGE>
SECURITY OWNERSHIP
The following table and the accompanying notes set forth certain
information concerning the beneficial ownership of our common stock by (1) each
person who is known by us to own beneficially more than 5% of our common stock,
(2) each director and each executive officer who is the beneficial owner of
shares of our common stock and (3) all directors and executive officers as a
group.
Beneficial Owners:
Amount and Nature Percent
Name and Address of Beneficial Ownership(1) of Class
---------------- -------------------------- --------
Franklin A. Jacobs(2)................. 2,027,724 22.0%
Chairman of the Board and Chief
Executive Officer of the Company
9387 Dielman Industrial Drive
St. Louis, Missouri 63132
David L. Babson & Company, Inc(3)..... 1,069,820 11.9
One Memorial Drive
Cambridge, MA 02142-1300
Robert Fleming, Inc.(3)............... 842,979 9.3
320 Park Avenue, 11th Floor
New York, NY 10022
Royce Funds, Inc.(3).................. 825,400 9.1
1414 Avenue of the Americas
New York, NY 10022
Dimensional Fund Advisors, Inc.(3).... 478,736 5.3
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
(l) Reflects the number of shares outstanding on January 20, 1999, and, with
respect to each person, assumes the exercise of all stock options held by
such person that are exercisable currently or within 60 days of the date
of this prospectus (such options being referred to hereinafter as
"currently exercisable options").
(2) Includes 81,789 shares held by Joyce Jacobs, the former wife of Mr.
Jacobs, and 39,553 shares held in revocable trusts for the benefit of Mr.
Jacobs' children as to which Mr. Jacobs serves as sole trustee. Also
includes currently exercisable options to acquire 192,500 shares of common
stock. Does not include 162,494 shares held in trust for the benefit of
Mr. Jacobs' children as to which Donald P. Gallop serves as sole trustee.
See Note 4 under "Directors and Executive Officers."
(3) According to Schedule 13G, provided to the Company in accordance with the
Exchange Act.
<PAGE>
Directors and Executive Officers:
Amount and Nature Percent
Name and Address of Beneficial Ownership(1) of Class
---------------- -------------------------- --------
Raynor E. Baldwin(2)................... 234,505 2.6%
Melvin F. Brown(3)..................... 4,060 *
Donald P. Gallop(4).................... 247,206 2.7
James L. Hoagland(5)................... 333,822 *
Franklin A. Jacobs(6).................. 2,027,724 22.0
S. Lee Kling(7)........................ 170,882 1.9
Lee M. Liberman(8)..................... 44,012 *
Darryl C. Rosser(9).................... 120,617 1.3
James Schneider(10).................... 339,456 3.8
Michael J. Dreller(11)................. 14,583 *
Richard J. Hnatek(12).................. 105,786 1.2
Michael J. Kula(13).................... 10,045 *
All Directors and Executive Officers as
a Group (14 individuals)(14)(15) ... 3,365,451 35.6%
(*) Represents less than 1% of the class.
(l) See Note (l) to the table under "Beneficial Owners."
(2) Includes 69,294 shares held in a pension trust as to which Mr. Baldwin
serves as sole trustee and principal beneficiary and 24,048 shares owned by
his wife. Also includes currently exercisable options to acquire 9,970
shares of common stock.
(3) Includes currently exercisable options to acquire 1,060 shares of common
stock.
(4) Includes 162,494 shares which are held in a trust for the benefit of Mr.
Jacobs' children as to which Mr. Gallop serves as sole trustee, 49,627
shares which are owned of record by Gallop, Johnson & Neuman, L.C., a law
firm of which Mr. Gallop is Chairman, and 1,324 shares which Mr. Gallop
owns of record as custodian for the benefit of his children. Mr. Gallop
disclaims beneficial ownership of all such shares. Also includes currently
exercisable options to acquire 9,970 shares of common stock.
(5) Includes currently exercisable options to acquire 9,970 shares of common
stock.
(6) See Note (2) to the table under "Beneficial Owners."
(7) Includes 130,716 shares owned by a revocable trust of which Mr. Kling and
his wife are the trustees. Mr. Kling shares voting and dispositive power
over such shares. Also includes currently exercisable options to acquire
9,970 shares of common stock.
(8) Includes currently exercisable options to acquire 9,970 shares of common
stock.
(9) Includes currently exercisable options to acquire 89,592 shares of
common stock.
(10) Includes 276,963 shares owned by a partnership of which Mr. Schneider and
his children are general partners and as to which Mr. Schneider shares
voting and dispositive power, 28,734 shares held in a pension trust as to
which Mr. Schneider serves as sole trustee and 331 shares which Mr.
Schneider holds as custodian for his children. Also includes currently
exercisable options to acquire 11,620 shares of common stock.
(11) Includes currently exercisable options to acquire 9,000 shares of common
stock.
(12) Includes currently exercisable options to acquire 60,100 shares of
common stock.
(13) Includes currently exercisable options to acquire 8,000 shares of common
stock.
(14) Includes 84,725 shares subject to currently exercisable options held
by non-director executive officers of Falcon and 344,622 shares subject to
currently exercisable options held by directors of Falcon.
(15) For purposes of determining the aggregate amount and percentage of shares
deemed beneficially owned by directors and executive officers of Falcon
individually and by all directors, nominees and executive officers as a
group, exercise of all currently exercisable options listed in the
footnotes hereto is assumed. For such purpose, 9,456,954 shares of common
stock are deemed to be outstanding.
<PAGE>
CERTAIN TRANSACTIONS
Falcon
Raynor E. Baldwin, a director of Falcon, is President and sole
stockholder of Woodsmiths, Incorporated, a manufacturer of table tops, which
purchases products from Falcon. During fiscal 1998, Falcon received payments of
$179,768 in connection with transactions with Woodsmiths.
Shelby Williams
William B. Kaplan, a director of Shelby Williams until the consummation
of our Acquisition of Shelby Williams, is Chairman and Chief Executive Officer
and 50% shareholder of Senior Lifestyle Corporation. Affiliates of Senior
Lifestyle have selected and from time to time in the future may select Shelby
Williams' products for purchase by building projects managed, but not owned, by
such affiliates. Neither Mr. Kaplan, Senior Lifestyle nor such affiliates
receive any compensation from Shelby Williams for such selections.
Douglas A. Parker, a director of Shelby Williams until the consummation
of our Acquisition of Shelby Williams, is president and Chief Executive Officer
of Leonard Parker Company, Inc. Leonard Parker purchased products from Shelby
Williams for resale in the normal course of business in 1998 and such purchases
are continuing in 1999. Net sales by Shelby Williams to Leonard Parker for
fiscal year 1998 amounted to approximately $7.2 million.
Trisha Wilson, a director of Shelby Williams until the consummation of
our Acquisition of Shelby Williams, has recommended or specified, and from time
to time in the future may recommend or specify, Shelby Williams' products for
projects in connection with which she or her company renders interior
architectural hospitality design services. Neither Ms. Wilson nor her company
receives any compensation from Shelby Williams for such recommendations or
specifications.
<PAGE>
DESCRIPTION OF THE SENIOR SECURED CREDIT FACILITIES
In connection with our Acquisition of Shelby Williams, DLJ Capital
Funding, Inc. provided senior secured credit facilities (the "Senior Secured
Credit Facilities") to us in the aggregate amount of $120.0 million consisting
of (1) a six-year revolving credit facility of up to $50.0 million (the
"Revolving Credit Facility") and (2) a six-year term loan in the principal
amount of $70.0 million (the "Term Loan"). DLJ Capital Funding has arranged a
syndicate of other financial institutions that will, together with DLJ Capital
Funding, participate in the Senior Secured Credit Facilities.
Repayment
The Term Loan matures in quarterly installments, resulting in aggregate
annual amortization payments as follows.
Annual
Year after Closing Amortization
- ------------------ -------------
(In thousands)
1................................................. $ 0
2................................................. 7,000
3................................................. 10,500
4................................................. 14,000
5................................................. 17,500
6................................................. 21,000
Guarantees; Security
All of our existing domestic subsidiaries (including Shelby Williams)
have guaranteed, and future domestic subsidiaries will guarantee, the Senior
Secured Credit Facilities. A first priority security interest in substantially
all of our properties and assets and the assets of our existing and future
domestic subsidiaries (and all of our non-United States subsidiaries to the
extent doing so would not result in material increased tax or similar
liabilities to us or our subsidiaries), including a pledge of all of the stock
of our domestic subsidiaries and 66% of the stock of our foreign subsidiaries,
will secure the Senior Secured Credit Facilities.
Interest
At our option, the interest rates per annum applicable to the Revolving
Credit Facility and Term Loan will be a fluctuating rate of interest determined
by reference to (1) the London Interbank Offered Rate ("LIBOR") plus the
applicable margin, or (2) the greater of the Prime Rate as set forth on Telerate
Page 5 and the rate which is of 1% in excess of the rates on overnight Federal
funds transactions as published by the Federal Reserve Bank of New York (the
"Base Rate"), plus the applicable margin. The applicable margin will be
determined based on our total leverage ratio. For the Revolving Credit Facility
and the Term Loan, the applicable margin will range from 1.75% to 2.50% for
LIBOR borrowings and from 0.75% to 1.50% for Base Rate borrowings. We are
required to obtain and maintain until June 18, 2001 one or more interest rate
agreements with respect to the Term Loan to convert the fluctuating interest
rate obligations to fixed interest rate obligations in an aggregate principal
amount of not less than 50% of the amount of the Term Loan outstanding on June
18, 1999.
Fees
We have agreed to pay customary fees with respect to the Senior Secured
Credit Facilities, including up-front arrangement and funding fees, annual
administrative agency fees, and commitment fees on the unused portion of the
Revolving Credit Facility.
Use of Proceeds
The entire amount of the Term Loan was used to finance the Acquisition
of Shelby Williams, the refinancing of existing debt in aggregate principal
amount of approximately $20.2 million (plus accrued interest) and fees and
expenses associated with the Transactions. The Revolving Credit Facility will be
available to be used for working capital and general corporate purposes,
including to fund possible acquisitions.
Prepayments
We are permitted to voluntarily prepay the obligations under the Term
Loan and to reduce the amount committed under the Revolving Credit Facility
without any penalty or premium at any time. We are required to prepay the Term
Loan with:
- 100% of the net proceeds of asset sales, other than sales in the
ordinary course of business and sales of obsolete equipment or the
proceeds of which do not exceed certain de minimis amounts and
subject to other limited exceptions;
- 100% of the net proceeds of any debt offering, excluding this
exchange offer and subject to certain other limited exceptions;
- 50% of the net proceeds of issuances of equity securities of the
Company, if our total leverage ratio exceeds 3.0 to 1, subject to
limited exceptions, subject to a reduction to 0% if the total
leverage ratio is less than 3.0 to 1; and
- 75% of excess cash flow of the Company for each fiscal year.
Such mandatory prepayments will be applied to scheduled installments of the Term
Loan on a pro rata basis.
Covenants; Events of Default
The Senior Secured Credit Facilities contain covenants restricting our
ability and the ability of any of our subsidiaries to (with limited exceptions),
among other things:
- incur debt;
- subject our assets to liens;
- make investments;
- incur contingent liabilities;
- pay dividends (other than in amounts consistent with existing
company practice);
- merge or sell assets;
- make capital expenditures;
- enter into sale/lease-back transactions;
- enter into new businesses;
- discount receivables;
- enter into affiliate transactions; and
- change our fiscal year.
In addition, the Senior Secured Credit Facilities require us to meet
certain financial performance tests, including a minimum fixed charge coverage
ratio, a maximum leverage ratio, a minimum consolidated EBITDA test and a
minimum consolidated net worth test.
The Senior Secured Credit Facilities also contain certain conditions
under which an event of default under the Senior Secured Credit Facilities will
exist, including:
- failure to make payments when due under the Senior Secured Credit
Facilities;
- defaults in other agreements;
- breach of covenants;
- material misrepresentations;
- involuntary or voluntary bankruptcy;
- judgments or attachments against us;
- dissolution; and
- changes in control.
<PAGE>
DESCRIPTION OF NEW NOTES
As used in this "Description of New Notes," the term the "Company"
refers only to Falcon Products, Inc., a Delaware corporation, and not to any of
our Subsidiaries. You can find the definitions of certain terms used in this
description under the subheading "Certain Definitions."
The Company will issue the New Notes under an Indenture (the
"Indenture") among itself, the Guarantors and The Bank of New York, as trustee
(the "Trustee"). The terms of the New Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (the "Trust Indenture Act"). The New Notes are subject to
all such terms, and holders of New Notes (the "Holders") are referred to the
Indenture and the Trust Indenture Act for a statement thereof.
The following description is a summary of the material provisions of
the Indenture. It does not restate that agreement in its entirety. We urge you
to read the Indenture because it, and not this description, defines your rights
as holders of the New Notes. Copies of the Indenture are available as set forth
below under "Where You Can Find More Information."
Brief Description of the New Notes and the Guarantees
The New Notes
The New Notes:
(1) are general obligations of the Company;
(2) are subordinated in right of payment to all existing and future
Senior Debt of the Company;
(3) are senior in right of payment to any future subordinated
Indebtedness of the Company; and
(4) are unconditionally guaranteed by the Guarantors.
The Guarantees
The New Notes are unconditionally guaranteed by all of the Domestic
Subsidiaries of the Company on a senior subordinated basis.
The Guarantees of the New Notes:
(1) are general obligations of each Guarantor;
(2) are subordinated in right of payment to all existing and future
Senior Debt of each Guarantor; and
(3) are senior in right of payment to any future subordinated
Indebtedness of each Guarantor.
As of the Issue Date, all of our subsidiaries will be "Restricted
Subsidiaries." However, under the circumstances described below under the
subheading "--Certain Covenants--Designation of Restricted and Unrestricted
Subsidiaries," we will be permitted to designate certain of our subsidiaries as
"Unrestricted Subsidiaries." Unrestricted Subsidiaries will not be subject to
many of the restrictive covenants in the Indenture. Unrestricted Subsidiaries
will not guarantee the New Notes.
Not all of our Restricted Subsidiaries will guarantee the New Notes. In
the event of a bankruptcy, liquidation or reorganization of any of these
non-guarantor subsidiaries, these non-guarantor subsidiaries will pay the
holders of their debt and their trade creditors before they will be able to
distribute any of their assets to us.
Principal, Maturity and Interest
The Company will issue New Notes with a maximum aggregate principal
amount of $100.0 million. The New Notes will be in denominations of $1,000 and
integral multiples of $1,000. The New Notes will mature on June 15, 2009.
Interest on the New Notes will accrue at the rate of 11 3/8% per annum
and will be payable semi-annually in arrears on June 15 and December 15,
commencing on December 15, 1999. The Company will make each interest payment to
the Holders of record of the New Notes on the immediately preceding June 1 and
December 1, respectively.
Interest on the New Notes will accrue from the date of original
issuance or, if interest has already been paid, from the date it was most
recently paid. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
Methods of Receiving Payments on the New Notes
If a Holder has given wire transfer instructions to the Company, the
Company will make all principal, premium and interest payments on those New
Notes in accordance with those instructions. All other payments on the New Notes
will be made at the office or agency of the Paying Agent and Registrar within
the City and State of New York unless the Company elects to make interest
payments by check mailed to the Holders at their address set forth in the
register of Holders.
Paying Agent and Registrar for the New Notes
The Trustee will initially act as Paying Agent and Registrar. The
Company may change the Paying Agent or Registrar without prior notice to the
Holders of the New Notes, and the Company or any of its Subsidiaries may act as
Paying Agent or Registrar.
Transfer and Exchange
A Holder may transfer or exchange New Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any New Note selected for redemption. Also, the Company is not required to
transfer or exchange any New Note for a period of 15 days before a selection of
New Notes to be redeemed. The registered Holder will be treated as the owner of
it for all purposes.
Subsidiary Guarantees
The Guarantors will jointly and severally guarantee the Company's
obligations under the New Notes. Each Subsidiary Guarantee will be subordinated
to the prior payment in full of all Senior Debt of that Guarantor.
The Indenture provides that a Guarantor may not sell or otherwise
dispose of all or substantially all of its assets, or consolidate with or merge
with or into (whether or not such Guarantor is the surviving Person, whether or
not such Person is affiliated with such Guarantor), another Person unless: (1)
immediately after giving effect to that transaction, no Default or Event of
Default exists; and (2) either: (a) the Person acquiring the property in any
such sale or disposition or the Person formed by or surviving any such
consolidation or merger assumes all the obligations of that Guarantor pursuant
to a supplemental indenture satisfactory to the Trustee; or (b) the Net Proceeds
of such sale or other disposition are applied in accordance with the applicable
provisions of the Indenture.
The Subsidiary Guarantee of a Guarantor will be released: (1) in
connection with any sale or other disposition of all or substantially all of the
assets of that Guarantor (including by way of merger or consolidation), if the
Company applies the Net Proceeds of that sale or other disposition, in
accordance with the applicable provisions of the Indenture; or (2) in connection
with any sale of all of the capital stock of a Guarantor, if the Company applies
the Net Proceeds of that sale in accordance with the applicable provisions of
the Indenture; or (3) if the Company designates any Restricted Subsidiary that
is a Guarantor as an Unrestricted Subsidiary.
See "--Repurchase at Option of Holders--Asset Sales."
Subordination
The payment of principal, premium, if any, and interest on the New
Notes are subordinated in right of payment, as set forth in the Indenture, to
the prior payment in full in cash of all Senior Debt of the Company, whether
outstanding on the Issue Date or thereafter incurred.
The holders of Senior Debt will be entitled to receive payment in full
in cash of all Obligations due in respect of Senior Debt (including interest
after the commencement of any bankruptcy proceeding at the rate specified in the
applicable Senior Debt, whether or not allowed as a claim in such proceeding)
before the Holders of New Notes will be entitled to receive any payment with
respect to the New Notes (except that Holders of New Notes may receive and
retain Permitted Junior Securities and payments made from the trust described
under "--Legal Defeasance and Covenant Defeasance"), in the event of any
distribution to creditors of the Company: (1) in a liquidation or dissolution of
the Company; (2) in a bankruptcy, reorganization, insolvency, receivership or
similar proceeding relating to the Company or its property; (3) in an assignment
for the benefit of creditors; or (4) in any marshalling of the Company's assets
and liabilities.
The Company also may not make any payment in respect of the New Notes
(except in Permitted Junior Securities or from the trust described under
"--Legal Defeasance and Covenant Defeasance") if: (1) a payment default on
Designated Senior Debt occurs and is continuing; or (2) any other default occurs
and is continuing on Designated Senior Debt that permits holders of the
Designated Senior Debt to accelerate its maturity and the Trustee receives a
notice of such default (a "Payment Blockage Notice") from the Company or the
holders of any Designated Senior Debt. Payments on the New Notes may and shall
be resumed: (1) in the case of a payment default, upon the date on which such
default is cured or waived; and (2) in case of a nonpayment default, the earlier
of the date on which such nonpayment default is cured or waived or 179 days
after the date on which the applicable Payment Blockage Notice is received,
unless the maturity of any Designated Senior Debt has been accelerated. No new
Payment Blockage Notice may be delivered unless and until 360 days have elapsed
since the effectiveness of the immediately prior Payment Blockage Notice. No
nonpayment default that existed or was continuing on the date of delivery of any
Payment Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice unless such default shall have been cured or
waived for a period of not less than 180 days.
The Company must promptly notify holders of Senior Debt if payment of
the New Notes is accelerated because of an Event of Default. As a result of the
subordination provisions described above, in the event of a bankruptcy,
liquidation or reorganization of the Company, Holders of the New Notes may
recover less ratably than creditors of the Company who are holders of Senior
Debt. See "Risk Factors--Your Right to Receive Payments on the New Notes is
Junior to our Bank and other Unsubordinated Indebtedness and Possibly all of our
Future Borrowings and the Guarantors of the New Notes are Junior to all
Guarantors' Existing Senior Indebtedness and Possibly to all of their Future
Borrowings."
Optional Redemption
At any time prior to June 15, 2002, the Company may on any one or more
occasions redeem up to 35% of the aggregate principal amount of New Notes issued
under the Indenture at a redemption price of 111.375% of the principal amount
thereof, plus accrued and unpaid interest to the redemption date, with the net
cash proceeds of one or more Public Equity Offerings; provided that
(1) at least 65% of the aggregate principal amount of New Notes
issued on the Issue Date remains outstanding immediately after the
occurrence of such redemption (excluding New Notes held by the Company and
its Subsidiaries); and
(2) the redemption must occur within 45 days of the date of the
closing of such Public Equity Offering.
Except pursuant to the preceding paragraph, the New Notes will not be
redeemable at the Company's option prior to June 15, 2004. On or after June 15,
2004, the Company may redeem the New Notes, in whole or from time to time in
part, upon not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below plus
accrued and unpaid interest thereon, if any, to the applicable redemption date,
if redeemed during the twelve-month period beginning on June 15 of the years
indicated below:
Year Percentage
---- ----------
2004.................................................... 105.688%
2005..................................................... 103.792%
2006..................................................... 101.896%
2007 and thereafter...................................... 100.000%
Repurchase at the Option of Holders
Change of Control
If a Change of Control occurs, each Holder of New Notes will have the
right to require the Company to repurchase all or any part (equal to $1,000 or
an integral multiple thereof) of that Holder's New Notes pursuant to the Change
of Control Offer. In the Change of Control Offer, the Company will offer a
Change of Control Payment in cash equal to 101% of the aggregate principal
amount of New Notes repurchased plus accrued and unpaid interest thereon, if
any, to the date of purchase. Within ten days following any Change of Control,
the Company will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
New Notes on the Change of Control Payment Date specified in such notice,
pursuant to the procedures required by the Indenture and described in such
notice. The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the New Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful:
(1) accept for payment all New Notes or portions thereof properly
tendered pursuant to the Change of Control Offer;
(2) deposit with the Paying Agent an amount equal to the Change of
Control Payment in respect of all New Notes or portions thereof so
tendered; and
(3) deliver or cause to be delivered to the Trustee the New Notes so
accepted together with an Officers' Certificate stating the aggregate
principal amount of New Notes or portions thereof being purchased by the
Company.
The Paying Agent will promptly mail to each Holder of New Notes so
tendered the Change of Control Payment for such New Notes, and the Trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a New Note equal in principal amount to any unpurchased portion of
the New Notes surrendered, if any; provided that each such replacement New Note
will be in a principal amount of $1,000 or an integral multiple thereof.
Prior to complying with any of the provisions of this "Change of
Control" covenant, but in any event within 90 days following a Change of
Control, the Company will either repay all outstanding Senior Debt or obtain the
requisite consents, if any, under all agreements governing outstanding Senior
Debt to permit the repurchase of New Notes required by this covenant. The
Company will publicly announce the results of the Change of Control Offer on or
as soon as practicable after the Change of Control Payment Date.
The provisions described above that require the Company to make a
Change of Control Offer following a Change of Control will be applicable
regardless of whether or not any other provisions of the Indenture are
applicable. Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the Holders of the New Notes
to require that the Company repurchase or redeem the New Notes in the event of a
takeover, recapitalization or similar transaction.
The Company's outstanding Senior Debt currently limits our ability to
purchase New Notes, and also provides that certain change of control events with
respect to the Company would constitute a default under the agreements governing
the Senior Debt. Any future credit agreements or other agreements relating to
Senior Debt to which the Company becomes a party may contain similar
restrictions and provisions. In the event a Change of Control occurs at a time
when the Company is prohibited from purchasing New Notes, the Company could seek
the consent of its senior lenders to the purchase of New Notes or could attempt
to refinance the borrowings that contain such prohibition. If the Company does
not obtain such a consent or repay such borrowings, the Company will remain
prohibited from purchasing New Notes. In such case, the Company's failure to
purchase tendered New Notes would constitute an Event of Default under the
Indenture which would, in turn, constitute a default under such Senior Debt. In
such circumstances, the subordination provisions in the Indenture would likely
restrict payments to the Holders of New Notes.
The Company will not be required to make a Change of Control Offer upon
a Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all New Notes validly tendered and not withdrawn under such Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or substantially
all" of the assets of the Company and its Subsidiaries taken as a whole.
Although there is a limited body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a Holder of New Notes to
require the Company to repurchase such New Notes as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the assets of the
Company and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
Asset Sales
The Company will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless:
(1) the Company (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to
the fair market value of the assets or Equity Interests issued or sold or
otherwise disposed of;
(2) such fair market value is determined by the Company's Board of
Directors and evidenced by a resolution of the Board of Directors set
forth in an Officers' Certificate delivered to the Trustee; and
(3) at least 85% of the consideration therefor received by the
Company or such Restricted Subsidiary is in the form of cash or Cash
Equivalents. For purposes of this provision, each of the following shall
be deemed to be cash:
(a) any liabilities (as shown on the Company's or such
Restricted Subsidiary's most recent balance sheet), of the Company or
any Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the New Notes or
any Subsidiary Guarantee) that are assumed by the transferee of any
such assets pursuant to a customary novation agreement that releases
the Company or such Restricted Subsidiary from further liability; and
(b) any securities, notes or other obligations received by the
Company or any such Restricted Subsidiary from such transferee that
are contemporaneously (subject to ordinary settlement periods)
converted by the Company or such Restricted Subsidiary into cash (to
the extent of the cash received in that conversion).
Within 360 days after the receipt of any Net Proceeds from an Asset
Sale, the Company may apply such Net Proceeds at its option:
(1) to repay permanently Senior Debt of the Company or Senior Debt of
any Guarantor and, if the Senior Debt repaid is revolving credit
Indebtedness, to correspondingly reduce commitments with respect thereto;
(2) to acquire all or substantially all of the assets of, or a
majority of the Voting Stock of, another Permitted Business;
(3) to make a capital expenditure; or
(4) to acquire other assets that are used or useful in a Permitted
Business.
Pending the final application of any such Net Proceeds, the Company may
temporarily reduce revolving credit borrowings or otherwise invest such Net
Proceeds in any manner that is not prohibited by the Indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute Excess Proceeds. When the
aggregate amount of Excess Proceeds exceeds $5.0 million, the Company will make
an Asset Sale Offer to all Holders of New Notes and all holders of other
Indebtedness that is pari passu with the New Notes containing provisions similar
to those set forth in the Indenture with respect to offers to purchase or redeem
with the proceeds of sales of assets to purchase the maximum principal amount of
New Notes and such other pari passu Indebtedness that may be purchased out of
the Excess Proceeds. The offer price in any Asset Sale Offer will be equal to
100% of principal amount plus accrued and unpaid interest, if any, to the date
of purchase, and will be payable in cash. If any Excess Proceeds remain after
consummation of an Asset Sale Offer, the Company may use such Excess Proceeds
for any purpose not otherwise prohibited by the Indenture. If the aggregate
principal amount of New Notes and such other pari passu Indebtedness tendered
into such Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee
shall select the New Notes and such other pari passu Indebtedness to be
purchased on a pro rata basis. Upon completion of each Asset Sale Offer, the
amount of Excess Proceeds shall be reset at zero.
Selection and Notice
If less than all of the New Notes are to be redeemed at any time, the
Trustee will select New Notes for redemption as follows:
(1) if the New Notes are listed, in compliance with the requirements
of the principal national securities exchange on which the New Notes are
listed; or
(2) if the New Notes are not so listed, on a pro rata basis, by lot
or by such method as the Trustee shall deem fair and appropriate.
No New Notes of $1,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but not more than 60
days before the redemption date to each Holder of New Notes to be redeemed at
its registered address. Notices of redemption may not be conditional.
If any New Note is to be redeemed in part only, the notice of
redemption that relates to that New Note shall state the portion of the
principal amount thereof to be redeemed. A New Note in principal amount equal to
the unredeemed portion of the original New Note will be issued in the name of
the Holder thereof upon cancellation of the original New Note. New Notes called
for redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on New Notes or portions of them
called for redemption.
Certain Covenants
Restricted Payments
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of the Company's or any of its Restricted
Subsidiaries' Equity Interests (including, without limitation, any payment
in connection with any merger or consolidation involving the Company or
any of its Restricted Subsidiaries) or to the direct or indirect holders
of the Company's or any of its Restricted Subsidiaries' Equity Interests
in their capacity as such (other than dividends or distributions payable
in Equity Interests (other than Disqualified Stock) of the Company or to
the Company or a Restricted Subsidiary of the Company);
(2) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or
consolidation involving the Company) any Equity Interests of the Company
or any direct or indirect parent of the Company or any Restricted
Subsidiary of the Company (other than any such Equity Interests owned by
the Company or any Restricted Subsidiary of the Company);
(3) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Indebtedness that (a)
is pari passu with the New Notes, (b) is subordinate in right of payment
to the Subsidiary Guarantees or (c) otherwise constitutes Subordinated
Indebtedness (other than the New Notes or the Subsidiary Guarantees),
except a payment of interest or principal at the Stated Maturity thereof
or pursuant to any required sinking fund payments; or
(4) make any Restricted Investment (all such payments and other
actions set forth in clauses (1) through (4) above being collectively
referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(2) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have
been permitted to incur at least $1.00 of additional Indebtedness pursuant
to the Fixed Charge Coverage Ratio test set forth in the first paragraph
of the covenant described below under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock"; and
(3) such Restricted Payment, together with the aggregate amount of
all other Restricted Payments made by the Company and its Restricted
Subsidiaries after the Issue Date (excluding Restricted Payments permitted
by clauses (2) and (3) of the next succeeding paragraph), is less than the
sum, without duplication, of
(a) 50% of the Consolidated Net Income of the Company for the
period (taken as one accounting period) from the beginning of the
first fiscal quarter commencing after the Issue Date to the end of
the Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a
deficit, less 100% of such deficit), plus
(b) 100% of the aggregate net cash proceeds received by the
Company since the Issue Date as a contribution to its common equity
capital or from the issue or sale of Equity Interests of the Company
(other than Disqualified Stock) or from the issue or sale of
convertible or exchangeable Disqualified Stock or convertible or
exchangeable debt securities of the Company that have been converted
into or exchanged for such Equity Interests (other than Equity
Interests (or Disqualified Stock or debt securities) sold to a
Subsidiary of the Company), plus
(c) to the extent that any Restricted Investment that was made
after the Issue Date is sold for cash or otherwise liquidated or
repaid for cash, the lesser of (i) the cash return of capital with
respect to such Restricted Investment (less the cost of disposition,
if any) and (ii) the initial amount of such Restricted Investment.
The preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would
have complied with the provisions of the Indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any pari passu or Subordinated Indebtedness of the Company
or any Guarantor or of any Equity Interests of the Company or any
Guarantor in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to a Subsidiary of the Company)
of, Equity Interests of the Company (other than Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized
for any such redemption, repurchase, retirement, defeasance or other
acquisition shall be excluded from clause (3) (b) of the preceding
paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
(a) pari passu Indebtedness, (b) Indebtedness which is subordinate in
right of payment to the Subsidiary Guarantees or (c) Subordinated
Indebtedness of the Company or any Guarantor with the net cash proceeds
from an incurrence of Permitted Refinancing Indebtedness;
(4) the payment of any dividend by a Restricted Subsidiary of the
Company to the holders of its common Equity Interests on a pro rata basis
provided that, at the time of the declaration of any such dividends, no
Default or Event of Default shall have occurred and be continuing or would
occur as a consequence thereof; and
(5) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of the Company or any Restricted Subsidiary
of the Company held by any member of the Company's (or any of its
Subsidiaries') management pursuant to any management equity subscription
agreement or stock option agreement; provided that (i) the aggregate price
paid for all such repurchased, redeemed, acquired or retired Equity
Interests shall not exceed $1.0 million in any twelve-month period (with
unused amounts in any calendar year being carried over to succeeding
calendar years, without being subject to any maximum due to such carry
over treatment or expiration of any amounts so carried over) and (ii) at
the time of the aforementioned repurchase, redemption, acquisition or
retirement, no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof.
The amount of all Restricted Payments (other than cash) shall be the
fair market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any assets or securities that are required to be valued
by this covenant shall be determined by the Board of Directors whose resolution
with respect thereto shall be delivered to the Trustee. The Board of Directors'
determination must be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if the
fair market value exceeds $5.0 million. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by this "Restricted Payments"
covenant were computed, together with a copy of any fairness opinion or
appraisal required by the Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable, contingently or otherwise,
with respect to (collectively, "incur") any Indebtedness (including Acquired
Debt), and the Company will not issue any Disqualified Stock and will not permit
any of its Restricted Subsidiaries to issue any shares of preferred stock;
provided, however, that the Company and any Guarantor may incur Indebtedness
(including Acquired Debt), and the Company may issue Disqualified Stock, if the
Fixed Charge Coverage Ratio for the Company's most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
or such Disqualified Stock is issued would have been at least (a) 2.0 to 1 if
such Indebtedness is incurred on or prior to June, 2001 and (b) 2.25 to 1 if
such Indebtedness is incurred thereafter, determined on a pro forma basis
(including a pro forma application of the net proceeds therefrom), as if the
additional Indebtedness had been incurred, or the Disqualified Stock had been
issued, as the case may be, at the beginning of such four-quarter period.
The first paragraph of this covenant will not prohibit the incurrence
of any of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by the Company and any Guarantor of Indebtedness
and letters of credit under one or more Credit Facilities; provided that
the aggregate principal amount of all Indebtedness and letters of credit
of the Company outstanding under all Credit Facilities after giving effect
to such incurrence (with letters of credit being deemed to have a
principal amount equal to the maximum potential liability of the Company
and the Guarantors thereunder) does not exceed an amount equal to $135
million less the aggregate amount applied by the Company or any of its
Subsidiaries since the Issue Date to permanently repay Indebtedness (and,
if any of such Indebtedness is revolving credit Indebtedness, to reduce
commitments with respect thereto) under a Credit Facility as a result of
asset dispositions;
(2) the incurrence by the Company and its Subsidiaries of Existing
Indebtedness;
(3) the incurrence by the Company and the Guarantors of Indebtedness
represented by the New Notes in an aggregate principal amount of $100.0
million at any time outstanding and the Subsidiary Guarantees;
(4) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case, incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement of property, plant or equipment used in the
business of the Company or such Restricted Subsidiary, in an aggregate
principal amount not to exceed $5.0 million at any time outstanding;
(5) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace,
Indebtedness (other than intercompany Indebtedness) that was permitted by
the Indenture to be incurred under the first paragraph of this covenant or
clauses (2), (3), (4) or (9) of this paragraph;
(6) the incurrence by the Company or any Guarantor of intercompany
Indebtedness between or among the Company and any of the Guarantors;
provided, however, that:
(a) such Indebtedness must be expressly subordinated to the
prior payment in full in cash of all Obligations with respect to the
New Notes, in the case of the Company, or the Subsidiary Guarantee of
such Guarantor, in the case of a Guarantor; and
(b) (i) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other
than the Company or a Guarantor and (ii) any sale or other transfer
of any such Indebtedness to a Person that is not either the Company
or a Guarantor shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by the Company or any such Guarantor,
as the case may be, that was not permitted by this clause (6);
(7) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging (i) interest rate risk with respect to any floating rate
Indebtedness or (ii) foreign currency valuation risk; in either case, in
respect of Indebtedness that is permitted by the terms of the Indenture to
be outstanding;
(8) the guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or a Restricted Subsidiary of the Company that
was permitted to be incurred by another provision of this covenant;
(9) the incurrence by the Company or any of its Restricted
Subsidiaries of additional Indebtedness in an aggregate principal amount
(or accreted value, as applicable) at any time outstanding, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or
replace any Indebtedness incurred pursuant to this clause (9), not to
exceed $7.5 million;
(10) Indebtedness of the Company's Foreign Subsidiaries in an amount
not to exceed $7.5 million at any time outstanding; and
(11) the accrual of interest, accretion or amortization of original
issue discount, the payment of interest on any Indebtedness in the form of
additional Indebtedness with the same terms, and the payment of dividends
on Disqualified Stock in the form of additional shares of the same class
of Disqualified Stock; provided, in each such case, that the amount
thereof is included in Fixed Charges of the Company as accrued.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (1) through (11) above, or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company will be permitted to classify such item of Indebtedness on the date of
its incurrence in any manner that complies with this covenant. Indebtedness
under Credit Facilities outstanding on the Issue Date shall be deemed to have
been incurred on such date in reliance on the exception provided by clause (1)
of the preceding paragraph. Subject to the other terms of the Indenture, any
Indebtedness incurred in accordance with this covenant may be incurred under the
Credit Agreement.
For purposes of determining compliance with any U.S. dollar-denominated
restriction on the incurrence of Indebtedness, the U.S. dollar-equivalent
principal amount of Indebtedness denominated in a foreign currency shall be
calculated based on the relevant currency exchange rate in effect on the date
such Indebtedness was incurred, in the case of term Indebtedness, or first
committed, in the case of revolving credit Indebtedness; provided that if such
Indebtedness is incurred to refinance other Indebtedness denominated in a
foreign currency, and such refinancing would cause the applicable U.S.
dollar-dominated restriction to be exceeded if calculated at the relevant
currency exchange rate in effect on the date of such refinancing, such U.S.
dollar-dominated restriction shall be deemed not to have been exceeded so long
as the principal amount of such refinancing Indebtedness does not exceed the
principal amount of such Indebtedness being refinanced. The principal amount of
any Indebtedness incurred to refinance other Indebtedness, if incurred in a
different currency from the Indebtedness being refinanced, shall be calculated
based on the currency exchange rate applicable to the currencies in which such
Permitted Refinancing Indebtedness is denominated that is in effect on the date
of such refinancing.
No Senior Subordinated Debt
The Company will not incur, create, issue, assume, guarantee or
otherwise become liable for any Indebtedness that is subordinate or junior in
right of payment to any Senior Debt of the Company and senior in any respect in
right of payment to the New Notes. No Guarantor will incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Debt of such Guarantor
and senior in any respect in right of payment to such Guarantor's Subsidiary
Guarantee.
Liens
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Lien of any kind securing Indebtedness, Attributable Debt or trade
payables on any asset now owned or hereafter acquired, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or permit to exist or become
effective any encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital
Stock to the Company or any of the Company's Restricted Subsidiaries, or
with respect to any other interest or participation in, or measured by,
its profits, or pay any indebtedness owed to the Company or any of the
Company Restricted Subsidiaries;
(2) make loans or advances to the Company or any of the Company's
Restricted Subsidiaries; or
(3) transfer any of its properties or assets to the Company or any of
the Company's Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) Existing Indebtedness and the Credit Agreement, in each case as
in effect on the Issue Date and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements
or refinancings thereof, provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacement or
refinancings are no more restrictive, taken as a whole, with respect to
such dividend and other payment restrictions than those contained in such
Existing Indebtedness or Credit Agreement, as in effect on the Issue Date;
(2) the Indenture, the Subsidiary Guarantees and the New Notes;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a
Person acquired by the Company or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent such
Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired, provided that, in
the case of Indebtedness, such Indebtedness was permitted by the terms of
the Indenture to be incurred;
(5) customary non-assignment provisions in licenses or leases entered
into in the ordinary course of business and consistent with past
practices;
(6) purchase money or capital lease obligations for property acquired
in the ordinary course of business that impose restrictions on the
property so acquired of the nature described in clause (3) of the
preceding paragraph;
(7) any agreement for the sale or other disposition of a Restricted
Subsidiary that restricts distributions by such Restricted Subsidiary
pending its sale or other disposition;
(8) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive, taken as a whole, than
those contained in the agreements governing the Indebtedness being
refinanced;
(9) Liens securing Indebtedness otherwise permitted to be incurred
pursuant to the provisions of the covenant described above under the
caption "--Liens" that limit the right of the Company or any of its
Restricted Subsidiaries to dispose of the assets subject to such Lien;
(10) provisions with respect to the disposition or distribution of
assets or property in joint venture agreements and other similar
agreements entered into in the ordinary course of business; and
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business.
Merger, Consolidation, or Sale of Assets
The Company may not, directly or indirectly: (1) consolidate or merge
with or into another Person (whether or not the Company is the surviving
corporation); or (2) sell, assign, transfer, convey or otherwise dispose of all
or substantially all of its properties or assets, in one or more related
transactions, to another Person; unless:
(1) either: (a) the Company is the surviving corporation; or (b) the
Person formed by or surviving any such consolidation or merger (if other
than the Company) or to which such sale, assignment, transfer, conveyance
or other disposition shall have been made is a corporation organized or
existing under the laws of the United States, any state thereof or the
District of Columbia;
(2) the Person formed by or surviving any such consolidation or
merger (if other than the Company) or the Person to which such sale,
assignment, transfer, conveyance or other disposition shall have been made
assumes all the obligations of the Company under the New Notes and the
Indenture pursuant to agreements reasonably satisfactory to the Trustee;
(3) immediately after such transaction no Default or Event of Default
exists; and
(4) the Company or the Person formed by or surviving any such
consolidation or merger (if other than the Company):
(a) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of
the Company immediately preceding the transaction; and
(b) will, on the date of such transaction after giving pro
forma effect thereto and any related financing transactions as if the
same had occurred at the beginning of the applicable four-quarter
period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described above under
the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock."
In addition, the Company may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. This "Merger, Consolidation, or Sale of
Assets" covenant will not apply to a sale, assignment, transfer, conveyance or
other disposition of assets between or among the Company and any of its Wholly
Owned Subsidiaries.
Transactions with Affiliates
The Company will not, and will not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each, an "Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less favorable
to the Company or the relevant Restricted Subsidiary than those that would
have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person; and
(2) the Company delivers to the Trustee:
(a) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in
excess of $1.0 million, a resolution of the Board of Directors set
forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with this covenant and that such Affiliate
Transaction has been approved by a majority of the disinterested
members of the Board of Directors; and
(b) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in
excess of $5.0 million, an opinion as to the fairness to the Holders
of such Affiliate Transaction from a financial point of view issued
by an accounting, appraisal or investment banking firm of national
standing.
The following items shall not be deemed to be Affiliate Transactions
and, therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment agreement entered into by the Company or any of
its Restricted Subsidiaries in the ordinary course of business and
consistent with the past practice of the Company or such Restricted
Subsidiary;
(2) transactions between or among the Company and/or its Restricted
Subsidiaries;
(3) payment of reasonable directors fees to Persons who are not
otherwise Affiliates of the Company; and
(4) Restricted Payments that are permitted by the provisions of the
Indenture described above under the caption "--Restricted Payments."
Additional Subsidiary Guarantees
If the Company or any of its Restricted Subsidiaries acquires or
creates another Domestic Subsidiary after the Issue Date or if any Foreign
Subsidiary becomes a Domestic Subsidiary, then that newly acquired or created
Restricted Subsidiary must become a Guarantor and execute a supplemental
indenture satisfactory to the Trustee and deliver an Opinion of Counsel to the
Trustee within 10 Business Days of the date on which it was acquired or created,
provided, this covenant shall not apply to any Subsidiary that has been properly
designated as an Unrestricted Subsidiary.
Designation of Restricted and Unrestricted Subsidiaries
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, all
outstanding Investments owned by the Company and its Restricted Subsidiaries in
the Subsidiary so designated will be deemed to be an Investment made as of the
time of such designation and will either reduce the amount available for
Restricted Payments under the first paragraph of the covenant described above
under the caption "--Restricted Payments" or reduce the amount available for
future Investments under one or more clauses of the definition of "Permitted
Investments." All such outstanding Investments will be valued at their fair
market value at the time of such designation. That designation will only be
permitted if such Restricted Payment would be permitted at that time and if such
Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary. The Board of Directors may redesignate any Unrestricted Subsidiary
to be a Restricted Subsidiary if the redesignation would not cause a Default.
Sale and Leaseback Transactions
The Company will not, and will not permit any of its Restricted
Subsidiaries to, enter into any sale and leaseback transaction; provided that
the Company or any Restricted Subsidiary of the Company that is a Guarantor may
enter into a sale and leaseback transaction if:
(1) the Company or that Guarantor, as applicable, could have (a)
incurred Indebtedness in an amount equal to the Attributable Debt relating
to such sale and leaseback transaction under the Fixed Charge Coverage
Ratio test in the first paragraph of the covenant described above under
the caption "--Incurrence of Additional Indebtedness and Issuance of
Preferred Stock" and (b) incurred a Lien to secure such Indebtedness
pursuant to the covenant described above under the caption "--Liens";
(2) the gross cash proceeds of that sale and leaseback transaction
are at least equal to the fair market value, as determined in good faith
by the Board of Directors and set forth in an Officers' Certificate
delivered to the Trustee, of the property that is the subject of such sale
and leaseback transaction; and
(3) the transfer of assets in that sale and leaseback transaction is
permitted by, and the Company applies the proceeds of such transaction in
compliance with, the covenant described above under the caption "--Asset
Sales."
Limitation on Issuances and Sales of Equity Interests in Wholly Owned
Subsidiaries
The Company will not, and will not permit any of its Restricted
Subsidiaries to, transfer, convey, sell, lease or otherwise dispose of any
Equity Interests in any Wholly Owned Restricted Subsidiary of the Company to any
Person (other than the Company or a Wholly Owned Restricted Subsidiary of the
Company), unless:
(1) such transfer, conveyance, sale, lease or other disposition is of
all the Equity Interests in such Wholly Owned Restricted Subsidiary; and
(2) the cash Net Proceeds from such transfer, conveyance, sale, lease
or other disposition are applied in accordance with the covenant described
above under the caption "--Asset Sales,"
provided, however, that the restrictions in clauses (1) and (2) above shall not
apply to (a) the issuance of Disqualified Stock in compliance with the covenant
described above under the caption "--Incurrence of Indebtedness and Issuance
of Preferred Stock" or (b) the pledge of the Capital Stock of any Restricted
Subsidiary of the Company in compliance with the covenant described above under
the caption "--Liens."
In addition, the Company will not permit any Wholly Owned Restricted
Subsidiary of the Company to issue any of its Equity Interests (other than, if
necessary, shares of its Capital Stock constituting directors' qualifying
shares) to any Person other than to the Company or a Wholly Owned Restricted
Subsidiary of the Company.
Limitations on Issuances of Guarantees of Indebtedness
The Company will not permit any of its Restricted Subsidiaries,
directly or indirectly, to Guarantee or pledge any assets to secure the payment
of any other Indebtedness of the Company unless such Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture providing for the
Guarantee of the payment of the New Notes by such Restricted Subsidiary, which
Guarantee shall be senior to or pari passu with such Restricted Subsidiary's
Guarantee of or pledge to secure such other Indebtedness, unless such other
Indebtedness is Senior Debt, in which case the Guarantee of the New Notes shall
be subordinated to the Guarantee of such Senior Debt to the same extent as the
New Notes are subordinated to such Senior Debt.
Notwithstanding the preceding paragraph, any Subsidiary Guarantee of
the New Notes will provide by its terms that it will be automatically and
unconditionally released and discharged under the circumstances described above
under the caption "--Subsidiary Guarantees." The form of the Subsidiary
Guarantee will be part of the Indenture.
Business Activities
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses.
Payments for Consent
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration to or for the
benefit of any Holder of New Notes for or as an inducement to any consent,
waiver or amendment of any of the terms or provisions of the Indenture or the
New Notes unless such consideration is offered to be paid and is paid to all
Holders of the New Notes that consent, waive or agree to amend in the time frame
set forth in the solicitation documents relating to such consent, waiver or
agreement.
Reports
Whether or not required by the SEC, so long as any New Notes are
outstanding, the Company will furnish to the Holders of New Notes, within the
time periods specified in the SEC's rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the SEC on Forms 10-Q and 10-K
if the Company were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and, with respect to the annual information only, a report on the annual
financial statements by the Company's certified independent accountants;
and
(2) all current reports that would be required to be filed with the
SEC on Form 8-K if the Company were required to file such reports.
If the Company has designated any of its Subsidiaries as Unrestricted
Subsidiaries, or if any of the Company's Subsidiaries are not Guarantors, then
the quarterly and annual financial information required by the preceding
paragraph shall include a reasonably detailed presentation, either on the face
of the financial statements or in the footnotes thereto, and in Management's
Discussion and Analysis of Financial Condition and Results of Operations, of the
financial condition and results of operations of the Company and its Restricted
Subsidiaries that are Guarantors separate from the financial condition and
results of operations of the Subsidiaries that are not Guarantors and the
Unrestricted Subsidiaries of the Company.
In addition, whether or not required by the SEC, the Company will file
a copy of all of the information and reports referred to in clauses (1) and (2)
above with the SEC for public availability within the time periods specified in
the SEC rules and regulations (unless the SEC will not accept such a filing) and
make such information available to securities analysts and prospective investors
upon request. For all reporting periods ending subsequent to June 14, 1999, the
Issuer shall include in each Form 10-Q and Form 10-K a presentation, which need
not be audited, of sales, operating income, interest expense, depreciation and
amortization, and capital expenditures for such operating period and the twelve
months ended on the last day of such reporting period, on a pro forma basis
consistent with the presentation under the "Unaudited Pro Forma Consolidated
Statement of Income" section of this prospectus.
Events of Default and Remedies
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on the
New Notes, whether or not prohibited by the subordination provisions of
the Indenture;
(2) default in payment when due of the principal of or premium, if
any, on the New Notes, whether or not prohibited by the subordination
provisions of the Indenture;
(3) failure by the Company or any of its Subsidiaries to comply with
the provisions described under the captions "--Change of Control,"
"--Merger, Consolidation or Sale of Assets," "--Asset Sales,"
"--Restricted Payments" or "--Incurrence of Indebtedness and Issuance of
Preferred Stock";
(4) failure by the Company or any of its Restricted Subsidiaries for
60 days after notice to comply with any of the other agreements in the
Indenture or the New Notes;
(5) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any
of its Restricted Subsidiaries) whether such Indebtedness or guarantee now
exists, or is created after the Issue Date, if that default:
(a) is caused by a failure to pay principal of such
Indebtedness when due at final stated maturity (after giving effect
to any grace period related thereto) (a "Payment Default"); or
(b) results in the acceleration of such Indebtedness prior to
its express maturity,
and, in each case, the principal amount of any such Indebtedness, together
with the principal amount of any other such Indebtedness under which there
has been a Payment Default or the maturity of which has been so
accelerated, aggregates $5.0 million or more;
(6) failure by the Company or any of its Restricted Subsidiaries to
pay final judgments aggregating in excess of $5.0 million (net of any
amounts with respect to which a reputable and creditworthy insurance
company has acknowledged liability in writing), which judgments are not
paid, discharged or stayed for a period of 60 days;
(7) except as permitted by the Indenture, any Subsidiary Guarantee
shall be held in any judicial proceeding to be unenforceable or invalid or
shall cease for any reason to be in full force and effect or any
Guarantor, or any Person acting on behalf of any Guarantor, shall deny or
disaffirm its obligations under its Subsidiary Guarantee; and
(8) certain events of bankruptcy or insolvency with respect to the
Company or any of its Restricted Subsidiaries.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, any Restricted Subsidiary
that is a Significant Subsidiary or any group of Restricted Subsidiaries that,
taken together, would constitute a Significant Subsidiary, all outstanding New
Notes will become due and payable immediately without further action or notice.
If any other Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding New Notes
may declare all the New Notes to be due and payable by notice in writing to the
Company and the Trustee specifying the respective Event of Default and that it
is a notice of acceleration (the "Acceleration Notice") and the same (i) shall
become immediately due and payable or (ii) if there are any amounts outstanding
under the Credit Agreement, shall become immediately due and payable upon the
first to occur of an acceleration under the Credit Agreement or five Business
Days after receipt by the Company and the Representative under the Credit
Agreement of such Acceleration Notice but only if such Event of Defaults is then
continuing.
Holders of the New Notes may not enforce the Indenture or the New Notes
except as provided in the Indenture. Subject to certain limitations, Holders of
a majority in principal amount of the then outstanding New Notes may direct the
Trustee in its exercise of any trust or power. In the event of a declaration of
acceleration of the New Notes because an Event of Default has occurred and is
continuing as a result of the acceleration of any Indebtedness described in
clause (5) of the preceding paragraph, the declaration of acceleration of the
New Notes shall be automatically annulled if the holders of any Indebtedness
described in clause (5) have rescinded the declaration of acceleration in
respect of such Indebtedness within 30 days of the date of such declaration and
if (i) the annulment of the acceleration of the New Notes would not conflict
with any judgment or decree of a court of competent jurisdiction, and (ii) all
existing Events of Default, except nonpayment of principal or interest on the
New Notes that became due solely because of the acceleration of the New Notes,
have been cured or waived. The Trustee may withhold from Holders of the New
Notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
The Holders of a majority in aggregate principal amount of the New
Notes then outstanding by notice to the Trustee may on behalf of the Holders of
all of the New Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of Default
in the payment of interest on, or the principal of, the New Notes.
In the case of any Event of Default occurring by reason of any willful
action or inaction taken or not taken by or on behalf of the Company with the
intention of avoiding payment of the premium that the Company would have had to
pay if the Company then had elected to redeem the New Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the New Notes. If an Event of Default occurs prior to
June 15, 2004, by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the New Notes prior to June 15, 2004, then the
premium specified in the Indenture shall also become immediately due and payable
to the extent permitted by law upon the acceleration of the New Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture. Upon becoming aware of any Default or
Event of Default, the Company is required to deliver to the Trustee a statement
specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the
Company or any Guarantor, as such, shall have any liability for any obligations
of the Company or the Guarantors under the New Notes, the Indenture, the
Subsidiary Guarantees, or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of New Notes by accepting a
New Note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the New Notes. The waiver may not be
effective to waive liabilities under the federal securities laws.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have all of
its obligations discharged with respect to the outstanding New Notes and all
obligations of the Guarantors discharged with respect to their Subsidiary
Guarantees ("Legal Defeasance") except for:
(1) the rights of Holders of outstanding New Notes to receive
payments in respect of the principal of, premium, if any, and interest on
such New Notes when such payments are due from the trust referred to
below;
(2) the Company's obligations with respect to the New Notes
concerning issuing temporary New Notes, registration of New Notes,
mutilated, destroyed, lost or stolen New Notes and the maintenance of an
office or agency for payment and money for security payments held in
trust;
(3) the rights, powers, trusts, duties and immunities of the Trustee,
and the Company's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to
have the obligations of the Company and the Guarantors released with respect to
certain covenants that are described in the Indenture ("Covenant Defeasance")
and thereafter any omission to comply with those covenants shall not constitute
a Default or Event of Default with respect to the New Notes. In the event
Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the New Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the Trustee, in trust,
for the benefit of the Holders of the New Notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium,
if any, and interest on the outstanding New Notes on the stated maturity
or on the applicable redemption date, as the case may be, and the Company
must specify whether the New Notes are being defeased to maturity or to a
particular redemption date;
(2) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an Opinion of Counsel reasonably acceptable to the Trustee
confirming that (a) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (b) since the Issue
Date, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel
shall confirm that, the Holders of the outstanding New Notes will not
recognize income, gain or loss for federal income tax purposes as a result
of such Legal Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an Opinion of Counsel reasonably acceptable to
the Trustee confirming that the Holders of the outstanding New Notes will
not recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as would
have been the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be
continuing either: (a) on the date of such deposit (other than a Default
or Event of Default resulting from the borrowing of funds to be applied to
such deposit); or (b) or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the
91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under the Credit
Agreement or any other material agreement or instrument (other than the
Indenture) to which the Company or any of its Restricted Subsidiaries is a
party or by which the Company or any of its Restricted Subsidiaries is
bound;
(6) the Company must have delivered to the Trustee an opinion of
counsel to the effect that after the 91st day following the deposit, the
trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally;
(7) the Company must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by the Company with the intent of
preferring the Holders of New Notes over the other creditors of the
Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and
(8) the Company must deliver to the Trustee an Officers' Certificate
and an opinion of counsel, each stating that all conditions precedent
relating to the Legal Defeasance or the Covenant Defeasance have been
complied with.
Amendment, Supplement and Waiver
Except as described in the next three succeeding paragraphs, the
Indenture or the New Notes may be amended or supplemented with the consent of
the Holders of at least a majority in principal amount of the New Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange offer for New Notes), and any existing default or compliance with any
provision of the Indenture or the New Notes may be waived with the consent of
the Holders of a majority in principal amount of the then outstanding New Notes
(including consents obtained in connection with a tender offer or exchange offer
for New Notes).
Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any New Notes held by a non-consenting Holder):
(1) reduce the principal amount of New Notes whose Holders must
consent to an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any New
Note or alter the provisions with respect to the redemption of the New
Notes (other than provisions relating to the covenants described above
under the caption "--Repurchase at the Option of Holders");
(3) reduce the rate of or change the time for payment of interest on
any New Note;
(4) waive a Default or Event of Default in the payment of principal
of or premium, if any, or interest on the New Notes (except a rescission
of acceleration of the New Notes by the Holders of at least a majority in
aggregate principal amount of the New Notes and a waiver of the payment
default that resulted from such acceleration);
(5) make any New Note payable in money other than that stated in the
New Notes;
(6) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders of New Notes to receive
payments of principal of or premium, if any, or interest on the New Notes;
(7) waive a redemption payment with respect to any New Note (other
than a payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders"); or
(8) make any change in the preceding amendment and waiver provisions.
In addition, any amendment to, or waiver of, the provisions of the
Indenture relating to subordination that adversely affects the rights of the
Holders of the New Notes will require the consent of the Holders of at least 75%
in aggregate principal amount of New Notes then outstanding.
Notwithstanding the preceding, without the consent of any Holder of New
Notes, the Company and the Trustee may amend or supplement the Indenture or the
New Notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated New Notes in addition to or in
place of certificated New Notes;
(3) to provide for the assumption of the Company's obligations to
Holders of New Notes in the case of a merger or consolidation or sale of
all or substantially all of the Company's assets;
(4) to make any change that would provide any additional rights or
benefits to the Holders of New Notes or that does not adversely affect the
legal rights under the Indenture of any such Holder; or
(5) to comply with requirements of the SEC in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act.
Transfer and Exchange
A Holder may transfer or exchange New Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture.
The registered holder of a New Note will be treated as the owner of it
for all purposes.
Concerning the Trustee
If the Trustee becomes a creditor of the Company or any Guarantor, the
Indenture limits its right to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such claim as security or
otherwise. The Trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such conflict
within 90 days, apply to the SEC for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding
New Notes will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur and be continuing, the Trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request of any
Holder of New Notes, unless such Holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense.
Book-Entry, Delivery and Form
Except as set forth below, New Notes will be issued in registered,
global form in minimum denominations of $1,000 and integral multiples of $1,000
in excess thereof. New Notes will be issued at the closing of this exchange
offer only against delivery of the tendered Original Notes.
The New Notes initially will be represented by one or more New Notes in
registered, global form without interest coupons (collectively, the "Global
Notes"). The Global Notes will be deposited upon issuance with the Trustee as
custodian for The Depository Trust Company ("DTC"), in New York, New York, and
registered in the name of DTC or its nominee, in each case for credit to an
account of a direct or indirect participant in DTC as described below.
Except as set forth below, the Global Notes may be transferred, in
whole and not in part, only to another nominee of DTC or to a successor of DTC
or its nominee. Beneficial interests in the Global Notes may not be exchanged
for New Notes in certificated form except in limited circumstances.
In addition, transfers of beneficial interests in the Global Notes will
be subject to the applicable rules and procedures of DTC and its direct or
indirect participants (including, if applicable, those of Euroclear and Cedel),
which may change from time to time.
Depository Procedures
The following description of the operations and procedures of DTC,
Euroclear and Cedel are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to changes by them. The Company takes no
responsibility for these operations and procedures and urges investors to
contact the system or their participants directly to discuss these matters.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Access to DTC's system is also available to
other entities such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly (collectively, the "Indirect Participants"). Persons who are not
Participants may beneficially own securities held by or on behalf of DTC only
through the Participants or the Indirect Participants. The ownership interests
in, and transfers of ownership interests in, each security held by or on behalf
of DTC are recorded on the records of the Participants and Indirect
Participants.
DTC has also advised the Company that, pursuant to procedures
established by it:
(1) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the tendering Holders with portions of the
principal amount of the Global Notes; and
(2) ownership of these interests in the Global Notes will be shown
on, and the transfer of ownership thereof will be effected only through,
records maintained by DTC (with respect to the Participants) or by the
Participants and the Indirect Participants (with respect to other owners
of beneficial interest in the Global Notes).
Investors in the Global Notes who are Participants in DTC's system may
hold their interests therein directly through DTC. Investors in the Global Notes
who are not Participants may hold their interests therein indirectly through
organizations (including Euroclear and Cedel) which are Participants in such
system. All interests in a Global Note, including those held through Euroclear
or Cedel, may be subject to the procedures and requirements of DTC. Those
interests held through Euroclear or Cedel may also be subject to the procedures
and requirements of such systems. The laws of some states require that certain
Persons take physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer beneficial interests in a Global Note to
such Persons will be limited to that extent. Because DTC can act only on behalf
of Participants, which in turn act on behalf of Indirect Participants, the
ability of a Person having beneficial interests in a Global Note to pledge such
interests to Persons that do not participate in the DTC system, or otherwise
take actions in respect of such interests, may be affected by the lack of a
physical certificate evidencing such interests.
Except as described below, owners of interests in the Global Notes will
not have New Notes registered in their names, will not receive physical delivery
of New Notes in certificated form and will not be considered the registered
owners or "Holders" thereof under the Indenture for any purpose.
Payments in respect of the principal of, and interest and premium and
Liquidated Damages, if any, on a Global Note registered in the name of DTC or
its nominee will be payable to DTC in its capacity as the registered Holder
under the Indenture. Under the terms of the Indenture, the Company and the
Trustee will treat the Persons in whose names the New Notes, including the
Global Notes, are registered as the owners thereof for the purpose of receiving
payments and for all other purposes. Consequently, neither the Company, the
Guarantors, the Trustee nor any agent of the Company, the Guarantors, or the
Trustee has or will have any responsibility or liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's (including Euroclear and Cedel, without limitation) records
relating to or payments made on account of beneficial ownership interest
in the Global Notes or for maintaining, supervising or reviewing any of
DTC's records or any Participant's or Indirect Participant's (including
Euroclear and Cedel, without limitation) records relating to the
beneficial ownership interests in the Global Notes; or
(2) any other matter relating to the actions and practices of DTC or
any of its Participants or Indirect Participants (including Euroclear and
Cedel, without limitation).
DTC has advised the Company that its current practice, upon receipt of
any payment in respect of securities such as the New Notes (including principal
and interest), is to credit the accounts of the relevant Participants with the
payment on the payment date unless DTC has reason to believe it will not receive
payment on such payment date. Each relevant Participant is credited with an
amount proportionate to its beneficial ownership of an interest in the principal
amount of the relevant security as shown on the records of DTC. Payments by the
Participants and the Indirect Participants to the beneficial owners of New Notes
will be governed by standing instructions and customary practices and will be
the responsibility of the Participants or the Indirect Participants and will not
be the responsibility of DTC, the Trustee, the Company or the Guarantors. The
Company, the Guarantors and the Trustee will not be liable for any delay by DTC
or any of its Participants in identifying the beneficial owners of the New
Notes, and the Company and the Trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee for all purposes.
Transfers between Participants in DTC will be effected in accordance
with DTC's procedures, and will be settled in same-day funds, and transfers
between participants in Euroclear and Cedel will be effected in accordance with
their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
New Notes described herein, cross-market transfers between the Participants in
DTC, on the one hand, and Euroclear or Cedel participants, on the other hand,
will be effected through DTC in accordance with DTC's rules on behalf of
Euroclear or Cedel, as the case may be, by its respective depositary; however,
such cross-market transactions will require delivery of instructions to
Euroclear or Cedel, as the case may be, by the counterparty in such system in
accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or Cedel, as the case may be, will, if
the transaction meets its settlement requirements, deliver instructions to its
respective depositary to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant Global Note in DTC, and making
or receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Euroclear participants and Cedel participants may
not deliver instructions directly to the depositories for Euroclear or Cedel.
DTC has advised the Company that it will take any action permitted to
be taken by a Holder of New Notes only at the direction of one or more
Participants to whose account DTC has credited the interests in the Global Notes
and only in respect of such portion of the aggregate principal amount of the New
Notes as to which such Participant or Participants has or have given such
direction. However, if there is an Event of Default under the New Notes, DTC
reserves the right to exchange the Global Notes for legended New Notes in
certificated form, and to distribute such New Notes to its Participants.
Although DTC, Euroclear and Cedel have agreed to the foregoing
procedures to facilitate transfers of interests in the Global Notes among
participants in DTC, Euroclear and Cedel, they are under no obligation to
perform or to continue to perform such procedures, and may discontinue such
procedures at any time. The Company, the Guarantors, the Trustee and their
respective agents will not have any responsibility for the performance by DTC,
Euroclear or Cedel or their respective participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations.
Certain Definitions
Set forth below are certain defined terms used in the Indenture.
Reference is made to the Indenture for a full disclosure of all such terms, as
well as any other capitalized terms used herein for which no definition is
provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such specified
Person, whether or not such Indebtedness is incurred in connection with,
or in contemplation of, such other Person merging with or into, or
becoming a Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
"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 purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of the
Voting Stock of a Person shall be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" shall have correlative meanings.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights, other than sales of Cash Equivalents or inventory in the ordinary
course of business consistent with past practices; provided that the sale,
conveyance or other disposition of all or substantially all of the assets
of the Company and its Restricted Subsidiaries taken as a whole will be
governed by the provisions of the Indenture described above under the
caption "--Change of Control" and/or the provisions described above under
the caption "--Merger, Consolidation or Sale of Assets" and not by the
provisions of the Asset Sale covenant; and
(2) the issuance of Equity Interests by any of the Company's
Restricted Subsidiaries or the sale of Equity Interests in any of its
Subsidiaries,
Notwithstanding the preceding, the following items shall not be deemed
to be Asset Sales:
(a) any single transaction or series of related transactions
that: (i) involves assets having a fair market value of less than
$1.0 million; or (ii) results in net proceeds to the Company and its
Restricted Subsidiaries of less than $1.0 million;
(b) a transfer of assets (i) between or among the Company and
any Guarantor or (ii) between or among a Restricted Subsidiary of the
Company that is not a Subsidiary Guarantor to another Restricted
Subsidiary of the Company that is not a Subsidiary Guarantor;
(c) an issuance of Equity Interests (i) by a Guarantor to the
Company or to another Guarantor or (ii) by a Restricted Subsidiary of
the Company that is not a Subsidiary Guarantor to another Restricted
Subsidiary of the Company that is not a Subsidiary Guarantor; and
(d) a Restricted Payment that is permitted by the covenant
described above under the caption "--Restricted Payments."
"Attributable Debt" in respect of a sale and leaseback transaction
means, at the time of determination, the present value of the obligation of the
lessee for net rental payments during the remaining term of the lease included
in such sale and leaseback transaction including any period for which such lease
has been extended or may, at the option of the lessor, be extended. Such present
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3
and Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as such term is used in Section 13(d)(3)
of the Exchange Act), such "person" shall be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire, whether such
right is currently exercisable or is exercisable only upon the occurrence of a
subsequent condition.
"Capital Lease Obligation" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at that time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means (i) marketable direct obligations issued by,
or unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state thereof or the District of Columbia or
any U.S. branch of a foreign bank having at the date of acquisition thereof
combined capital and surplus of not less than $250.0 million; (v) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (iv) above; and (vi) investments in money
market funds with assets of $100.0 million or greater which invest substantially
all their assets in securities of the types described in clauses (i) through (v)
above.
"Change of Control" means the occurrence of any of the following:
(1) the sale, transfer, conveyance or other disposition (other than
by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the Company and
its Subsidiaries taken as a whole to any "person" (as such term is used in
Section 13(d)(3) of the Exchange Act);
(2) the adoption of a plan relating to the liquidation or dissolution
of the Company;
(3) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), becomes the Beneficial Owner, directly or
indirectly, of more than 35% of the Voting Stock of the Company, measured
by voting power rather than number of shares;
(4) the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors; or
(5) the Company consolidates with, or merges with or into, any
Person, or any Person consolidates with, or merges with or into, the
Company, in any such event pursuant to a transaction in which any of the
outstanding Voting Stock of the Company is converted into or exchanged for
cash, securities or other property, other than any such transaction where
the Voting Stock of the Company outstanding immediately prior to such
transaction is converted into or exchanged for Voting Stock (other than
Disqualified Stock) of the surviving or transferee Person constituting a
majority of the outstanding shares of such Voting Stock of such surviving
or transferee Person immediately after giving effect to such issuance.
"Consolidated Cash Flow" means, with respect to any Person for any
period, the Consolidated Net Income of such Person for such period plus:
(1) an amount equal to any extraordinary loss plus any net loss
realized in connection with an Asset Sale, to the extent such losses were
deducted in computing such Consolidated Net Income; plus
(2) provision for taxes based on income or profits of such Person and
its Restricted Subsidiaries for such period, to the extent that such
provision for taxes was deducted in computing such Consolidated Net
Income; plus
(3) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations,
imputed interest with respect to Attributable Debt, commissions, discounts
and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments, if any, pursuant to
Hedging Obligations), to the extent that any such expense was deducted in
computing such Consolidated Net Income; plus
(4) depreciation, amortization (including amortization of goodwill
and other intangibles but excluding amortization of prepaid cash expenses
that were paid in a prior period) and other non-cash expenses (excluding
any such non-cash expense to the extent that it represents an accrual of
or reserve for cash expenses in any future period or amortization of a
prepaid cash expense that was paid in a prior period) of such Person and
its Restricted Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income; minus
(5) non-cash items increasing such Consolidated Net Income for such
period, other than items that were accrued in the ordinary course of
business, in each case, on a consolidated basis and determined in
accordance with GAAP.
Notwithstanding the preceding, the provision for taxes based on the
income or profits of, and the depreciation and amortization and other non-cash
charges of, a Restricted Subsidiary of the Company shall be added to
Consolidated Net Income to compute Consolidated Cash Flow of the Company only to
the extent that a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Restricted Subsidiary
without prior approval (that has not been obtained), pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to that Subsidiary or
its stockholders.
"Consolidated Net Income" means, with respect to any specified Person
for any period, the aggregate of the Net Income of such Person and its
Restricted Subsidiaries for such period, on a consolidated basis, determined in
accordance with GAAP; provided that:
(1) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends
or distributions paid in cash to the specified Person or a Wholly Owned
Subsidiary thereof;
(2) the Net Income of any Restricted Subsidiary shall be excluded to
the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental
approval (that has not been obtained) or, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary or its stockholders;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded;
(4) the Net Income (but not loss) of any Unrestricted Subsidiary
shall be excluded, whether or not distributed to the specified Person or
one of its Subsidiaries; and
(5) the cumulative effect of a change in accounting principles shall
be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any
date, the sum of:
(1) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date; plus
(2) the respective amounts reported on such Person's balance sheet as
of such date with respect to any series of preferred stock (other than
Disqualified Stock) that by its terms is not entitled to the payment of
dividends unless such dividends may be declared and paid only out of net
earnings in respect of the year of such declaration and payment, but only
to the extent of any cash received by such Person upon issuance of such
preferred stock.
"Continuing Directors" means, as of any date of determination, any
member of the Board of Directors of the Company who:
(1) was a member of such Board of Directors on the Issue Date; or
(2) was nominated for election or elected to such Board of Directors
with the approval of a majority of the Continuing Directors who were
members of such Board at the time of such nomination or election.
"Credit Agreement" means that certain Credit Agreement, dated as of
June 17, 1999, by and among the Company, DLJ Capital Funding, Inc., as
Administrative Agent, and the other parties thereto providing for revolving
credit and term loans, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, and in
each case as amended, modified, supplemented, extended, renewed, restated,
refunded, replaced or refinanced from time to time, including any amendment,
modification, supplement, extension, renewal, restatement, refunding,
replacement or refinancing that increases the amount borrowable thereunder
provided such Indebtedness could be incurred under the Indenture or alters the
maturity thereof.
"Credit Facilities" means, with respect to the Company or any
Guarantor, one or more debt facilities or commercial paper facilities,
including, without limitation, the Credit Agreement, in each case with banks or
other institutional lenders providing for revolving credit loans, term loans,
receivables financing (including through the sale of receivables to such lenders
or to special purpose entities formed to borrow from such lenders against such
receivables) or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Designated Senior Debt" means (1) Obligations under the Credit
Agreement and (2) any other Senior Debt permitted under the Indenture the
principal amount of which is $25.0 million or more and that has been designated
by the Company as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by
the terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the holder
thereof, in whole or in part, on or prior to the date that is 91 days after the
date on which the New Notes mature. Notwithstanding the preceding sentence, any
Capital Stock that would constitute Disqualified Stock solely because the
holders thereof have the right to require the Company to repurchase such Capital
Stock upon the occurrence of a change of control or an asset sale shall not
constitute Disqualified Stock if the terms of such Capital Stock provide that
the Company may not repurchase or redeem any such Capital Stock pursuant to such
provisions unless such repurchase or redemption complies with the covenant
described above under the caption "--Certain Covenants--Restricted Payments."
"Domestic Subsidiary" means a Subsidiary that is organized under the
laws of the United States, any state thereof or the District of Columbia.
"Equity Interests" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means the Indebtedness of the Company and its
Restricted Subsidiaries in existence on the Issue Date, until such amounts are
repaid.
"Fixed Charges" means, with respect to any Person for any period, the
sum, without duplication, of:
(1) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued,
including, without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of
all payments associated with Capital Lease Obligations, imputed interest
with respect to Attributable Debt, commissions, discounts and other fees
and charges incurred in respect of letter of credit or bankers' acceptance
financings, and net payments, if any, pursuant to Hedging Obligations;
plus
(2) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period; plus
(3) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such Person or one of its Restricted Subsidiaries,
whether or not such Guarantee or Lien is called upon; plus
(4) the product of (a) all dividend payments, whether or not in cash,
on any series of preferred stock of such Person or any of its Restricted
Subsidiaries, other than dividend payments on Equity Interests payable
solely in Equity Interests of the Company (other than Disqualified Stock)
or to the Company or a Restricted Subsidiary of the Company, times (b) a
fraction, the numerator of which is one and the denominator of which is
one minus the then current combined federal, state and local statutory tax
rate of such Person, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any specified
Person for any period, the ratio of the Consolidated Cash Flow of such Person
and its Restricted Subsidiaries for such period to the Fixed Charges of such
Person for such period. In the event that the specified Person or any of its
Restricted Subsidiaries incurs, assumes, Guarantees or redeems any Indebtedness
(other than revolving credit borrowings) or issues or redeems preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period.
In addition, for purposes of calculating the Fixed Charge Coverage
Ratio:
(1) acquisitions that have been made by the specified Person or any
of its Restricted Subsidiaries, including through mergers or
consolidations and including any related financing transactions, during
the four-quarter reference period or subsequent to such reference period
and on or prior to the Calculation Date shall be deemed to have occurred
on the first day of the four-quarter reference period and Consolidated
Cash Flow for such reference period shall be calculated without giving
effect to clause (3) of the proviso set forth in the definition of
Consolidated Net Income;
(2) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, shall be excluded;
and
(3) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed
of prior to the Calculation Date, shall be excluded, but only to the
extent that the obligations giving rise to such Fixed Charges will not be
obligations of the specified Person or any of its Restricted Subsidiaries
following the Calculation Date.
For the purpose 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 Fixed Charges associated with any Indebtedness
Incurred in connection therewith, or any other calculation under this
definition, the pro forma calculations will be determined in good faith by a
responsible financial or accounting officer of the Company (including pro forma
expense and cost reductions calculated on a basis consistent with Regulation S-X
under the Securities Act). If any Indebtedness bears a floating rate of interest
and is being given pro forma effect, the interest expense on such Indebtedness
will 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 in excess of 12 months).
"Foreign Subsidiary" means any Restricted Subsidiary that was organized
under the laws of a jurisdiction outside the United States and substantially all
of whose assets are located and business is conducted outside of the United
States.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
"Guarantors" means each of:
(1) the Company's Domestic Subsidiaries; and
(2) any other subsidiary that executes a Subsidiary Guarantee;
and their respective successors and assigns.
"Hedging Obligations" means, with respect to any Person, the
obligations of such Person under:
(1) foreign currency exchange agreements, interest rate swap
agreements, interest rate cap agreements and interest rate collar
agreements; and
(2) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates or currency exchange rates.
"Indebtedness" means, with respect to any specified Person, any
indebtedness of such Person, whether or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof);
(3) in respect of banker's acceptances;
(4) representing Capital Lease Obligations;
(5) representing the balance deferred and unpaid of the purchase
price of any property, except any such balance that constitutes an accrued
expense or trade payable; or
(6) representing any Hedging Obligations,
if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of the
specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person (whether or not such Indebtedness is assumed by
the specified Person) and, to the extent not otherwise included, the Guarantee
by such Person of any indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness
issued with original issue discount; and
(2) the principal amount thereof in the case of any other
Indebtedness.
"Investments" means, with respect to any Person, all investments by
such Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Restricted Subsidiary of the Company, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity Interests of such
Restricted Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "--Restricted Payments."
"Issue Date" means the date of original issuance of the Original Notes.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
"Net Income" means, with respect to any Person, the net income (loss)
of such Person and its Restricted Subsidiaries, determined in accordance with
GAAP and before any reduction in respect of preferred stock dividends,
excluding, however:
(1) any gain (but not loss), together with any related provision for
taxes on such gain (but not loss), realized in connection with: (a) any
Asset Sale; or (b) the disposition of any securities by such Person or any
of its Restricted Subsidiaries or the extinguishment of any Indebtedness
of such Person or any of its Restricted Subsidiaries; and
(2) any extraordinary gain (but not loss), together with any related
provision for taxes on such extraordinary gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the
Company or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale), net of
the direct costs relating to such Asset Sale, including, without limitation,
legal, accounting and investment banking fees, and sales commissions, and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof, in each case after taking into account any available tax credits
or deductions and any tax sharing arrangements and amounts required to be
applied to the repayment of Indebtedness, other than Senior Debt, secured by a
Lien on the asset or assets that were the subject of such Asset Sale.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither the Company nor any of its Restricted
Subsidiaries (a) provides credit support of any kind (including any
undertaking, agreement or instrument that would constitute Indebtedness),
(b) is directly or indirectly liable as a guarantor or otherwise, or (c)
constitutes the lender;
(2) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against an
Unrestricted Subsidiary) would permit upon notice, lapse of time or both
any holder of any other Indebtedness (other than the New Notes or the
Credit Facilities) of the Company or any of its Restricted Subsidiaries to
declare a default on such other Indebtedness or cause the payment thereof
to be accelerated or payable prior to its stated maturity; and
(3) as to which the lenders have been notified in writing that they
will not have any recourse to the stock or assets of the Company or any of
its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means the manufacture, distribution and marketing
of furniture and related products.
"Permitted Investments" means:
(1) any Investment in the Company or in a Wholly Owned Restricted
Subsidiary that is not a Guarantor;
(2) any Investment in Cash Equivalents;
(3) any Investment by the Company or any Restricted Subsidiary of the
Company in a Person, if as a result of such Investment:
(a) such Person becomes a Guarantor or
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or
is liquidated into, the Company or a Guarantor;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption
"--Repurchase at the Option of Holders--Asset Sales";
(5) any acquisition of assets solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of the Company;
(6) Hedging Obligations;
(7) other Investments in any Person engaged in a Permitted Business
having an aggregate fair market value (measured on the date each such
Investment was made and without giving effect to subsequent changes in
value), when taken together with all other Investments made pursuant to
this clause (7) since the Issue Date, not to exceed $5.0 million;
(8) other Investments in any Foreign Subsidiary having an aggregate
fair market value (measured on the date each such Investment was made and
without giving effect to subsequent changes in value), when taken together
with all other Investments made pursuant to this clause (8) since the
Issue Date, not to exceed $2.5 million;
(9) Investments in prepaid expenses, negotiable instruments held for
collection and lease, utility and workers' compensation, performance and
other similar deposits;
(10) accounts receivable and commercially reasonable advances to
customers in the ordinary course of business and extensions of trade
credit; and
(11) any Investment acquired by the Company or any of its Restricted
Subsidiaries (a) in exchange for any other Investment or accounts
receivable held by the Company or any such Restricted Subsidiary in
connection with or as a result of a bankruptcy, workout, reorganization or
recapitalization of the issuer of such other Investment or accounts
receivable or (b) as a result of a foreclosure by the Company or any of
its Restricted Subsidiaries with respect to any secured Investment or
other transfer of title with respect to any secured Investment in default.
"Permitted Junior Securities" means: (1) Equity Interests in the
Company; or (2) debt securities of the Company that are subordinated to all
Senior Debt and any debt securities issued in exchange for Senior Debt to the
same extent as, or to a greater extent than, the New Notes and the Subsidiary
Guarantees are subordinated to Senior Debt pursuant to Article Eight of the
Indenture, that have a final maturity date and a weighted average life to
maturity which is the same as or greater than, the New Notes and that are not
secured by a Lien on any assets.
"Permitted Liens" means:
(1) Liens on the assets of the Company and any Guarantor securing
Indebtedness and other Obligations under the Credit Facilities that were
permitted by the terms of the Indenture to be incurred;
(2) Liens in favor of the Company or the Guarantors;
(3) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with the Company or any Restricted
Subsidiary of the Company; provided that such Liens were in existence
prior to the contemplation of such merger or consolidation and do not
extend to any assets other than those of the Person merged into or
consolidated with the Company or the Restricted Subsidiary;
(4) Liens on property existing at the time of acquisition thereof by
the Company or any Restricted Subsidiary of the Company, provided that
such Liens were in existence prior to the contemplation of such
acquisition;
(5) Liens to secure the performance of statutory obligations, surety
or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(6) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (4) of the second paragraph of the
covenant entitled "Incurrence of Indebtedness and Issuance of Preferred
Stock" covering only the assets acquired with such Indebtedness;
(7) Liens existing on the Issue Date;
(8) Liens on Assets of the Company and of the Guarantors to secure
Senior Debt of the Company or any such Guarantors that was permitted by
the Indenture to be incurred;
(9) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor; and
(10) Liens incurred in the ordinary course of business of the Company
or any Restricted Subsidiary of the Company with respect to obligations
that do not exceed $5.0 million at any one time outstanding.
"Permitted Refinancing Indebtedness" means any Indebtedness of the
Company or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries
(other than intercompany Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount of
(or accreted value, if applicable), plus accrued interest on, the
Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of premiums, prepayments, penalties and
reasonable expenses incurred in connection therewith);
(2) such Permitted Refinancing Indebtedness has a final maturity date
equal to or later than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average
Life to Maturity of, the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded;
(3) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
New Notes, such Permitted Refinancing Indebtedness has a final maturity
date later than the final maturity date of, and is subordinated in right
of payment to, the New Notes on terms at least as favorable to the Holders
of New Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and
(4) such Indebtedness is incurred either by the Company or by the
Restricted Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Public Equity Offering" means any underwritten public offering of
common stock of the Company in which the gross proceeds to the Company are at
least $35.0 million.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the
referent Person that is not an Unrestricted Subsidiary.
"Senior Debt" means:
(1) all Indebtedness and all Obligations (including without
limitation interest accruing after filing of a petition in bankruptcy
whether or not such interest is an allowable claim in such proceeding) of
the Company or its Subsidiaries, including without limitation any
Guarantees of such Obligations, pursuant to the Credit Facilities and all
Hedging Obligations with respect thereto;
(2) any other Indebtedness permitted to be incurred by the Company or
the Guarantors under the terms of the Indenture, unless the instrument
under which such Indebtedness is incurred expressly provides that it is on
a parity with or subordinated in right of payment to the New Notes; and
(3) all Obligations with respect to the items listed in the preceding
clauses (1) and (2).
Notwithstanding anything to the contrary in the preceding, Senior Debt
will not include:
(1) any liability for federal, state, local or other taxes owed or
owing by the Company;
(2) any Indebtedness of the Company to any of its Subsidiaries or
other Affiliates;
(3) any trade payables; or
(4) any Indebtedness that is incurred in violation of the Indenture.
"Significant Subsidiary" means any Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Act, as such Regulation is in effect on the date
hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subordinated Indebtedness" 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 New Notes pursuant to a written
agreement.
"Subsidiary" means, with respect to any Person:
(1) any corporation, association or other business entity of which
more than 50% of the total voting power of shares of Capital Stock
entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by such Person or one or more
of the other Subsidiaries of that Person (or a combination thereof); and
(2) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or
(b) the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Subsidiary Guarantee" means that certain Subsidiary Guarantee executed
by the Guarantors in accordance with the terms of the Indenture.
"Unrestricted Subsidiary" means any Subsidiary of the Company that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a
Board Resolution, but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted
Subsidiary than those that might be obtained at the time from Persons who
are not Affiliates of the Company;
(3) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of the Company or any of its
Restricted Subsidiaries; and
(5) has at least one director on its board of directors that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries and has at least one executive officer that is not a director
or executive officer of the Company or any of its Restricted Subsidiaries.
Any designation of a Subsidiary of the Company as an Unrestricted
Subsidiary shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
preceding conditions and was permitted by the covenant described above under the
caption "--Certain Covenants--Restricted Payments." If, at any time, any
Unrestricted Subsidiary would fail to meet the preceding requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary
shall be deemed to be incurred by a Restricted Subsidiary of the Company as of
such date and, if such Indebtedness is not permitted to be incurred as of such
date under the covenant described under the caption "Incurrence of Indebtedness
and Issuance of Preferred Stock," the Company shall be in default of such
covenant. The Board of Directors of the Company may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if (1) such Indebtedness
is permitted under the covenant described under the caption "Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock,"
calculated on a pro forma basis as if such designation had occurred at the
beginning of the four-quarter reference period; and (2) no Default or Event of
Default would be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of
such Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect thereof, by (b) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making of such
payment; by
(2) the then outstanding principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person and/or by one or more Wholly Owned Restricted
Subsidiaries of such Person.
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
Set forth below are the material United States federal income tax
consequences relevant to, in the opinion of Gallop, Johnson & Neuman, L.C., our
legal counsel, the exchange offer. Except where noted, the following deals only
with New Notes held as capital assets within the meaning of section 1221 of the
Internal Revenue Code of 1986, as amended ("Internal Revenue Code") by a holder
of New Notes that is an individual citizen or resident of the United States or a
United States corporation that purchased the New Notes pursuant to their
original issue. The following does not deal with special situations, such as
those of broker-dealers, tax-exempt organizations, individual retirement
accounts and other tax deferred accounts, financial institutions, insurance
companies, or persons holding New Notes as part of a hedging or conversion
transaction or a straddle. Furthermore, the following is based upon the
provisions of the Internal Revenue Code and regulations, rulings and judicial
decisions promulgated under the Internal Revenue Code as of the date hereof.
Such authorities may be repealed, revoked, or modified, possibly with
retroactive effect, so as to result in United States federal income tax
consequences different from those discussed below. In addition, except as
otherwise indicated, the following does not consider the effect of any
applicable foreign, state, local or other tax laws or estate or gift tax
considerations.
As used herein, a "United States person" is
(1) a citizen or resident of the U.S.,
(2) a corporation, partnership or other entity created or organized in
or under the laws of the U.S. or any political subdivision thereof,
(3) an estate the income of which is subject to U.S. federal income
taxation regardless of its source,
(4) a trust if
(A) a United States court is able to exercise primary supervision
over the administration of the trust and
(B) one or more United States persons have the authority to control
all substantial decisions of the trust,
(5) a certain type of trust in existence on August 20, 1996, which was
treated as a United States person under the Internal Revenue Code in effect
immediately prior to such date and which has made a valid election to be treated
as a United States person under the Internal Revenue Code, and
(6) any person otherwise subject to U.S. federal income tax on a net
income basis in respect of its worldwide taxable income.
A U.S. Holder is a beneficial owner of a New Note who is a United
States person. A Non-U.S. Holder is a beneficial owner of a New Note that is not
a U.S. Holder.
The Exchange Offer
The exchange of New Notes pursuant to the exchange offer will be
treated as a continuation of the corresponding Original Notes because the terms
of the New Notes are not materially different from the terms of the Original
Notes. Accordingly:
(1) such exchange will not constitute a taxable event to a U.S. Holder,
(2) no gain or loss will be realized by a U.S. Holder upon receipt of a
New Note,
(3) the holding period of the New Note will include the holding period
of the Original Note exchanged therefor and
(4) the adjusted tax basis of the New Notes will be the same as the
adjusted tax basis of the Original Notes exchanged.
The filing of a shelf registration statement should not result in a
taxable exchange to us or any holder of a New Note.
Tax Consequences to U.S. Holders
Payments of Interest. If you are a U.S. Holder, generally you will be
required to include interest payable on a New Note in your gross income as
ordinary interest income at the time it accrues or when you receive it, in
accordance with your method of accounting for federal income tax purposes.
Sale or Retirement of the New Notes. When you sell or exchange a New
Note, or when the Company retires a New Note, you will recognize capital gain or
loss equal to the difference between the amount you realized on the sale,
exchange or retirement and your adjusted tax basis in the New Note. For these
purposes, the amount you realize does not include any amount attributable to
accrued interest on the New Note. Amounts attributable to accrued interest on
the New Note are treated as interest as described under "Payments of Interest"
above. Such capital gain will be long-term capital gain if at the time of such
sale, exchange or retirement the New Note has been held by you for more than 12
months, and will be short-term capital gain if the New Note has been held by you
for 12 months or less. In the case of certain non-corporate taxpayers, long-term
capital gain will be subject to tax at a maximum rate of 20% and short-term
capital gain will be taxable as ordinary income at a maximum rate of 39.6%.
Capital gains (whether short-term or long-term) recognized by corporations will
be taxed at the same rates applicable to ordinary income, although the
distinction between capital gain or loss and ordinary income or loss is relevant
for purposes of, among other things, limitations on the deductibility of capital
losses.
Market Discount
If a U.S. Holder acquires a New Note after its original issue for an
amount that is less than its adjusted issue price at the time of acquisition,
the amount of the difference will be treated as "market discount," unless such
difference is less than a specified de minimis amount. The adjusted issue price
of a New Note is its stated redemption price at maturity reduced by any payments
of principal thereon at the time of the acquisition thereof.
Under the market discount rules, a U.S. Holder will be required to
treat any partial principal payment on, or any gain on the sale, exchange,
retirement or other disposition of, a New Note as ordinary income to the extent
of the market discount which has not previously been included in income and is
treated as having accrued on such New Note at the time of such payment or
disposition. In addition, the U.S. Holder may be required to defer, until the
maturity of the New Note or its earlier disposition in a taxable transaction,
the deduction of a portion of the interest expense on any indebtedness incurred
or continued to purchase or carry such New Notes.
Any market discount will be considered to accrue ratably during the
period from the date of acquisition to the maturity date of the New Note, unless
the U.S. Holder elects to accrue such discount on a constant interest rate
method. A U.S. Holder may elect to include market discount in income currently
as it accrues, on either a ratable or constant interest rate method. This
election is made on a debt-by-debt basis and is irrevocable. If this election is
made, the Holder's basis in the New Note will be increased to reflect the amount
of income recognized and the rules described above regarding deferral of
interest deductions will not apply. This election to include market discount in
income currently, once made, applies to all market discount obligations acquired
on or after the first taxable year to which the election applies and may not be
revoked without the consent of the Internal Revenue Service.
Amortizable Bond Premium
A U.S. Holder that purchases a New Note for an amount in excess of the
principal amount will be considered to have purchased such New Note with
"amortizable bond premium." A U.S. Holder generally may elect to amortize the
premium over the remaining term of the New Note on a constant yield method as
applied with respect to each accrual period of the New Note, and allocated
ratably to each day within an accrual period in a manner substantially similar
to the method of calculating daily portions of original issue discount, as
described above. However, because the New Notes may be optionally redeemed for
an amount that is in excess of their principal amount, special rules apply that
could result in a deferral of the amortization of bond premium until later in
the term of the New Note. The amount amortized in any year will be treated as a
reduction of the U.S. Holder's interest income, including original issue
discount income, from the New Note. Bond premium on a New Note held by a U.S.
Holder that does not make such an election will decrease the gain or increase
the loss otherwise recognized upon disposition of the New Note. The election to
amortize premium on a constant yield method, once made, applies to all debt
obligations held or subsequently acquired by the electing U.S. Holder on or
after the first day of the first taxable year to which the election applies and
may not be revoked without the consent of the Internal Revenue Service.
Backup Withholding and Information Reporting. Certain noncorporate U.S.
Holders may be subject to backup withholding at a rate of 31% on payments of
principal, and interest on, and the proceeds of disposition of, a New Note.
Backup withholding will apply only if:
(1) the U.S. Holder fails to furnish its Taxpayer Identification Number
("TIN") in the manner required (which number, for an individual,
would be his or her Social Security number);
(2) the U.S. Holder furnishes an incorrect TIN;
(3) the Internal Revenue Service notifies the Company or other payor that
the U.S. Holder has underreported payments of interest or dividends;
or
(4) under certain circumstances, the U.S. Holder fails to certify, under
penalty of perjury, that it has furnished a correct TIN and has not
been notified by the IRS that it is subject to backup withholding.
Tax Consequences to Non-U.S. Holders
Payments of Interest. If you are not a U.S. Holder (referred to as a
"Non-U.S. Holder"), payments of interest on the New Notes to you will generally
not be subject to U.S. federal income or withholding tax, provided that:
(1) (a) you are not (A) a direct or indirect owner of 10% or more of the
total voting power of all voting equity interests in the Company within
the meaning of Section 871(h)(3) of the Internal Revenue Code and the
Regulations thereunder or (B) a controlled foreign corporation related
to us within the meaning of Section 864(d)(4) of the Internal Revenue
Code;
(b) such interest is not effectively connected with your conduct of a
trade or business within the United States; and
(c) we or our paying agent receives (A) from you, a properly completed
Form W-8 (or substitute Form W-8), signed under the penalties of
perjury, which provides your name and address and certifies that you
are a Non-U.S. Holder or (B) from a security clearing organization,
bank or other financial institution that holds the New Notes in the
ordinary course of its trade or business (a "Financial Institution") on
your behalf, a statement certifying under penalties of perjury that it
has received such a Form W-8 (or substitute Form W-8) from you, or that
it has received from another Financial Institution a statement that it
has received a Form W-8 (or substitute Form W-8) from you, and a copy
of such Form W-8 is furnished to the payor; or
(2) if you are entitled to the benefits of an income tax treaty under which
interest on the New Notes is exempt from United States federal
withholding tax and you provide a properly executed Form 1001 claiming
the exemption.
If payment of interest on a New Note is effectively connected with the
conduct of a trade or business in the United States by you as a Non-U.S. Holder,
such payment will be subject to United States federal income tax on a net basis
at the rates applicable to U.S. Holders generally (and, if you are a corporate
Non-U.S. Holder, such payments may also be subject to a 30% branch profits tax).
Payments that are subject to United States federal income tax on a net basis
will not be subject to United States withholding tax so long as the Non-U.S.
Holder provides us or our paying agent with a properly executed Form 4224.
Sale, Exchange or Retirement of the New Notes. If you are a Non-U.S.
Holder, you will not be subject to United States federal income or withholding
tax with respect to gain recognized on a sale, exchange or retirement of the New
Notes unless (1) the gain is effectively connected with your conduct of a trade
or business in the United States or (2) if you are an individual, you are
present in the United States for 183 or more days in the taxable year of the
disposition and certain other requirements are met.
Backup Withholding and Information Reporting. Interest paid with
respect to a New Note, and payment of the proceeds from the sale, exchange or
retirement of a New Note to or through a United States office of a broker,
received by a Non-U.S. Holder will be subject to information reporting and
backup withholding unless the payor receives the appropriate certification
statement. Appropriate certification procedures require that you certify as to
your status as a Non-U.S. Holder and provide your name and address. In addition,
payments of the proceeds from the sale, redemption or other disposition of a New
Note to or through a foreign office of a broker or the foreign office of a
custodian, nominee or other agent acting on behalf of the beneficial owner of a
New Note will not be subject to information reporting or backup withholding;
however, if the broker, custodian, nominee or other agent is a United States
person, a controlled foreign corporation for federal income tax purposes or a
foreign person 50% or more of whose gross income over a specified three-year
period is from a United States trade or business, information reporting may be
required with respect to such payments.
If you are a Non-U.S. Holder, any amounts withheld under the backup
withholding rules from a payment to you would be allowed as a refund or a credit
against your federal income tax liability, provided that the required
information is furnished to the IRS.
On October 7, 1997, the Department of Treasury issued new regulations
governing the certification procedures regarding withholding, back-up
withholding and information reporting on certain amounts paid to Non-U.S.
Holders, which are effective for payments made after December 31, 2000. In
general, the new Treasury regulations do not alter the treatment of Non-U.S.
Holders who satisfy current reporting requirements. The new Treasury regulations
alter the procedures for claiming the benefits of an income tax treaty and may
change certain procedures relating to intermediaries receiving payments on
behalf of a beneficial owner of a New Note. You should consult your tax advisor
concerning the effect, if any, of such new Treasury regulations on an investment
in the New Notes.
PLAN OF DISTRIBUTION
A broker-dealer that is the Holder of Original Notes that were acquired
for the account of such broker-dealer as a result of market-making or other
trading activities, other than Original Notes acquired directly from us or any
of our affiliates may exchange such Original Notes for New Notes pursuant to the
exchange offer. This is true so long as each broker-dealer that receives New
Notes for its own account in exchange for Original Notes, where such Original
Notes were acquired by such broker-dealer as a result of market-marking or other
trading activities acknowledges that it will deliver a prospectus in connection
with any resale of such New Notes. This prospectus, as it may be amended or
supplemented form time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Original Notes where such
Original Notes were acquired as result of market-making activities or other
trading activities. We have agreed that for a period of 270 days after
consummation of the exchange offer or such shorter period as will terminate when
all registrable securities covered hereby have been sold pursuant hereto, we
will make this prospectus, as it may be amended or supplemented from time to
time, available to any broker-dealer for use in connection with any such resale.
All broker-dealers effecting transactions in the New Notes may be required to
deliver a prospectus.
We will not receive any proceeds from any sale of New Notes by
broker-dealers or any other Holder of New Notes. New Notes received by
broker-dealers for their own account in 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 and/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 270 days after consummation of the exchange offer or
such time as any broker-dealer no longer owns any registrable securities, we
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. We have agreed to pay all expenses incident to the
exchange offer and to our performance of, or compliance with, the registration
rights agreements (other than commissions or concessions of any brokers or
dealers) and will indemnify the Holders of the New Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the issuance of the New Notes offered hereby will be
passed upon for us and the Guarantors by Gallop, Johnson & Neuman, L.C., St.
Louis, Missouri. Donald P. Gallop, a member of Gallop, Johnson & Neuman, L.C.,
serves as one of our directors. In addition, Gallop, Johnson & Neuman, L.C. and
certain of its members beneficially own 247,206 shares of our common stock.
EXPERTS
The consolidated financial statements of Falcon Products, Inc. as of
October 31, 1998 and November 1, 1997 and for each of the three fiscal years in
the period ended October 31, 1998 included in this registration statement and
incorporated by reference in this registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The consolidated financial statements of Shelby Williams Industries,
Inc. at December 31, 1998 and 1997, and for each of the three years in the
period ended December 31, 1998, appearing in this prospectus and registration
statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
This prospectus represents only a summary of the information presented
herein, and incorporates by reference the following reports of Falcon that have
been filed with the SEC:
- Annual Report on Form 10-K for the fiscal year ended October 31, 1998;
- Quarterly Reports on Form 10-Q for the fiscal quarters ended January
30, 1999 and May 1, 1999;
- Current Reports on Form 8-K dated May 12, 1999, June 11, 1999, June 15,
1999 and June 28, 1999, and Current Report on Form 8-K/A filed on July
20, 1999;
- Schedule 14D-1 dated May 12, 1999, Schedule 14D-1/A dated June 2, 1999
and Schedule 14D-1/A-2 dated June 10, 1999; and
- all documents subsequently filed by Falcon pursuant to sections 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of this
exchange offer.
In addition, this prospectus incorporates by reference the following
reports of Shelby Williams that have been filed with the SEC:
- Annual Report on Form 10-K for the fiscal year ended December 31, 1998;
- Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1999;
- Current Report on Form 8-K dated May 12, 1999;
- Schedule 14D-9 dated May 12, 1999 and Schedule 14D-9/A dated June 3,
1999; and
- all documents subsequently filed by Shelby Williams pursuant to
sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the
termination of this exchange offer.
By referring to this "prospectus" we are referring not only to the
information presented herein, but also to the information contained in those
documents that have been incorporated by reference. Any statement contained
herein that contradicts any statement contained in the incorporated documents
will be deemed to modify or supercede the statement contained in the
incorporated documents to the extent of such contradiction for purposes of this
prospectus. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this prospectus.
Falcon files, and until the consummation of our Acquisition of Shelby
Williams, Shelby Williams filed, annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
document that either Falcon or Shelby Williams has filed at the following
locations:
- at the Public Reference Room of the SEC, Room 1024--Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C.
20549;
- at the public reference facilities of the SEC's regional offices at
Seven World Trade Center, 13th Floor, New York, New York 10048 or
Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661;
- by writing to the SEC, Public Reference Section, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549;
- at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005; or
- from the SEC's web site, www.sec.gov.
Some of these locations may charge a prescribed fee for copies.
Documents incorporated by reference, other than exhibits to these documents not
specifically incorporated by reference into this prospectus, are available
without charge, upon written or oral request by any person to whom this
prospectus has been delivered, from Falcon, 9387 Dielman Industrial Drive, St.
Louis, Missouri 63132, telephone (314) 991-9200, Attention: Corporate Secretary.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Falcon Products, Inc.
Page
----
Report of Independent Public Accountants.............................. F-2
Consolidated Statements of Earnings for the years
ended October 31, 1998, November 1, 1997 and
November 2, 1996................................................... F-3
Consolidated Balance Sheets, as of October 31, 1998 and
November 1, 1997.................................................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended October 31, 1998, November 1,
1997 and November 2, 1996.......................................... F-5
Consolidated Statements of Cash Flows for the years ended
October 31, 1998, November 1, 1997 and
November 2, 1996................................................... F-6
Notes to Consolidated Financial Statements............................ F-7
Consolidated Statements of Earnings for the thirteen and
twenty-six weeks ended May 1, 1999 and May
2, 1998 (Unaudited)................................................ F-24
Consolidated Balance Sheets, as of May 1, 1999 (Unaudited)
and October 31, 1998............................................... F-25
Consolidated Statements of Stockholders' Equity for the
twenty-six weeks ended May 1, 1999 and May
2, 1998 (Unaudited)................................................ F-26
Consolidated Statements of Cash Flows for the twenty-six weeks
ended May 1, 1999 and May 2, 1998
(Unaudited)........................................................ F-27
Notes to Unaudited Consolidated Financial Statements--
twenty-six weeks ended May 1, 1999................................. F-28
Shelby Williams Industries, Inc.
Report of Independent Auditors...................................... F-33
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996................................. F-34
Consolidated Balance Sheets as of December 31, 1998
and 1997........................................................... F-35
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996................................... F-36
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997 and
1996.............................................................. F-37
Notes to Consolidated Financial Statements........................... F-38
Consolidated Statements of Income for the three months
ended March 31, 1999 and 1998 (Unaudited)......................... F-48
Consolidated Balance Sheets as of March 31, 1999
(Unaudited) and December 31, 1998................................. F-49
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998
(Unaudited)....................................................... F-50
Notes to Unaudited Consolidated Financial Statements................. F-51
F-1
<PAGE>
Report of Independent Public Accountants
To Falcon Products, Inc.:
We have audited the accompanying consolidated balance sheets of FALCON
PRODUCTS, INC. (a Delaware corporation) and subsidiaries as of October 31, 1998
and November 1, 1997, and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the three fiscal years in the
period ended October 31, 1998. These financial statements are the responsibility
of the Company'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 financial position of Falcon Products,
Inc. and subsidiaries as of October 31, 1998 and November 1, 1997, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended October 31, 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
St. Louis, Missouri
December 15, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
FALCON PRODUCTS, INC.
Consolidated Statements of Earnings
For the Years Ended October 31, 1998, November 1, 1997, and November 2,
1996
(In thousands, except per share data) 1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Net sales..................................................... $143,426 $113,010 $100,702
Cost of sales, including nonrecurring items................... 103,067 79,507 69,125
Special and nonrecurring items................................ 271 3,700 --
----------- -------- -------
Gross margin.................................................. 40,088 29,803 31,577
Selling, general and administrative expenses.................. 29,482 22,044 20,469
----------- ---------- ----------
Operating profit.............................................. 10,606 7,759 11,108
Interest income (expense), net; including interest
income of $264, $228 and $263, respectively............... (619) 139 95
Minority interest in consolidated subsidiary.................. 64 47 89
--------- -------- --------
Earnings from continuing operations before income taxes....... 10,051 7,945 11,292
Income tax expense............................................ 3,701 3,019 4,291
--------- -------- --------
Net earnings from continuing operations....................... 6,350 4,926 7,001
Discontinued operations, net of tax........................... -- 938 1,432
Gain on sale of discontinued operations, net of tax........... -- 6,770 --
--------- -------- -------
Net earnings.................................................. $ 6,350 $ 12,634 $ 8,433
========- ======== ========
Earnings per share - Basic:
Continuing operations.................................... $ .69 $ .51 $ .73
Discontinued operations.................................. -- .10 .15
Gain on sale of discontinued operations.................. -- .70 --
--------- -------- -------
Net earnings per share................................... $ .69 $ 1.31 $ .88
========= ======== ========
Earnings per share - Diluted:
Continuing operations.................................... $ .68 $ .50 $ .71
Discontinued operations.................................. -- .09 .15
Gain on sale of discontinued operations.................. -- .69 --
--------- -------- -------
Net earnings per share................................... $ .68 $ 1.28 $ .86
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FALCON PRODUCTS, INC.
Consolidated Balance Sheets
October 31, 1998, and November 1, 1997
(In thousands, except per share data) 1998 1997
--------- ------
Assets
Current assets:
Cash and cash equivalents.......................... $ 5,186 $ 16,294
Accounts receivable, less allowances of $672
and $337, respectively........................... 22,683 18,625
Inventories, net................................... 24,877 22,687
Prepayments and other current assets............... 3,081 3,732
---------- --------
Total current assets.......................... 55,827 61,338
---------- --------
Property, plant and equipment:
Land 2,116 2,731
Buildings and improvements......................... 11,395 12,347
Machinery and equipment............................ 32,154 26,360
--------- --------
45,665 41,438
Less accumulated depreciation...................... 18,167 16,227
---------- --------
Net property, plant and equipment............. 27,498 25,211
--------- --------
Other assets, net of accumulated amortization:
Goodwill........................................... 23,243 9,454
Other 5,406 3,354
---------- --------
Total other assets...................................... 28,649 12,808
---------- --------
Total Assets....................................... $ 111,974 $ 99,357
========== =========
Liabilities and Stockholders' Equity Current
liabilities:
Accounts payable................................... $ 11,695 $ 10,458
Accrued liabilities................................ 6,769 10,716
Current maturities of long-term debt............... 1,607 1,473
---------- --------
Total current liabilities..................... 20,071 22,647
Long-term obligations:
Long-term debt..................................... 17,208 321
Pension liability.................................. -- 96
Deferred income taxes.............................. 876 2,155
Minority interest in consolidated subsidiary....... 810 874
Other 1,063 --
---------- --------
Total liabilities............................. 40,028 26,093
---------- --------
Stockholders' equity:
Common stock, $.02 par value: authorized
20,000,000 shares; issued 9,915,117.............. 198 198
Additional paid-in capital......................... 47,376 47,376
Treasury stock, at cost (992,777 and 477,512
shares, respectively)............................ (13,557) (6,855)
Cumulative translation adjustments................. (19) (727)
Retained earnings.................................. 37,948 33,272
--------- --------
Total stockholders' equity.................... 71,946 73,264
---------- --------
Total Liabilities and Stockholders' Equity.............. $ 111,974 $ 99,357
========= =========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
FALCON PRODUCTS, INC.
Consolidated Statements of Stockholders'
Equity For the Years Ended October 31, 1998, November 1, 1997, and November 2, 1996
Additional Cumulative Total
Common Paid-in Treasury Translation Retained Stockholders'
(In thousands) Stock Capital Stock Adjustments Earnings Equity
------ ---------- -------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 28, 1995.................. $ 191 $ 42,761 $ (135) $ 182 $15,308 $ 58,307
Net earnings.......................... -- -- -- -- 8,433 8,433
Cash dividends........................ -- -- -- -- (958) (958)
Issuance of stock to Employee
Stock Purchase Plan................ -- 195 533 -- -- 728
Exercise of employee incentive
stock options...................... 2 355 864 -- (553) 668
Compensation expense under non-
qualified stock options............ -- 7 -- -- -- 7
Tax benefit of stock options.......... -- 647 -- -- -- 647
Translation adjustments............... -- -- -- 92 -- 92
Cancellation of restricted stock...... -- (19) -- -- 19 --
Amortization of restricted stock...... -- -- -- -- 24 24
Treasury stock purchases.............. -- -- (2,791) -- -- (2,791)
Issuance of stock for acquisition..... 5 3,314 -- -- -- 3,319
-------- ---------- --------- ---------- -------- -----------
Balance, November 2, 1996.................. 198 47,260 (1,529) 274 22,273 68,476
Net earnings.......................... -- -- -- -- 12,634 12,634
Cash dividends........................ -- -- -- -- (1,348) (1,348)
Issuance of stock to Employee
Stock Purchase Plan................ -- 8 893 -- -- 901
Exercise of employee incentive
stock options...................... -- -- 624 -- (314) 310
Tax benefit of stock options.......... -- 103 -- -- -- 103
Translation adjustments............... -- -- -- (1,001) -- (1,001)
Amortization of restricted stock...... -- -- -- -- 27 27
Treasury stock purchases.............. -- -- (7,202) -- -- (7,202)
Issuance of stock for acquisition..... -- 5 359 -- -- 364
-------- --------- --------- ---------- ------- ---------
Balance, November 1, 1997.................. 198 47,376 (6,855) (727) 33,272 73,264
Net earnings.......................... -- -- -- -- 6,350 6,350
Cash dividends........................ -- -- -- -- (1,457) (1,457)
Issuance of stock to Employee
Stock Purchase Plan................ -- -- 31 -- -- 31
Exercise of employee incentive
stock options...................... -- -- 323 -- (217) 106
Translation adjustments............... -- -- -- 708 -- 708
Treasury stock purchases.............. -- -- (7,473) -- -- (7,473)
Issuance of stock for acquisition..... -- -- 417 -- -- 417
- ------ --------- ---------- ---------- -------- -----------
Balance, October 31, 1998.................. $ 198 $ 47,376 $ (13,557) $ (19) $ 37,948 $ 71,946
======= ========= ========= ========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
FALCON PRODUCTS, INC.
Consolidated Statements of Cash Flows
For the Years Ended October 31, 1998, November 1, 1997, and November 2, 1996
(In thousands) 1998 1997 1996
----------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 6,350 $ 12,634 $ 8,433
Adjustments to reconcile net earnings to cash
provided by operating activities:
Gain on sale of discontinued operations............... -- (6,770) --
Earnings from discontinued operations................. -- (938) (1,432)
Depreciation and amortization......................... 3,753 4,230 3,816
Special and nonrecurring items, net................... 3,521 -- --
Translation adjustments during year................... 708 (1,001) 92
Tax benefit of stock option exercises................. -- 103 647
Compensation expense under stock and option plans..... -- 27 31
Deferred income tax provision......................... 1,768 (978) 819
Minority interest in consolidated subsidiary.......... (64) (47) (89)
Change in assets and liabilities:
Accounts receivable, net......................... (595) (3,346) 1,472
Inventories...................................... (4,695) (3,055) (3,941)
Prepayments and other current assets............. 587 (438) (464)
Other assets, net................................ (2,490) (944) (1,443)
Accounts payable................................. (1,845) 3,264 (172)
Accrued liabilities.............................. (6,215) 763 (1,203)
Other liabilities................................ (156) -- --
--------- -------- -------
Cash provided by continuing operations........... 627 3,504 6,566
Cash provided by (used in) discontinued
operations..................................... -- (99) 867
--------- -------- -------
Cash provided by operating activities............ 627 3,405 7,433
--------- -------- -------
Cash flows from investing activities:
Additions to property, plant and equipment, net....... (6,594) (3,807) (4,449)
Proceeds from sale of discontinued operations......... -- 17,711 --
Net proceeds from sale of building.................... 5,170 -- --
Cost of businesses acquired (including working
capital at acquisition of
$564 in 1998 and $165 in 1996)..................... (15,962) -- (1,189)
--------- -------- --------
Cash provided by (used in) investing activities.. (17,386) 13,904 (5,638)
--------- -------- --------
Cash flows from financing activities:
Common stock issuances................................ 137 1,575 1,396
Treasury stock purchases.............................. (7,473) (7,202) (2,791)
Cash dividends........................................ (1,457) (1,348) (958)
Additions to (repayment of) long-term debt, net....... 14,777 389 (634)
Change in pension liability........................... (333) (143) (64)
--------- -------- --------
Cash provided by (used in) financing activities.. 5,651 (6,729) (3,051)
--------- -------- --------
Increase (decrease) in cash and cash equivalents........... (11,108) 10,580 (1,256)
Cash and cash equivalents - beginning of period............ 16,294 5,714 6,970
--------- -------- -------
Cash and cash equivalents - end of period.................. $ 5,186 $16,294 $ 5,714
========= ======== =======
Supplemental cash flow information:
Cash paid for interest................................ $ 728 $ 91 $ 121
========= ======== =======
Cash paid for taxes................................... $ 5,329 $ 4,841 $ 3,809
========= ======== =======
</TABLE>
F-6
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Falcon Products, Inc. and its subsidiaries (the Company). All significant
intercompany balances and transactions are eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to October 31.
Fiscal years 1998 and 1997 ended October 31, 1998 and November 1, 1997,
respectively, and included 52 weeks. Fiscal year 1996 ended on November 2, 1996,
and included 53 weeks. References to years relate to fiscal years rather than
calendar years.
Nature of Business
The principal products manufactured and sold by the Company are
pedestal table bases, table tops, metal and wood chairs, booths, millwork and
casegoods. The Company's sales are primarily to the food service, contract
furniture, hospitality, government and healthcare markets. The Company considers
its operations a single industry segment.
The Company operates factories in Mexico through wholly-owned
subsidiaries which produce all of its table base casting requirements and wood
chair frames and casegood products for the hospitality industry. Substantially
all of the sales of these subsidiaries are to the parent company and are
eliminated in consolidation. The Company has a manufacturing facility in the
Czech Republic, Falcon Mimon, a.s., which manufactures and sells chair frames
and fully finished wood chairs throughout Europe and in North America. In
addition, the Company operates Howe Europe a/s, in Middelfart, Denmark, which
markets, assembles and distributes tables and chairs to the European
contract/office market. Sales from foreign operations and export sales from
domestic facilities were $13.6 million, $9.3 million and $10.9 million in 1998,
1997 and 1996, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Substantially
all of the Company's cash equivalents are denominated in U.S. dollars and
therefore the effect of exchange rate changes on cash balances was not
significant during any of the years presented.
Inventories
Inventories are valued at the lower of cost or market. Cost is
determined by the first-in, first-out method. Inventories at October 31, 1998,
and November 1, 1997, consist of the following:
(In thousands) 1998 1997
------- -------
Raw materials............... $18,174 $17,579
Work in process............. 5,288 4,320
Finished goods, net......... 1,415 788
-------- --------
$ 24,877 $ 22,687
========= =========
F-7
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
Property, Plant and Equipment
Investments in property, plant and equipment are recorded at cost.
Improvements are capitalized, while repair and maintenance costs are charged to
operations. When assets are retired or disposed of, the cost and accumulated
depreciation are removed from the accounts; gains or losses are included in
operations.
Depreciation, including the amortization of assets recorded under
capital leases, is computed by use of the straight-line method over estimated
service lives. Principal service lives are: buildings and improvements - 5 to 40
years; machinery and equipment - 3 to 13 years.
Certain of the Company's assets were acquired through long-term lease
obligations financed principally by Industrial Development Revenue Bonds. These
leases represent installment purchases. Accordingly, the assets are recorded at
cost and the related obligations are included in long-term obligations as
mortgages payable.
Long-lived Assets
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
Of," requires that long-lived assets and certain identifiable intangibles to be
held and used or disposed of by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of assets
may not be recoverable. The Company has assessed the recoverability of
long-lived assets, including intangible assets, and has determined that no
impairment loss need be recognized for applicable assets of continuing
operations.
Other Assets
Other assets consist of the following at October 31, 1998, and November
1, 1997:
(In thousands) 1998 1997
--------- -------
Goodwill, net of accumulated amortization
of $2,285 and $1,481.............................. $23,243 $ 9,454
Deferred catalog costs, net of accumulated
amortization of $965 and $318..................... 2,241 1,226
Other, net of accumulated amortization
of $1,127 and $544............................... 3,165 2,128
--------- --------
$ 28,649 $ 12,808
========== =========
Goodwill represents the excess of cost over fair value of net assets
acquired at the date of acquisition. Goodwill is amortized on a straight-line
basis over thirty to forty years. Deferred debt issue costs are amortized on a
straight-line basis over the original life of the respective debt issue,
approximately three years. The cost of the design, production and distribution
of sales catalogs and reprints thereof is being amortized on a straight-line
basis over two to five years.
Pension Plan
The Company has a noncontributory defined benefit pension plan covering
certain hourly and substantially all domestic salaried personnel. The Company's
policy is to fund pension benefits to the extent contributions are deductible
for tax purposes and in compliance with federal laws and regulations.
The Company also has a noncontributory defined benefit pension plan
which covered certain employees of Howe Furniture Corporation. Benefits under
this plan were curtailed January 1, 1993.
F-8
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
Stock Dividends
On November 21, 1995, the Board of Directors of the Company declared a
10% stock dividend. The record date of this transaction was December 13, 1995,
with a distribution date of January 2, 1996. All information contained in the
accompanying Consolidated Financial Statements and these Notes to Consolidated
Financial Statements relating to the Company's common stock, including shares
outstanding, stock option plans and per share data, has been restated to give
effect to the stock dividend discussed above.
Foreign Currency Translation
The Financial Statements of the Company's non-U.S. subsidiaries are
translated into U.S. dollars in accordance with SFAS No. 52. The functional
currency for Falcon Mimon, a.s. and Howe Europe a/s has been determined to be
the subsidiaries' local currency. As a result, the gain or loss resulting from
the translation of its financial statements to U.S. dollars is included as a
separate component of stockholders' equity.
For the Company's Mexican subsidiaries, inventory, prepayments and
property are translated at historical exchange rates while other assets and
liabilities are translated at current exchange rates. Revenues and expenses are
translated at average exchange rates during the year. The resulting translation
adjustment is included in selling, general and administrative expenses.
The net foreign currency translation and transaction losses included in
earnings for 1998, 1997 and 1996, were $737, $304 and $235 thousand,
respectively.
Interest Rate Hedge Agreement
The Company manages fluctuations in interest rates on borrowings under
its revolving credit facility by using an interest rate swap agreement. The
interest rate swap agreement is accounted for as a hedge of a debt obligation,
and accordingly, the net settlement amount is recorded as an adjustment to
interest expense in the period incurred.
The Company's interest rate swap agreement requires the Company to pay
a fixed rate and receive a floating rate thereby creating fixed rate debt. The
Company's participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing risk.
The interest rate swap agreement has been designed for hedging purposes and is
not held or issued for speculative purposes.
Earnings Per Share
In 1998, the Company adopted SFAS No. 128, "Earnings Per Share." All
per share amounts have been calculated in accordance with SFAS No. 128 using the
weighted average number of shares outstanding during each period, adjusted for
the impact of common stock equivalents using the treasury stock method when the
effect is dilutive. All per share data has been retroactively restated in
accordance with SFAS No. 128.
Note 2 - Business Acquisitions
In March 1998, the Company acquired the stock of Howe Furniture
Corporation and its subsidiaries ("Howe") for $16.6 million, and assumed $2.2
million of outstanding long-term debt of Howe. Howe specializes in the design,
engineering and marketing of tables for the contract office and hospitality
markets. The Company used the purchase method of accounting to record this
acquisition. Accordingly, results of operations have been included in the
financial statements from the date of acquisition. The excess of the purchase
price over amounts assigned to net tangible assets ($13.9 million) was recorded
as goodwill.
F-9
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
In October 1996, the Company acquired certain assets and assumed
certain liabilities of The Chair Source for 241,400 newly issued shares of
common stock valued at approximately $3.3 million, plus 75,000 shares of common
stock to be issued through October 1999, subject to certain contingencies. The
Chair Source manufactures wood and upholstered seating and distributes them
primarily to the hospitality, lodging and food service markets. The company used
the purchase method of accounting to account for this acquisition and recorded
goodwill of approximately $2.9 million relating to this acquisition.
In February 1996, the Company acquired substantially all of the assets
and assumed certain liabilities of a manufacturing facility located in Tijuana,
Mexico. This facility specializes in manufacturing upscale wood and upholstered
seating for the lodging and hospitality markets. The total purchase price for
this facility was approximately $500 thousand and was funded by the Company with
its available cash reserves. The company used the purchase method of accounting
to account for this acquisition and recorded goodwill of approximately $421
thousand relating to this acquisition.
Note 3 - Special and Nonrecurring Items
During 1998, the Company recorded a pre-tax charge of $4.7 million,
$2.9 million after-tax, related to management's decision to discontinue and
dispose of the Company's hotel casegoods line of business. The charge entails
the writedown of assets, including goodwill, inventories and equipment,
associated with the product line located in the Tijuana, Mexico facility. Of the
total charge, cost of sales includes a $3.3 million charge to write-down the
carrying value of inventory. The remaining components of the charge have been
reported in special and nonrecurring items in the Consolidated Statement of
Earnings and are related to impairment charges and reserves for losses on
disposal of certain assets and exit costs for lease termination.
In 1998, the Company also recorded a $1.3 million pre-tax gain, $0.8
million after-tax, on the sale of the Company's corporate headquarters building
during 1998, which is included in special and non-recurring items, in the
accompanying Consolidated Statement of Earnings. The Company entered into a two
year lease agreement to lease back a portion of the premises, and accordingly,
the portion of the total $2.5 million gain representing the present value of the
operating lease payments, approximately $1.2 million, was deferred and is
included in other liabilities on the accompanying Consolidated Balance Sheet as
of October 31, 1998. The deferred gain will be credited to income as a reduction
to rent expenses over the term of the lease.
During the fourth quarter of 1998, the Company recorded an additional
pre-tax charge of $0.2 million, $0.1 million after-tax, related to the
consolidation of the Company's manufacturing facilities that was announced in
1997.
During 1997, the Company recorded a pre-tax charge of $3.7 million,
$2.3 million after-tax, for special and nonrecurring items. The charges are a
result of the consolidation of the Company's manufacturing operations at its
Anaheim, California and Belding, Michigan facilities into its City of Industry,
California facility and the elimination of several duplicative and nonperforming
wood seating product lines. These pre-tax charges are recorded as a separate
line in the Consolidated Statements of Earnings and included $3.0 million for
costs associated with asset write-downs and dispositions and $0.7 million for
exit costs of leased facilities and employee severance and termination costs.
Note 4 - Discontinued Operations
On September 8, 1997, the Company completed the sale of its William
Hodges division (the Hodges Division) to Leggett & Platt, Incorporated for
approximately $17.7 million. The Hodges Division manufactures wire shelving and
kitchen equipment. The sale resulted in a gain of approximately $6.8 million,
net of applicable income taxes of $3.8 million.
The results of the Hodges Division for 1997 through the date of the
sale (approximately 10.5 months) and for fiscal year 1996 are classified as
discontinued operations in the accompanying consolidated financial statements.
Earnings from the discontinued Hodges Division were $938 thousand in 1997 and
$1,432 thousand in 1996, net of applicable income taxes of $575 thousand and
$877 thousand, respectively. Net revenues from the Hodges Division in 1997
through the date of the sale were $7.8 million. Hodges Division revenues in
fiscal year 1996 were $10.3 million.
F-10
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
Note 5 - Rental Expense and Lease Commitments
The Company leases certain manufacturing facilities and certain office
and transportation equipment under non-cancelable lease agreements having an
initial term of more than one year and expiring at various dates through the
year 2006.
The future minimum rental commitments due under lease agreements are as
follows at October 31, 1998:
Capital Operating
(In thousands) Leases Leases
------- ---------
1999........................................... $ 61 $ 2,129
2000........................................... 61 1,411
2001........................................... 61 1,373
2002........................................... 61 849
2003........................................... 61 670
Later years.................................... 61 1,777
-------- -------
Total minimum lease payments................... 366 $ 8,209
=======
Less-amount representing interest.............. (45)
-------
Present value of minimum lease payments........ $ 321
=======
Total operating lease and rental expense was approximately $1,622,
$1,463 and $953 thousand in 1998, 1997 and 1996, respectively.
Note 6 - Long Term Debt
Long-term debt consists of the following at October 31, 1998, and
November 1, 1997:
(In thousands) 1998 1997
-------- ------
Revolving line of credit expiring April 22, 2000,
interest at prime minus 2.0%.......................... $16,935 $ --
Notes payable to a foreign bank, secured by certain
assets of Falcon Mimon, due in varying monthly
installments through 1999, interest at LIBOR + 2.5%... 1,559 1,301
Obligations under capital leases, due in annual
installments through November 16, 2003,
interest at 4.0%...................................... 321 368
Other................................................... -- 125
------- -------
18,815 1,794
Less current maturities................................. 1,607 1,473
------- -------
$17,208 $ 321
======= =======
At October 31, 1998, the Company had letters of credit outstanding of
approximately $409 thousand relating to insurance reserves and certain foreign
purchases.
In connection with the acquisition of Howe, the Company entered into an
unsecured $20.0 million revolving line of credit expiring April 22, 2000. The
rate of interest on borrowings under this agreement is, at the Company's option,
the Prime Rate, Federal Funds Rate or LIBOR adjusted for a spread based upon the
Company's leverage ratio. The variable interest rate was 6.4% at October 31,
1998.
Under the loan agreements, the Company must comply with certain
covenants including, but not limited to, the maintenance of specific ratios and
net worth. The Company has complied with the terms of the loan agreements.
F-11
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
The minimum annual maturities of long-term debt, including capital
lease obligations, are: $1,607, $16,985, $52, $54 and $57 thousand in 1999
through 2003, respectively, and $60 thousand thereafter.
The Company has entered into an interest rate swap agreement with a
notional amount of $12.0 million. The notional amount of the interest rate swap
does not represent amounts exchanged by the parties and thus, is not a measure
of the Company's exposure through its use of the interest rate swap agreement.
The amounts exchanged are determined by reference to the notional amount and
other terms of the contract.
Management believes that the seller of the interest rate swap agreement
will be able to meet its obligation under the agreement. The Company has
policies regarding the financial stability and credit standing of major
counterparties. Non-performance by the counterparty is not anticipated nor would
it have a material adverse effect on the results of operations or financial
position of the Company.
Note 7 - Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes" (SFAS No. 109), which requires income taxes to be
accounted for using a balance sheet approach known as the liability method. The
liability method accounts for deferred income taxes by applying statutory tax
rates in effect at the date of the balance sheet to differences between the book
and tax basis of assets and liabilities. Adjustments to deferred income taxes
resulting from statutory rate changes flow through the tax provision in the year
of the change.
The components of income tax expense are as follows:
(In thousands) 1998 1997 1996
------- -------- ------
Current:
Federal.................. $ 1,551 $ 3,587 $ 3,107
State.................... 207 410 365
Foreign.................. 175 -- --
Deferred...................... 1,768 (978) 819
------- -------- -------
$ 3,701 $ 3,019 $ 4,291
======= =======- =======
The following is a reconciliation between statutory federal income tax
expense and actual income tax expense:
(In thousands) 1998 1997 1996
-------- -------- ------
Computed "expected" federal income tax
expense............................... $ 3,417 $ 2,701 $ 3,852
Increase (decrease) resulting from:
State income taxes.................. 393 378 452
Other, net.......................... (109) (60) (13)
------- ------- -------
$ 3,701 $ 3,019 $ 4,291
======= =======- =======
F-12
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
The significant components of deferred income tax assets and
liabilities are as follows:
(In thousands) 1998 1997
------- ------
Deferred tax assets:
Inventories................................... $ 434 $ 648
Reserves and accruals......................... 949 1,505
Net operating loss carryforward............... 822 --
-------- -------
2,205 2,153
-------- -------
Deferred tax liabilities:
Depreciation and other property
basis differences........................... (1,153) (1,558)
Other......................................... (158) (597)
-------- -------
(1,311) (2,155)
------- -------
Net deferred income tax asset (liability).......... $ 894 $ (2)
======= =======
Net current deferred income tax assets are included in prepayments and
other current assets in the accompanying Consolidated Balance Sheets. The
Company's net operating loss carryforward of $2.2 million expires in 2013. The
Company's income tax returns have been examined by the Internal Revenue Service
for fiscal years through 1994.
Note 8 - Stock Option and Stock Purchase Plans
The Company has an employee incentive stock option plan which allows
the Company to grant key employees incentive and nonqualified stock options to
purchase up to 1,100,000 shares of the Company's common stock at not less than
the market price on the date of grant. Options not exercised accumulate and are
exercisable, in whole or in part, in any subsequent period but not later than
ten years from the date of grant.
The Company also has a Non-Employee Director Stock Option Plan,
approved by the stockholders, under which the Company annually grants an option
to purchase 1,650 shares of common stock to each director who is neither an
officer of the Company nor compensated under any employment or consulting
arrangements ("Non-Employee Director"). Under the plan, the option exercise
price is the fair market value of the Company's common stock on the date of the
grant and the options are exercisable, on a cumulative basis, at 20% per year
commencing on the date of the grant.
The Non-Employee Director Stock Option Plan was amended in December
1998 to increase the number of shares underlying the options granted from 1,650
to 2,000.
The Company accounts for the option plans using APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Accordingly, no compensation expense
has been recognized relating to the stock options.
Pro forma net earnings and net earnings per common share in the
following table were prepared as if the Company had accounted for its stock
option plans under the fair market value method of SFAS No. 123, "Accounting for
Stock-Based Compensation."
1998 1997 1996
-------- -------- ------
Net earnings - pro forma................. $ 6,127 $12,446 $ 8,425
======= ======= =======
Net earnings per share - pro forma....... $ .66 $ 1.26 $ .86
======= ======= =======
Weighted-average fair value of options
granted................................ $ 6.64 $ 7.39 $ 6.54
======= ======= =======
F-13
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
For the pro forma disclosures, the fair value of each option grant is
estimated at the date of the grant using an option pricing model with the
following assumptions:
1998 1997 1996
-------- -------- --------
Expected dividend yield........... 1% .7% .6%
Expected stock price volatility... 30% 30% 30%
Risk-free interest rate........... 5.8% 6.4% 5.8%
Expected life of option........... 10 years 10 years 10 years
In 1998, the Company adopted an Employee Stock Purchase Plan. Under the
Employee Stock Purchase Plan, employees may contribute up to 10% of their gross
income to purchase stock of the Company at 85% of the lesser of the fair market
value on the grant date or the exercise date.
During 1997, the Company had a Stock Purchase Plan under which eligible
employees could elect to invest up to 10% of salary earned during each pay
period and the Company contributed an amount equal to 40% of each participant's
contributions. This plan was terminated at the end of fiscal 1997.
<TABLE>
<CAPTION>
Stock option transactions under the plans for 1998, 1997, and 1996 are
summarized below:
1998 1997 1996
-------------------- ------------------- ---------------------
Average Number Average Number Average Number
Price of Shares Price of Shares Price of Shares
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning
of year............................ $ 10.70 687,892 $ 9.35 575,925 $ 7.58 766,450
Options granted....................... 14.07 242,550 14.49 168,900 13.04 68,150
Options canceled...................... 13.55 37,791 13.16 12,754 10.00 64,348
Options exercised..................... 4.88 21,803 7.01 44,179 3.44 194,327
------- ------- ------- ------- ------- -------
Options outstanding at end of year.... $ 11.66 870,848 $ 10.70 687,892 $ 9.35 575,925
======= ======= ======= ======= ======= =======
Exercisable at end of year............ 447,663 311,847 245,346
======= ======= =======
Stock options outstanding at October 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------ ---------------------------
Remaining Weighted Weighted
Number Contractual Average Number Average
Range of Exercise of Options Life Exercise Price of Options Exercise Price
----------------- ---------- ----------- -------------- ----------- --------------
$ 0.50 - $ 10.00 355,488 4.6 $ 9.07 314,733 $ 8.99
$ 10.00 - $ 13.00 132,510 6.5 $ 11.16 63,620 $ 10.96
$ 13.00 - $ 15.00 382,850 8.7 $ 14.23 69,310 $ 14.37
----------- -------- ------------ ----------- ------------
870,848 6.7 $ 11.66 447,663 $ 10.10
=========== ======== ============ =========== ============
</TABLE>
F-14
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
Note 9 - Earnings Per Share
As discussed in Note 1 herein, the Company adopted SFAS No. 128 in
1998. In accordance with SFAS No. 128, the following tables reconcile net
earnings from continuing operations and weighted average shares outstanding to
the amounts used to calculate basic and diluted earnings per share for each of
the years ended 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Per
Net Share
(In thousands, except per share data) Earnings Shares Amount
<S> <C> <C> <C>
For the year ended October 31, 1998
Net Earnings from Continuing Operations.............. $ 6,350 -- $ --
======= ======= =======
Basic Earnings Per Share
Earnings available to common stockholders.......... $ 6,350 9,156 $ 0.69
Assumed exercise of options (treasury method)...... -- 126 --
------- ------- -------
Diluted Earnings Per Share
Earnings available to common stockholders.......... $ 6,350 9,282 $ 0.68
======= ======= =======
For the year ended November 1, 1997
Net Earnings from Continuing Operations.............. $ 4,926 -- $ --
======= ======= =======
Basic Earnings Per Share
Earnings available to common stockholders.......... $ 4,926 9,665 $ 0.51
Assumed exercise of options (treasury method)...... -- 211 --
------- ------- -------
Diluted Earnings Per Share
Earnings available to common stockholders.......... $ 4,926 9,876 $ 0.50
======= ======= =======
For the year ended November 2, 1996
Net Earnings from Continuing Operations.............. $ 7,001 -- $ --
======= ======= =======
Basic Earnings Per Share
Earnings available to common stockholders.......... $ 7,001 9,591 $ 0.73
Assumed exercise of options (treasury method)...... -- 202 --
------- ------- -------
Diluted Earnings Per Share
Earnings available to common stockholders..... $ 7,001 9,793 $ 0.71
======= ======= =======
</TABLE>
Basic earnings per share was computed by dividing Earnings available to
common stockholders by the weighted average shares of common stock outstanding
during the year. Diluted Earnings available to common stockholders was
determined assuming the options issued and outstanding were exercised as of the
first day of the respective year of the grant date. Options to purchase 386,850
shares at a weighted average exercise price of $14.23 per share, 155,400 shares
at a weighted average exercise price of $14.51 per share and 5,000 shares at a
weighted average exercise price of $14.50 were outstanding during 1998, 1997 and
1996, respectively but were not included in the computation of diluted earnings
per share because the exercise price was greater than the average market price
of the common stock. As a result of adoption of SFAS No. 128, the Company
restated reported earnings per share for 1997 and 1996. This accounting change
had no impact of previously reported per share data.
F-15
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
Note 10 - Pension Plans
The Company has two noncontributory defined benefit pension plans
covering certain hourly and substantially all salaried domestic personnel. In
connection with the Howe acquisition, the Company acquired the curtailed pension
plan of Howe, whose assets exceed the accumulated benefits. For the Company's
non-curtailed plan, normal retirement age is 65, but provision is made for
earlier retirement. Benefits are based on 1.5% of average annual compensation
for each year of service. Full vesting occurs upon completion of five years of
service. Assets of the plan consist entirely of an investment in a group annuity
contract with an insurance company.
The following actuarial assumptions were used in determining the
Company's net periodic pension cost and projected benefit obligation:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ------
<S> <C> <C> <C>
Discount rate....................................... 7.25% 7.25% 7.25%
Rate of salary increase............................. 5.00% 5.00% 5.50%
Expected long-term rate of return on plan assets.... 9.00% 9.00% 9.00%
Net periodic pension cost of the plan, is as follows:
(In thousands) 1998 1997 1996
-------- ------- ------
Service cost - benefits earned during the period. $ 619 $ 473 $ 421
Interest cost on projected benefit obligation..... 369 279 257
Return on plan assets............................. 704 (641) (389)
Net total of other components..................... (1,108) 345 137
------- ------- -------
Net periodic pension cost......................... $ 584 $ 456 $ 426
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
The funded status of the defined benefit pension plans is as follows:
(In thousands) 1998 1998 1997
---------- ---------- -------
Plan Whose Plan Whose
Assets Accumulated
Exceed Benefits
Accumulated Exceed
Benefits Assets
---------- -----------
<S> <C> <C> <C>
Vested benefit obligation...................................... $ (1,059) $ (4,359) $ (3,643)
Non-vested benefits............................................ -- (380) (631)
---------- --------- ---------
Accumulated benefit obligation................................. (1,059) (4,739) (4,274)
Effect of projected future compensation levels................. (114) (611) (467)
--------- --------- ---------
Projected benefit obligation................................... (1,173) (5,350) (4,741)
Plan assets at fair value...................................... 1,438 4,447 4,018
---------- ---------- ----------
Plan assets greater (less) than projected benefit obligation... 265 (903) (723)
Unrecognized net loss due to past experience different from
assumptions................................................. 89 676 130
Unrecognized prior service cost................................ -- 513 586
Unrecognized net asset......................................... -- (49) (89)
---------- ---------- ----------
Prepaid (accrued) pension cost................................. $ 354 $ 237 $ (96)
========== ========== ==========
</TABLE>
F-16
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
Note 11 - Transactions with Related Parties
Certain of the Company's directors or their affiliates provide various
consulting and other professional services to the Company or receive commissions
as sales representatives. During 1998, 1997 and 1996, the Company incurred
expenses of approximately $222, $99 and $220 thousand, respectively, for such
services.
Note 12 - Contingencies
The Company is subject to various lawsuits and claims with respect to
such matters as patents, product liabilities, government regulations, and other
actions arising in the normal course of business. In the opinion of management,
the ultimate liabilities resulting from such lawsuits and claims will not have a
material adverse effect on the Company's financial condition and results of
operations.
Note 13 - Domestic and Foreign Subsidiaries
Following is condensed consolidating financial statements of Falcon
Products, Inc. and its domestic subsidiaries (Domestic) and Falcon Products,
Inc.'s foreign subsidiaries (Foreign):
<TABLE>
<CAPTION>
Consolidating Statement of Earnings
For the Year Ended October 31, 1998
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ --------
<S> <C> <C> <C> <C>
Net sales...................................... $ 135,742 $ 20,665 $ (12,981) $ 143,426
Cost of sales, including nonrecurring items.... 97,801 18,247 (12,981) 103,067
Special and nonrecurring items................. 271 -- -- 271
---------- ---------- ---------- ----------
Gross margin.............................. 37,670 2,418 -- 40,088
Selling, general and administrative expenses... 27,225 2,257 -- 29,482
---------- ---------- ---------- ----------
Operating profit.......................... 10,445 161 -- 10,606
Minority interest in consolidated subsidiary... 64 -- -- 64
Interest income (expense)...................... (546) (73) -- (619)
---------- ---------- ---------- ----------
Earnings before income taxes.............. 9,963 88 -- 10,051
Income tax expense............................. 3,668 33 -- 3,701
---------- ---------- ---------- ----------
Net earnings.............................. $ 6,295 $ 55 $ -- $ 6,350
========== ========== ========== ==========
</TABLE>
F-17
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
Consolidating Balance Sheet
October 31, 1998
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ --------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents............................. $ 3,666 $ 1,520 $ -- $ 5,186
Accounts receivable................................... 20,472 2,211 -- 22,683
Inventories, net...................................... 20,922 3,955 -- 24,877
Other assets 2,760 321 -- 3,081
---------- ---------- ---------- ----------
Total current assets........................ 47,820 8,007 -- 55,827
Property plant and equipment, net..................... 18,362 9,136 -- 27,498
Investment in subsidiaries............................ 7,150 -- (7,150) --
Goodwill and other assets............................. 28,649 -- -- 28,649
---------- ---------- ---------- ----------
Total assets................................ $ 101,981 $ 17,143 $ (7,150) $ 111,974
========== ========== =========== ==========
Liabilities and Stockholders' Equity
Current liabilities................................... $ 16,143 $ 3,928 $ -- $ 20,071
Long-term debt........................................ 17,208 -- -- 17,208
Other long-term liabilities........................... 2,749 -- -- 2,749
Intercompany payable (receivable)..................... (6,065) 6,065 -- --
------------ ---------- ---------- ----------
Total liabilities........................... 30,035 9,993 -- 40,028
---------- ---------- ---------- ----------
Stockholders' equity
Common stock..................................... 198 6,446 (6,446) 198
Additional paid-in capital....................... 47,376 925 (925) 47,376
Treasury stock................................... (13,557) -- -- (13,557)
Cumulative translation adjustment................ (19) -- -- (19)
Retained earnings................................ 37,948 (221) 221 37,948
---------- ----------- ---------- ----------
Total stockholders' equity.................. 71,946 7,150 (7,150) 71,946
---------- ---------- ----------- ----------
Total liabilities and stockholders' equity. $ 101,981 $ 17,143 $ (7,150) $ 111,974
========== =========== ============ ==========
</TABLE>
F-18
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
Consolidating Statement of Cash Flows
For the Year Ended October 31, 1998
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ -----
<S> <C> <C> <C> <C>
Net cash provided by (used in) operating activities...... $ (452) $ 1,079 $ -- $ 627
---------- ---------- ---------- ----------
Cash flows from investing activities
Acquisition, net of cash............................ (16,457) 495 -- (15,962)
Additions to property, plant and equipment, net..... (845) (579) -- (1,424)
---------- ---------- ---------- ----------
Net cash used in investing activities.......... (17,302) (84) -- (17,386)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Common stock issuance............................... 137 -- -- 137
Treasury stock purchases............................ (7,473) -- -- (7,473)
Cash dividends...................................... (1,457) -- -- (1,457)
Additions to (repayment of) long-term debt, net..... 14,777 -- -- 14,777
Change in pension liability......................... (333) -- -- (333)
----------- ---------- ---------- ----------
Net cash provided by financing activities...... 5,651 -- -- 5,651
---------- ---------- ---------- ----------
Net change in cash and cash equivalents........ $ (12,103) $ 995 $ -- $ (11,108)
========== ========== ========== ===========
Consolidating Statement of Earnings
For the Year Ended November 1, 1997
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ -----
Net sales........................................... $ 109,105 $ 13,917 $ (10,012) $ 113,010
Cost of sales, including nonrecurring items......... 76,003 13,516 (10,012) 79,507
Special and nonrecurring items................. 3,700 -- -- 3,700
---------- ----------- ---------- ----------
Gross margin................................... 29,402 401 -- 29,803
Selling, general and administrative expenses........ 21,797 247 -- 22,044
---------- ---------- ---------- ----------
Operating profit............................... 7,605 154 -- 7,759
Minority interest in consolidated subsidiary........ 47 -- -- 47
Interest income (expense)........................... (154) -- 139
---------- ---------- ---------- ----------
Earnings before income taxes................... 7,945 -- -- 7,945
Income tax expense.................................. 3,019 -- -- 3,019
---------- ---------- ---------- ----------
Net earnings from continuing operations........ $ 4,926 $ -- $ -- $ 4,926
========== ========== ========== ==========
</TABLE>
F-19
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
Consolidating Balance Sheet
November 1, 1997
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ -----
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents............................. $ 15,769 $ 525 $ -- $ 16,294
Accounts receivable................................... 17,986 639 -- 18,625
Inventories, net...................................... 18,638 4,049 -- 22,687
Other assets ......................................... 3,241 491 -- 3,732
---------- ---------- ---------- ----------
Total current assets........................ 55,634 5,704 -- 61,338
Property plant and equipment, net..................... 16,780 8,431 -- 25,211
Investment in subsidiaries............................ 5,527 -- (5,527) --
Goodwill and other assets............................. 12,808 -- -- 12,808
---------- ---------- ---------- ----------
Total assets................................ $ 90,749 $ 14,135 $ (5,527) $ 99,357
========== ========== ========== ==========
Liabilities and Stockholders' Equity
Current liabilities................................... $ 20,465 $ 2,182 $ -- $ 22,647
Long-term debt........................................ 321 -- -- 321
Other long-term liabilities........................... 3,125 -- -- 3,125
Intercompany payable (receivable)..................... (6,426) 6,426 -- --
---------- ---------- ---------- ----------
Total liabilities........................... 17,485 8,608 -- 26,093
---------- ---------- ---------- ----------
Stockholders' equity
Common stock..................................... 198 5,726 (5,726) 198
Additional paid-in capital....................... 47,376 77 (77) 47,376
Treasury stock................................... (6,855) -- -- (6,855)
Cumulative translation adjustment................ (727) -- -- (727)
Retained earnings................................ 33,272 (276) 276 33,272
---------- ---------- ---------- ----------
Total stockholders' equity.................. 73,264 5,527 (5,527) 73,264
---------- ---------- ----------- ----------
Total liabilities and stockholders' equity.. $ 90,749 $ 14,135 $ (5,527) $ 99,357
========== ========== ========== ==========
</TABLE>
F-20
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
Consolidating Statement of Cash Flows
For the Year Ended November 1, 1997
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ -------
<S> <C> <C> <C> <C>
Net cash provided by (used in) operating activities............. $ 4,991 $ (1,586) $ -- $ 3,405
---------- ----------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of discontinued operations.............. 17,711 -- -- 17,711
Additions to property, plant and equipment, net............ (3,807) -- -- (3,807)
---------- ---------- ---------- ----------
Net cash provided by investing activities............. 13,904 -- -- 13,904
---------- ---------- ---------- ----------
Cash flows from financing activities:
Common stock issuance...................................... (114) 1,689 -- 1,575
Treasury stock purchases................................... (7,202) -- -- (7,202)
Cash dividends............................................. (1,348) -- -- (1,348)
Additions to (repayment of) long-term debt, net............ 389 -- -- 389
Change in pension liability................................ (143) -- -- (143)
---------- ---------- ---------- ----------
Net cash provided by (used in) financing activities... (8,418) 1,689 -- (6,729)
---------- ---------- ---------- ----------
Net change in cash and cash equivalents............... $ 10,477 $ 103 $ -- $ 10,580
=========== ========== ========== ==========
Consolidating Statement of Earnings
For the Year Ended November 2, 1996
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ --------
<S> <C> <C> <C> <C>
Net sales.............................................. $ 96,838 $ 11,446 $ (7,582) $ 100,702
Cost of sales.......................................... 65,904 10,803 (7,582) 69,125
---------- ---------- ---------- ----------
Gross margin...................................... 30,934 643 -- 31,577
Selling, general and administrative expenses........... 19,757 712 -- 20,469
---------- ---------- ---------- ----------
Operating profit.................................. 11,177 (69) -- 11,108
Minority interest in consolidated subsidiary........... 89 -- -- 89
Interest income (expense).............................. 288 (193) -- 95
---------- ---------- ---------- ----------
Earnings before income taxes...................... 11,554 (262) -- 11,292
Income tax expense..................................... 4,391 (100) -- 4,291
---------- ---------- ---------- ----------
Net earnings from continuing operations........... $ 7,163 $ (162) $ -- $ 7,001
========== ========== ========== ==========
</TABLE>
F-21
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
Consolidating Statement of Cash Flows
For the Year Ended November 2, 1996
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ ---------
<S> <C> <C> <C> <C>
Net cash provided by operating activities....................... $ 4,148 $ 3,285 $ -- $ 7,433
---------- ---------- ---------- ----------
Cash flows from investing activities:
Acquisition, net of cash................................... (1,189) -- -- (1,189)
Additions to property, plant and equipment, net............ (851) (3,598) -- (4,449)
---------- ---------- ---------- ----------
Net cash used in investing activities................. (2,040) (3,598) -- (5,638)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Common stock issuance...................................... 1,389 7 -- 1,396
Treasury stock purchases................................... (2,791) -- -- (2,791)
Cash dividends............................................. (958) -- -- (958)
Additions to (repayment of) long-term debt, net............ (634) -- -- (634)
Change in pension liability................................ (64) -- -- (64)
---------- ---------- ---------- ----------
Net cash provided by (used in) financing activities... (3,058) 7 -- (3,051)
---------- ---------- ---------- ----------
Net change in cash and cash equivalents............... $ (950) $ (306) $ -- $ (1,256)
========== =========== ========== ==========
</TABLE>
F-22
<PAGE>
FALCON PRODUCTS, INC.
Notes to Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
Note 14 - Quarterly Financial Information (Unaudited)
(In thousands, except for share data) First Second Third Fourth
-------- -------- ------- -------
<S> <C> <C> <C> <C>
1998
Net sales........................................ $28,060 $33,651 $41,297 $40,418
Special and nonrecurring items................... -- -- 111 160
Gross margin..................................... 8,134 9,525 9,113 13,316
Net earnings..................................... 1,782 1,838 216 2,514
Earnings per share - Diluted:
Net earnings per share...................... $ .19 $ .20 $ .02 $ .28
First Second Third Fourth
------- ------- ------- -------
1997
Net sales........................................ $26,733 $26,850 $28,570 $30,857
Special and nonrecurring items................... -- -- -- 3,700
Gross margin..................................... 7,658 7,844 8,371 5,930
Net earnings from continuing operations.......... 1,688 1,580 1,653 5
Net earnings from discontinued operations........ 179 362 397 --
Gain on sale of discontinued operations.......... -- -- -- 6,770
Net earnings..................................... 1,867 1,942 2,050 6,775
Earnings per share - Diluted:
Continuing operations....................... $ .17 $ .16 $ .17 $ --
Discontinued operations..................... .02 .04 .04 --
Gain on sale of discontinued operations..... -- -- -- .69
Net earnings per share...................... .19 .20 .21 .69
First Second Third Fourth
------- ------- ------- -------
1996
Net sales........................................ $23,239 $23,266 $25,228 $28,969
Gross margin..................................... 6,855 7,604 7,619 9,499
Net earnings from continuing operations.......... 1,459 1,730 1,699 2,113
Net earnings from discontinued operations........ 164 397 346 525
Net earnings..................................... 1,623 2,127 2,045 2,638
Earnings per share - Diluted:
Continuing operations....................... $ .15 $ .18 $ .17 $ .22
Discontinued operations..................... .02 .04 .04 .05
Net earnings per share...................... .17 .22 .21 .27
</TABLE>
F-23
<PAGE>
FALCON PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
Twenty-Six Weeks
Thirteen Weeks Ended Ended
May 1, May 2, May 1, May 2,
(In thousands, except per share data) 1999 1998 1999 1998
------- ------- ------- ------
<S> <C> <C> <C> <C>
Net sales....................................... $36,469 $33,651 $71,064 $61,711
Cost of sales................................... 25,797 24,126 50,490 44,052
------ ------- ------- -------
Gross margin............................... 10,672 9,525 20,574 17,659
Selling, general and administrative expenses.... 7,220 6,465 13,833 11,813
------- ------- ------- -------
Operating profit........................... 3,452 3,060 6,741 5,846
Interest (expense) income, net.................. (307) (90) (596) 7
Minority interest in consolidated subsidiary.... 8 19 14 34
------- ------- ------- -------
Earnings before income taxes............... 3,153 2,989 6,159 5,887
Income tax expense.............................. 1,183 1,151 2,325 2,267
------- ------- ------- -------
Net earnings............................... $ 1,970 $ 1,838 $ 3,834 $ 3,620
======= ======= ======= =======
Basic and diluted earnings per share:........... $ .23 $ .20 $ .43 $ .38
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
FALCON PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
May 1, October 31,
(In thousands, except share data) 1999 1998
--------- -------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents........................ $ 1,162 $ 5,186
Accounts receivable, less allowances of
$421 and $672, respectively.................... 20,567 22,683
Inventories...................................... 27,761 24,877
Prepayments and other current assets............. 3,421 3,081
-------- --------
Total current assets........................ 52,911 55,827
-------- --------
Property, plant and equipment:
Land 2,116 2,116
Buildings and improvements....................... 11,451 11,395
Machinery and equipment.......................... 34,190 32,154
-------- --------
47,757 45,665
Less accumulated depreciation.................... (19,403) (18,167)
-------- --------
Total property, plant and equipment......... 28,354 27,498
-------- --------
Other assets, net of accumulated amortization:
Goodwill......................................... 24,749 23,243
Other ......................................... 5,717 5,406
-------- --------
Total other assets.......................... 30,466 28,649
-------- --------
Total Assets $111,731 $111,974
======== ========
Liabilities and Stockholders' Equity Current
liabilities:
Accounts Payable................................. $ 10,528 $ 11,695
Accrued liabilities.............................. 5,018 6,769
Current maturities of long-term debt............. 2,079 1,607
-------- --------
Total current liabilities................... 17,625 20,071
Long-term obligations:
Long-term debt................................... 19,249 17,208
Deferred income taxes............................ 876 876
Minority interest in consolidated subsidiary..... 796 810
Other ......................................... 759 1,063
-------- --------
Total liabilities........................... 39,305 40,028
-------- --------
Stockholders' equity:
Common stock, $.02 par value: authorized
20,000,000 shares;
9,915,117 shares issued....................... 198 198
Additional paid-in capital....................... 47,376 47,376
Treasury stock, at cost (942,540 and 992,777
shares, respectively).......................... (15,685) (13,557)
Cumulative translation adjustment................ (196) (19)
Retained earnings................................ 40,733 37,948
-------- --------
Total stockholders' equity.................. 72,426 71,946
-------- --------
Total Liabilities and Stockholders' Equity............ $111,731 $111,974
======== ========
See accompanying notes to consolidated financial statements.
F-25
<PAGE>
FALCON PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Twenty-Six Weeks Ended May 1, 1999, and May 2, 1998
(Unaudited)
<TABLE>
<CAPTION>
Additional Cumulative Total
Common Paid-in Treasury Translation Retained Stockholders'
(In thousands) Stock Capital Stock Adjustments Earnings Equity
----------- ---------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 1, 1997............. $ 198 $ 47,376 $ (6,855) $ (727) $ 33,272 $ 73,264
Net earnings..................... -- -- -- -- 3,620 3,620
Exercise of stock options........ -- -- 219 -- (139) 80
Issuance of stock to Employee
Stock Purchase Plan........... -- -- 30 -- -- 30
Translation adjustments.......... -- -- -- (176) -- (176)
Cash dividends................... -- -- -- -- (734) (734)
Treasury stock purchases......... -- -- (5,900) -- -- (5,900)
Issuance of stock for business
acquisition................... -- -- 243 -- -- 243
---------- --------- ---------- ---------- --------- ----------
Balance, May 2, 1998.................. $ 198 $ 47,376 $ (12,263) $ (903) $ 36,019 $ 70,427
========== ========= ========== ========== ========= ==========
Balance, October 31, 1998............. $ 198 $ 47,376 $ (13,557) $ (19) $ 37,948 $ 71,946
Net earnings..................... -- -- -- -- 3,834 3,834
Exercise of stock options........ -- -- 139 -- (67) 72
Issuance of stock to Employee
Stock Purchase Plan........... -- -- 574 -- (226) 348
Translation adjustments.......... -- -- -- (177) -- (177)
Cash dividends................... -- -- -- -- (710) (710)
Treasury stock purchases......... -- -- (3,025) -- -- (3,025)
Issuance of stock for business
acquisition................... -- -- 184 -- (46) 138
---------- --------- ---------- ---------- ---------- ----------
Balance, May 1, 1999.................. $ 198 $ 47,376 $ (15,685) $ (196) $ 40,733 $ 72,426
========== ========= ========== ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE>
FALCON PRODUCTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Twenty-Six Weeks Ended
----------------------
May 1, May 2,
(In thousands) 1999 1998
-------- ------
Cash flows from operating activities:
Net earnings $ 3,834 $ 3,620
Adjustments to reconcile net earnings to net
cash provided by (used in)
operating activities:
Depreciation and amortization................... 1,721 1,823
Translation adjustments......................... (177) (176)
Minority interest in consolidated subsidiary.... (14) (34)
Change in assets and liabilities:
Accounts receivable, net................... 2,116 2,166
Inventories................................ (2,884) (1,429)
Prepayments and other current assets....... (340) (1,127)
Other assets, net.......................... (221) (221)
Accounts payable........................... (1,167) (1,082)
Accrued liabilities........................ (1,751) (6,510)
Other liabilities.......................... (304) --
-------- -------
Net cash used in operating activities........... (1,857) (2,970)
------- -------
Cash flows from investing activities:
Additions to property, plant and equipment, net...... (1,503) (3,931)
Acquisition, net of cash............................. -- (15,962)
------- -------
Net cash used in investing activities........... (1,503) (19,893)
------- --------
Cash flows from financing activities:
Additions to (repayment of) long-term debt, net...... 2,513 15,150
Common stock issuances............................... 558 110
Cash dividends....................................... (710) (734)
Treasury stock purchases............................. (3,025) (5,900)
-------- --------
Net cash provided by (used in)
financing activities.......................... (664) 8,626
-------- -------
Net decrease in cash and cash equivalents................. (4,024) (14,237)
Cash and cash equivalents-beginning of period............. 5,186 16,294
------- -------
Cash and cash equivalents-end of period................... $ 1,162 $ 2,057
======= =======
Supplemental Cash Flow Information:
Cash paid for interest............................... $ 578 $ 277
======= =======
Cash paid for income taxes........................... $ 2,745 $ 9,770
======= =======
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
FALCON PRODUCTS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Twenty-six Weeks Ended May 1, 1999
Note 1 - Interim Results
The financial statements contained herein are unaudited. In the opinion
of management, these financial statements reflect all adjustments, consisting
only of normal recurring adjustments, which are necessary for fair presentation
of the results of the interim periods presented. Reference is made to the
footnotes to the consolidated financial statements contained in the Company's
Annual Report on Form 10-K for the year ended October 31, 1998, filed with the
Securities and Exchange Commission.
Note 2 - Business Acquisition
The Company's results for the thirteen and twenty-six weeks ended May
1, 1999 include Howe Furniture Corporation and its subsidiaries ("Howe"). Howe
was acquired during March 1998, and therefore Howe's results of operation are
not included in the reported results for a portion of the thirteen and
twenty-six weeks ended May 2, 1998.
Note 3 - Comprehensive Income
In June 1997, the Financial Accounting Standards Board adopted
Statements of Financial Accounting Standards, "Reporting Comprehensive Income"
(SFAS) No. 130, which is the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources; it includes all changes in equity during the period except those
resulting from investments by owners and distribution to owners. Comprehensive
income is the total of all components of comprehensive income and other
comprehensive income, including net income. Other comprehensive income refers to
revenues, expenses, gains and losses that under GAAP are excluded from net
income. Effective November 1, 1998, the Company adopted SFAS No. 130. For the
Company, the only element of other comprehensive income is cumulative
translation adjustments, arising from the translation of certain balance sheet
accounts from local currency to functional currency. Comprehensive income was
$2.1 million and $1.9 million for the thirteen weeks ended May 1, 1999 and May
2, 1998, respectively and $3.7 million and $3.4 million for the twenty-six weeks
ended May 1, 1999 and May 2, 1998, respectively.
Note 4 - Subsequent Event
On May 5, 1999, the Company entered into a merger agreement to acquire
all of the outstanding shares of Shelby Williams Industries, Inc. ("Shelby
Williams") for $16.50 per share in cash. The aggregate purchase price, including
transaction costs, for the outstanding Shelby Williams common stock and the cost
of redemption of outstanding Shelby Williams stock options is expected to be
approximately $149.3 million. The acquisition will be funded by senior secured
credit facilities comprised of a $70 million term loan and a $50 million
revolving credit facility in addition to an offering of $100 million of senior
subordinated notes (at the closing, it is expected that the outstanding current
revolver amount of $19.2 million will be paid off and that the term loan and the
notes will be drawn in full and the revolving credit facility will be undrawn.)
The Company's domestic subsidiaries will guarantee the notes on a senior
subordinated basis.
The following condensed consolidating financial statements of the
Company include the combined accounts of the Company and its domestic
subsidiaries and the combined accounts of the foreign subsidiaries. Given the
size of the foreign subsidiaries, relative to the Company and its domestic
subsidiaries on a consolidated basis, separate financial statements of the
respective Company and its domestic subsidiaries are not presented because
management has determined that such information is not material in assessing the
Company and its domestic subsidiaries.
F-28
<PAGE>
FALCON PRODUCTS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
Falcon Products, Inc.
Consolidating Statement of Earnings
For the Thirteen Weeks Ended May 1, 1999
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ -------
<S> <C> <C> <C> <C>
Net sales....................................... $ 35,161 $ 4,472 $ (3,164) $ 36,469
Cost of sales................................... 24,940 4,021 (3,164) 25,797
---------- ---------- ---------- ----------
Gross margin............................... 10,221 451 -- 10,672
Selling, general and administrative expenses.... 7,179 41 -- 7,220
---------- ---------- ---------- ----------
Operating profit........................... 3,042 410 -- 3,452
Minority interest in consolidated subsidiary.... 8 -- -- 8
Interest income (expense)....................... (282) (25) -- (307)
---------- ---------- ---------- ----------
Earnings before income taxes............... 2,768 385 -- 3,153
Income tax expense.............................. 1,095 88 -- 1,183
---------- ---------- ---------- ----------
Net earnings............................... $ 1,673 $ 297 $ -- $ 1,970
========== ========== ========== ==========
Falcon Products, Inc.
Consolidating Statement of Earnings
For the Thirteen Weeks Ended May 2, 1998
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ -------
Net sales....................................... $ 31,525 $ 5,145 $ (3,019) $ 33,651
Cost of sales................................... 22,432 4,713 (3,019) 24,126
---------- ---------- ---------- ----------
Gross margin............................... 9,093 432 -- 9,525
Selling, general and administrative............. 6,022 443 -- 6,465
---------- ---------- ---------- ----------
Operating profit........................... 3,071 (11) -- 3,060
Minority interest in consolidated subsidiary.... 19 -- -- 19
Interest income (expense)....................... (75) (15) -- (90)
---------- ---------- ---------- ----------
Earnings before income taxes............... 3,015 (26) -- 2,989
Income tax expense.............................. 1,161 (10) -- 1,151
---------- ---------- ---------- ----------
Net earnings............................... $ 1,854 $ (16) $ -- $ 1,838
========== ========== ========== ==========
Falcon Products, Inc.
Consolidating Statement of Earnings
For the Twenty-six Weeks Ended May 1, 1999
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ -------
Net sales....................................... $ 67,786 $ 9,606 $ (6,328) $ 71,064
Cost of sales................................... 48,440 8,378 (6,328) 50,490
---------- ---------- ---------- ----------
Gross margin............................... 19,346 1,228 -- 20,574
Selling, general and administrative............. 13,306 527 -- 13,833
---------- ---------- ---------- ----------
Operating profit........................... 6,040 701 -- 6,741
Minority interest in consolidated subsidiary.... 14 -- -- 14
Interest income (expense)....................... (566) (30) -- (596)
---------- ---------- ---------- ----------
Earnings before income taxes............... 5,488 671 -- 6,159
Income tax expense.............................. 2,168 157 -- 2,325
---------- ---------- ---------- ----------
Net earnings............................... $ 3,320 $ 514 $ -- $ 3,834
========== ========== ========== ==========
F-29
<PAGE>
Falcon Products, Inc.
Consolidating Statement of Earnings
For the Twenty-six Weeks Ended May 2, 1998
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ -------
Net sales...................................... $ 58,201 $ 8,957 $ (5,447) $ 61,711
Cost of sales.................................. 40,970 8,529 (5,447) 44,052
---------- ---------- ---------- ----------
Gross margin.............................. 17,231 428 -- 17,659
Selling, general and administrative............ 11,304 509 -- 11,813
---------- ---------- ---------- ----------
Operating profit.......................... 5,927 (81) -- 5,846
Minority interest in consolidated subsidiary... 34 -- -- 34
Interest income (expense)...................... 45 (38) -- 7
---------- ---------- ---------- ----------
Earnings before income taxes.............. 6,006 (119) -- 5,887
Income tax expense............................. 2,312 (45) -- 2,267
---------- ---------- ---------- ----------
Net earnings.............................. $ 3,694 $ (74) $ -- $ 3,620
========== ========== ========== ==========
Falcon Products, Inc.
Consolidating Balance Sheet
May 1, 1999
Total Total
Domestic Foreign Eliminations Total
-------- ------- ------------ -------
Assets
Cash and cash equivalents............................. $ (31) $ 1,193 $ -- $ 1,162
Accounts receivable................................... 18,185 2,382 -- 20,567
Inventories ......................................... 22,902 4,859 -- 27,761
Other assets ......................................... 2,891 530 -- 3,421
---------- ---------- ---------- ----------
Total current assets........................ 43,947 8,964 -- 52,911
Property, plant and equipment, net.................... 19,329 9,025 -- 28,354
Investment in subsidiaries............................ 7,664 -- (7,664) --
Intangibles and other assets.......................... 30,466 -- -- 30,466
---------- ---------- ---------- ----------
Total assets................................ $ 101,406 $ 17,989 $ (7,664) $ 111,731
========== ========== ========== ==========
Liabilities and Stockholders' Equity
Current liabilities................................... $ 13,056 $ 4,569 $ -- $ 17,625
Long-term debt........................................ 19,249 -- -- 19,249
Other long-term liabilities........................... 2,431 -- -- 2,431
Intercompany payable (receivable)..................... (5,756) 5,756 -- --
---------- ---------- ---------- ----------
Total liabilities........................... 28,980 10,325 -- 39,305
---------- ---------- ---------- ----------
Stockholders' equity
Common stock..................................... 198 6,446 (6,446) 198
Additional paid-in capital....................... 47,376 925 (925) 47,376
Treasury stock................................... (15,685) -- -- (15,685)
Cumulative translation adjustment................ (196) -- -- (196)
Retained earnings................................ 40,733 293 (293) 40,733
Total stockholders' equity.................. 72,426 7,664 (7,664) 72,426
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity. $ 101,406 $ 17,989 $ (7,664) $ 111,731
========== ========== ========== ==========
F-30
<PAGE>
FALCON PRODUCTS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements--(Continued)
Consolidating Balance Sheet
October 31, 1998
Total Total
Domestic Foreign Eliminations Total
--------- -------- ------------ --------
Assets
Cash and cash equivalents............................. $ 3,666 $ 1,520 $ -- $ 5,186
Accounts receivable................................... 20,472 2,211 -- 22,683
Inventories, net...................................... 20,922 3,955 -- 24,877
Other assets 2,760 321 -- 3,081
--------- --------- ---------- ----------
Total current assets........................ 47,820 8,007 -- 55,827
Property plant and equipment, net..................... 18,362 9,136 -- 27,498
Investment in subsidiaries............................ 7,150 -- (7,150) --
Goodwill and other assets............................. 28,649 -- -- 28,649
---------- ---------- ---------- ----------
Total assets................................ $ 101,981 $ 17,143 $ (7,150) $ 111,974
========== ========== ========== ==========
Liabilities and Stockholders' Equity
Current liabilities................................... $ 16,143 $ 3,928 $ -- $ 20,071
Long-term debt........................................ 17,208 -- -- 17,208
Other long-term liabilities........................... 2,749 -- -- 2,749
Intercompany payable (receivable)..................... (6,065) 6,065 -- --
---------- ---------- ---------- ----------
Total liabilities........................... 30,035 9,993 -- 40,028
---------- ---------- ---------- ----------
Stockholders' equity
Common stock..................................... 198 6,446 (6,446) 198
Additional paid-in capital....................... 47,376 925 (925) 47,376
Treasury stock................................... (13,557) -- -- (13,557)
Cumulative translation adjustment................ (19) -- -- (19)
Retained earnings................................ 37,948 (221) 221 37,948
---------- ---------- ---------- ----------
Total stockholders' equity.................. 71,946 7,150 (7,150) 71,946
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity.. $ 101,981 $ 17,143 $ (7,150) $ 111,974
========== ========== ========== ==========
Falcon Products, Inc.
Consolidating Statement of Cash Flows
For the Twenty-six Weeks Ended May 1, 1999
Total Total
Domestic Foreign Eliminations Total
--------- -------- ------------ --------
Net cash from operating activities..................... $ (1,444) $ (413) $ -- $ (1,857)
---------- ---------- ---------- ----------
Cash flows used in investing activities
Capital expenditures, net.......................... (1,589) 86 -- (1,503)
---------- ---------- ---------- ---------
Net cash used in investing activities.................. (1,589) 86 -- (1,503)
---------- ---------- ---------- ---------
Cash flows used in financing activities
Common stock issuance............................. 558 -- -- 558
Treasury stock purchases.......................... (3,025) -- -- (3,025)
Cash dividends.................................... (710) -- -- (710)
Additions to (repayment of) long-term debt, net... 2,513 -- -- 2,513
---------- ---------- ---------- ----------
Net cash used in financing activities.................. (664) -- -- (664)
---------- ---------- ---------- ----------
Net change in cash and cash equivalents................ $ (3,697) $ (327) $ -- $ (4,024)
========== ========== ========== ==========
F-31
<PAGE>
FALCON PRODUCTS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements--(Continued)
Falcon Products, Inc.
Consolidating Statement of Cash Flows
For the Twenty-six Weeks Ended May 2, 1998
Total Total
Domestic Foreign Eliminations Total
--------- --------- ------------ --------
Net cash from operating activities..................... $ (1,411) $ (1,559) $ -- $ (2,970)
---------- ---------- ---------- ----------
Cash flows used in investing activities
Acquisition, net of cash.......................... (15,962) -- -- (15,962)
Capital expenditures, net......................... (4,548) 617 -- (3,931)
---------- ---------- ---------- ----------
Net cash used in investing activities.................. (20,510) 617 -- (19,893)
---------- ---------- ---------- ----------
Cash flows used in financing activities
Common stock issuance............................. 110 -- -- 110
Treasury stock purchases.......................... (5,900) -- -- (5,900)
Cash dividends.................................... (734) -- -- (734)
Additions to (repayment of) long-term debt, net... 15,150 -- -- 15,150
---------- ---------- ---------- ----------
Net cash used in financing activities.................. 8,626 -- -- 8,626
---------- ---------- ---------- ----------
Net change in cash and cash equivalents................ $ (13,295) $ (942) $ -- $ (14,237)
========== ========== ========== ==========
</TABLE>
F-32
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Shelby Williams Industries, Inc.
We have audited the accompanying consolidated balance sheets of Shelby
Williams Industries, Inc., as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company'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 consolidated financial position of Shelby
Williams Industries, Inc., as of December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
January 29, 1999
Atlanta, Georgia
F-33
<PAGE>
<TABLE>
<CAPTION>
SHELBY WILLIAMS INDUSTRIES, INC.
Consolidated Statements of Income
Years Ended December 31,
1998 1997 1996
------------- ------------- ---------
<S> <C> <C> <C>
Net sales................................ $ 165,937,000 $ 157,779,000 $ 149,481,000
Cost of goods sold....................... 126,388,000 120,849,000 114,998,000
Selling, general and administrative
expenses............................... 22,994,000 22,268,000 22,100,000
------------- ------------- -------------
16,555,000 14,662,000 12,383,000
Other deductions (income):
Interest expense......................... 391,000 622,000 969,000
Interest income.......................... (539,000) (614,000) (18,000)
Miscellaneous income..................... (102,000) (89,000) (44,000)
------------- ------------- -------------
(250,000) (81,000) 907,000
------------- ------------- -------------
Income from continuing operations
before income taxes.................... 16,805,000 14,743,000 11,476,000
Income taxes:
Current.................................. 7,626,000 4,926,000 3,247,000
Deferred................................. (1,435,000) 140,000 473,000
------------- ------------- -------------
6,191,000 5,066,000 3,720,000
------------- ------------- -------------
Income from continuing operations........ 10,614,000 9,677,000 7,756,000
Discontinued operations:
Income (loss) from discontinued
operations, net of taxes............... (48,000) 915,000 661,000
Loss on disposal of discontinued
operations, net of taxes............... (7,081,000) -- --
------------- ------------- -------------
Net income............................... $ 3,485,000 $ 10,592,000 $ 8,417,000
============= ============= =============
Income per share:
Continuing operations.................... $ 1.17 $ 1.05 $ 0.88
Income (loss) from discontinued
operations, net of taxes............... (0.01) 0.10 0.08
Loss on disposal of discontinued
operations, net of taxes............... (0.78) -- --
------------- ------------- -------------
Net income............................... $ 0.38 $ 1.15 $ 0.96
============= ============= =============
Income per share-assuming dilution:
Continuing operations.................... $ 1.17 $ 1.05 $ 0.88
Income (loss) from discontinued
operations, net of taxes............... (0.01) 0.10 0.07
Loss on disposal of discontinued
operations, net of taxes............... (0.78) -- --
------------- ------------- -------------
Net income............................... $ 0.38 $ 1.15 $ 0.95
============= ============= =============
Weighted average number of common
shares outstanding..................... 9,078,000 9,198,000 8,805,000
============= ============= =============
Weighted average number of common
shares outstanding-assuming dilution... 9,108,000 9,250,000 8,838,000
============= ============= =============
</TABLE>
See accompanying notes.
F-34
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Consolidated Balance Sheets
December 31,
1998 1997
------------- ------------
Assets
Current assets:
Cash and cash equivalents...................... $ 6,355,000 $ 11,124,000
Accounts receivable, less allowance for
doubtful accounts of $375,000 in 1998
and $325,000 in 1997........................ 28,025,000 26,165,000
Inventories:
Raw materials............................. 11,818,000 8,147,000
Work in process........................... 5,492,000 4,978,000
Finished goods............................ 5,234,000 4,643,000
------------ ------------
22,544,000 17,768,000
Prepaid expenses............................... 5,187,000 5,015,000
Net assets of discontinued operations.......... -- 8,857,000
------------ ------------
Total current assets........................... 62,111,000 68,929,000
Net assets of discontinued operations.......... -- 2,335,000
Excess of cost over net assets of acquired
companies................................... 151,000 160,000
Property, plant and equipment, at cost:
Land and land improvements................ 2,560,000 2,392,000
Buildings and leasehold improvements...... 20,974,000 20,176,000
Machinery and equipment................... 26,746,000 22,720,000
Construction in progress.................. -- 1,690,000
------------ ------------
50,280,000 46,978,000
Less accumulated depreciation and
amortization........................... 24,295,000 22,367,000
------------ ------------
25,985,000 24,611,000
Other assets................................... 1,386,000 1,203,000
------------ ------------
$ 89,633,000 $ 97,238,000
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................... $ 7,063,000 $ 4,730,000
Customer deposits on orders in process......... 5,717,000 4,225,000
Accrued liabilities............................ 6,278,000 5,629,000
Income taxes................................... 889,000 1,851,000
Current portion of long-term debt.............. 3,000,000 4,000,000
------------ ------------
Total current liabilities...................... 22,947,000 20,435,000
Long-term debt................................. -- 3,000,000
Deferred income taxes.......................... 1,991,000 2,031,000
Commitments (see notes)
Stockholders' equity:
Common stock, $.05 par value; authorized
30,000,000 shares; issued
11,876,000 shares (1997-11,848,000).... 593,000 592,000
Capital in excess of par value............ 10,128,000 9,837,000
Retained earnings......................... 77,012,000 76,820,000
------------ ------------
87,733,000 87,249,000
Less common stock held in treasury;
3,025,000 shares at cost
(1997-2,500,000)....................... 23,038,000 15,477,000
------------ ------------
Total stockholders' equity..................... 64,695,000 71,772,000
------------ ------------
$ 89,633,000 $ 97,238,000
============ ============
See accompanying notes.
F-35
<PAGE>
<TABLE>
<CAPTION>
SHELBY WILLIAMS INDUSTRIES, INC.
Consolidated Statements of Cash Flows
Years Ended December 31,
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 3,485,000 $ 10,592,000 $ 8,417,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................ 2,478,000 2,298,000 2,457,000
Provision for losses on accounts receivable.................. 207,000 110,000 136,000
Change in net assets of discontinued operations.............. 9,692,000 (468,000) (314,000)
Changes in assets and liabilities net of effects
from sale of facility:
Accounts receivable........................................ (2,067,000) (2,953,000) (540,000)
Inventories................................................ (4,776,000) 2,380,000 (640,000)
Prepaid expenses........................................... (172,000) (2,051,000) (267,000)
Accounts payable and accrued liabilities................... 4,474,000 (818,000) (2,706,000)
Income taxes payable....................................... (962,000) 147,000 921,000
Increase (decrease) in deferred taxes........................... (40,000) (106,000) 34,000
Pension liability adjustment.................................... -- 789,000 119,000
Other ........................................................ (183,000) 168,000 452,000
------------ ------------ ------------
Net cash provided by operating activities............................ 12,136,000 10,088,000 8,069,000
Cash flows from investing activities:
Proceeds from sale of business and facility..................... 1,500,000 -- 2,000,000
Proceeds from disposal of property, plant and equipment......... 76,000 133,000 5,000
Capital expenditures............................................ (3,919,000) (3,557,000) (1,189,000)
------------ ------------ ------------
Net cash provided (used) by investing activities .................... (2,343,000) (3,424,000) 816,000
Cash flows from financing activities:
Sale of treasury stock at public offering....................... -- 7,953,000 --
Repayment of short-term borrowings.............................. -- -- (5,900,000)
Principal payments of long-term debt............................ (4,000,000) (1,000,000) (32,000)
Sale of common stock under stock option plan.................... 292,000 296,000 290,000
Purchase of common stock for the treasury....................... (7,561,000) (884,000) (1,937,000)
Dividends declared and paid..................................... (3,293,000) (2,944,000) (2,643,000)
------------ ------------ ------------
Net cash provided (used) by financing activities..................... (14,562,000) 3,421,000 (10,222,000)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents............ (4,769,000) 10,085,000 (1,337,000)
Cash and cash equivalents at beginning of year.................. 11,124,000 1,039,000 2,376,000
------------ ------------ ------------
Cash and cash equivalents at end of year............................. $ 6,355,000 $ 11,124,000 $ 1,039,000
============ ============ ============
Supplemental cash flow information:
Cash paid during the year for:
Interest..................................................... $ 447,000 $ 632,000 $ 969,000
Income taxes................................................. 4,557,000 6,104,000 3,277,000
------------ ------------ ------------
$ 5,004,000 $ 6,736,000 $ 4,246,000
============ ============ ============
</TABLE>
See accompanying notes.
F-36
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Years Ended December 31, 1998, 1997 and 1996
----------------------------------------------------------------------------------------
Common Stock Accumulated
------------ Capital in other
Shares excess of Retained comprehensive Treasury
Issued Amount par value earnings income stock, at cost Total
------ ------ ---------- -------- ------------- -------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995 ...................... 11,779,000 $ 589,000 $ 7,855,000 $ 63,398,000 $ (908,000) $(19,210,000) $ 51,724,000
Net income.................... -- -- -- 8,417,000 -- -- 8,417,000
Other comprehensive
income:
Pension liability
adjustment............ -- -- -- -- 198,000 -- 198,000
Tax expense.............. -- -- -- -- (79,000) -- (79,000)
------------ ----------- ------------
Comprehensive income.......... -- -- -- 8,417,000 119,000 -- 8,536,000
Sale of common stock under
stock option plan.......... 35,000 2,000 288,000 -- -- -- 290,000
Common stock purchased for
treasury (168,000
shares).................... -- -- -- -- -- (1,937,000) (1,937,000)
Cash dividends - $.30 per
share...................... -- -- -- (2,643,000) -- -- (2,643,000)
------------ ----------- ----------- ------------ ----------- ----------- ------------
Balance at December 31,
1996 ...................... 11,814,000 591,000 8,143,000 69,172,000 (789,000) (21,147,000) 55,970,000
Net income.................... -- -- -- 10,592,000 -- -- 10,592,000
Other comprehensive
income:
Pension liability
adjustment............ -- -- -- -- 1,315,000 -- 1,315,000
Tax expense.............. -- -- -- -- (526,000) -- (526,000)
------------- ----------- - ------------
Comprehensive income.......... -- -- -- 10,592,000 789,000 -- 11,381,000
Sale of treasury stock at
public offering (619,000
shares).................... -- -- 1,399,000 -- -- 6,554,000 7,953,000
Sale of common stock under
stock option plan.......... 34,000 1,000 295,000 -- -- -- 296,000
Common stock purchased for
treasury (72,000 shares)... -- -- -- -- -- (884,000) (884,000)
Cash dividends - $.32 per
share...................... -- -- -- (2,944,000) -- -- (2,944,000)
------------ ----------- ----------- ------------ ----------- ----------- ------------
Balance at December 31,
1997 ...................... 11,848,000 592,000 9,837,000 76,820,000 0 (15,477,000) 71,772,000
Net income and
comprehensive income....... -- -- -- 3,485,000 -- -- 3,485,000
Sale of common stock under
stock option plan.......... 28,000 1,000 291,000 -- -- -- 292,000
Common stock purchased for
treasury (525,000
shares).................... -- -- -- -- -- (7,561,000) (7,561,000)
Cash dividends - $.36 per
share...................... -- -- -- (3,293,000) -- -- (3,293,000)
------------ ----------- ----------- ------------ ----------- ----------- ------------
Balance at December 31,
1998 ...................... 11,876,000 $ 593,000 $10,128,000 $ 77,012,000 $ 0 $(23,038,000) $ 64,695,000
============ =========== =========== ============= =========== ============ ============
</TABLE>
See accompanying notes.
F-37
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Notes to Consolidated Financial Statements
Summary of Significant Accounting Policies
Description of Business
Shelby Williams designs, manufactures and distributes products for the
contract furniture market. The Company has a significant position in the
hospitality and food service markets through its "Shelby Williams" seating line,
"King Arthur" line of function room furniture and "Sterno" accessories. It
serves the health care, university, and other institutional markets through its
"Thonet" division with health care and university furniture, including chairs,
tables, and other institutional products. The Company also processes and
distributes vinyl wallcoverings for residential, hotel and office use under the
name "Sellers & Josephson."
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant intercompany
items and transactions are denominated in U.S. dollars and have been eliminated
in consolidation.
Revenue Recognition
Sales are recognized when the products are shipped.
Income Taxes
Income tax expense includes Federal and state income taxes currently
payable and deferred taxes arising from temporary differences between the tax
bases of assets or liabilities and their reported amounts in the financial
statements.
Cash and Cash Equivalents
Cash equivalents include highly liquid investments, with original
maturities of three months or less, that are readily convertible to known
amounts of cash.
Inventories
Inventories are carried at the lower of cost or market, determined by
the last-in, first-out (LIFO) method. The current replacement cost of
inventories exceeded carrying value by approximately $10,828,000 at December 31,
1998 and $9,997,000 at December 31, 1997.
As a result of the difference between the method of allocating the cost
of acquisitions in 1976, 1987 and 1988 for financial reporting purposes, and the
method used for income tax purposes, the Company's tax basis in the inventories
is approximately $20,204,000 at December 31, 1998 and $22,278,000 at December
31, 1997. Related 1998 disposition cost of $616,000 was not a deduction for tax.
F-38
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Notes to Consolidated Financial Statements--(Continued)
Property, Plant and Equipment
Depreciation and amortization of property, plant and equipment is
provided using the straight-line method over the estimated useful lives of the
respective assets.
Post-employment Benefits
The Company provides certain post-employment benefits. Payments of
these benefits in the past have been infrequent and are not estimable, thus the
Company records these benefits on an event basis.
Other Significant Accounting Policies
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. As a result of significant deductibles in its insurance
coverage for liability and worker's compensation claims, the Company provides
amounts which management believes are sufficient to cover the associated
liabilities.
Commitments
Leases
The Company leases certain manufacturing facilities under operating
leases which expire over the next seven years. The Company also leases showroom
space under operating leases expiring over the next five years.
Future minimum rental payments required under operating leases that
have initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 1998 are:
Year ending
December 31,
-------------
1999.......................................................... $ 1,058,000
2000.......................................................... 968,000
2001.......................................................... 573,000
2002.......................................................... 532,000
2003.......................................................... 469,000
Subsequent to 2003............................................ 62,000
------------
Total minimum lease payments.................................. $ 3,662,000
============
Total rental expense for all operating leases aggregated $1,899,000 in
1998, $1,955,000 in 1997, and $1,912,000 in 1996.
Short-Term Borrowings
The Company has unsecured lines of credit amounting to $20,000,000 at
interest rates of prime or less. At December 31, 1998, all of these lines were
unused.
F-39
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Notes to Consolidated Financial Statements--(Continued)
Long-Term Debt
Long-term debt at December 31, 1998, and 1997 consisted of the
following:
1998 1997
----------------------------
7.8% senior notes due in quarterly
installments through July 1999............ $ 3,000,000 $ 7,000,000
Less amounts due within one year............ 3,000,000 4,000,000
------------ ------------
$ -- $ 3,000,000
============ ============
The terms of the senior note agreement contain certain restrictions. At
December 31, 1998, the Company was in compliance with all such restrictions. The
final $863,000 of a capitalized lease obligation was discharged by assignment
with sale of the related facility in August 1996.
Common Stock Information (unaudited)
The following table sets forth the high and low sales prices of the
Company's common stock as reported by the New York Stock Exchange.
Sales
Prices High Low
------ ---- -----
1998 1st Quarter................................ 17 1/8 14 5/8
2nd Quarter................................ 16 1/8 14 5/8
3rd Quarter................................ 15 3/4 11
4th Quarter................................ 13 1/8 11
1997 1st Quarter................................ 17 11 7/8
2nd Quarter................................ 14 3/8 11 3/8
3rd Quarter................................ 19 7/8 13 3/4
4th Quarter................................ 20 5/8 14 3/4
At December 31, 1998, there were approximately 3,000 holders of record
of the Company's common stock, including individual participants in security
position listings.
The Company declared and paid cash dividends on its common stock during
the last two fiscal years as follows:
Cash Dividend
per
Common Share
-----------------
Period 1998 1997
------ -----------------
1st Quarter....................................... $ 0.09 $ 0.08
2nd Quarter....................................... 0.09 0.08
3rd Quarter....................................... 0.09 0.08
4th Quarter....................................... 0.09 0.08
------ ------
$ 0.36 $ 0.32
====== ======
F-40
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Notes to Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
Quarterly Results (unaudited)
Summarized quarterly results for the two years ended December 31, 1998
follows (dollars in thousands, except for per share amounts):
1998 1997
---------------------------------------- --------------------------------------
Fourth Third Second First Fourth Third Second First
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $ 44,237 $ 42,387 $ 40,829 $ 38,484 $ 41,966 $ 39,608 $ 39,749 $ 36,456
Gross profit................ 10,962 10,095 9,937 8,555 10,256 9,435 9,182 8,057
Income from continuing
operations............... 3,120 2,727 2,689 2,078 2,862 2,532 2,450 1,833
Net income (loss)........... 3,120 2,727 (4,476) 2,114 2,985 2,734 2,707 2,166
Income (loss) per share
(basic and diluted):
Continuing operations.... 0.35 0.30 0.29 0.22 0.31 0.27 0.26 0.21
Net income (loss)........ 0.35 0.30 (0.49) 0.23 0.32 0.29 0.29 0.25
</TABLE>
Stock Option Plans
Under the Company's incentive stock option plan and directors' stock
option plan, options are granted to key employees and directors to purchase the
Company's common stock at not less than fair market value at date of grant. At
December 31, 1998 and 1997, there were 276,000 and 308,000 shares, respectively,
reserved for issuance under the plans. Of options granted, 20,000 in 1997 and
16,000 in 1996 have five year terms and vest and become fully exercisable at the
end of six months service. The remaining options granted in 1997 and 1996 and
all of the options granted in 1998 have five year terms and vest and become
exercisable in 1/3 increments after 15 months, 30 months, and 45 months,
respectively, of continued employment.
The intrinsic value method is used in accounting for stock-based awards
under the Company's stock option plans. Because the exercise price of the
Company's stock options at least equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
A summary of the Company's stock option activity, and related
information for years ended December 31 follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Options Exercise Options Exercise
(000) Price (000) Price (000) Price
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year................... 217 $ 12.17 147 $ 9.97 119 $ 8.30
Granted........................................... 43 16.69 107 13.96 63 12.25
Exercised......................................... (28) 10.37 (34) 8.61 (35) 8.38
Forfeited......................................... (4) 14.00 (3) 8.38 -- --
----- ------- ----- ------- ----- ------
Outstanding - end of year......................... 228 $ 13.21 217 $ 12.17 147 $ 9.97
===== ======= ===== ======= ===== ======
Exercisable at end of year........................ 111 $ 11.62 88 $ 10.89 79 $ 9.14
===== ======= ===== ======= ===== ======
Weighted-average fair value of options granted
during the year................................ $ 5.17 $ 4.05 $ 3.68
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 ranged
from $7.94 to $8.73 for 33,000 options and $12.12 to $18.15 for 195,000 options,
with weighted-average exercise prices of $8.03 and $14.10, respectively. The
weighted-average remaining contractual life of those options is 1 year and 3
years, respectively, or 2.7 years as a whole. Exercise prices for options
exercisable at December 31, 1998 ranged from $7.94 to $8.73 for 33,000 shares
and $12.12 to $15.25 for 78,000 shares, with weighted-average exercise prices of
$8.03 and $13.15, respectively.
F-41
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Notes to Consolidated Financial Statements--(Continued)
The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1996, 1997 and 1998, respectively: risk-free interest rates of
6.5%, 6.2% and 5.3%; dividend yields of 2.7%, 2.6% and 2.2%; volatility factors
of the expected market price of the Company's common stock of .32, .31 and .35;
and a weighted-average expected life of the option of five years.
The effect of applying the fair value method to the Company's
stock-based awards results in net income and earnings per share that are not
materially different from amounts reported. The assumed dilutive effect of stock
options, which were the only dilutive securities outstanding in 1998, 1997 and
1996, was 30,000, 52,000 and 33,000 shares, respectively.
Restructuring Charge
Due to increases in lumber prices and increased competition primarily
from imported products, the Company made changes in its product and
manufacturing strategies during December 1994, designed to make the Company more
competitive in the industry. The plan was to exit certain portions of the
Company's enterprise by selling an upholstery business with a related
manufacturing facility and discontinuing a part of the product lines in the
health care, university and office markets, resulting in closure of another
plant. The Company anticipated completing the restructuring by December 31,
1995; however, the sale of the upholstery business was not completed until
August 1996.
At December 31, 1995, accrued liabilities included $439,000 related to
the plan. These costs were paid and charged against the liability in 1996,
completing the plan. In 1996, revenues and net operating income for the
upholstery business that was sold amounted to $5,858,000 and $182,000,
respectively.
Discontinued Operations
On July 14, 1998, the Company's Board of Directors approved
management's plan to discontinue the Company's distribution operations of
textile and floor covering products manufactured by outside suppliers. Of the
two businesses comprising these operations, one was sold and one was liquidated.
The plan was completed in December, 1998. During the second quarter 1998, the
Company recorded a loss on the disposition of these operations of $9,698,000, or
$7,081,000 after taxes, including a provision for losses prior to disposal,
which is summarized below:
Reduction of inventory value.......................... $ 4,706,000
Reduction of property to net realizable value......... 2,198,000
Reduction of accounts receivable and prepaids value... 629,000
Other liabilities..................................... 1,445,000
Losses through disposition............................ 720,000
------------
Total................................................. 9,698,000
Income tax benefit.................................... 2,617,000
------------
$ 7,081,000
============
The operating results of the discontinued operations are summarized as
follows:
Year ended December 31,
--------------------------------------------
1998 1997 1996
--------------------------------------------
Net sales..........................$ 6,981,000 $ 21,849,000 $ 22,950,000
Income (loss) before income taxes.. (77,000) 1,474,000 1,052,000
Income taxes (benefit)............. (29,000) 559,000 391,000
Net income (loss).................. (48,000) 915,000 661,000
Net income (loss) per share........ (0.01) 0.10 0.08
Net income (loss) per
share-assuming dilution.......... (0.01) 0.10 0.07
F-42
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Notes to Consolidated Financial Statements--(Continued)
The net assets of the discontinued operations follows:
As of
December 31, 1997
-----------------
Current assets......................................... $ 9,947,000
Current liabilities.................................... 1,090,000
------------
Net assets of discontinued operations, current......... $ 8,857,000
============
Property, net.......................................... $ 2,235,000
------------
Net assets of discontinued operations, non-current..... $ 2,235,000
============
The consolidated financial statements of the Company have been restated
to reflect the results of operations and net assets of these operations as a
discontinued operation in accordance with generally accepted accounting
principles. The losses recorded on the disposition of these operations were not
materially different from those incurred on the actual amounts realized in the
sale and liquidation process.
Retirement Plans
The Company has several defined pension plans covering essentially all
of its employees in the United States. These plans held 66,000 shares of the
Company's common stock at December 31, 1998 and December 31, 1997.
Weighted-average assumptions used in the accounting were as follows:
As of
December 31,
---------------
1998 1997
---- ----
Discounts rates............................... 7.0% 8.3%
Rates of compensation increase................ 3.5% 3.5%
Expected return on plan assets................ 8.5% 8.5%
<TABLE>
<CAPTION>
Components of net periodic benefit cost are as follows:
Year ended December 31,
---------------------------------------------
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Benefit cost:
Service cost.................................................... $ 1,062,000 $ 964,000 $ 966,000
Interest cost................................................... 1,496,000 1,354,000 1,151,000
Expected return on plan assets.................................. (1,654,000) (1,350,000) (1,143,000)
Amortization:
Transition asset........................................... (25,000) (25,000) (25,000)
Net actuarial loss......................................... -- 38,000 102,000
------------ ------------ ------------
Net benefit cost................................................ $ 879,000 $ 981,000 $ 1,051,000
============ ============ ============
</TABLE>
F-43
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Notes to Consolidated Financial Statements--(Continued)
Changes in plan assets and benefit obligation, indicating the end of
year funded status and prepaid pension, included in prepaid expenses of the
accompanying consolidated balance sheets, were as follows:
Year ended December 31,
---------------------------------
1998 1997
---------------------------------
Fair value of plan assets:
Beginning of year....................... $ 19,485,000 $ 15,142,000
Actual return on plan assets............ 2,318,000 3,169,000
Employer contribution................... 1,462,000 1,858,000
Benefits paid........................... (809,000) (684,000)
------------- -------------
End of year............................. 22,456,000 19,485,000
------------- -------------
Benefit obligation:
Beginning of year....................... 18,484,000 15,983,000
Service cost............................ 1,062,000 964,000
Interest cost........................... 1,496,000 1,354,000
Actuarial loss.......................... 3,859,000 867,000
Benefits paid........................... (809,000) (684,000)
------------- -------------
End of year............................. 24,092,000 18,484,000
------------- -------------
Funded status........................... (1,636,000) 1,001,000
Unrecognized net asset.................. (137,000) (163,000)
Unrecognized net loss................... 4,184,000 989,000
Unrecognized prior service cost......... 60,000 61,000
------------- -------------
Prepaid pension at end of year.......... $ 2,471,000 $ 1,888,000
============= =============
The Company has an employee stock ownership plan covering essentially
all salaried employees. The contributions were $83,000 for 1998, $69,000 for
1997, and $63,000 for 1996. The plan held 52,000 shares of the Company's common
stock at December 31, 1998 and 44,000 shares at December 31, 1997.
Retirement plan expense was $962,000, $1,050,000, and $1,114,000 for
1998, 1997, and 1996 respectively.
Operating Segments
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information". Applying the criteria from this statement,
the Company has three segments. The hotel and food service furniture segment
manufactures and distributes chairs, tables, and guest, banquet and function
room furnishings, along with specialty items for banquet use, for the
hospitality market. The healthcare and university furniture segment produces and
markets seating products used for healthcare, university and other institutional
facilities. The wall coverings segment processes and distributes vinyl wall
coverings for the hospitality and other markets.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. Cash and cash equivalents are
considered corporate assets and interest expense and interest income are
unallocated. Intersegment sales are not significant. The Company evaluates
performance based on income before income taxes.
The Company's segments are strategic business units that offer
different products or serve different markets. They are managed separately
because each requires different technology and marketing strategies, which are
coordinated to the extent practical.
F-44
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Notes to Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
Segment information follows:
December 31, Hotel and Healthcare
and year food service and university
then ended furniture furniture Wall coverings Total
---------- ------------ -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales: 1998 $126,726,000 $23,478,000 $15,733,000 $165,937,000
1997 117,707,000 24,868,000 15,204,000 157,779,000
1996 113,436,000 22,135,000 13,910,000 149,481,000
Depreciation and amortization: 1998 1,564,000 431,000 483,000 2,478,000
1997 1,396,000 417,000 485,000 2,298,000
1996 1,501,000 419,000 537,000 2,457,000
Segment profit: 1998 13,990,000 1,022,000 1,645,000 16,657,000
1997 11,991,000 1,178,000 1,582,000 14,751,000
1996 10,626,000 504,000 1,297,000 12,427,000
Capital expenditures: 1998 2,390,000 684,000 845,000 3,919,000
1997 2,737,000 465,000 355,000 3,557,000
1996 751,000 115,000 323,000 1,189,000
Segment assets: 1998 59,685,000 15,797,000 7,796,000 83,278,000
1997 52,387,000 15,346,000 7,189,000 74,922,000
</TABLE>
Reconciliation of segment profits to consolidated income from
continuing operations before income taxes, follows:
Year ended December 31,
---------------------------------------------
1998 1997 1996
---------------------------------------------
Total profit for segments...... $ 16,657,000 $ 14,751,000 $ 12,427,000
Unallocated:
Interest expense.......... (391,000) (622,000) (969,000)
Interest income........... 539,000 614,000 18,000
------------ ------------ ------------
Income from continuing
operations before
income taxes................ $ 16,805,000 $ 14,743,000 $ 11,476,000
============ ============ ============
Reconciliation of segment assets to consolidated assets, follows:
As of December 31,
-----------------------------
1998 1997
-----------------------------
Total assets for segments.................. $ 83,278,000 $ 74,922,000
Net assets of discontinued operations...... -- 11,192,000
Cash and cash equivalents.................. 6,355,000 11,124,000
------------ ------------
Consolidated assets........................ $ 89,633,000 $ 97,238,000
============ ============
F-45
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Notes to Consolidated Financial Statements--(Continued)
Geographic information for net sales follows:
Year ended December 31,
-----------------------------------------------
1998 1997 1996
-----------------------------------------------
Net sales:
United States......... $ 151,727,000 $ 140,834,000 $ 135,025,000
Foreign (exports)..... 14,210,000 16,945,000 14,456,000
------------- ------------- -------------
Total ................... $ 165,937,000 $ 157,779,000 $ 149,481,000
============= ============= =============
Geographic information for long-lived assets follows:
As of December 31,
----------------------------
1998 1997
----------------------------
Long-lived assets:
United States......................... $ 23,070,000 $ 21,527,000
Mexico................................ 3,066,000 3,244,000
------------ ------------
Total.................................... $ 26,136,000 $ 24,771,000
============ ============
Income Taxes
Deferred income tax liabilities (assets) for differences in tax bases
and amounts in the financial statements were as follows:
As of December 31,
----------------------------
1998 1997
----------------------------
Current:
Allocated costs of acquisition inventories... $ 796,000 $ 1,005,000
Prepaid pension.............................. 850,000 763,000
Other - net.................................. (1,641,000) (368,000)
------------ ------------
Total included in current income taxes.......... 5,000 1,400,000
Noncurrent:
Property, plant and equipment................ 1,991,000 2,031,000
------------ ------------
Net deferred tax liabilities.................... $ 1,996,000 $ 3,431,000
============ ============
The components of income tax expense are as follows:
Year ended December 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------
Current:
Federal..................... $ 6,806,000 $ 4,414,000 $ 2,790,000
State....................... 820,000 512,000 457,000
------------ ------------ ------------
7,626,000 4,926,000 3,247,000
Deferred:
Federal..................... (1,435,000) 140,000 473,000
------------ ------------ ------------
$ 6,191,000 $ 5,066,000 $ 3,720,000
============ ============ ============
F-46
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Notes to Consolidated Financial Statements--(Continued)
Income tax expense differs from amounts computed by applying the
Federal statutory tax rate to income before income taxes as follows:
Year ended December 31,
--------------------------------------------
1998 1997 1996
--------------------------------------------
Statutory rate................. $ 5,714,000 $ 5,013,000 $ 3,902,000
State income taxes, net of
Federal tax benefit......... 541,000 337,000 302,000
Other.......................... (64,000) (284,000) (484,000)
------------ ------------ ------------
$ 6,191,000 $ 5,066,000 $ 3,720,000
============ ============ ============
Effective rate................. 36.8% 34.4% 32.4%
F-47
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Consolidated Statements of Income
Three Months Ended
March 31,
--------------------
(Amounts in thousands, except per share data) 1999 1998
--------------------
(Unaudited)
Net sales............................................ $43,128 $38,484
Cost of goods sold................................... 34,081 29,929
------- -------
Gross profit......................................... 9,047 8,555
Selling, general and administrative expenses......... 5,548 5,302
------- -------
3,499 3,253
Other deductions (income):
Interest expense..................................... 46 125
Interest and dividend income......................... (107) (188)
Miscellaneous expense................................ 22 18
------- -------
(39) (45)
------- -------
Income from continuing operations before
income taxes...................................... 3,538 3,298
Income taxes:
Current.............................................. 1,256 1,202
Deferred............................................. 18 18
------- -------
1,274 1,220
------- -------
Income from continuing operations.................... 2,264 2,078
Income from discontinued operations,
net of taxes...................................... -- 36
------- -------
Net income........................................... $ 2,264 $ 2,114
======= =======
Income per share (basic and diluted):
Continuing operations................................ $ 0.26 $ 0.22
Income from discontinued operations,
net of taxes...................................... -- 0.01
------- -------
Net income........................................... $ 0.26 $ 0.23
======= =======
Weighted average number of common shares
outstanding....................................... 8,786 9,296
======= =======
F-48
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Consolidated Balance Sheets
March 31, December 31,
(Amounts in thousands, except per share data) 1999 1998
-------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents............................. $ 6,282 $ 6,355
Accounts receivable, less allowance for doubtful
accounts of $337 at March 31, 1999
and $375 at December 31, 1998...................... 27,237 28,025
Inventories:
Raw materials.................................... 11,772 11,818
Work in process.................................. 5,072 5,492
Finished goods................................... 6,463 5,234
--------- ---------
23,307 22,544
Prepaid expense....................................... 4,591 5,187
--------- ---------
Total current assets.................................. 61,417 62,111
Excess of cost over net assets of acquired company.... 149 151
Property, plant and equipment at cost:
Land and land improvements....................... 2,560 2,560
Buildings and leasehold improvements............. 20,980 20,974
Machinery and equipment.......................... 27,239 26,746
Construction in progress......................... 43 --
--------- ---------
50,822 50,280
Less accumulated depreciation and amortization... 24,896 24,295
--------- ---------
25,926 25,985
Other assets.......................................... 1,153 1,386
--------- ---------
$ 88,645 $ 89,633
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable...................................... $ 5,415 $ 7,063
Customer deposits on orders in process................ 6,033 5,717
Accrued liabilities................................... 6,189 6,278
Income taxes.......................................... 1,975 889
Current portion of long-term debt..................... 2,000 3,000
--------- ---------
Total current liabilities............................. 21,612 22,947
Deferred income taxes................................. 2,009 1,991
Stockholder's equity:
Common stock, $.05 par value; authorized
30,000 shares; issued 11,877 shares
(1998--11,876 shares)......................... 594 593
Capital in excess of par value................... 10,135 10,128
Retained earnings................................ 78,479 77,012
--------- ---------
89,208 87,733
Less common stock held in treasury; 3,115
shares at cost (1998--3,025).................. 24,184 23,038
--------- ---------
Total stockholders' equity....................... 65,024 64,695
--------- ---------
$ 88,645 $ 89,633
========= =========
F-49
<PAGE>
<TABLE>
<CAPTION>
SHELBY WILLIAMS INDUSTRIES, INC.
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
---------------------
(Amounts in thousands) 1999 1998
---------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income ......................................................................... $ 2,264 $ 2,114
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................. 681 611
Provision for losses on accounts receivable.................................... 2 31
Change in assets and liabilities of discontinued operations.................... -- 124
Change in assets and liabilities:
Accounts receivable....................................................... 786 838
Inventories............................................................... (763) (505)
Prepaid expenses.......................................................... 596 275
Accounts payable and accrued liabilities.................................. (1,421) 775
Income taxes payable...................................................... 1,086 689
Increase in deferred taxes................................................ 18 18
Other..................................................................... 233 (65)
-------- --------
Net cash provided by operating activities................................................ 3,482 4,905
Cash flows from investing activities:
Proceeds from disposal of property, plant and equipment............................. 3 7
Capital expenditures................................................................ (623) (1,608)
-------- --------
Net cash used by investing activities.................................................... (620) (1,601)
Cash flows from financing activities:
Principal payments of long-term debt................................................ (1,000) (1,000)
Sale of common stock under stock option plan........................................ 8 76
Purchase of common stock for the treasury........................................... (1,146) (79)
Dividends declared and paid......................................................... (797) (843)
-------- --------
Net cash used by financing activities.................................................... (2,935) (1,846)
-------- --------
Net increase (decrease) in cash..................................................... (73) 1,458
Cash and cash equivalents at beginning of period.................................... 6,355 11,124
-------- --------
Cash and cash equivalents at end of period............................................... $ 6,282 $ 12,582
======== ========
Supplemental cash flow information:
Cash paid during the period for:
Interest....................................................................... $ 58 $ 141
Income taxes................................................................... 170 535
-------- --------
$ 228 $ 676
======== ========
</TABLE>
F-50
<PAGE>
SHELBY WILLIAMS INDUSTRIES, INC.
Notes to Unaudited Consolidated Financial Statements
Discontinued Operations
On July 14, 1998, the Company's Board of Directors approved
management's plan to discontinue the Company's distribution operations of
textile and floor covering products manufactured by outside suppliers. Of the
two businesses comprising these operation, one was sold and one was liquidated.
The plan was completed in December, 1998. During the second quarter 1998, the
Company recorded a loss on the disposition of these operations of $9,698,000, or
$7,081,000 after taxes, including a provision for losses prior to disposal,
which is summarized below:
Reduction of inventory value ................................ $ 4,706,000
Reduction of property to net realizable value ............... 2,198,000
Reduction of accounts to net receivable and prepaids value .. 629,000
Other liabilities ........................................... 1,445,000
Losses through disposition................................... 720,000
------------
Total ............................................. 9,698,000
Income tax benefit .......................................... 2,617,000
------------
$ 7,081,000
============
The operating results of the discontinued operations for the three
months ended March 31, 1998, are summarized as follows:
Net sales................................................... $ 3,534,000
Income before income taxes.................................. 58,000
Income taxes................................................ 22,000
Net income.................................................. 36,000
Net income per share (basic and diluted).................... 0.01
The consolidated financial statements of the Company have been restated
to reflect the results of operations and net assets of these operations as a
discontinued operation in accordance with generally accepted accounting
principles. The losses recorded on the disposition of these operations were not
materially different from those incurred on the actual amounts realized in the
sale and liquidation process.
Interim Results
The attached unaudited statements include all adjustments which are, in
the opinion of management, necessary to a fair statement of the results for the
interim periods presented. Except as indicated above, all such adjustments are
of a normal recurring nature.
Operating Segments
Operating Segment information follows (amounts in thousands):
Three Months Ended
March 31,
----------------------
1999 1998
----------------------
Segment revenue:
Hotel and food service furniture.............. $ 34,417 $ 28,193
Healthcare and university furniture........... 3,926 6,005
Wall coverings................................ 4,785 4,286
--------- ---------
Net sales.......................................... $ 43,128 $ 38,484
========= =========
Segments profit (loss):
Hotel and food service furniture.............. $ 3,138 $ 2,577
Healthcare and university furniture........... (271) 177
Wall coverings................................ 610 481
--------- ---------
3,477 3,235
Interest income, net............................... 61 63
--------- ---------
Income from continuing operations before
income taxes.................................... $ 3,538 $ 3,298
========= =========
F-51
<PAGE>
Falcon Products, Inc.
$100,000,000
Offer to Exchange
11 3/8% Senior Subordinated Notes due 2009, Series B
for any and all outstanding
11 3/8% Senior Subordinated Notes due 2009, Series A
PROSPECTUS
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representation as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the Company
have not changed since the date hereof.
<PAGE>
Part II
Information Not Required in the Prospectus
Item 20. Indemnification of Directors and Officers
Indemnification Under the By-Laws of the Registrant.
The By-Laws of Falcon Products, Inc. provide that Falcon, to the
broadest and maximum extent permitted by applicable law, will indemnify each
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, by reason of the fact that such
person is or was a director or officer of Falcon, or is or was serving at the
request of Falcon 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. To the extent that a director, officer,
employee or agent of Falcon has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in the preceding
paragraph, or in defense of any claim, issue or matter, such person will be
indemnified against expenses, including attorneys' fees, actually and reasonably
incurred by such person. Expenses, including attorneys' fees, incurred by a
director or officer in defending any civil or criminal action, suit or
proceeding may be paid by Falcon in advance of the final disposition of such
action, suit or proceeding, as authorized by the Board of Directors of Falcon,
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 such director or
officer was not entitled to be indemnified by Falcon as authorized in the
By-Laws of Falcon. The indemnification and advancement of expenses provided by,
or granted pursuant to, the By-Laws of Falcon will not be deemed exclusive and
are declared expressly to be non-exclusive of any other rights to which those
seeking indemnification or advancements of expenses may be entitled under any
by-law, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in such person's official capacity and as to action in another
capacity while holding an office, and, unless otherwise provided when authorized
or ratified, will continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such person.
Indemnification Under the Delaware General Corporation Law
Section 145 of the Delaware General Corporation Law, authorizes a
corporation to 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, by reason
of the fact that the person is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request o 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 the person in connection with such action, suit or proceeding, if the person
acted in good faith and in a manner the 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 the person's
conduct was unlawful. In addition, the Delaware General Corporation Law does not
permit indemnification in any threatened, pending or completed action or suit by
or in the right of the corporation in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the corporation,
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability, but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses, which such court
shall deem proper. To the extent that a present or former director or officer of
a corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to above, or in defense of any claim, issue
or matter, such person shall be indemnified against expenses, including
attorneys' fees, actually and reasonably incurred by such person. Indemnity is
mandatory to the extent a claim, issue or matter has been successfully defended.
The Delaware General Corporation Law also allows a corporation to provide for
the elimination or limit of the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision shall not eliminate or limit
the liability of a director
(1) for any breach of the director's duty of loyalty to the corporation
or its stockholders,
(2) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law,
(3) for unlawful payments of dividends or unlawful stock purchases or
redemptions, or
(4) for any transaction from which the director derived an improper
personal benefit. These provisions will not limit the liability of
directors or officers under the federal securities laws of the
United States.
Item 21. Exhibits and Financial Statement Schedules.
Exhibits
See Exhibit Index.
Financial Statement Schedules
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the information required by
such omitted schedules is set forth in the financial statements or the notes
thereto.
Item 22. Undertakings.
The undersigned Registrant hereby undertakes that:
(1) Prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a part of
this Registration Statement, by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c), the issuer undertakes
that such reoffering prospectus will contain the information called for
by the applicable registration form with respect to the reofferings by
persons who may be deemed underwriters, in addition to the information
called for by the other items of the applicable form.
(2) Every prospectus: (i) that is filed pursuant to the
immediately preceding paragraph or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the Registration Statement and will
not be used until such amendment is effective, and that, for purposes
of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 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.
The undersigned Registrant hereby undertakes 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.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the 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 the Registrant of expenses incurred or
paid by a director, officer or controlling person of the 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, the Registrants will, unless in the opinion of their counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by then is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Falcon
Products, Inc. has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of St.
Louis, State of Missouri on the 3rd day of August, 1999.
FALCON PRODUCTS, INC.
By: /s/ Franklin A. Jacobs*
-------------------------------------
Name: Franklin A. Jacobs
Title: Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Franklin A. Jacobs*
- ------------------------ Chairman of the Board of August 3, 1999
Franklin A. Jacobs Directors and Chief Executive
Officer and Director
/s/ Darryl C. Rosser*
- ------------------------ President and Chief Operating August 3, 1999
Darryl C. Rosser Officer and Director
/s/ Michael J. Dreller
- ------------------------ Vice President - Finance, Chief August 3, 1999
Michael J. Dreller Financial Officer, Secretary
and Treasurer
/s/ Raynor E. Baldwin*
- ------------------------ Director August 3, 1999
Raynor E. Baldwin
- ------------------------ Director August ___, 1999
Melvin F. Brown
/s/ Donald P. Gallop*
- ------------------------ Director August 3, 1999
Donald P. Gallop
- ------------------------ Director August ___, 1999
James L. Hoagland
/s/ S. Lee Kling*
- ------------------------ Director August 3, 1999
S. Lee Kling
- ------------------------ Director August ___, 1999
Lee M. Liberman
- ------------------------ Director August ___, 1999
James Schneider
*By: /s/ Michael J. Dreller
------------------------
Michael J. Dreller,
as attorney-in-fact
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Agreement and Plan of Merger dated as of May 5, 1999 among the
Registrant, SY Acquisition, Inc. ("Purchaser") and Shelby Williams
Industries, Inc. (the "Merger Agreement") filed as Exhibit (c)(1) to
the Schedule 14D-1/Schedule 13D filed May 12, 1999 by Purchaser and the
Registrant (the "Schedule") and incorporated herein by this reference.
2.2 Supplement to the Merger Agreement dated May 5, 1999 filed as Exhibit
(c)(2) of the Schedule, and incorporated herein by reference.
3.1 Restated Certificate of Incorporation of the Company, filed as Exhibit
3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended April 27, 1996 (the "April 27, 1996 10-Q").
3.2 Restated Bylaws, filed as Exhibit 3.2 to the April 27, 1996 10-Q.
3.3 Amendment to Restated Bylaws, effective January 16, 1997, filed as
Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year
ended November 2, 1996.
4.1 Form of Stock Certificate for Common Stock, incorporated herein by
reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-1, Reg. No. 33-61706.
4.2* Indenture, dated as of June 17, 1999, by and among the Registrant, The
Bank of New York and the Guarantors.
4.3* Supplemental Indenture, dated as of June 18, 1999, by and among Shelby
Williams Industries, Inc., Sellers and Josephson Inc., Madison
Furniture Industries, Inc., Registrant, Guarantors and The Bank of New
York.
4.4* Form of Note.
4.5* A/B Exchange Registration Rights Agreement, dated June 17, 1999, by and
among the Registrant, Guarantors and Initial Purchaser.
5.1* Opinion of Gallop, Johnson and Neuman, L.C..
8.1* Tax Opinion of Gallop, Johnson and Neuman, L.C. (included in Exhibit
5.1).
10.1 Lease Agreement dated February 1, 1980, between Lafayette County,
Arkansas and the Company, incorporated herein by reference to Exhibit
10(e) to the Company's Annual Report on Form 10-K for the year ended
October 31, 1980 (the "1980 10-K").
10.2 Assignment and Assumption Agreement dated January 30, 1980, and the
lease thereunder, incorporated herein by reference to Exhibit 10(g) to
1980 10-K.
10.3 Lease Agreement dated as of June 1, 1988, among Burley Builders, Inc.
and Tennessee Tobacco Sales, Incorporated, as lessors, and the Company,
as lessee, incorporated herein by reference to Exhibit 10(m) to the
Company's Annual Report on Form 10-K for the year ended October 29,
1988.
10.4 First Amendment to Lease Agreement dated as of November 21, 1991, among
Burley Builders, Inc. and Tennessee Tobacco Sales, Incorporated, as
lessors, and the Company, as lessee, incorporated herein by reference
to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the
year ended November 2, 1991 (the "1991 10-K").
10.5 Falcon Products, Inc. 1981 Employee Incentive Stock Option Plan
("ISOP"), incorporated herein by reference to Exhibit 4(h) to the
Company's Registration Statement on Form S-8, Reg. No. 33-15698.
10.6 Form of Stock Option Agreement dated June 9, 1986, regarding options
issued to Directors, incorporated herein by reference to Exhibit 10(i)
to the Company's Annual Report on Form 10-K for the year ended November
1, 1986 (the "1986 10-K").
10.7 First Amendment to the ISOP, adopted June 16, 1987, incorporated herein
by reference to Exhibit 10(1) to the Company's Annual Report on Form
10-K for the year ended October 31, 1987.
10.8 Falcon Products, Inc. Amended and Restated 1991 Stock Option Plan,
incorporated herein by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8, Reg. No. 33-46997.
10.9 Falcon Products, Inc. Amended and Restated Stock Purchase Plan,
incorporated herein by reference to Exhibit 10.15 to 1991 10-K.
10.10 Minutes of Meeting of Board of Directors of the Company dated March 14,
1991 (the "Non-Employee Director Plan"), incorporated herein by
reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-8, Reg. No. 33-46998.
10.11 Minutes of Meeting of Board of Directors of the Company dated September
15, 1992, amending the Non-Employee Director Plan, incorporated herein
by reference to Exhibit 10.17 to the 1992 10-K.
10.12 Amendment to the Falcon Products, Inc. Amended and Restated 1991 Stock
Option Plan incorporated herein by reference to Exhibit 10.18 to the
Company's Annual Report on Form 10-K for the year ended October 30,
1993 (the "1993 10-K").
10.13 Consulting Agreement dated August 1, 1993, by and between the Company
and AJR Enterprises, Inc., incorporated herein by reference to Exhibit
10.19 to the 1993 10-K.
10.14 Amendment No. 2 to the Falcon Products, Inc. Amended and Restated 1991
Stock Option Plan, incorporated herein by reference to Exhibit 10.23 to
the 1994 10-K.
10.15 Amendment to the Non-Employee Director Stock Option Plan, incorporated
herein by reference to Exhibit 10.26 to the April 27, 1996 10-Q.
10.16 Falcon Products, Inc. Employee Stock Purchase Plan, incorporated herein
by reference to Exhibit 10.27 to the Company's Annual Report on Form
10-K for the year ended November 1, 1997 (the "1997 10-K").
10.17 Falcon Products, Inc. Non-Employee Directors' Deferred Compensation
Plan, incorporated herein by reference to Exhibit 10.28 to the 1997
10-K.
10.18* Credit Agreement, dated June 17, 1999, of the Registrant.
11 Computation of Net Earnings Per Share, incorporated by reference to
Exhibit 11 to the Company's Annual Report on Form 10-K for the year
ended October 31, 1998 (the "1998 10-K").
12* Statement regarding Computation of Ratios.
21* Subsidiaries of the Company.
23.1* Consent of Arthur Andersen LLP.
23.2* Consent of Ernst & Young LLP.
24* Power of Attorney (included on Signature Page of initial filing).
25* Statement of Eligibility and Qualification on Form T-1 of The Bank of
New York, as Trustee.
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery for Outstanding 11 3/8% Senior
Subordinated Notes due 2009, Series A, in exchange for 11 3/8% Senior
Subordinated Notes due 2009, Series B.
99.3* Form of Letter to Clients of Registered Holder of Tender for all
Outstanding 11 3/8% Senior Subordinated Notes due 2009, Series A, in
exchange for 11 3/8% Senior Subordinated Notes due 2009, Series B.
99.4* Form of Letter to Registered Holder of Tender for all Outstanding 11
3/8% Senior Subordinated Notes due 2009, Series A, in exchange for 11
3/8% Senior Subordinated Notes due 2009, Series B.
99.5* Form of Instruction to Registered Holder from Beneficial Owner of 11
3/8% Senior Subordinated Notes due 2009, Series A.
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* Previously filed with initial filing of this Registration Statement on
Form S-4 (333-83207).
