<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 21, 1996
REGISTRATION NO. 333-00219
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
INTERCO INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-0337683
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
101 SOUTH HANLEY ROAD
ST. LOUIS, MISSOURI 63105
(314) 863-1100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
----------------
LYNN CHIPPERFIELD, ESQUIRE
VICE-PRESIDENT, GENERAL COUNSEL AND SECRETARY
INTERCO INCORPORATED
101 SOUTH HANLEY ROAD
ST. LOUIS, MISSOURI 63105
(314) 863-1100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S AGENT FOR SERVICE OF PROCESS)
----------------
COPIES OF ALL COMMUNICATIONS TO:
PETER S. SARTORIUS, ESQUIRE JOHN T. GAFFNEY, ESQUIRE
MORGAN, LEWIS & BOCKIUS LLP CRAVATH, SWAINE & MOORE
2000 ONE LOGAN SQUARE WORLDWIDE PLAZA
PHILADELPHIA, PENNSYLVANIA 19103 825 EIGHTH AVENUE
(215) 963-5000 NEW YORK, NEW YORK 10019-7475
(212) 474-1122
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable on or after this Registration Statement is
declared effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, 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, please 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(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 21, 1996
PROSPECTUS
8,750,000 SHARES
[LOGO OF INTERCO INCORPORATED APPEARS HERE]
To be renamed Furniture Brands International, Inc.
COMMON STOCK
--------
[LOGOS OF BROYHILL, LANE AND THOMASVILLE APPEAR HERE]
All of the shares of Common Stock, no par value (the "Common Stock"), offered
hereby (the "Offering") are being sold by INTERCO INCORPORATED. The Common
Stock is listed on the New York Stock Exchange under the symbol "ISS." On
January 31, 1996, the last reported sale price of the Common Stock on the New
York Stock Exchange was $9 1/8 per share.
The Company intends to change its corporate name to Furniture Brands
International, Inc. The Company anticipates that such change will become
effective on or about March 1, 1996. See "Prospectus Summary--Recent
Developments."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- -------------------------------------------------------------------
Total(3) $ $ $
===================================================================
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $500,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up
to 1,250,000 additional shares of Common Stock solely to cover over-
allotments, if any. If such option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Company
will be $ , $ and $ , respectively.
--------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about ,
1996, at the office of Smith Barney Inc., 14 Wall Street, New York, New York
10005.
--------
SMITH BARNEY INC.
DEAN WITTER REYNOLDS INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
WHEAT FIRST BUTCHER SINGER
February , 1996
<PAGE>
[PICTURES]
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information appearing elsewhere in this
Prospectus. Reference is made to, and this summary is qualified in its entirety
by, the more detailed information and financial statements, including the notes
thereto, contained elsewhere or incorporated by reference in this Prospectus.
As used in this Prospectus, unless the context indicates otherwise, (i) the
"Company" refers to INTERCO INCORPORATED and its subsidiaries, (ii) "Broyhill"
refers to Broyhill Furniture Industries, Inc., (iii) "Lane" refers to The Lane
Company Incorporated and its subsidiaries, (iv) "Thomasville" refers to
Thomasville Furniture Industries, Inc. and (v) "Action Industries" refers to
Action Industries, Inc., a subsidiary of Lane. Unless otherwise indicated, the
information in this Prospectus assumes that the Underwriters' over-allotment
option is not exercised.
THE COMPANY
The Company, which is to be renamed Furniture Brands International, Inc., is
the largest manufacturer of residential furniture in the United States. The
Company markets its products under three of the best known brand names in the
industry - Broyhill, Lane and Thomasville. The Company is a quality and style
leader across a broad spectrum of price categories from "premium" priced home
furnishings to lower priced ready-to-assemble ("RTA") furniture. The Company
distributes its products through a diverse network of independently-owned
retail locations, which includes the largest system of dedicated retail outlets
in the residential furniture industry. Management believes that the acquisition
of Thomasville in December 1995 (see "Thomasville Acquisition") significantly
enhances the Company's competitive strengths and positions the Company to
increase its market share, sales and earnings.
The Company is organized into three primary operating subsidiaries of similar
size which target particular product and price categories as described below:
BROYHILL. Broyhill is a leader in the "good" and "better" price
categories, which are two of the largest segments of the residential
furniture market. Management believes Broyhill is the largest manufacturer
of residential furniture under one brand name and has been rated the number
one brand in the industry in terms of brand awareness by several recent
consumer surveys. The Company believes that the Broyhill Fontana collection
has been the best selling furniture collection in the industry for the last
three years. Broyhill distributes its products through an extensive
distribution network of more than 6,200 independently-owned retail
locations, including more than 330 dedicated Broyhill Showcase Galleries
and more than 410 dedicated Broyhill Furniture Centers.
LANE. Lane manufactures specialty products for niche markets in the
"better," "best" and "premium" price categories. Lane is the largest
manufacturer of motion furniture, the largest manufacturer of cedar chests
and the second largest manufacturer of recliners in the United States. Lane
is one of the most widely recognized brands in the residential furniture
industry and has established a reputation for innovative marketing and
quality designs. Lane distributes its products through an extensive
distribution network of more than 16,000 independently-owned retail
locations, including more than 200 dedicated furniture galleries.
THOMASVILLE. Thomasville is the largest residential furniture
manufacturer under one brand name in the "premium" price category and
manufactures furniture which embodies the widely recognized "Thomasville
Look" for both the "best" and "premium" price categories. Thomasville has
been rated the "highest quality" brand by several recent consumer surveys.
Management believes that the Collector's Cherry and the Mahogany Collection
have consistently been among the best selling collections in the industry.
Thomasville distributes its products through more than 680 independently-
owned retail locations, including more than 410 dedicated Thomasville
Galleries and approximately 80 free-standing Thomasville Home Furnishings
stores, which exclusively feature Thomasville furniture. Thomasville also
produces a separate line of lower priced RTA and promotional furniture.
3
<PAGE>
The Company believes that in addition to its substantial size relative to its
competitors, the Company's competitive strengths include its (i) widely
recognized brand names; (ii) broad range of product offerings across all price
categories; (iii) extensive distribution networks, including dedicated
galleries located in independently-owned retail locations; (iv) innovative,
high quality products; (v) highly efficient, low cost manufacturing
capabilities; and (vi) experienced management teams. In addition, the Company's
breadth of product and national scope of distribution enable it to service
effectively national and major regional retailers, which are commanding an
increasing presence in the furniture retailing industry. Management believes
that these competitive strengths position the Company to increase its market
share in the highly-fragmented residential furniture industry.
GROWTH STRATEGY
The Company's strategy for growth in both sales and profits includes the
following elements:
ENHANCING BRAND NAME STRENGTH. Brand name recognition is a critical
factor in consumer purchases of furniture. The Company believes that
consumer recognition of its brand names is a key to increasing its market
share. The Company has three of the six most recognized brand names in the
residential furniture industry--Broyhill, Lane and Thomasville. The Company
intends to continue to strengthen its brand names through ongoing
investment in innovative consumer advertising through leading shelter
magazines, such as House Beautiful, Better Homes and Gardens and
Architectural Digest, as well as through cooperative advertising programs
with retailers and national and regional television advertising.
MAXIMIZING OPERATING MARGINS. The Company's Gross Profit Management
Program consists of twelve specific "building blocks" that management uses
in its strategic and operational planning to maximize gross profit margins
and thereby provide the Company with additional funds for purposes such as
increased advertising and product development. These "building blocks"
include continuous product profitability review, new product introductions,
pricing strategies and management incentive programs. Management believes
that this program has contributed to the Company achieving among the
highest EBITDA (as hereinafter defined) margins of publicly-owned
residential furniture manufacturing companies in recent years. Management
believes opportunities exist to increase the EBITDA margins of its
operating companies through continued implementation of the Gross Profit
Management Program, including the initiation of the program at Thomasville.
EXPANDING DEDICATED DISTRIBUTION CHANNELS. Dedicated distribution
outlets, such as galleries, tend to have higher sales per square foot and
faster inventory turns than non-gallery locations. The Company has
generated increased sales volume by distributing its products through
independently-owned dedicated retail outlets. In addition, the Company
believes that it strengthens its manufacturer/retailer alliances through
gallery relationships. The Company intends to continue to expand these
distribution channels by attracting additional retailers in new and
existing geographic markets to participate in the Company's gallery
programs. Furthermore, the Company intends to expand the network of free-
standing Thomasville Home Furnishings stores.
PENETRATING NEW MARKETS. The Company is actively pursuing sales
opportunities in new markets. In the United States, management is targeting
key furniture retailers in important geographic territories, particularly
portions of the West Coast and New England. In addition, the Company has
developed a program designed to increase sales to the contract market,
which includes hotels, motels and health care facilities. The Company is
also actively pursuing the international export market, particularly
Canada, Europe, Japan and the Middle East, where the Company believes there
are significant opportunities for growth.
EMPHASIZING NEW AND GROWING PRODUCT AREAS. The Company emphasizes
development of new high margin products in growing product areas. For
example, the Company has become a leader in the fast growing motion
furniture and recliner segments. The Company has also introduced a sleeper
sofa incorporating a unique sleep deck designed to be more comfortable,
both as a sofa and a bed, than
4
<PAGE>
competitive product offerings. Furthermore, the Company is currently
designing innovative new products for the growing home office and home
entertainment center markets.
CAPITALIZING ON DEMOGRAPHIC TRENDS. Management believes that demographic
trends will continue to drive long-term growth in the furniture industry.
In particular, as "baby boomers" (people born between 1946 and 1964) mature
to the 35-64 year age group over the next decade, they will be reaching
their highest earnings power. It is currently estimated that the 35-64 year
age group will increase by approximately 11 million persons by the year
2000. According to Furniture Today, such age group includes the largest
consumers of residential furniture. Furthermore, statistics show that the
average size of new homes has increased in recent years, which generally
results in increased purchases of furniture per home. The Company believes
that it is well positioned to capitalize on these demographic trends as a
result of its broad range of product offerings and widely-recognized brand
names.
INCREASING OPERATING EFFICIENCIES. The Company believes that it has
opportunities to increase operating efficiencies through improved
coordination among its operating companies. These opportunities include (i)
cost savings generated through volume purchasing, (ii) reductions in future
capital expenditures through better utilization of existing capacity and
(iii) complementary sales and marketing activities.
THOMASVILLE ACQUISITION
On December 29, 1995, the Company completed the acquisition of Thomasville
from Armstrong World Industries, Inc. for approximately $339 million,
consisting of $331 million in cash and $8 million in assumed indebtedness.
Thomasville is the largest residential furniture manufacturer under one brand
name in the "premium" price category and manufactures furniture which embodies
the widely recognized "Thomasville Look" for both the "best" and "premium"
price categories of the residential furniture market. The cash portion of the
acquisition of Thomasville was financed through funds obtained under a secured
credit agreement (the "Secured Credit Agreement") and an amended receivables
securitization facility (the "Receivables Securitization Facility"). The
acquisition of Thomasville, on a pro forma basis and as adjusted for this
Offering, is accretive to earnings per share for the year ended December 31,
1995. See "Pro Forma Condensed Consolidated Financial Information."
RECENT DEVELOPMENTS
At its meeting on January 30, 1996, the Board of Directors of the Company
determined to change the Company's corporate name from INTERCO INCORPORATED to
Furniture Brands International, Inc. In connection with the change in name, the
Company also intends to change its New York Stock Exchange symbol. The Company
anticipates that the name change will become effective on or about March 1,
1996.
----------------
The Company was incorporated in Delaware in 1921. Its principal executive
offices are located at 101 South Hanley Road, St. Louis, Missouri 63105-3493,
and its telephone number at such location is (314) 863-1100.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.. 8,750,000 shares(1)
Common Stock to be outstanding after
the Offering........................ 58,870,079 shares(1)(2)
Use of proceeds...................... Repayment of a portion of the term loans
outstanding under the Secured Credit
Agreement
New York Stock Exchange Symbol....... ISS
</TABLE>
- --------
(1) Excludes 1,250,000 shares that may be offered under an over-allotment
option granted by the Company. See "Underwriting."
(2) Excludes, as of January 31, 1996, 10,233,147 shares of Common Stock
issuable pursuant to warrants or stock options, consisting of 6,907,198
shares issuable pursuant to warrants exercisable at $7.13 per share and
3,325,949 shares issuable pursuant to management stock options, 1,271,750
of which are currently exercisable.
5
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
DATA
The following summary consolidated historical and pro forma condensed
consolidated financial data of the Company are derived from and should be read
in connection with the historical consolidated financial statements of the
Company and Thomasville and the pro forma condensed consolidated financial
information and the notes thereto of the Company, in each case included
elsewhere or incorporated by reference in this Prospectus. The pro forma
condensed consolidated financial and other data is presented for comparative
purposes only and is not necessarily indicative of the combined results of
operations in the future or of what the combined results of operations would
have been had the transactions assumed therein been consummated at the
beginning of the period for which the statement is presented. In addition, the
pro forma condensed consolidated statement of operations does not give effect
to profit improvement opportunities, if any, which may be realized by the
Company as a result of the acquisition of Thomasville.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1993 1994 1995 1995
HISTORICAL HISTORICAL HISTORICAL PRO FORMA(1)
---------- ---------- ---------- ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................... $980,532 $1,072,696 $1,073,889 $1,624,116
Costs and expenses:
Cost of operations............... 685,749 752,528 760,393 1,190,142
Selling, general and
administrative expenses......... 186,205 199,333 198,321 271,423
Depreciation and
amortization(2)................. 34,455 35,776 36,104 52,053
-------- ---------- ---------- ----------
Earnings from operations.......... 74,123 85,059 79,071 110,498
Interest expense.................. 38,621 37,886 33,845 52,556
Other income, net:
Gain on insurance settlement(3).. -- -- 7,882 7,882
Other............................ 1,764 1,668 3,930 4,103
-------- ---------- ---------- ----------
Earnings before income tax
expense, discontinued operations
and extraordinary item........... 37,266 48,841 57,038 69,927
Income tax expense................ 15,924 20,908 22,815 28,099
-------- ---------- ---------- ----------
Net earnings from continuing
operations(4).................... $ 21,342 $ 27,933 $ 34,223 $ 41,828
======== ========== ========== ==========
Net earnings from continuing
operations before gain on
insurance settlement, net of
income tax expense............... $ 21,342 $ 27,933 $ 29,463 $ 37,068
======== ========== ========== ==========
Net earnings per common share from
continuing operations before gain
on insurance settlement, net of
income tax expense............... $ 0.41 $ 0.54 $ 0.56 $ 0.61
======== ========== ========== ==========
Weighted average common shares
outstanding (fully diluted)
(in thousands)................... 51,397 51,506 52,317 61,067
OTHER DATA:
Earnings from operations.......... $ 74,123 $ 85,059 $ 79,071 $ 110,498
Depreciation and amortization:
1992 Asset Revaluation (Fresh
Start).......................... 16,463 16,900 15,922 15,922
Excess of cost over net assets
acquired........................ -- -- -- 2,644
-------- ---------- ---------- ----------
Adjusted earnings from
operations....................... 90,586 101,959 94,993 129,064
Depreciation and amortization
(other than Fresh Start and
excess
of cost over net assets
acquired)........................ 17,992 18,876 20,182 33,487
-------- ---------- ---------- ----------
EBITDA(5)......................... $108,578 $ 120,835 $ 115,175 $ 162,551
======== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
--------------------------
AS
HISTORICAL ADJUSTED(6)
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 26,412 $ 26,412
Working capital..................................... 455,036 455,576
Total assets........................................ 1,291,739 1,290,327
Long-term debt, less current maturities............. 705,040 629,688
Total shareholders' equity.......................... 301,156 375,636
</TABLE>
6
<PAGE>
IMPACT OF 1992 ASSET REVALUATION (FRESH-START REPORTING)
Included in the Company's statement of operations are depreciation and
amortization charges related to adjustments of assets and liabilities to fair
value made in 1992. These adjustments are a result of the Company's 1992
reorganization and the adoption of AICPA Statement of Position ("SOP") 90-7,
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code"
(commonly referred to as "fresh-start" reporting) and are not the result of
historical capital expenditures. Fair value adjustments included the write up
of property, plant and equipment, trademarks and reorganization value in excess
of identifiable assets. Due to the significance of these items, management
believes that it is useful to isolate their impact on the statement of
operations as shown below. This information does not represent and should not
be considered an alternative to net earnings, any other measure of performance
as determined by generally accepted accounting principles or as an indicator of
operating performance. See "Intangible Assets" in Note 3 to the Company's
Consolidated Financial Statements and related notes included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1993 1994 1995 1995
HISTORICAL HISTORICAL HISTORICAL PRO FORMA(1)
---------- ---------- ---------- ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Depreciation and
amortization--fresh-start.. $(16,463) $(16,900) $(15,922) $(15,922)
After-tax impact on net
earnings................... (12,799) (13,051) (12,470) (12,470)
Impact on earnings per
share-fully diluted........ (0.25) (0.25) (0.24) (0.20)
</TABLE>
- --------
(1) Pro forma to reflect the acquisition of Thomasville and the consummation of
this Offering (at an assumed offering price of $9.125 per share) and the
application of the estimated net proceeds therefrom, as if such
transactions occurred on January 1, 1995.
(2) Includes $16,463, $16,900 and $15,922 for the years ended December 31,
1993, 1994, and 1995 (historical and pro forma), respectively, related to
the 1992 asset revaluation. See Note 3 to the Company's Consolidated
Financial Statements included elsewhere in this Prospectus.
(3) Gain on insurance settlement related to the November 1994 fire at the
Company's particleboard plant.
(4) On November 17, 1994, the Company distributed the common stock of each of
The Florsheim Shoe Company and Converse Inc. (which in aggregate
represented the Company's "Footwear Segment") to the Company's
shareholders. The financial results of the Footwear Segment are reported as
discontinued operations, and as such the Company's historical results of
operations were restated.
(5) EBITDA is defined as earnings from operations before depreciation and
amortization. The Company believes that EBITDA provides useful information
regarding a company's financial performance. EBITDA should not be
considered in isolation or as an alternative to net earnings, an indicator
of the Company's operating performance, or an alternative to the Company's
cash flow from operating activities as a measure of liquidity.
(6) As adjusted to reflect the consummation of this Offering (at an assumed
offering price of $9.125 per share) and the application of the estimated
net proceeds therefrom, as if such transactions occurred on December 31,
1995.
7
<PAGE>
RISK FACTORS
Prospective purchasers should carefully consider the following factors,
together with other information contained and incorporated by reference in
this Prospectus, in evaluating an investment in the shares of Common Stock.
ECONOMIC CONDITIONS
The furniture industry historically has been cyclical, fluctuating with
general economic cycles. During economic downturns, the furniture industry
tends to experience longer periods of recession and greater declines than the
general economy. The Company believes that the industry is significantly
influenced by economic conditions generally and particularly by consumer
behavior and confidence, the level of personal discretionary spending, housing
activity, interest rates, credit availability, demographics and overall
consumer confidence. These factors not only affect the ultimate consumer, but
also impact retailers, the Company's primary direct customers. There can be no
assurance that a prolonged economic downturn would not have a material adverse
effect on the Company. See "Business."
COMPETITION
The residential furniture manufacturing business is highly competitive and
fragmented. Because of the Company's broad product lines, its products compete
with products made by a number of major furniture manufacturers. The elements
of competition include pricing, styling, quality and marketing. See
"Business--Competition."
SIGNIFICANT LEVERAGE
The Company has a capital structure that contains significant leverage. On
December 29, 1995, the Company entered into the Secured Credit Agreement
consisting of term loan facilities totalling $450 million and a $180 million
revolving credit facility. In addition, the Company has the Receivables
Securitization Facility of $225 million. As of December 31, 1995, the
Company's debt totalled approximately $724 million. Assuming that this
Offering had occurred on December 31, 1995, the Company's debt to equity ratio
on that date would have been 1.73 to 1. Further, as of December 31, 1995, the
Company had approximately $81 million and approximately $21 million available
under the Secured Credit Agreement and the Receivables Securitization
Facility, respectively. This substantial indebtedness could reduce the
Company's ability to respond to changing business and economic conditions by
impairing access to additional financing and requiring a significant portion
of the Company's cash flow from operations to be used to service debt. The
ability of the Company to further reduce its debt and increase its equity will
be dependent upon the future performance of the Company, which will be subject
to prevailing economic conditions and to financial, business and other
factors, including factors beyond the control of the Company that affect its
business and operations. The Company intends to use the net proceeds of this
Offering to repay a portion of the term loans outstanding under the Secured
Credit Agreement. See "Capitalization."
RESTRICTIVE COVENANTS IN CERTAIN DEBT INSTRUMENTS
The Secured Credit Agreement to which the Company is a party contains a
number of covenants that restrict, among other things, the ability of the
Company to incur additional indebtedness, make capital expenditures, pay
dividends, repurchase capital stock, create liens, dispose of certain assets,
enter into sale and leaseback transactions, or engage in mergers. In addition,
under the Secured Credit Agreement, the Company is required to maintain
certain interest coverage and other financial ratios and achieve certain
levels of earnings before interest, taxes, depreciation and amortization.
Unfavorable operating results could affect the Company's ability to pay debt
service on its outstanding indebtedness or to meet its debt covenants. The
indebtedness under the Secured Credit Agreement is secured by most of the
assets of the Company. Among other consequences, the terms of the Secured
Credit Agreement could increase the Company's vulnerability to adverse general
economic conditions and could impair the Company's ability to obtain
additional financing in the future and to take advantage of significant
business opportunities that may arise.
8
<PAGE>
GOVERNMENTAL REGULATIONS
The Company's operations must meet federal, state, and local regulatory
standards in the areas of safety, health, and environmental pollution
controls. Historically, these standards have not had any material adverse
effect on the Company's sales or operations. If the Company fails to comply
with such regulations, the Company could be subject to liability ranging from
monetary damages to injunctive action, which could adversely affect the
Company. Future changes to such regulations could also have a material adverse
effect on the Company. See "Business--Environmental Matters."
CONTROLLING STOCKHOLDERS
Apollo Investment Fund, L.P. ("Apollo") and Lion Advisors, L.P. ("Lion")
together beneficially own approximately 67.4% of the outstanding Common Stock
of the Company, and will beneficially own approximately 57.4% of the
outstanding Common Stock of the Company after this Offering. Apollo and Lion
are affiliated companies. By reason of their ownership of shares of Common
Stock, Apollo and Lion currently have, and will continue to have after this
Offering, the power to control or influence control of the Company, including
the power to elect the entire Board of Directors and to approve matters
submitted to a vote of the Company's stockholders, including extraordinary
corporate transactions. Apollo and Lion may exercise such control from time to
time. A majority of the Board of Directors consists of individuals associated
with affiliates of Apollo and Lion. See "Management" and "Principal
Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE
Apollo and Lion together beneficially own 33,691,099 shares of Common Stock.
The Company, Apollo and Lion have agreed not to sell any shares of Common
Stock owned by them for a period of 120 days following the consummation of
this Offering without the prior written consent of Smith Barney Inc., as
representative of the Underwriters. After expiration of the lock-up period,
the Company, Apollo and Lion may sell shares of Common Stock without regard to
any such limitations. The sale of a substantial number of shares by the
Company, Apollo or Lion could adversely affect the market price of the Common
Stock.
ABSENCE OF DIVIDENDS
The Company does not anticipate paying any cash dividends in the foreseeable
future, and the Secured Credit Agreement to which the Company is a party
restricts the payment of dividends. See "Price Range of Common Stock and
Dividend Policy."
ANTI-TAKEOVER PROVISIONS
The Company's Restated Certificate of Incorporation contains certain
provisions, including authorization to issue "blank check" preferred stock
("Preferred Stock"), prohibition of stockholder action by written consent and
the requirement of 75% ("supermajority") stockholder vote to alter, amend,
repeal or adopt certain provisions of the Restated Certificate of
Incorporation. In addition, the Company's Restated Certificate of
Incorporation contains provisions limiting the ability of any person who is
the beneficial owner of more than 10% of the outstanding voting stock to
effect certain transactions involving the Company unless approved by a
majority of the Disinterested Directors (as defined in the Restated
Certificate of Incorporation of the Company). Such provisions could impede any
merger, consolidation, takeover or other business combination involving the
Company or discourage a potential acquiror from making a tender offer or
otherwise attempting to obtain control of the Company. See "Description of
Capital Stock."
9
<PAGE>
THOMASVILLE ACQUISITION
On December 29, 1995, the Company completed the acquisition of Thomasville
from Armstrong World Industries, Inc. for approximately $339 million,
consisting of $331 million in cash and $8 million in assumed indebtedness.
Thomasville is the largest residential furniture manufacturer under one brand
name in the "premium" price category and manufactures furniture which embodies
the widely recognized "Thomasville Look" for both the "best" and "premium"
price categories of the residential furniture market. The cash portion of the
acquisition of Thomasville was financed through funds obtained under the
Secured Credit Agreement and the Receivables Securitization Facility. The
acquisition of Thomasville, on a pro forma basis and as adjusted for this
Offering, is accretive to earnings per share for the year ended December 31,
1995. See "Pro Forma Condensed Consolidated Financial Information."
The following table presents summary historical financial information and
other data for Thomasville. The summary historical financial information
should be read in conjunction with the historical financial statements of
Thomasville incorporated by reference herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 1994 1995(1)
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales............................................ $449,583 $526,643 $550,227
Costs and expenses:
Cost of operations................................. 361,116 409,934 428,497
Selling, general and administrative expenses....... 54,833 65,654 70,661
Depreciation and amortization...................... 13,003 12,205 12,557
-------- -------- --------
Earnings from operations(2).......................... $ 20,631 $ 38,850 $ 38,512
======== ======== ========
EBITDA(3)............................................ $ 33,634 $ 51,055 $ 51,069
Capital expenditures................................. 10,035 14,091 15,208
</TABLE>
- --------
(1) Reflects historical financial information and other data for Thomasville
for the period beginning January 1, 1995 and ended December 29, 1995, the
date upon which Thomasville was acquired by the Company.
(2) Excludes restructuring charges of $582, $1,000 and $404 for the years
ended December 31, 1993, 1994 and 1995, respectively.
(3) EBITDA is defined as earnings from operations before restructuring charges
and depreciation and amortization.
RESULTS OF OPERATIONS
The following is a discussion of the summary historical financial
information and other data for Thomasville.
Comparison of Year Ended December 31, 1995 with Year Ended December 31, 1994
Net sales of $550.2 million for the year ended December 31, 1995 increased
$23.6 million, or 4.5%, from $526.6 million for the year ended December 31,
1994. This increase was achieved despite difficult conditions for the industry
as a whole and was primarily attributable to strong consumer acceptance of
Thomasville's new product offerings.
Earnings from operations of $38.5 million for the year ended December 31,
1995 decreased $338,000, or 0.9%, from $38.9 million for the year ended
December 31, 1994. Earnings from operations as a percentage of net sales
declined to 7.0% in 1995 from 7.4% in 1994. This decrease was primarily
attributable to an increase in bad debt expense of $2.1 million related to a
financially distressed dealer and approximately $500,000 of start-up expenses
related to a new upholstering manufacturing facility. Excluding the non-
recurring increase in bad debt expense and start-up expenses, earnings from
operations would have increased by $2.3 million compared to 1994 and earnings
from operations as a percentage of net sales would have increased to 7.5%.
10
<PAGE>
Comparison of Year Ended December 31, 1994 with Year Ended December 31, 1993
Net sales of $526.6 million for the year ended December 31, 1994 increased
$77.0 million, or 17.1%, from $449.6 million for the year ended December 31,
1993. This increase compared favorably to a 10.8% increase for overall
industry shipments, which reflected an improving U.S. economy and favorable
industry conditions. Thomasville stores and galleries achieved significantly
higher sales and production through successful new wood furniture
introductions, improvement in the upholstery business and new marketing
programs that were well received by customers.
Earnings from operations of $38.9 million for the year ended December 31,
1994 increased $18.2 million, or 88.3%, from $20.6 million for the year ended
December 31, 1993. Earnings from operations as a percentage of net sales
increased to 7.4% in 1994 from 4.6% in 1993. The increase was primarily
attributable to higher utilization of Thomasville's manufacturing facilities
as well as continuing efforts in cost reduction programs.
USE OF PROCEEDS
The net proceeds from the sale of the shares of Common Stock offered hereby
are estimated to be $75.4 million, assuming an offering price of $9.125 per
share ($86.2 million if the over-allotment option is exercised in full), after
deducting estimated offering expenses and underwriting discounts and
commissions. The net proceeds will be used to repay a portion of the term
loans incurred on December 29, 1995 under the Company's Secured Credit
Agreement. The indebtedness to be repaid bears interest at a variable rate
equal to the London Interbank Offered Rate plus 3 1/8% and matures in
approximately eight years.
11
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is listed and traded on the New York Stock
Exchange under the symbol "ISS." The following table sets forth for the
periods indicated the high and low closing prices of the Common Stock, as
reported on the New York Stock Exchange Composite Tape.
<TABLE>
<CAPTION>
HIGH LOW
----- ------
<S> <C> <C>
1994:
Fourth Quarter (November 21 through December 31)........... $8 $6 1/8
1995:
First Quarter.............................................. 7 1/8 6 1/8
Second Quarter............................................. 6 7/8 5 3/4
Third Quarter.............................................. 8 1/8 5 3/4
Fourth Quarter............................................. 9 1/8 7
1996:
First Quarter (January 1 through January 31)............... 9 3/8 8 5/8
</TABLE>
The price range of the Common Stock prior to November 21, 1994 has not been
included because on November 17, 1994 the Company distributed to its
stockholders all the stock of its former footwear subsidiaries, Converse Inc.
and The Florsheim Shoe Company. November 21, 1994 was the first day of trading
reflecting such distribution and prices prior to November 21, 1994 are not
comparable.
On January 31, 1996, the last reported sale price of the Common Stock on the
New York Stock Exchange was $9.125 per share. As of December 31, 1995 there
were approximately 3,000 holders of record of the Company's Common Stock.
The Company does not anticipate paying any cash dividends in the foreseeable
future, and the Secured Credit Agreement to which the Company is a party
restricts the payment of dividends. Any future payment of dividends will
depend upon the financial condition, capital requirements and earnings of the
Company, as well as upon other factors that the Board of Directors may deem
relevant.
12
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company and its consolidated subsidiaries as of December 31, 1995 on an actual
basis and as adjusted to give effect to the consummation of this Offering and
the application of the estimated net proceeds therefrom as described in "Use
of Proceeds." The information in the table below is qualified in its entirety
by, and should be read in conjunction with, the Consolidated Financial
Statements of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------
ACTUAL AS ADJUSTED(1)
---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents........................ $ 26,412 $ 26,412
========== ==========
Current maturities of long-term debt............. $ 18,639 $ 18,639
========== ==========
Secured Credit Agreement(2)...................... $ 504,000 $ 428,648
Receivables Securitization Facility(2)........... 185,000 185,000
Other............................................ 16,040 16,040
---------- ----------
Long-term debt, less current maturities...... 705,040 629,688
Shareholders' equity:
Preferred stock, 10,000,000 shares authorized,
no par value,
none issued and outstanding................... -- --
Common stock, 100,000,000 shares authorized,
$1.00 stated
value (no par value), 50,120,079 shares issued
and outstanding
(58,870,079 shares issued and outstanding, as
adjusted)..................................... 50,120 58,870
Paid-in capital................................ 218,156 284,758
Retained earnings.............................. 32,880 32,008
---------- ----------
Total shareholders' equity................... 301,156 375,636
---------- ----------
Total capitalization............................. $1,006,196 $1,005,324
========== ==========
</TABLE>
- --------
(1) Information is adjusted to give effect to the consummation of this
Offering (assuming an offering price of $9.125 per share) and the
application of the estimated net proceeds therefrom.
(2) As of December 31, 1995, the Company had approximately $81 million of
availability under the Secured Credit Agreement and approximately $21
million available under the Receivables Securitization Facility.
13
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
We have examined the pro forma adjustments reflecting the transactions
described in the notes to the pro forma condensed consolidated financial
statements (the "Notes") and the application of those adjustments to the
historical amounts in the accompanying pro forma condensed consolidated
balance sheet of INTERCO INCORPORATED (the "Company") as of December 31, 1995,
and the pro forma condensed consolidated statement of operations for the year
ended December 31, 1995. The historical consolidated financial statements of
the Company are derived from the historical consolidated financial statements
of the Company, which were audited by us appearing elsewhere herein. The
historical statement of operations of Thomasville Furniture Industries, Inc.
("Thomasville") is derived from the historical consolidated statement of
operations of Thomasville which was audited by us and incorporated by
reference herein. Such pro forma adjustments are based upon management's
assumptions described in the Notes. Our examination was made in accordance
with standards established by the American Institute of Certified Public
Accountants and, accordingly, included such procedures as we considered
necessary in the circumstances.
The objective of this pro forma condensed financial information is to show
what the significant effects on the historical information might have been had
these transactions occurred at an earlier date. However, the pro forma
condensed consolidated financial statements are not necessarily indicative of
the results of operations or related effects on financial position that would
have been attained had the above-mentioned transactions actually occurred
earlier.
In our opinion, management's assumptions provide a reasonable basis for
presenting the significant effects directly attributable to the above-
mentioned transactions described in the Notes, the related pro forma
adjustments give appropriate effect to those assumptions, and the pro forma
columns reflect the proper applications of those adjustments to the historical
consolidated financial statement amounts in the pro forma condensed
consolidated balance sheet as of December 31, 1995, and the pro forma
condensed consolidated statement of operations for the year ended December 31,
1995.
KPMG Peat Marwick LLP
St. Louis, Missouri
January 31, 1996
14
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following pro forma condensed consolidated statement of operations
reflects the acquisition of Thomasville, which was consummated on December 29,
1995, the incurrence of indebtedness by the Company in connection therewith
and in connection with the refinancing of a portion of the Company's then-
existing indebtedness, and the completion of this Offering (at an assumed
offering price of $9.125 per share) and the application of the estimated net
proceeds therefrom, as of the beginning of the period presented for pro forma
condensed consolidated statement of operations data purposes. The pro forma
condensed consolidated balance sheet reflects the completion of this Offering
(at an assumed offering price of $9.125 per share) and the application of the
estimated net proceeds therefrom pursuant to the use of proceeds set forth
herein, as of December 31, 1995.
The pro forma condensed consolidated financial information should be read
in connection with the historical financial statements of the Company and
Thomasville presented elsewhere in this Prospectus or incorporated herein by
reference.
Management believes that the assumptions used provide a reasonable basis on
which to present the pro forma condensed consolidated financial statements.
The pro forma condensed consolidated financial statements are presented for
informational purposes only and are not necessarily indicative of the combined
results of operations in the future or of what the combined results of
operations would have been if the foregoing transactions had actually been
consummated as of such dates. In addition, the pro forma condensed
consolidated statement of operations does not give effect to profit
improvement opportunities, if any, which may be realized by the Company as a
result of the acquisition of Thomasville.
The pro forma condensed consolidated financial statements have been prepared
on the basis of assumptions described in the notes thereto and include
assumptions relating to the allocation of the consideration paid for the
Thomasville acquisition to its respective assets and liabilities based on
preliminary estimates of their respective fair values. The actual allocation
of such consideration may differ from that reflected in the pro forma
condensed consolidated financial statements after valuations and other studies
to be performed pursuant to post-closing adjustments related to the
acquisition have been completed.
The net proceeds to the Company from this Offering are estimated to be $75.4
million (assuming the underwriters' over-allotment option is not exercised),
after deducting estimated underwriting discounts and commissions and estimated
expenses payable by the Company.
15
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------
HISTORICAL EQUITY OFFERING
----------- ------------------------
PRO FORMA
THE COMPANY ADJUSTMENTS PRO FORMA
----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.... $ 26,412 $ -- $ 26,412
Receivables, net............. 276,116 -- 276,116
Inventories.................. 269,677 -- 269,677
Prepaid expenses and other
current assets.............. 17,888 -- 17,888
---------- ------- ----------
Total current assets........ 590,093 -- 590,093
Net property, plant and
equipment................... 306,406 -- 306,406
Reorganization value in
excess of amounts allocable
to identifiable assets,
net......................... 121,111 -- 121,111
Trademarks and trade names,
net......................... 143,432 -- 143,432
Excess of cost over net
assets acquired............. 105,764 -- 105,764
Other assets................. 24,933 (1,412)(a) 23,521
---------- ------- ----------
$1,291,739 $(1,412) $1,290,327
========== ======= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-
term debt................... $ 18,639 $ -- $18,639
Accrued interest expense..... 1,304 -- 1,304
Accounts payable and other
accrued expenses............ 115,114 (540)(a) 114,574
---------- ------- ----------
Total current liabilities... 135,057 (540) 134,517
Long-term debt, less current
maturities.................. 705,040 (75,352)(b) 629,688
Other long-term liabilities.. 150,486 -- 150,486
Shareholders' equity:
Common stock................. 50,120 8,750 (b) 58,870
Paid-in capital.............. 218,156 66,602 (b) 284,758
Retained earnings............ 32,880 (872)(a) 32,008
---------- ------- ----------
Total shareholders' equity.. 301,156 74,480 375,636
---------- ------- ----------
$1,291,739 $(1,412) $1,290,327
========== ======= ==========
</TABLE>
- --------
(a) Adjusted to reflect the write-off of deferred debt costs related to the
Secured Credit Agreement, for the application of the estimated net
proceeds of this Offering to repay a portion of the indebtedness
outstanding under the Secured Credit Agreement, net of income tax benefits
of $540.
(b) Adjusted to reflect the application of the estimated net proceeds of the
Offering (assuming the sale of 8,750,000 shares of Common Stock at a price
to public of $9.125, less underwriting discounts and commissions and
estimated expenses payable by the Company) to repay a portion of the
indebtedness outstanding under the Secured Credit Agreement.
16
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------------------------------
HISTORICAL THOMASVILLE ACQUISITION EQUITY OFFERING
------------------------- ----------------------------- ------------------------
THE PRO FORMA PRO FORMA
COMPANY THOMASVILLE ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
---------- ----------- ------------ ------------ ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $1,073,889 $550,227 $ -- $ 1,624,116 $ -- $1,624,116
Costs and expenses:
Cost of operations..... 760,393 428,497 1,252 (a) 1,190,142 -- 1,190,142
Selling, general and
administrative
expenses.............. 198,321 70,661 3,600 (b)
(1,159)(c) 271,423 -- 271,423
Restructuring charges.. -- 404 (404)(d) -- -- --
Depreciation and
amortization.......... 36,104(l) 12,557 (257)(e)
2,644 (f)
1,005 (g) 52,053(l) -- 52,053(l)
---------- -------- ---------- ------------ ------- ----------
Earnings from
operations............. 79,071 38,108 (6,681) 110,498 -- 110,498
Interest expense........ 33,845 12,919 12,927 (h) 59,691 (7,135)(k) 52,556
Other income, net:
Gain on insurance
settlement............ 7,882 -- -- 7,882 -- 7,882
Other.................. 3,930 2,049 (1,876)(i) 4,103 -- 4,103
---------- -------- ---------- ------------ ------- ----------
Earnings before income
tax expense............ 57,038 27,238 (21,484) 62,792 7,135 69,927
Income tax expense...... 22,815 10,773 (8,218)(j) 25,370 2,729 (j) 28,099
---------- -------- ---------- ------------ ------- ----------
Net earnings from
continuing operations.. $ 34,223 $ 16,465 $ (13,266) $ 37,422 $ 4,406 $ 41,828
========== ======== ========== ============ ======= ==========
Net earnings from
continuing operations
before gain on
insurance settlement
net of income tax
expense................ $ 29,463 $ 32,662 $ 37,068
========== ============ ==========
Net earnings per common
share from continuing
operations (fully
diluted)............... $ 0.65(l) $ 0.72(l) $ 0.68(l)
========== ============ ==========
Net earnings per common
share from continuing
operations before gain
on insurance
settlement, net of
income tax expense
(fully diluted)........ $ 0.56(l) $ 0.62(l) $ 0.61(l)
========== ============ ==========
Weighted average common
and common equivalent
shares outstanding (in
thousands) (fully
diluted)............... 52,317 52,317 61,067
</TABLE>
- --------
(a) Adjusted to reflect cost of sales based upon first-in, first-out method of
accounting for inventory from the last-in, first-out method used by
Thomasville in 1995.
(b) Adjusted to reflect the estimated pension expense to the Company
associated with the formation of the new Thomasville pension plan.
(c) Adjusted to reflect the reversal of expenses incurred by Thomasville for
certain of its employee benefit plans, which were discontinued at the time
of the acquisition by the Company.
(d) Adjusted to reflect the reversal of Thomasville's nonrecurring
restructuring charge of $404 in 1995 prior to the acquisition by the
Company.
(e) Adjusted to reverse the amortization of Thomasville's historical excess of
cost over net assets acquired for the period prior to the acquisition of
Thomasville by the Company.
(f) Adjusted to reflect the amortization of the excess of cost over net assets
of Thomasville acquired by the Company.
(g) Adjusted to reflect increased depreciation expense to the Company
resulting from recording property, plant and equipment of Thomasville at
estimated fair value.
(h) Adjusted to reflect increased interest expense to the Company related to
borrowings under the Secured Credit Agreement and Receivables
Securitization Facility in connection with the acquisition of Thomasville.
(i) Adjusted to reflect reduction in interest income of the Company
attributable to cash used by the Company to finance the Thomasville
acquisition.
(j) Adjusted to record the income tax effect of all adjustments at a combined
statutory rate of 38.25%.
(k) Adjusted to reflect reduced interest expense for the application of the
estimated net proceeds of the Offering (assuming the sale of 8,750,000
shares of Common Stock at a price to public of $9.125, less underwriting
discounts and commissions and estimated expenses payable by the Company)
to repay a portion of the indebtedness outstanding under the Company's
Secured Credit Agreement.
(l) Includes $15,922 related to the 1992 asset revaluation. This item resulted
in a reduction of $12,470 in net earnings from continuing operations and a
reduction of $0.24 per share (fully diluted) and $0.20 per share (fully
diluted) in net earnings per common share and pro forma net earnings per
common share, respectively. See Note 3 to the Consolidated Financial
Statements of the Company included elsewhere in this Prospectus.
17
<PAGE>
SELECTED CONSOLIDATED HISTORICAL AND
PRO FORMA FINANCIAL INFORMATION
The following selected consolidated historical financial data of the Company
should be read in conjunction with the Consolidated Financial Statements and
related notes included elsewhere and incorporated by reference in this
Prospectus. The selected consolidated historical financial data as of December
31, 1994 and 1995, and for the years ended December 31, 1993, 1994 and 1995
are derived from the Consolidated Financial Statements of the Company, which
have been audited by KPMG Peat Marwick LLP, independent certified public
accountants, as indicated in the report included elsewhere and incorporated by
reference in this Prospectus. The selected pro forma condensed consolidated
financial data as of December 31, 1995 and for the year then ended are derived
from the pro forma condensed consolidated financial information of the Company
which have been examined by KPMG Peat Marwick LLP, independent certified
public accountants, as indicated in the report included elsewhere in this
Prospectus.
In 1992, the Company was required to adopt "fresh-start" reporting
principles in accordance with AICPA SOP 90-7, "Financial Reporting by Entities
in Reorganization under the Bankruptcy Code," which resulted in the
revaluation of all assets and liabilities to reflect the Company's estimated
reorganization value.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1993 1994 1995 1995
HISTORICAL HISTORICAL HISTORICAL PRO FORMA(1)
---------- ---------- ---------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................... $980,532 $1,072,696 $1,073,889 $1,624,116
Costs and expenses:
Cost of operations.............. 685,749 752,528 760,393 1,190,142
Selling, general and
administrative expenses........ 186,205 199,333 198,321 271,423
Depreciation and amortization
(includes $16,463, $16,900 and
$15,922 related to fair value
adjustments for 1993, 1994 and
1995, respectively)............ 34,455 35,776 36,104 52,053
-------- ---------- ---------- ----------
Earnings from operations........ 74,123 85,059 79,071 110,498
Interest expense................ 38,621 37,886 33,845 52,556
Other income, net:
Gain on insurance
settlement(2).................. -- -- 7,882 7,882
Other........................... 1,764 1,668 3,930 4,103
-------- ---------- ---------- ----------
Earnings before income tax
expense, discontinued
operations and extraordinary
item .......................... 37,266 48,841 57,038 69,927
Income tax expense.............. 15,924 20,908 22,815 28,099
-------- ---------- ---------- ----------
Net earnings from continuing
operations..................... $ 21,342 $ 27,933 $ 34,223 $ 41,828
======== ========== ========== ==========
Net earnings from continuing op-
erations before gain on insur-
ance settlement, net of income
tax expense ................... $ 21,342 $ 27,933 $ 29,463 $ 37,068
======== ========== ========== ==========
Per share of common stock--fully
diluted:
Net earnings from continuing
operations..................... $ 0.41 $ 0.54 $ 0.65 $ .68
======== ========== ========== ==========
Net earnings from continuing op-
erations before gain on insur-
ance settlement, net of income
tax expense.................... $ 0.41 $ 0.54 $ 0.56 $ .61
======== ========== ========== ==========
Weighted average common and
common equivalent shares
outstanding--fully diluted (in
thousands)..................... 51,397 51,506 52,317 61,067
OTHER DATA:
Gross profit(3)................. $275,323 $ 298,712 $ 291,237 $ 399,308
======== ========== ========== ==========
Earnings from operations........ $ 74,123 $ 85,059 $ 79,071 $ 110,498
Depreciation and amortization:
1992 Asset Revaluation (fresh-
start)......................... 16,463 16,900 15,922 15,922
Excess of cost over net assets
acquired....................... -- -- -- 2,644
-------- ---------- ---------- ----------
Adjusted earnings from opera-
tions.......................... 90,586 101,959 94,993 129,064
Depreciation and amortization
(other than fresh-start and
excess of cost over net assets
acquired)...................... 17,992 18,876 20,182 33,487
-------- ---------- ---------- ----------
EBITDA(4)....................... $108,578 $ 120,835 $ 115,175 $ 162,551
======== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------
1994 1995 1995
HISTORICAL HISTORICAL AS ADJUSTED(5)
---------- ---------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 32,145 $ 26,412 $ 26,412
Working capital........................... 308,323 455,036 455,576
Property, plant and equipment, net........ 181,393 306,406 306,406
Capital expenditures...................... 21,108 35,616 50,824
Total assets.............................. 881,735 1,291,739 1,290,327
Long-term debt, less current maturities... 409,679 705,040 629,688
Shareholders' equity...................... $275,394 $ 301,156 $ 375,636
</TABLE>
18
<PAGE>
IMPACT OF 1992 ASSET REVALUATION (FRESH-START REPORTING)
Included in the Company's statement of operations are depreciation and
amortization charges related to adjustments of assets and liabilities to fair
value made in 1992. These adjustments are a result of the Company's 1992
reorganization and the adoption of AICPA SOP 90-7, "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code" (commonly referred to as
"fresh-start" reporting) and are not the result of historical capital
expenditures. Fair value adjustments included the write up of property, plant
and equipment, trademarks and reorganization value in excess of identifiable
assets. Due to the significance of these items, management believes that it is
useful to isolate their impact on the statement of operations as shown below.
This information does not represent and should not be considered an
alternative to net earnings, any other measure of performance as determined by
generally accepted accounting principles or as an indicator of operating
performance. See "Intangible Assets" in Note 3 to the Company's Consolidated
Financial Statements and related notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1993 1994 1995 1995
HISTORICAL HISTORICAL HISTORICAL PRO FORMA(1)
---------- ---------- ---------- ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Depreciation and amortiza-
tion--fresh-start........... $(16,463) $(16,900) $(15,922) $(15,922)
After-tax impact on net earn-
ings........................ (12,799) (13,051) (12,470) (12,470)
Impact on earnings per
share--fully diluted........ (0.25) (0.25) (0.24) (0.20)
</TABLE>
- --------
(1) Pro forma to reflect the acquisition of Thomasville and the consummation
of this Offering (at an assumed offering price of $9.125 per share) and
the application of the estimated net proceeds therefrom, as if such
transactions occurred on January 1, 1995.
(2) Gain on insurance settlement related to the November 1994 destruction of
the Company's particleboard plant.
(3) The Company believes that gross profit provides useful information
regarding a Company's financial performance. Gross profit should not be
considered in isolation or as an alternative to net earnings, an indicator
of the Company's operating performance, or an alternative to the Company's
cash flow from operating activities as a measure of liquidity. Gross
profit has been calculated by subtracting cost of operations and the
portion of depreciation associated with cost of goods sold from net sales.
Pro forma information reflects the adjustments set forth in footnote 1.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1993 1994 1995 1995
HISTORICAL HISTORICAL HISTORICAL PRO FORMA
---------- ---------- ---------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net sales....................... $980.5 $1,072.7 $1,073.9 $1,624.1
Cost of operations.............. 685.7 752.5 760.4 1,190.1
Depreciation (associated with
cost of goods sold)............ 19.5 21.5 22.3 34.7
------ -------- -------- --------
Gross profit.................... $275.3 $ 298.7 $291.2 $ 399.3
====== ======== ======== ========
</TABLE>
(4) EBITDA is defined as earnings from operations before depreciation and
amortization. The Company believes that EBITDA provides useful information
regarding a company's financial performance. EBITDA should not be
considered in isolation or as an alternative to net earnings, an indicator
of the Company's operating performance, or an alternative to the Company's
cash flow from operating activities as a measure of liquidity.
(5) As adjusted to reflect the consummation of this Offering (at an assumed
offering price of $9.125 per share) and the application of the estimated
net proceeds therefrom, as if such transactions occurred on December 31,
1995.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the Consolidated Financial
Statements and related notes included elsewhere in this Prospectus. In
addition, management believes that the following four factors have had a
significant effect on its recent financial statements.
Acquisition of Thomasville. During the year ended December 31, 1995, the
Company had two primary operating subsidiaries, Broyhill and Lane. On December
29, 1995, the Company acquired Thomasville. The transaction was accounted for
as a purchase and, since the acquisition occurred as of the last business day
of 1995, has been reflected in the Company's consolidated balance sheet. The
Company's results of operations for 1995 do not include any of the operations
of Thomasville. The cash portion of the acquisition of Thomasville was
financed through funds obtained under the Secured Credit Agreement and the
Receivables Securitization Facility. The acquisition of Thomasville, on a pro
forma basis and as adjusted for this Offering, is accretive to fully-diluted
earnings per share for the year ended December 31, 1995. See "Pro Forma
Condensed Consolidated Financial Information."
Recent Industry Conditions. During 1995, residential furniture
manufacturers' results were adversely affected by industry-wide price
discounting and promotional activity in response to weaker consumer demand for
durable goods. The Company believes that it minimized the impact of these
industry conditions on its operations by introducing new products and
continuing advertising support of its brand names. The American Furniture
Manufacturer's Association expects industry conditions to improve in 1996,
with industry shipments forecast to increase by 5.7%.
1994 Spin-Off Transactions. In order to focus on its core furniture
operations, the Company completed a spin-off of its footwear subsidiaries in
1994. On November 17, 1994, the Company simultaneously refinanced the majority
of its outstanding indebtedness and distributed to its stockholders all the
stock of its former footwear subsidiaries, Converse Inc. and The Florsheim
Shoe Company. Upon completion of this restructuring, the Company retained no
ownership interest in or management control of the footwear businesses.
Accordingly, the financial results of the footwear businesses have been
reflected as discontinued operations for all applicable periods.
1992 Asset Revaluation (Fresh-Start Reporting). Included in the Company's
statement of operations are depreciation and amortization charges related to
adjustments of assets and liabilities to fair value made in 1992. These
adjustments are a result of the Company's 1992 reorganization and the adoption
of AICPA SOP 90-7, "Financial Reporting by Entities in Reorganization under
the Bankruptcy Code" (commonly referred to as "fresh-start" reporting) and are
not the result of historical capital expenditures. The impact of such
adjustments is that pro forma earnings per share is $0.20 less than it would
have been without "fresh-start" reporting. See "Selected Consolidated
Historical and Pro Forma Financial Information--Impact of 1992 Asset
Revaluation (Fresh-Start Reporting)."
20
<PAGE>
RESULTS OF OPERATIONS
As an aid to understanding the Company's results of operations on a
comparative basis, the following table has been prepared to set forth certain
statement of operations and other data for fiscal 1993, 1994 and 1995. The
results for these periods do not include any of the operations of Thomasville.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1994 DECEMBER 31, 1995
-------------------- ----------------- -----------------
% OF NET % OF NET % OF NET
DOLLARS SALES DOLLARS SALES DOLLARS SALES
--------- --------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ 980.5 100.0% $1,072.7 100.0% $1,073.9 100.0%
Cost of operations...... 685.7 69.9 752.5 70.2 760.4 70.8
Selling, general and ad-
ministrative expenses.. 186.2 19.0 199.3 18.6 198.3 18.5
Depreciation and amorti-
zation................. 34.5 3.5 35.8 3.3 36.1 3.3
--------- -------- -------- ----- -------- -----
Earnings from opera-
tions.................. 74.1 7.6 85.1 7.9 79.1 7.4
Interest expense........ 38.6 3.9 37.9 3.5 33.9 3.2
Other income, net:
Gain on insurance set-
tlement................ -- -- -- -- 7.9 0.7
Other................. 1.8 0.1 1.6 0.1 3.9 0.4
--------- -------- -------- ----- -------- -----
Earnings before income
tax expense, discontin-
ued operations and ex-
traordinary item....... 37.3 3.8 48.8 4.5 57.0 5.3
Income tax expense...... 15.9 1.6 20.9 1.9 22.8 2.1
--------- -------- -------- ----- -------- -----
Net earnings from
continuing operations.. $ 21.4 2.2% $ 27.9 2.6% $ 34.2 3.2%
========= ======== ======== ===== ======== =====
Gross profit (1)........ $275.3 28.1% $ 298.7 27.8% $ 291.2 27.1%
EBITDA (2).............. 108.6 11.1 120.9 11.3 115.2 10.7
</TABLE>
- --------
(1) The Company believes that gross profit provides useful information
regarding a company's financial performance. Gross profit should not be
considered in isolation or as an alternative to net earnings, an indicator
of the Company's operating performance, or an alternative to the Company's
cash flow from operating activities as a measure of liquidity. Gross
profit has been calculated by subtracting cost of operations and the
portion of depreciation associated with cost of goods sold from net sales.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1993 1994 1995
------ -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net sales......................................... $980.5 $1,072.7 $1,073.9
Cost of operations................................ 685.7 752.5 760.4
Depreciation (associated with cost of goods
sold)............................................ 19.5 21.5 22.3
------ -------- --------
Gross profit...................................... $275.3 $ 298.7 $ 291.2
====== ======== ========
</TABLE>
(2) EBITDA is defined as earnings from operations before depreciation and
amortization. The Company believes that EBITDA provides useful information
regarding a company's financial performance. EBITDA should not be
considered in isolation or as an alternative to net earnings, an indicator
of the Company's operating performance, or an alternative to the Company's
cash flow from operating activities as a measure of liquidity.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net sales for 1995 were $1.07 billion, approximately unchanged from 1994.
The Company was able to maintain comparable net sales despite soft industry
conditions and weaker consumer demand for durable goods through new product
introductions at both Broyhill and Lane and continued advertising support of
its brand names.
Cost of operations for 1995 was $760.4 million, compared to $752.5 million
for 1994, an increase of 1.0%. The increase in cost of operations as a
percentage of net sales from 70.2% in 1994 to 70.8% in 1995, was primarily the
result of unfavorable overhead absorption rates reflecting the Company's
effort to maintain manufacturing utilization rates at levels necessary to
balance inventory with incoming orders.
21
<PAGE>
Selling, general and administrative expenses decreased to $198.3 million in
1995 from $199.3 million in 1994, a reduction of 0.5%. In 1995, such expenses
included a $2.7 million non-cash expense related to stock options. As a
percentage of net sales, selling, general and administrative expenses were
18.5% in 1995 compared to 18.6% in 1994, reflecting the Company's successful
implementation of its ongoing cost reduction programs.
Depreciation and amortization for 1995 was $36.1 million, compared to $35.8
million in 1994, an increase of 0.9%. The amount of depreciation and
amortization attributable to the "fresh-start" reporting was $15.9 million and
$16.9 million, in 1995 and 1994, respectively.
Interest expense for 1995 totaled $33.9 million and reflects twelve months
of interest expense on the Company's debt structure, which was substantially
refinanced as of December 29, 1995. Interest expense for 1995 was not
comparable to interest expense for 1994 as a result of the previous
refinancing of substantially all of the Company's debt in November 1994.
Other income, net for 1995 totaled $11.8 million, compared to $1.6 million
in 1994. For 1995, other income, consisted of a gain on insurance settlement
of $7.9 million pertaining to the November 1994 destruction of a particleboard
plant, interest income on short-term investments of $2.4 million and other
miscellaneous income and (expense) items totaling $1.5 million.
For 1995, the Company provided for income taxes totaling $22.8 million on
earnings before income tax expense, discontinued operations and extraordinary
item, producing an effective tax rate of 40.0%, compared to an effective tax
rate for 1994 of 42.8%. The effective tax rates for such years were adversely
impacted by certain nondeductible expenses incurred and provisions for state
and local income taxes. The effective income tax rate for 1995 was favorably
impacted by special state income tax incentives granted in connection with the
issuance of certain industrial revenue bonds on behalf of one of the Company's
subsidiaries.
Net earnings per common share for continuing operations on a fully diluted
basis were $0.65 and $0.54 for 1995 and 1994, respectively. Net earnings per
common share for continuing operations before gain on insurance settlement net
of income tax expense on a fully diluted basis was $0.56 and $0.54 for 1995
and 1994, respectively.
Weighted average shares used in the calculation of primary and fully diluted
net earnings per common share for 1995 were 50,639,000 and 52,317,000,
respectively.
Gross profit for 1995 was $291.2 million, compared to $298.7 million for
1994, a decrease of 2.5%. Gross profit as a percentage of net sales declined
from 27.8% in 1994 to 27.1% in 1995, primarily as a result of lower factory
utilization rates at certain of the Company's manufacturing facilities
reflecting the Company's effort to balance inventories with incoming orders.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Net sales for 1994 were $1.07 billion, representing an increase of 9.4% over
net sales of $980.5 million in 1993. The net sales increase for 1994 reflected
an improving U.S. economy and favorable industry conditions as well as new
product offerings and marketing programs that were well received by customers.
Cost of operations for 1994 was $752.5 million, compared to $685.7 million
for 1993, an increase of 9.7%. The increase in cost of operations as a
percentage of net sales from 69.9% in 1993 to 70.2% in 1994, was primarily the
result of start-up costs at a new motion upholstery manufacturing facility,
the testing of a new state-of-the-art finishing facility and the impact of an
explosion and fire that destroyed a particleboard plant in November 1994,
partially offset by favorable factory utilization rates.
22
<PAGE>
Depreciation and amortization for 1994 was $35.8 million, compared to $34.5
million in 1993, an increase of 3.8%. The amount of depreciation and
amortization attributed to the "fresh-start" reporting was $16.9 million and
$16.5 million, in 1994 and 1993, respectively.
Selling, general and administrative expenses for 1994 were $199.3 million,
representing an increase of 7.0% over selling, general and administrative
expenses for 1993 of $186.2 million. Selling, general and administrative
expenses as a percentage of net sales, decreased to 18.6% from 19.0%. The
reduction in selling, general and administrative expenses as a percentage of
net sales was attributable to the Company's emphasis on control and reduction
of operating expenses, as well as a nonrecurring $2.6 million charge included
in 1993 related to the Company's 1992 reorganization.
Interest expense for 1994 totaled $37.9 million compared to $38.6 million in
1993. The reduction in interest expense was primarily due to refinancing the
Company's long-term debt in conjunction with the November 17, 1994 spin-off
distribution to shareholders of the Company's footwear segment.
Other income, net for 1994 and 1993 totaled $1.6 million and $1.8 million,
respectively.
The Company's effective tax rate for 1994 and 1993 was 42.8% and 42.7%,
respectively. The effective tax rates for such years were adversely impacted
by certain nondeductible expenses incurred and provisions for state and local
income taxes.
Net earnings per common share from continuing operations on a fully diluted
basis were $0.54 and $0.41 for 1994 and 1993, respectively.
Gross profit for 1994 was $298.7 million, representing an increase of 8.5%
over gross profit for 1993 of $275.3 million. The increase resulted from an
increase in net sales, partially offset by a reduction in gross profit margin.
The reduction in gross profit margin, to 27.8% in 1994 from 28.1% for 1993,
was primarily a result of start-up costs at a new motion upholstery
manufacturing facility, the testing of a state-of-the-art finishing facility
and the impact of an explosion and fire that destroyed a particleboard plant
in November 1994, partially offset by favorable factory utilization rates.
FINANCIAL CONDITION AND LIQUIDITY
Cash and cash equivalents at December 31, 1995 totaled $26.4 million,
compared to $32.1 million at December 31, 1994. For 1995, net cash provided by
operating activities totaled $92.0 million. Net cash used by investing
activities totaled $370.5 million, including $335.4 million related to the
acquisition of Thomasville and $35.6 million of capital expenditures incurred
to add, upgrade or replace property, plant and equipment. Net cash provided by
financing activities during 1995 totaled $272.8 million.
Working capital was $455.0 million at December 31, 1995, compared to $308.3
million at December 31, 1994. The current ratio was 4.4 to 1 at December 31,
1995, compared to 4.2 to 1 at December 31, 1994. The increase in working
capital between years is primarily the result of the acquisition of
Thomasville.
At December 31, 1995, long-term debt, including current maturities, totaled
$723.7 million, compared to $426.3 million at December 31, 1994. The increase
in long-term debt resulted from entering into the Secured Credit Agreement and
amending the Receivables Securitization Facility in conjunction with the
December 29, 1995 Thomasville acquisition. The interest rate on the Company's
long-term debt is based on selected credit ratios and, as of the date hereof,
is estimated at 7.6% on a weighted average basis. The Company intends to use
the net proceeds of this Offering to repay a portion of its long-term debt.
See "Use of Proceeds." As a result of the repayment of such debt, the interest
rate of the Company's long-term debt will be reduced to 7.4% on a weighted
average basis. The Company's debt-to-capitalization ratio was 70.6% at
December 31, 1995, compared to 60.8% at December 31, 1994. The Company's debt-
to-capitalization ratio at December 31, 1995, assuming that the consummation
of this Offering and the application of the estimated net proceeds therefrom
had occurred on such date, would have been 63.3%.
23
<PAGE>
To meet short-term working capital and other financial requirements, the
Company maintains a $180 million revolving credit facility as part of its
Secured Credit Agreement with a group of financial institutions. The revolving
credit facility allows for both issuance of letters of credit and cash
borrowings. Letter of credit outstandings are limited to no more than $60.0
million. Cash borrowings are limited only by the facility's maximum
availability less letters of credit outstanding. See Note 8 of the Notes to
Consolidated Financial Statements included elsewhere in this Prospectus for
additional information. At December 31, 1995, there was $71.0 million of cash
borrowings outstanding under the revolving credit facility and $28.3 million
in letters of credit outstanding, leaving an excess of $80.7 million available
under the revolving credit facility.
In addition to the revolving credit facility, the Company also had $20.5
million of excess availability under its Receivables Securitization Facility
as of December 31, 1995.
The Company believes its revolving credit facility, together with cash
generated from operations, will be adequate to meet liquidity requirements for
the foreseeable future.
The Company maintains a significant capital expenditure program focusing on
increasing manufacturing efficiency and expanding capacity as required. The
Company's total capital expenditures were $35.6 million, $21.1 million and
$30.2 million for the years ended December 31, 1995, 1994 and 1993,
respectively. These figures do not include the capital expenditures of
Thomasville ($15.2 million, $14.1 million and $10.0 million for the years
ended December 31, 1995, 1994 and 1993, respectively). Significant new
projects during the past three years included a new upholstery manufacturing
facility at Action Industries to meet the increased demand for the Company's
recliners, motion furniture and sleep sofas and a state-of-the-art flat line
finishing system at Lane. The capital expenditures for 1995 include $18.2
million to construct a new state-of-the-art particleboard manufacturing
facility at Broyhill, which was funded by proceeds from an insurance
settlement, to replace the Company's facility that was destroyed by fire in
November 1994. The Company believes that as a result of the availability of
excess capacity in the Lane and Thomasville manufacturing facilities, the
Company will be able to pursue its growth strategy over the next several years
without the necessity of making significant additional capital expenditures to
expand capacity.
ACCOUNTING STANDARDS NOT YET IMPLEMENTED
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under SFAS
No. 123, companies can either measure the compensation cost of equity
instruments issued under employee compensation plans using a fair value based
method, or can continue to recognize compensation cost under the provisions of
Accounting Principles Board Opinion No. 25 ("Opinion No. 25"). However, if the
provisions of Opinion No. 25 are continued, pro forma disclosures of net
income and earnings per share must be presented in the financial statements as
if the fair value method had been applied. The Company intends to continue to
recognize compensation costs under the provisions of Opinion No. 25, and upon
adoption of SFAS No. 123 as of January 1, 1996, will disclose the effects of
SFAS No. 123 on net earnings and earnings per share for 1995 and 1996.
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 requires that long-lived
assets, certain identifiable intangibles and goodwill to be held and used by
an entity be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
SFAS No. 121 is effective for the Company in 1996. The Company believes the
adoption of this accounting standard will not have a material impact on its
operating results or financial condition.
24
<PAGE>
BUSINESS
GENERAL
The Company, which is to be renamed Furniture Brands International, Inc., is
the largest manufacturer of residential furniture in the United States. The
Company markets its products under three of the best known brand names in the
industry--Broyhill, Lane and Thomasville. The Company is a quality and style
leader across a broad spectrum of price categories from "premium" priced home
furnishings to lower priced RTA furniture. The Company distributes its
products through a diverse network of independently-owned retail locations,
which includes the largest system of dedicated retail outlets in the
residential furniture industry. Management believes that the acquisition of
Thomasville in December 1995 (see "Thomasville Acquisition") significantly
enhances the Company's competitive strengths and positions the Company to
increase its market share, sales and earnings.
The Company is organized into three primary operating subsidiaries of
similar size which target particular product and price categories as described
below:
BROYHILL. Broyhill is a leader in the "good" and "better" price
categories, which are two of the largest segments of the residential
furniture market. Management believes Broyhill is the largest manufacturer
of residential furniture under one brand name and has been rated the number
one brand in the industry in terms of brand awareness by several recent
consumer surveys. The Company believes that the Broyhill Fontana collection
has been the best selling furniture collection in the industry for the last
three years. Broyhill distributes its products through an extensive
distribution network of more than 6,200 independently-owned retail
locations, including more than 330 dedicated Broyhill Showcase Galleries
and more than 410 dedicated Broyhill Furniture Centers.
LANE. Lane manufactures specialty products for niche markets in the
"better," "best" and "premium" price categories. Lane is the largest
manufacturer of motion furniture, the largest manufacturer of cedar chests
and the second largest manufacturer of recliners in the United States. Lane
is one of the most widely recognized brands in the residential furniture
industry and has established a reputation for innovative marketing and
quality designs. Lane distributes its products through an extensive
distribution network of more than 16,000 independently-owned retail
locations, including more than 200 dedicated furniture galleries.
THOMASVILLE. Thomasville is the largest residential furniture
manufacturer under one brand name in the "premium" price category and
manufactures furniture which embodies the widely recognized "Thomasville
Look" for both the "best" and "premium" price categories. Thomasville has
been rated the "highest quality" brand by several recent consumer surveys.
Management believes that the Collector's Cherry and the Mahogany Collection
have consistently been among the best selling collections in the industry.
Thomasville distributes its products through more than 680 independently-
owned retail locations, including more than 410 dedicated Thomasville
Galleries and approximately 80 free-standing Thomasville Home Furnishings
stores, which exclusively feature Thomasville furniture. Thomasville also
produces a separate line of lower priced RTA and promotional furniture.
COMPETITIVE STRENGTHS
In addition to its substantial size relative to its competitors, the Company
believes that its focus on the following elements has contributed to its
leading position in the residential furniture industry:
BRAND NAME STRENGTH. According to a recent consumer survey conducted by
America's Research Group and commissioned by the Company, Broyhill, Lane
and Thomasville are three of the six best known brand names in the retail
furniture industry. According to this survey, Broyhill was rated the number
one brand in the industry in terms of consumer awareness, and Thomasville
was rated the "highest quality" brand and the leading brand in the "best"
price category.
BROAD RANGE OF PRODUCT OFFERINGS. The Company offers consumers a wide
range of products from the "premium" to "RTA" price categories across
virtually all residential furniture segments including:
25
<PAGE>
bedroom, dining room, living room, motion/recliner, stationary upholstery,
occasional table and rattan/wicker. The recent acquisition of Thomasville
strengthens the Company's position across the "premium" and "best" price
categories of the market.
DEDICATED DISTRIBUTION CHANNELS. The Company distributes its products
through a diverse network of independently-owned retail locations which
includes more than 940 galleries dedicated to Broyhill, Lane and
Thomasville, more than 410 Broyhill Furniture Centers, and approximately 80
free-standing Thomasville Home Furnishings stores. The gallery concept
displays products in complete room ensembles, which include furnishings,
wall decor, window treatments, floor coverings, accents and accessories.
According to Furniture Today, the median sales per square foot of galleries
exceeds that of non-galleries by 27%. The Broyhill Furniture Centers are
participants in a gallery program developed for smaller dealers, which
enables retailers to commit less area to Broyhill products than a gallery.
The Thomasville Home Furnishings stores are dedicated solely to the
display, promotion and sale of Thomasville products. See "Distribution."
INNOVATIVE, HIGH QUALITY PRODUCTS. The Company focuses on designing
innovative and stylish furniture, by regularly introducing new and updated
collections and designs. For example, management believes that the Broyhill
Fontana collection has been the best selling furniture collection, and the
Thomasville Collector's Cherry collection has been the best selling dining
room collection in the industry for the last three years. In addition, Lane
has teamed up with innovative, widely recognized designers such as Mark
Hampton and Dakota Jackson to design and market furniture collections. Each
of these companies strives to differentiate its products with design
elements that include special detailing, innovative finishes and unique
hardware. Lane's Action Industries subsidiary has developed new
technologies that have enhanced its position in the growing motion
furniture segment, such as an innovative deck mechanism for sleeper sofas.
MANUFACTURING EXPERTISE. The Company is a leader in automated furniture
manufacturing. Modern state-of-the-art technology and economies of scale
have made the Company a very efficient producer. The Company consistently
modernizes its manufacturing facilities through capital investment. For
example, Lane recently completed a state-of-the-art flat line finishing
plant for more efficient production of high sheen and enhanced grain
finishes and has invested in additional advanced-technology manufacturing
equipment to increase productivity. In addition, Broyhill recently
completed construction of a state-of-the-art particleboard manufacturing
facility.
EXPERIENCED MANAGEMENT TEAMS. The Company believes that an experienced,
dedicated management team is a critical factor in achieving success. The
management teams for each of the operating subsidiaries of the Company have
extensive experience in the furniture industry. The Chief Executive
Officers of Broyhill, Lane and Thomasville each have an average of more
than 28 years of experience with their respective companies.
The Company believes that these competitive strengths position the Company
to increase its market share in the highly-fragmented residential furniture
industry. The Company's breadth of products, strength of brands, innovative
consumer advertising and national scope of distribution give it the ability to
service effectively national retailers such as J.C. Penney and Sears and large
regional retailers such as Haverty's and Heilig-Meyers. These large retailers
are commanding an increasing presence in the consolidating furniture retailing
industry. Furthermore, the increased number of galleries dedicated to
particular manufacturers in retail furniture stores highlights the increasing
importance of manufacturer/retailer alliances. The market position of the
Company's products allows it to develop and maintain close relationships with
dealers and to achieve the most favorable positioning of its galleries at
retail locations.
26
<PAGE>
GROWTH STRATEGY
The Company's strategy for growth in both sales and profits include the
following elements:
ENHANCING BRAND NAME STRENGTH. Brand name recognition is a critical
factor in consumer purchases of furniture. The Company believes that
consumer recognition of its brand names is a key to increasing its market
share. The Company has three of the six most recognized brand names in the
residential furniture industry--Broyhill, Lane and Thomasville. The Company
intends to continue to strengthen its brand names through ongoing
investment in innovative consumer advertising through leading shelter
magazines, such as House Beautiful, Better Homes and Gardens and
Architectural Digest, as well as through cooperative advertising programs
with retailers and national and regional television advertising.
MAXIMIZING OPERATING MARGINS. The Company's Gross Profit Management
Program consists of twelve specific "building blocks" that management uses
in its strategic and operational planning to maximize gross profit margins
and thereby provide the Company with additional funds for purposes such as
increased advertising and product development. These "building blocks"
include (a) introducing new high quality products with above average profit
margins, (b) marketing products to new customers, (c) developing new
markets, (d) implementing a well-defined pricing strategy to maximize the
effectiveness of price increases and decreases, (e) focusing on cost
control and cost reduction programs that target a minimum savings of 3% of
cost of goods sold each year, (f) reviewing product and purchasing
strategies, and (g) implementing other management and personnel strategies.
Management believes that this program has contributed to the Company
achieving among the highest EBITDA margins of publicly-owned residential
furniture manufacturing companies in recent years. Management believes
opportunities exist to increase the EBITDA margins of its operating
companies through continued implementation of the Gross Profit Management
Program, including the initiation of the program at Thomasville.
EXPANDING DEDICATED DISTRIBUTION CHANNELS. Dedicated distribution
outlets, such as galleries, tend to have higher sales per square foot and
faster inventory turns than non-gallery locations. The Company has
generated increased sales volume by distributing its products through
independently-owned dedicated retail outlets. In addition, the Company
believes that it strengthens its manufacturer/retailer alliances through
gallery relationships. The Company intends to continue to expand these
distribution channels by attracting additional retailers in new and
existing geographic markets to participate in the Company's gallery
programs. Furthermore, the Company intends to expand the network of free-
standing Thomasville Home Furnishings stores.
PENETRATING NEW MARKETS. The Company is actively pursuing sales
opportunities in new markets. In the United States, management is targeting
key furniture retailers in important geographic territories, particularly
portions of the West Coast and New England. In addition, the Company has
developed a program designed to increase sales to the contract market,
which includes hotels, motels and health care facilities. The Company is
also actively pursuing the international export market, particularly
Canada, Europe, Japan and the Middle East, where the Company believes there
are significant opportunities for growth.
EMPHASIZING NEW AND GROWING PRODUCT AREAS. The Company emphasizes
development of new high margin products in growing product areas. For
example, the Company has become a leader in the fast growing motion
furniture and recliner segments. The Company has also introduced a sleeper
sofa incorporating a unique sleep deck designed to be more comfortable,
both as a sofa and a bed, than competitive product offerings. Furthermore,
the Company is currently designing innovative new products for the growing
home office and home entertainment center markets.
CAPITALIZING ON DEMOGRAPHIC TRENDS. Management believes that demographic
trends will continue to drive long-term growth in the furniture industry.
In particular, as "baby boomers" (people born between 1946 and 1964) mature
to the 35-64 year age group over the next decade, they will be reaching
their highest earnings power. It is currently estimated that the 35-64 year
age group will increase by approximately 11 million persons by the year
2000. According to Furniture Today, such age group includes the largest
consumers of residential furniture. Furthermore, statistics show that the
average size of new homes has
27
<PAGE>
increased in recent years, which generally results in increased purchases
of furniture per home. The Company believes that it is well positioned to
capitalize on these demographic trends as a result of its broad range of
product offerings and widely-recognized brand names.
INCREASING OPERATING EFFICIENCIES. The Company believes that it has
opportunities to increase operating efficiencies through improved
coordination among its operating companies. These opportunities include (i)
cost savings generated through volume purchasing, (ii) reductions in future
capital expenditures through better utilization of existing capacity and
(iii) complementary sales and marketing activities.
THE FURNITURE INDUSTRY
The domestic residential furniture industry had approximately $19 billion in
sales during 1994 according to the American Furniture Manufacturers
Association (the "AFMA"). The industry is comprised of an estimated 600
manufacturers, of which the top 10 accounted for approximately 37% of industry
sales, representing an increase from 26% in 1986. The residential furniture
market consists of three principal product categories: wood, upholstery and
metal. Of these categories, wood is the largest, representing approximately
half of total industry sales, while upholstery represents approximately one-
third of total industry sales and metal and other products account for the
balance.
The access to diverse distribution channels has become increasingly
important over the past decade. Home centers, mass merchants, national chains
and specialty stores have emerged as increasingly important distribution
channels for residential furniture manufacturers. Management believes that
these retailers require suppliers that offer broad product lines combined with
substantial marketing and advertising resources. In addition, access to the
consumer has become more important to residential furniture manufacturers. As
a result, the "gallery" concept and other dedicated distribution outlets have
become an important development in the industry. Galleries are large display
areas within independently-owned retail furniture locations which are
committed to the products of a single manufacturer. A gallery generally takes
up a significant portion of a retailer's floor space. For example, the average
retail store has approximately 30,000 square feet with 7,500 square feet
dedicated to a gallery which has complete room settings and fully accessorized
displays that help customers visualize their room. In return for featuring a
manufacturer's merchandise, the retailer receives layout designs, cooperative
promotions and other assistance from the manufacturer.
The residential furniture industry is cyclical, fluctuating with the general
economy. Periods of decline, however, have been brief, with annual industry
shipments declining in only four of the past twenty-four years. The Company
believes furniture sales are influenced by a number of macroeconomic factors
including existing home sales, housing starts, consumer confidence, interest
rates and demographic trends. Management believes favorable fundamental home
building and demographic trends will continue to drive long-term growth in the
furniture industry with AFMA expecting shipments to increase 5.7% in 1996.
28
<PAGE>
PRODUCTS
The Company manufactures and distributes (i) case goods, consisting of
bedroom, dining room and living room furniture, (ii) occasional furniture,
consisting of wood tables and accent items and freestanding home entertainment
centers, (iii) stationary upholstered products, consisting of sofas,
loveseats, sectionals, chairs and (iv) recliners, motion furniture and sleep
sofas. The Company's product strategy, which is enhanced by the acquisition of
Thomasville, is to be the quality and style leader across a broad spectrum of
price categories in the residential furniture industry from "premium" to "RTA"
home furnishings. The Company believes that its products are well-positioned
in terms of selection, quality and value within each of the major style
categories in home furnishings including American Traditional/Country, 18th
Century, European Traditional, Casual Contemporary and Oriental. The Company's
brand name positioning by price and product category are shown below.
<TABLE>
<CAPTION>
CASE STATIONARY MOTION/
PRICING CATEGORY GOODS OCCASIONAL UPHOLSTERY RECLINER
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PREMIUM Thomasville Thomasville Thomasville
Lane Lane
- ----------------------------------------------------------------------------------
BEST Thomasville Thomasville Thomasville Thomasville
Lane Lane Lane Lane
- ----------------------------------------------------------------------------------
BETTER Lane Lane Lane Lane
Broyhill Broyhill Broyhill Broyhill
- ----------------------------------------------------------------------------------
GOOD Broyhill Broyhill Broyhill
- ----------------------------------------------------------------------------------
PROMOTIONAL(1) Armstrong
- ----------------------------------------------------------------------------------
RTA(1) Armstrong
</TABLE>
- --------
(1) Promotional and RTA furniture is currently sold by Thomasville under the
Armstrong name. See "Thomasville Furniture Industries" below.
BROYHILL FURNITURE INDUSTRIES
Broyhill produces collections of medium price bedroom, dining room,
upholstered and occasional furniture aimed at middle-income consumers.
Broyhill's wood furniture offerings consist primarily of bedroom, dining room
and living room furniture, occasional tables, accent items and free standing
home entertainment centers. Upholstered products include sofas, sleep sofas,
loveseats, sectionals and chairs, all offered in a variety of fabrics and
leathers. Broyhill's residential furniture divisions produce a wide range of
furnishings in colonial, country, traditional and contemporary styles.
The widely recognized Broyhill trademarks include Broyhill, Broyhill Premier
and Highland House. The flagship Broyhill product line concentrates on
bedroom, dining room, upholstered and occasional furniture designed for the
"good" and "better" price categories. The Broyhill Premier product line enjoys
an excellent reputation for classically styled, complete furniture collections
in the "better" price category. Highland House also manufactures upholstered
products in the "better" price category. In addition, management believes that
the Broyhill Fontana collection has been the best selling furniture collection
for the past three years.
THE LANE COMPANY
Lane manufactures and markets a broad range of high quality furniture
targeting the "better," "best" and "premium" price categories. Lane targets
niche markets with its seven operating divisions, which participate in such
segments of the residential furniture market as 19th century reproductions,
motion furniture, wicker and rattan, cedar chests and finely tailored
upholstered furniture. Using its recently installed, state-of-the-art
finishing system, Lane produces quality high sheen and enhanced grain finishes
at attractive prices.
The Lane Division of Lane manufactures and sells cedar chests, occasional
living room tables, bedroom and dining room furniture, wall systems, desks,
console tables and mirrors and other occasional wood pieces.
29
<PAGE>
The Lane Division has teamed up with widely recognized designers such as
Dakota Jackson, as well as design institutions such as the American Museum of
Folk Art in New York, to design and market furniture collections. The Lane
Division furniture is sold in the "better" and "best" price categories.
Action Industries, a subsidiary of Lane, manufactures and markets reclining
chairs and motion furniture in the "good," "better" and "best" price
categories under the Action by Lane brand name. Motion furniture consists of
sofas and loveseats with recliner-style moving parts and comfort features,
wall saver recliners, pad-over chaise recliners, and motion sectionals. Lane's
Royal Development Company designs and manufactures the mechanisms used in
Action Industries' reclining furniture products. Management believes that
Action Industries currently commands an approximately 14% market share
position in the motion furniture and an approximately 22% market share in the
reclining chair markets.
The Hickory Chair division manufactures and markets traditional styles of
upholstered furniture, dining room chairs and occasional tables in the "best"
and "premium" price categories. The Hickory Chair division has been crafting
fine reproductions of 18th century furniture for over 80 years. For example,
Hickory Chair offers the James River collection which features reproductions
of fine furnishings from Virginia plantations, and more recently the new Mount
Vernon collection, which features reproductions from George Washington's home.
The Pearson division has been manufacturing and selling contemporary and
traditional styles of finely tailored upholstered furniture including sofas,
love seats, chairs and ottomans for over 50 years. Pearson manufactures the
Viceroy collection, which features fine furnishings from the award winning
designer Victoria Moreland. Pearson furniture sells in the "premium" price
category and is distributed to high end furniture stores and interior
designers.
The Lane Upholstery division includes two product lines, one of which is
composed of contemporary and modern upholstered furniture and metal and glass
occasional and dining tables, and the other of which is composed of
traditional and contemporary upholstered furniture, primarily sofas, love
seats, chairs and ottomans.
The Venture Furniture division manufactures and markets moderately priced
wicker, rattan and bamboo upholstered furniture, tables, occasional wood
pieces and other home furnishings accessories. The division manufactures a
line of outdoor and patio furniture featuring fast drying upholstered cushions
under the name WeatherMaster, which has developed significant consumer
acceptance.
Hickory Business Furniture manufactures and sells a line of office
furniture, including chairs, tables, conference tables, desks and credenzas,
in the upper-medium price range.
THOMASVILLE FURNITURE INDUSTRIES
Thomasville manufactures and markets wood furniture, upholstered products
and RTA/promotional furniture. Thomasville markets its products primarily
under the Thomasville brand name. Management believes Thomasville products
contain special design elements which embody the famous "Thomasville Look." In
wood furniture, these elements include special details, high sheen finishes,
original design hardware, hand selected veneers and fancy face veneer patterns
and decorative carvings that are made possible by the unique manufacturing
techniques that have been developed by Thomasville and the skills of its
experienced employees. In upholstery, these elements include a wide range of
frames, fabrics and leathers combined with fringes, cords, pillows, exposed
frame finishes and seating options.
Management believes that Thomasville's wood products are well-positioned in
terms of selection, quality and value within each of the major style
categories in home furnishings. In 1994, Thomasville introduced two major new
collections, American Revival and Stone Terrace. Additionally, Collector's
Cherry and the Mahogany Collection have consistently been among the most
successful collections in the industry.
Thomasville offers an assortment of upholstery under one brand name that
targets the "best" and "premium" price categories. Upholstery is primarily
marketed in three major styles: Traditional, American
30
<PAGE>
Traditional/Country and Casual Contemporary. Upholstery style is determined by
both frame style and fabric or leather selection. Thomasville's frame
assortment allows the consumer to select from over 90 different styles within
the general style categories, and as much as 45% of the Thomasville fabric
offering changes in a 12 month period, insuring that the latest styles are
available.
Thomasville's RTA/Promotional division offers assembled bedroom sets,
bookcases and home entertainment centers as well as RTA furniture consisting
of home entertainment centers, audio cabinets, television/VCR carts, room
dividers, bookcases, bedroom and kitchen/utility furniture, microwave carts,
computer desks and storage armoires. These products are primarily constructed
from fibreboard or particleboard and are printed or covered with laminated
paper in a variety of finishes and colors.
Thomasville's RTA/Promotional division markets products under the Armstrong
brand name to a variety of retailers for sale to consumer end-users and
certain contract customers. The Company has the right to continue to use the
Armstrong name for 18 months after the closing of the Thomasville acquisition.
Management does not believe that the loss of the Armstrong name will have a
material adverse effect on the Company's sales of RTA and promotional
furniture.
DISTRIBUTION
The Company's strategy of targeting diverse distribution channels such as
furniture centers, independent dealers, national and local chain stores,
department stores, specialty stores and decorator showrooms is supported by
dedicated sales forces covering each of these distribution channels. The
Company is also exploring opportunities to expand international sales and to
distribute through non-traditional channels such as electronic retailers,
wholesale clubs, catalog retailers and television home shopping.
The Company's breadth of product and national scope of distribution enable
it to service effectively national retailers such as J.C. Penney, Sears and
Levitz and key regional retailers such as Haverty's and Heilig-Meyers. These
large retailers are commanding an increasing presence in the consolidating
furniture retailing industry and management believes that the Company is
better positioned than its competitors to meet their needs. Additionally, the
consolidation of the retail furniture industry has made access to distribution
channels an important competitive advantage for manufacturers. The Company has
developed dedicated distribution channels by expanding its gallery program and
the network of independently-owned dedicated retail locations, such as
Thomasville Home Furnishings stores. The Company distributes its products
through a diverse network of independently-owned retail locations, which
includes approximately 80 free-standing stores, more than 680 galleries and
more than 410 furniture centers.
Broyhill, Lane and Thomasville have all developed gallery programs with
dedicated dealers displaying furniture in complete room ensembles. These
retailers employ a consistent showcase gallery concept wherein products are
displayed in complete and fully accessorized room settings instead of as
individual pieces. This presentation format encourages consumers to purchase
an entire room of furniture instead of individual pieces from different
manufacturers. As a result, galleries tend to have higher sales per square
foot as well as faster inventory turns than non-gallery locations. According
to Furniture Today, the median sales per square foot of galleries exceeds that
of non-galleries by 27%. The Company recognizes the importance of the gallery
network to its long-term success, and has developed and maintains close
relationships with its dealers. The Company offers substantial services to
retailers to support their marketing efforts, including coordinated national
advertising, merchandising and display programs and extensive dealer training.
The Thomasville Home Furnishings stores are free-standing retail locations
that exclusively feature Thomasville furniture. The Company believes
distributing its products through dedicated free-standing stores strengthens
brand awareness, provides well-informed and focused sales personnel and
encourages the purchase of multiple items per visit. Management is currently
evaluating similar opportunities to market Lane and Broyhill products.
31
<PAGE>
Showrooms for the national furniture market are located in High Point, North
Carolina and for regional markets in Dallas, Texas, Atlanta, Georgia, Chicago,
Illinois, and San Francisco, California.
BROYHILL FURNITURE INDUSTRIES
One of Broyhill's principal distribution channels is the Broyhill Showcase
Gallery Program. This program, developed over the past twelve years, involves
more than 330 participating dealer locations. Each dealer in the Broyhill
Showcase Gallery Program owns the gallery and the Broyhill furniture
inventory. The program incorporates a core merchandise program, advertising
material support, in-store merchandising events and educational opportunities
for the retail store sales and management personnel. The average Broyhill
Showcase Gallery consists of 7,500 square feet of display space within a
30,000 square foot store. Furniture is displayed in complete and fully
accessorized room settings instead of as individual pieces.
For the retailer that is currently not a participant in the gallery program,
Broyhill offers the Independent Dealer Program. This concept, initiated in
1987, is designed to strengthen Broyhill's relationship with these retailers
by assisting them in overcoming some of the significant difficulties in
running an independent furniture business. The Company seeks to develop these
relationships so that these retailers may become participants in the Broyhill
Showcase Gallery Program. Participating retailers in the Independent Dealer
Program commit to a minimum pre-selected lineup of Broyhill merchandise and,
in return, receive a detailed, step-by-step, year-round advertising and
merchandising plan. The program includes four major sales events per year,
monthly promotional themes and professionally prepared advertising and
promotional materials at nominal cost in order to help increase consumer
recognition on the local level. As part of the Independent Dealer Program,
Broyhill offers the Broyhill Furniture Center Program for retailers that have
committed at least 2,000 square feet exclusively to Broyhill products. This
program includes all of the benefits of the Independent Dealer Program, plus
additional marketing, designing and advertising assistance.
The Company is currently exploring opportunities to expand its distribution
channels for Broyhill through free-standing retail stores similar to the
Thomasville Home Furnishings stores. A retailer in Memphis, Tennessee recently
opened an independently-owned Broyhill store.
THE LANE COMPANY
Lane distributes its products nationally through a well established network
of approximately 16,000 retail locations. A diverse distribution network is
utilized in keeping with Lane's strategy of supplying customers highly
specialized products in selected niche markets. This distribution network
primarily consists of independent furniture stores, regional chains such as
Haverty's and Art Van, and department store companies such as J.C. Penney,
Sears, May Department Stores, Federated Department Stores and Dillard
Department Stores. Lane has an established specialty gallery program with more
than 200 participating dealers.
THOMASVILLE FURNITURE INDUSTRIES
Thomasville products are offered at more than 680 independently-owned retail
locations, including more than 410 Thomasville Galleries, approximately 80
Thomasville Home Furnishings stores and more than 180 selected furniture
chains and retailers. The Thomasville Gallery concept was initiated in 1983.
Each Thomasville Gallery has an average 7,500 square feet of retail space
specifically dedicated to the display, promotion and sale of Thomasville
products. Management believes that the gallery concept results in increased
sales of Thomasville products by encouraging the consumer to purchase a
complete collection as opposed to individual pieces from different
manufacturers. The first Thomasville Home Furnishings store opened in 1988.
The typical Thomasville Home Furnishings store is a 15,000 square foot
independently-owned store offering a broad range of Thomasville products,
presented in a home-like setting by specially trained salespersons.
Thomasville's management believes that the gallery and dedicated store
programs have helped create one of the most efficient distribution systems in
the industry.
Thomasville's RTA/Promotional division sells promotional and RTA furniture
to a variety of retailers for sale to consumer end-users and certain contract
customers. Promotional furniture is sold to retail chains such as
32
<PAGE>
Wal-Mart and Levitz, as well as independent furniture stores. Promotional
furniture is also sold in the hospitality and health care markets of
Thomasville's contract business. RTA customers include national chains such as
Wal-Mart and Ames, catalog showrooms, discount mass merchandisers, warehouse
clubs and home furnishings retailers.
MARKETING AND ADVERTISING
The Company continues to strengthen its valuable brand names through ongoing
investment in innovative consumer advertising. The Company is one of the
largest advertisers in the residential furniture industry. Advertising is used
to increase consumer awareness of its brand names and is targeted to specific
customer segments through leading shelter magazines. Each operating company
uses focused advertising in major markets to create buying urgency around
specific sale and location information, enabling retailers to be listed
jointly in advertisements for maximum advertising efficiency and shared costs.
The Company seeks to increase consumer buying and strengthen relationships
with retailers through cooperative advertising and selective promotional
programs. The Company focuses its marketing efforts on prime potential
customers utilizing information from databases and from callers to each
operating company's toll-free telephone number. Each of the operating
companies also advertises selectively on television in conjunction with
dealers, and Action and Thomasville also use television advertising
independently.
BROYHILL FURNITURE INDUSTRIES
Broyhill's advertising programs focus on translating its strong consumer
awareness into increased sales. According to the recent consumer survey
conducted for the Company by America's Research Group, Broyhill was rated the
number one brand in the industry in terms of brand awareness. In addition, a
survey of readers by Better Homes and Gardens found that 92.5% of people
recognized the name in an aided name recognition test, and a nationwide survey
by Southern Bride magazine found that Broyhill had the highest unaided name
recognition of any residential furniture manufacturer.
Broyhill's current marketing strategy features a national print advertising
program in addition to traditional promotional programs such as furniture
"giveaways" on television gameshows and dealer-based promotions such as
product mailings and brochures. The national print advertising program, which
consists of multi-page lay-outs, is designed to appeal to the consumer's
desire for decorating assistance and increased confidence in making the
decision to purchase a big ticket product such as furniture. These
advertisements are run in publications such as Good Housekeeping and Country
Living which appeal to Broyhill's customer base. Game show promotions, a long-
standing Broyhill tradition, include popular programs such as Wheel of Fortune
and The Price is Right.
THE LANE COMPANY
Management believes that Lane was the first residential furniture
manufacturer to institute a national advertising campaign. Lane became a well-
known brand name through Lane's initial use in the 1920s of creative
advertising to promote its cedar chests. Since then, Lane has continued to use
advertising programs to generate consumer awareness of the Lane brand name.
Through Lane's in-house advertising agency, recent programs have been
developed for print campaigns in national publications such as Country Home,
Country Living, House Beautiful and Architectural Digest. Action Industries is
engaged in selective national and regional television advertising.
The Lane Keepsake program has made the Lane cedar chest one of the best-
known furniture products in the industry and contributes to the high level of
consumer recognition. The program enables the 1,100 participating dealers to
establish early personal contact with a large number of women who are about to
enter the bridal market as potential buyers of home furnishings. Information
regarding a graduation gift of a miniature Lane cedar chest, available at the
local participating furniture store, is sent to the parents of graduating high
school women. This Keepsake program is believed to be instrumental in building
consumer recognition and promoting the Lane brand name.
33
<PAGE>
Lane markets its products through the use of well-known designers and
affiliation with institutions. For example, Lane has teamed up with widely
recognized designers such as Mark Hampton and Dakota Jackson, as well as
design institutions such as the American Museum of Folk Art in New York, to
design and market furniture collections.
THOMASVILLE FURNITURE INDUSTRIES
According to a recent consumer survey conducted by America's Research Group,
Thomasville is consistently rated the "highest quality" residential furniture
brand. Management seeks to enhance this brand identification through
advertising programs. Thomasville's current campaign, featured in household
magazines and periodic television commercials, emphasizes single dramatic,
high quality wood and upholstery pieces to support the emphasis on higher
quality. Thomasville invests in image advertising by placing advertisements in
up-front positions in national household magazines, such as Better Homes and
Gardens, Good Housekeeping and House Beautiful. Thomasville also utilizes
focused advertising in major markets to create buying urgency around specific
sale and location information, enabling retailers to be listed jointly in
advertisements for maximum advertising efficiency and shared costs.
To reach additional customers, Thomasville uses promotional discounts and
dealer cooperative advertising support. Thomasville has two major retailer
promotions, the Winter and Summer Thomasville Sales, which coincide with
traditional industry sale periods and are supported by eight page color
circulars and full page advertisements in USA Today. Typically, six to eight
million circulars are mailed by retailers during these periods to draw
customers to Thomasville Galleries and Thomasville Home Furnishings stores.
MANUFACTURING
Management believes that the Company is one of the world's most advanced
producers of furniture products and a leader in automated manufacturing. The
Company has sophisticated and computerized manufacturing facilities that are
run by a well-trained, non-union work force. Management believes that the
Company is one of the lowest cost producers in the furniture industry. In
addition to cost efficiency, the high degree of automation results in
substantial additional capacity, which can be accessed by implementing
selected departmental second and third shifts. Management believes that the
Company is well positioned to respond to an increase in demand for furniture
products. As a result of the availability of some excess capacity in Lane and
Thomasville manufacturing facilities, management believes that it will be able
to meet its manufacturing requirements over the next several years without the
necessity of making significant additional capital expenditures to expand
capacity.
Broyhill operates 16 finished case goods and upholstery production and
warehouse facilities totalling over 4.9 million square feet of manufacturing
and warehouse space. All finished goods plants are located in North Carolina.
Broyhill pioneered the use of mass production techniques in the furniture
industry and continues to be a leader in this area by utilizing longer
production runs to achieve economies of scale. Short set-up times and long
production runs have allowed for a reduction of both manufacturing cost and
overhead over the last five years. Broyhill recently completed construction of
a state-of-the-art particleboard manufacturing facility that provides a
captive, cost-effective source of high quality particleboard, a primary
material used in the Company's products.
Lane operates 15 finished case goods and upholstery production and warehouse
facilities in Virginia, North Carolina and Mississippi. Since the late 1980s,
significant capital expenditures have been made to acquire technologically
advanced manufacturing equipment which has increased factory productivity. In
1993, Lane completed a new 396,000 square foot plant, located in Mississippi,
which manufactures motion furniture as well as a new sleep sofa product line.
This facility added approximately $100 million of annual production capacity.
Lane recently installed a state-of-the-art flat-line finishing system that
produces quality high sheen and enhanced grain finishes at attractive prices.
34
<PAGE>
Thomasville manufactures or assembles its products at 16 finished case goods
and upholstery production and warehouse facilities located in North Carolina,
Virginia, Tennessee and Mississippi, close to sources of raw materials and
skilled craftsmen. Each plant is specialized, manufacturing limited product
categories, allowing longer, more efficient production runs and economies of
scale. During recent years, Thomasville has focused on reducing manufacturing
costs by closing less efficient plants, reducing labor costs and establishing
process improvement programs.
The manufacturing process for Thomasville's RTA/promotional product line is
highly automated. Large fiberboard and particleboard sheets are machine-
finished in long production runs, then stored and held for assembly using
highly automated assembly lines. Completed goods are stored in an automated
warehouse to provide quicker delivery to customers. All plant operations use
automated manufacturing processes and inventory management systems. Ninety
percent of Thomasville's RTA/promotional products are shipped within 14 days
of production.
RAW MATERIALS AND SUPPLIERS
The raw materials used by the Company in manufacturing its products are
lumber, veneers, plywood, fiberboard, particleboard, paper, hardware,
adhesives, finishing materials, glass, mirrored glass, fabrics, leathers and
upholstered filling material (such as synthetic fibers, foam padding and
polyurethane cushioning). The various types of wood used in the Company's
products include cherry, oak, maple, pine and pecan, which are purchased
domestically, and mahogany, which is purchased abroad. Fabrics, leathers and
other raw materials are purchased both domestically and abroad. Management
believes that its supply sources for those materials are adequate.
The Company has no long-term supply contracts and has experienced no
significant problems in supplying its operations. Although the Company has
strategically selected suppliers of raw materials, the Company believes that
there are a number of other sources available, contributing to its ability to
obtain competitive pricing for raw materials. Raw materials prices fluctuate
over time depending upon factors such as supply, demand and weather. Increases
in prices may have a short-term impact on the Company's margins for its
products.
The majority of supplies for RTA and promotional products is purchased
domestically, although paper and certain hardware is purchased abroad.
Management believes, however, that its proximity to and relationships with
suppliers are advantageous for the sourcing of such materials. In addition, by
combining the purchase of various raw materials (such as foam, cartons,
springs and fabric) and services, Lane and Broyhill have been able to realize
cost savings. Management believes that the Company's position as the largest
residential furniture manufacturer will create opportunities for additional
cost savings.
ENVIRONMENTAL MATTERS
The Company is subject to a wide-range of federal, state and local laws and
regulations relating to protection of the environment, worker health and
safety and the emission, discharge, storage, treatment and disposal of
hazardous materials. These laws include the Clean Air Act of 1970, as amended,
the Resource Conservation and Recovery Act, the Federal Water Pollution
Control Act and the Comprehensive Environmental, Response, Compensation and
Liability Act ("Superfund"). Certain of the Company's operations use glues and
coating materials that contain chemicals that are considered hazardous under
various environmental laws. Accordingly, management closely monitors the
Company's environmental performance at all of its facilities. Management
believes that the Company is in substantial compliance with all environmental
laws.
Under the provisions of the Clean Air Act Amendments of 1990 (the "CAA"), in
December 1995, the Environmental Protection Agency (the "EPA") promulgated air
emission standards for the wood furniture industry. These regulations, known
as National Emission Standards for Hazardous Air Pollutants ("NESHAPs"),
govern the levels of emission of certain designated chemicals into the air and
will require that the Company reduce emissions of certain volatile organic
compounds ("VOCs") by November 1997. Management is
35
<PAGE>
investigating and evaluating techniques to meet these standards at all
facilities to which the NESHAPs standards will apply. While the Company may be
required to make capital investments at some of its facilities to ensure
compliance, the Company believes that it will meet all applicable requirements
in a timely fashion and that the amount of money required to meet the NESHAPs
requirements will not materially affect its financial condition or its results
of operations.
The Company has been identified as a potentially responsible party ("PRP")
at a number of Superfund sites. The Company believes that its liability with
respect to most of the sites is de minimis, and the Company is entitled to
indemnification by others with respect to liability at certain sites. The
Company also accrued a reserve for such environmental liabilities in
connection with the acquisition of Thomasville. Management believes that any
liability as a PRP with regard to the Superfund sites will not have a material
adverse effect on the financial condition or results of operations of the
Company.
COMPETITION
The furniture manufacturing industry is highly competitive. The Company's
products compete with products made by a number of furniture manufacturers,
including Masco Corporation, La-Z-Boy Chair Company, Ladd Furniture, Inc.,
Bassett Furniture Industries, Inc., and Ethan Allen Interiors, Inc., as well
as approximately 600 smaller producers. The elements of competition include
pricing, styling, quality and marketing.
EMPLOYEES
As of December 31, 1995, the Company employed approximately 20,700 people.
None of the Company's employees is represented by a union.
BACKLOG
The combined backlog of the Company's operating companies as of December 31,
1995 aggregated approximately $194 million, compared to approximately $209
million as of December 31, 1994. The backlog calculations for each year have
been adjusted to include the backlog for Thomasville. Substantially all of the
decrease in backlog is attributable to a change in the Company's method of
calculating backlog with regard to certain operations. Management believes
that if it had reported its backlog on a consistent basis, the year end
backlog would have been substantially the same for each of the years ended
December 31, 1994 and 1995.
36
<PAGE>
MANAGEMENT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND PRINCIPAL OCCUPATION
---- --- ---------------------------------
<C> <C> <S>
Richard B. Loynd 68 Chairman of the Board, President and Chief Executive
Officer of the Company
Brent B. Kincaid 64 President and Chief Executive Officer of Broyhill
K. Scott Tyler, Jr. 56 President and Chief Executive Officer of Lane
Frederick B. Starr 63 President and Chief Executive Officer of Thomasville
David P. Howard 45 Vice-President and Chief Financial Officer of the Com-
pany
Lynn Chipperfield 44 Vice-President, General Counsel and Secretary of the
Company
Steven W. Alstadt 41 Controller of the Company
Leon D. Black 44 Director of the Company; Officer and director of Apollo
Capital Management, Inc. and Lion Capital Management,
Inc.
Michael S. Gross 34 Director of the Company; Officer of Apollo Capital
Management, Inc. and Lion Capital Management, Inc.
John J. Hannan 43 Director of the Company; Officer and director of Apollo
Capital Management, Inc. and Lion Capital Management,
Inc.
Joshua J. Harris 31 Director of the Company; Officer of Apollo Capital
Management, Inc. and Lion Capital Management, Inc.
Bruce A. Karsh 40 Director of the Company; President of Oaktree Capital
Management, LLC
John H. Kissick 54 Director of the Company; Officer of Lion Capital
Management, Inc. and advisor to Apollo Capital Manage-
ment, Inc.
Donald E. Lasater 70 Director of the Company; Retired, formerly Chairman and
Chief
Executive Officer of Mercantile Bancorporation, Inc.
Lee M. Liberman 74 Director of the Company; Retired, formerly Chairman and
Chief Executive Officer of Laclede Gas Company
John J. Ryan III 68 Director of the Company; Director of Artemis S.A. and
Financiere Pinault S.A.
Michael D. Weiner 43 Director of the Company; Officer of Apollo Capital
Management, Inc. and Lion Capital Management, Inc.
</TABLE>
Apollo Capital Management, Inc. ("Apollo Capital") and Lion Capital
Management, Inc. ("Lion Capital") are affiliates of Apollo and Lion, which
together beneficially own approximately 67.5% of the outstanding Common Stock
of the Company. See "Principal Stockholders" below. Apollo Capital and Lion
Capital are the general partners of Apollo Advisors, L.P. ("Apollo Advisors")
and Lion, respectively. Apollo Advisors is the managing general partner of
Apollo, AIF II, L.P. and Apollo Investment Fund III, L.P., private securities
investment funds. Lion acts as financial advisor to and representative of
certain institutional investors with respect to securities investments.
MR. LOYND was elected Vice-President and member of the Board of Directors of
the Company in 1987. He was named President of the Company in March 1989,
became Chief Executive Officer in November 1989 and Chairman of the Board in
June 1990. Previously, Mr. Loynd was Chairman of the Board of Converse Inc.
from 1982 to 1989. He is a director of Emerson Electric Company, Converse Inc.
and The Florsheim Shoe Company.
MR. KINCAID has served as President and Chief Executive Officer of Broyhill
since 1992. Previously, Mr. Kincaid held several positions within Broyhill,
including Executive Vice President (1991 to 1992), Vice President-Operations
(1987 to 1991) and Vice President-Purchasing (1982 to 1987).
MR. TYLER has served as Chief Executive Officer of Lane since 1991 and
President of Lane since 1989. From 1987 to 1989, Mr. Tyler served as President
of the Lane Division, and has been a Vice President of Lane since 1986.
37
<PAGE>
MR. STARR was named President and Chief Executive Officer of Thomasville in
1982. From 1977 to 1982, Mr. Starr served as Senior Vice President and General
Sales Manager of Thomasville.
MR. HOWARD joined the Company in July 1984 as Director of Internal Audit. He
was promoted to Controller in March 1990, elected Vice-President in April 1991
and appointed Chief Financial Officer in July 1994.
MR. CHIPPERFIELD has served as General Counsel of the Company since January
1993, and as Vice-President and Secretary of the Company since January 1996.
From 1986 to 1993, Mr. Chipperfield served as Assistant General Counsel of the
Company.
MR. ALSTADT joined the Company in June 1979 as a member of the Internal
Audit Department. He was named Manager, Financial Reporting and Analysis in
1990 and was elected Controller and appointed Chief Accounting Officer in
1994.
CERTAIN TRANSACTIONS
The Company is party to a consulting agreement with Apollo Advisors, an
affiliate of the Company's controlling stockholders (the "Consulting
Agreement"), pursuant to which Apollo Advisors provides corporate advisory,
financial and other consulting services to the Company. Fees under the
Consulting Agreement are payable at an annual rate of $500,000, plus out-of-
pocket expenses. The Consulting Agreement is for a term ending December 31,
1996 and is automatically renewable for successive one-year terms unless
terminated by independent members of the Board of Directors. The Company has
also granted registration rights to Apollo and Lion with respect to shares of
Common Stock owned by Apollo and Lion.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of the Company Common Stock as of December 31, 1995 by
each person known by the Company to beneficially own more than five percent of
the outstanding shares of Common Stock.
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
NUMBER OF PRIOR TO AFTER
NAME SHARES OFFERING(1) OFFERING(1)
---- ---------- ----------- -----------
<S> <C> <C> <C>
Apollo Investment Fund, L.P.
c/o CICB Bank and Trust Company
(Cayman) Limited, Edward Street,
Georgetown, Grand Cayman, Cayman
Islands, British West Indies and
Lion Advisors, L.P.
Two Manhattanville Road
Purchase, New York 10577................ 33,691,099(2) 67.4% 57.4%
J.P. Morgan & Co. Incorporated
60 Wall Street
New York, New York...................... 3,342,503 6.6% 5.6%
</TABLE>
- --------
(1) Shares of Common Stock issuable upon exercise of warrants to purchase
Common Stock owned by such stockholder were deemed to be outstanding for
purposes of calculating the percentages of outstanding shares.
(2) Messrs. Black, Gross, Hannan, Harris, Kissick and Weiner disclaim
beneficial ownership of the shares owned by Apollo and Lion. See
"Management."
By reason of its ownership of its shares of Common Stock, Apollo and Lion
have the power to control or influence control of the Company, and Apollo and
Lion have reported that they may exercise such control from time to time.
38
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, no par value, and 10,000,000 shares of Preferred Stock, no
par value. The Common Stock has a stated value of $1.00 per share.
As of December 31, 1995, there were 50,120,079 shares of Common Stock
outstanding held of record by approximately 3,000 persons, 2,498,000 shares of
Common Stock reserved for issuance upon the exercise of outstanding stock
options and 6,907,198 shares of Common Stock reserved for issuance upon the
exercise of outstanding warrants at an exercise price of $7.13 per share. No
shares of Preferred Stock have been issued by the Company.
COMMON STOCK
Holders of shares of the Company's Common Stock are entitled to one vote per
share on all matters to be voted upon by the stockholders and are not entitled
to cumulate votes for the election of directors. Subject to preferences that
may be applicable to any outstanding Preferred Stock, holders of shares of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. In the event of liquidation, dissolution or winding up of
the Company, the holders of shares of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of Preferred Stock, if any, then outstanding. Shares of
Common Stock have no preemptive, conversion or other subscription rights and
there are no redemption or sinking fund provisions applicable to the Common
Stock.
PREFERRED STOCK
The Restated Certificate of Incorporation of the Company provides that the
Company may issue up to 10,000,000 shares of Preferred Stock. The Board of
Directors has the authority to issue Preferred Stock in one or more series and
to fix the rights, preferences, privileges and restrictions, including the
dividend, conversion, voting, redemption (including sinking fund provisions),
and other rights, liquidation preferences, and the number of shares
constituting any series and the designations of such series, without any
further vote or action by the stockholders of the Company. Because the terms
of the Preferred Stock may be fixed by the Board of Directors of the Company
without stockholder action, the Preferred Stock could be issued quickly with
terms calculated to defeat a proposed takeover of the Company, or to make the
removal of management of the Company more difficult. Under certain
circumstances this could have the effect of decreasing the market price of the
Common Stock. Management of the Company is not aware of any such threatened
transaction to obtain control of the Company.
CERTAIN RESTATED CERTIFICATE OF INCORPORATION AND BY-LAW PROVISIONS
Transactions with Substantial Stockholders. The Restated Certificate of
Incorporation of the Company contains provisions limiting the ability of any
person who is the beneficial owner of more than 10% of the outstanding voting
stock of the Company (a "Substantial Stockholder") to effect certain
transactions involving the Company unless approved by a majority of the
Disinterested Directors of the Company (as defined in the Restated Certificate
of Incorporation). If there are no Disinterested Directors, the transaction
must be approved by the holders of a majority of the shares voting on such
transaction of which the Substantial Stockholder is not a beneficial owner.
Approval will also be required by the holders of a majority of the shares
voting on such transaction not owned by the Substantial Stockholder, if the
transaction is required to be approved by stockholders under applicable law
(provided that such stockholder approval requirement will not be required if
the Substantial Stockholder is the record owner of at least 90% of the
outstanding Common Stock).
Transactions covered by these provisions include (a) the merger or
consolidation of the Company with a Substantial Stockholder, (b) the sale,
exchange, mortgage, pledge, lease or transfer of assets to a Substantial
Stockholder, (c) the issuance or transfer by the Company of any securities or
other property to a Substantial
39
<PAGE>
Stockholder, (d) the reclassification of securities of the Company or the
recapitalization or merger of the Company with any of its subsidiaries if the
transaction would, directly or indirectly, increase the proportionate share of
any class of equity or convertible securities of the Company or a subsidiary
owned by a Substantial Stockholder, or (e) any other transaction with a
Substantial Stockholder, including without limitation payment of compensation
and management fees (but not including customary directors' fees and expense
reimbursements). Covered transactions will not, however, include (1) bona fide
loans by the Substantial Stockholder not exceeding $10.0 million in any 12-
month period, (2) participation by the Substantial Stockholder in bona fide
offerings of equity, convertible or equity-related securities by the Company
to the extent required to allow the Substantial Stockholder to avoid dilution
of its percentage interest in the Common Stock, (3) repurchases of securities
either pursuant to certain open market transactions or on terms identical to
those being offered to all other holders of the same securities, (4) the
preparation and filing of registration statements with respect to securities
received by any Substantial Stockholder pursuant to the Plan of Reorganization
and the payment of reasonable expenses associated therewith, and (5) other
immaterial transactions in the ordinary course of business.
Repurchase of Stock. The Restated Certificate of Incorporation of the
Company provides that, except under certain circumstances, the Company may not
repurchase its stock at a price greater than the Market Price (as defined in
the Company's Restated Certificate of Incorporation) or for consideration
other than cash from a 5% or more stockholder who has held such shares for
less than two years, unless the repurchase is authorized by a majority of all
shares entitled to vote generally in the election of directors, excluding the
shares held by such stockholder.
No Stockholder Action by Written Consent; Special Meetings. The Company's
Restated Certificate of Incorporation and By-Laws provide that stockholder
action can be taken only at an annual or special meeting of stockholders, and
prohibit stockholder action by written consent in lieu of a meeting. The
Company's Restated Certificate of Incorporation and By-Laws provide that
special meetings of stockholders can only by called (i) pursuant to a
resolution adopted by a majority of the entire Board of Directors or (ii) upon
the request of stockholders holding 20% or more the Company's voting stock
outstanding at that time. Any call for a special meeting of stockholders must
specify the matters to be acted upon at such a meeting and only those
specified matters may be acted upon at such special meeting.
Supermajority Vote Requirements. The Company's Restated Certificate of
Incorporation contains provisions requiring the affirmative vote of the
holders of at least a majority of all shares voting, excluding the shares
owned by a Substantial Stockholder, to approve an Affiliate Transaction (as
defined in the Company's Restated Certificate of Incorporation) and requiring
the affirmative vote of the holders of at least a majority of all shares
entitled to vote generally in the election of directors, excluding the shares
owned by an Interested Stockholder (as defined in the Company's Restated
Certificate of Incorporation), to approve a Stock Repurchase (as defined in
the Company's Restated Certificate of Incorporation) from an Interested
Stockholder.
The Company's Restated Certificate of Incorporation contains provisions
requiring the affirmative vote of the holders of at least 75% of all shares
entitled to vote generally in the election of directors and, in addition, the
affirmative votes of the holders of at least 50% of the shares voting,
excluding the shares owned by a Substantial Stockholder, to alter, amend,
repeal or adopt provisions inconsistent with present provisions providing for
action by stockholders only during duly called annual or special meetings and
not by consent, the calling of special meeting of stockholders, defining the
phrase "Substantial Stockholder" and approving Affiliate Transactions.
TRANSFER AGENT AND REGISTRAR
The Transfer Agents and Registrars for the Common Stock are KeyCorp
Shareholder Services Inc. and First Chicago Trust Company of New York.
40
<PAGE>
UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), each
Underwriter named below has severally agreed to purchase, and the Company has
agreed to sell to such Underwriter, the number of shares of Common Stock set
forth opposite the name of such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Smith Barney Inc. ..............................................
Dean Witter Reynolds Inc. ......................................
Donaldson, Lufkin & Jenrette Securities Corporation.............
Wheat, First Securities, Inc. ..................................
---------
Total......................................................... 8,750,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock are
subject to approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to take and pay for all shares of
Common Stock offered hereby (other than those covered by the over-allotment
option described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc., Dean Witter Reynolds Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation and Wheat, First
Securities, Inc. are acting as the Representatives, propose to offer some of
the shares of Common Stock directly to the public at the price to public set
forth on the cover page of this Prospectus and some of the shares of Common
Stock to certain dealers at a price which represents a concession not in
excess of $ per share under the price to public. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share of Common Stock to certain other dealers.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 1,250,000 additional
shares of Common Stock at the price to public set forth on the cover page of
this Prospectus minus the underwriting discounts and commissions. The
Underwriters may exercise such option solely for the purpose of covering over-
allotments, if any, in connection with the Offering. To the extent such option
is exercised, each Underwriter will be obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number of shares set forth opposite each Underwriter's name in
the preceding table bears to the total number of shares listed in such table.
The Company, its officers and directors, and Apollo and Lion have agreed
that, for a period of 120 days from the date of this Prospectus, they will
not, without the prior written consent of Smith Barney Inc., offer, sell,
contract to sell, or otherwise dispose of, any shares of Common Stock of the
Company or any securities convertible into, or exercisable or exchangeable for
Common Stock of the Company.
Smith Barney Inc. has from time to time performed various investment banking
services for the Company, including in connection with the Company's recent
acquisition of Thomasville, and has received customary fees in respect of such
services.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
41
<PAGE>
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Company by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain
legal matters will be passed upon for the Underwriters by Cravath, Swaine &
Moore, New York, New York.
EXPERTS
The Consolidated Financial Statements and financial statement schedule of
the Company and subsidiaries as of December 31, 1995 and 1994, and for each of
the years in the three-year period ended December 31, 1995, have been audited
by KPMG Peat Marwick LLP, independent certified public accountants. The pro
forma adjustments appearing in the Company's pro forma condensed consolidated
balance sheet as of December 31, 1995 and the pro forma condensed consolidated
statement of operations for the year ended December 31, 1995, included herein
have been examined by KPMG Peat Marwick LLP, independent certified public
accountants. Such financial statements, schedule, and pro forma adjustments
have been included and incorporated by reference herein and in the
Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP,
appearing elsewhere and incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Thomasville as of December 31, 1994
and 1993 and for each of the years in the three-year period ended December 31,
1994, have been incorporated by reference herein, and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing. The report of
KPMG Peat Marwick LLP refers to changes in accounting for post employment
benefits, post retirement benefits and income taxes.
In addition, the consolidated balance sheet of Thomasville as of December
29, 1995 and the related consolidated statement of operations for the year
then ended, have been incorporated by reference herein, and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, incorporated by reference herein,
and upon the authority of said firm as experts in accounting and auditing. The
report of KPMG Peat Marwick LLP refers to the omission, in the consolidated
financial statements of the Company, of the consolidated statements of
shareholder's equity and cash flows for the year ended December 29, 1995 and
notes to the consolidated financial statements which are required by generally
accepted accounting principles and results in an incomplete presentation. The
report also refers to Thomasville's acquisition by the Company on December 29,
1995. The acquisition was accounted for under the purchase method of
accounting. The accompanying consolidated financial statements do not include
the effects of push down accounting.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities of the Commission, Judiciary Plaza,
450 Fifth Street, N.W., Washington, DC 20549, as well as at the following
Commission Regional Offices: Seven World Trade Center, 13th Floor, New York,
NY 10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies can be obtained from the Commission by mail at
prescribed rates. Requests should be directed to the Commission's Public
Reference Branch, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC
20549. Such material can also be inspected and copied at the offices of the
New York Stock Exchange, 20 Broad Street, New York, New York, 10005, on which
the Company's Common Stock is listed.
42
<PAGE>
This Prospectus constitutes a part of a registration statement on Form S-3
(herein, together with all exhibits thereto, referred to as the "Registration
Statement") filed by the Company with the Commission under the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the securities
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Reference is
hereby made to the Registration Statement and to the exhibits thereto for
further information with respect to the Company and the securities offered
hereby. Copies of the Registration Statement and the exhibits thereto are on
file at the offices of the Commission and may be obtained upon payment of the
prescribed fee or may be examined without charge at the public reference
facilities of the Commission described above. Statements contained herein
concerning the provisions of documents are necessarily summaries of such
documents, and each statement is qualified in its entirety by reference to the
copy of the applicable document filed with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission (File No.
I-91) are incorporated by reference in this Prospectus:
(1) Annual Report on Form 10-K for the year ended December 31, 1995;
(2) Current Report on Form 8-K filed January 12, 1996 as amended by Form 8-
K/A-1 filed January 16, 1996, and Form 8-K/A-2 filed February 1, 1996;
(3) Current Report on Form 8-K filed January 31, 1996; and
(4) the description of the Company's Common Stock contained in its Form 8
filed with the Commission on June 29, 1992.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the Offering shall be deemed to be incorporated by
reference into this Prospectus.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. These documents (not including exhibits to the
documents incorporated by reference unless such exhibits are specifically
incorporated by reference into the information that the Prospectus
incorporates) are available without charge to each person to whom a Prospectus
is delivered upon written or oral request. Requests should be directed to
INTERCO INCORPORATED, 101 South Hanley Road, St. Louis, Missouri 63105-3493,
Attention: Secretary (telephone number (314) 863-1100).
43
<PAGE>
INTERCO INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
CONSOLIDATED FINANCIAL STATEMENTS: ----
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheet as of December 31, 1994 and 1995.............. F-3
Consolidated Statement of Operations for the Years Ended December 31,
1993, 1994 and 1995..................................................... F-4
Consolidated Statement of Cash Flows for the Years Ended December 31,
1993, 1994 and 1995..................................................... F-5
Consolidated Statement of Shareholders' Equity for the Years Ended
December 31, 1993,
1994 and 1995........................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders INTERCO INCORPORATED:
We have audited the accompanying consolidated balance sheets of INTERCO
INCORPORATED and subsidiaries as of December 31, 1994 and 1995, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of INTERCO
INCORPORATED and subsidiaries as of December 31, 1994 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
St. Louis, Missouri
January 30, 1996
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 32,145 $ 26,412
Receivables, less allowances of $5,062 and $20,724
at December 31, 1994 and 1995 (Note 9)............. 202,270 276,116
Inventories (Note 6)................................ 155,031 269,677
Prepaid expenses and other current assets........... 14,325 17,888
-------- ----------
Total current assets................................ 403,771 590,093
Property, plant and equipment:
Land................................................ 11,933 16,635
Buildings and improvements.......................... 111,076 166,214
Machinery and equipment............................. 115,407 206,580
-------- ----------
238,416 389,429
Less accumulated depreciation....................... 57,023 83,023
-------- ----------
Net property, plant and equipment................... 181,393 306,406
Intangible assets (Note 7)........................... 275,767 370,307
Other assets......................................... 20,804 24,933
-------- ----------
$881,735 $1,291,739
======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 9)....... $ 16,574 $ 18,639
Accounts payable.................................... 37,721 53,093
Accrued employee compensation....................... 19,771 29,020
Accrued interest expense............................ 1,652 1,304
Other accrued expenses.............................. 19,730 33,001
-------- ----------
Total current liabilities........................... 95,448 135,057
Long-term debt, less current maturities (Note 9)..... 409,679 705,040
Other long-term liabilities.......................... 101,214 150,486
Shareholders' equity:
Preferred stock, authorized 10,000,000 shares, no
par value--issued, none............................ -- --
Common stock, authorized 100,000,000 shares, $1.00
stated value (no par value)--issued 50,076,515 and
50,120,079 shares at December 31, 1994 and 1995
(Note 10).......................................... 50,076 50,120
Paid-in capital..................................... 220,788 218,156
Retained earnings................................... 4,530 32,880
-------- ----------
Total shareholders' equity.......................... 275,394 301,156
-------- ----------
$881,735 $1,291,739
======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 1994 1995
----------------------------- ---------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales...................... $ 980,532 $ 1,072,696 $ 1,073,889
Costs and expenses:
Cost of operations........... 685,749 752,528 760,393
Selling, general and
administrative expenses..... 186,205 199,333 198,321
Depreciation and amortization
(includes $16,463, $16,900
and $15,922 related to fair
value adjustments).......... 34,455 35,776 36,104
------------- --------------- ---------------
Earnings from operations....... 74,123 85,059 79,071
Interest expense............... 38,621 37,886 33,845
Other income, net:
Gain on insurance settlement
(Note 15)................... -- -- 7,882
Other........................ 1,764 1,668 3,930
------------- --------------- ---------------
Earnings before income tax
expense, discontinued
operations and extraordinary
item.......................... 37,266 48,841 57,038
Income tax expense (Note 11)... 15,924 20,908 22,815
------------- --------------- ---------------
Net earnings from continuing
operations.................... 21,342 27,933 34,223
Discontinued operations (Note
4):
Earnings from operations, net
of taxes.................... 24,026 25,443 --
Loss on distribution, net of
taxes....................... -- (15,104) --
------------- --------------- ---------------
Net earnings before
extraordinary item............ 45,368 38,272 34,223
Extraordinary item--early
extinguishment of debt,
net of tax benefit (Note 5)... -- -- (5,815)
------------- --------------- ---------------
Net earnings................... $ 45,368 $ 38,272 $ 28,408
============= =============== ===============
Net earnings per common share--
primary (Note 3):
Net earnings from continuing
operations ................. $ 0.41 $ 0.54 $ 0.67
Discontinued operations...... 0.47 0.20 --
Extraordinary item--early
extinguishment of debt...... -- -- (0.11)
------------- --------------- ---------------
Net earnings per common share--
primary....................... $ 0.88 $ 0.74 $ 0.56
============= =============== ===============
Net earnings per common share--
fully diluted (Note 3):
Net earnings from continuing
operations.................. $ 0.41 $ 0.54 $ 0.65
Discontinued operations...... 0.47 0.20 --
Extraordinary item--early
extinguishment of debt...... -- -- (0.11)
------------- --------------- ---------------
Net earnings per common share--
fully diluted................. $ 0.88 $ 0.74 $ 0.54
============= =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
-------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings.................................. $ 45,368 $ 38,272 $ 28,408
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Net loss on early extinguishment of debt.... -- -- 5,815
Net earnings from discontinued operations... (24,026) (10,339) --
Depreciation of property, plant and
equipment.................................. 24,304 25,675 26,371
Amortization of intangible and other
assets..................................... 10,151 10,101 9,733
Noncash interest and other expense.......... 2,097 196 2,150
(Increase) decrease in receivables.......... (3,237) (27,979) 165
(Increase) decrease in inventories.......... (11,072) (20,553) 3,340
(Increase) decrease in prepaid expenses and
other assets............................... (714) 2,648 1,179
Increase (decrease) in accounts payable,
accrued interest expense and other accrued
expenses................................... (3,866) 15,788 6,133
Increase (decrease) in income taxes......... 3,938 (17,021) 8,661
Increase (decrease) in net deferred tax
liabilities................................ 969 7,904 (211)
Increase (decrease) in other long-term
liabilities................................ (886) (2,676) 246
-------- --------- --------
Net cash provided by continuing operations.... 43,026 22,016 91,990
Net cash used by discontinued operations...... (11,993) (16,695) --
-------- --------- --------
Net cash provided by operating activities..... 31,033 5,321 91,990
-------- --------- --------
Cash Flows from Investing Activities:
Acquisition of business (Note 2).............. -- -- (335,438)
Proceeds from the disposal of assets.......... 358 5,621 519
Additions to property, plant and equipment.... (30,197) (21,108) (35,616)
-------- --------- --------
Net cash used by investing activities......... (29,839) (15,487) (370,535)
-------- --------- --------
Cash Flows from Financing Activities:
Payments for debt issuance costs.............. -- (11,455) (14,026)
Additions to long-term debt................... -- 423,000 576,000
Payments of long-term debt.................... (20,940) (404,741) (286,574)
Proceeds from the issuance of common stock.... 42 698 201
Payments for the repurchase of common stock
warrants..................................... -- -- (2,789)
-------- --------- --------
Net cash provided (used) by financing
activities................................... (20,898) 7,502 272,812
-------- --------- --------
Net decrease in cash and cash equivalents....... (19,704) (2,664) (5,733)
Cash and cash equivalents at beginning of
period......................................... 54,513 34,809 32,145
-------- --------- --------
Cash and cash equivalents at end of period...... $ 34,809 $ 32,145 $ 26,412
======== ========= ========
Supplemental Disclosure:
Cash payments for income taxes, net........... $ 11,115 $ 37,127 $ 14,386
======== ========= ========
Cash payments for interest.................... $ 38,454 $ 39,345 $ 32,010
======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance December 31, 1992.............. $50,000 $225,400 $ 17,714 $ 293,114
Net earnings........................... 45,368 45,368
Common stock activity:
Stock option grants and exercises
(Note 10)........................... 4 988 992
Warrant exercises--282 shares........ 3 3
Foreign currency translations.......... (920) (920)
------- -------- -------- ---------
Balance December 31, 1993.............. 50,004 226,391 62,162 338,557
Net earnings........................... 38,272 38,272
Common stock activity:
Stock option exercises (Note 10)..... 71 615 686
Warrant exercises--983 shares........ 1 11 12
Foreign currency translations.......... 2,659 2,659
Distribution of discontinued operations
to shareholders....................... (6,229) (98,563) (104,792)
------- -------- -------- ---------
Balance December 31, 1994.............. 50,076 220,788 4,530 275,394
Net earnings........................... 28,408 28,408
Common stock activity:
Stock option exercises (Note 10)..... 43 153 196
Warrant exercises--564 shares........ 1 4 5
Warrants purchased--1,489,422
shares.............................. (2,789) (2,789)
Foreign currency translations.......... (58) (58)
------- -------- -------- ---------
Balance December 31, 1995.............. $50,120 $218,156 $ 32,880 $ 301,156
======= ======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
INTERCO INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. THE COMPANY
INTERCO INCORPORATED (the "Company") is a major manufacturer of residential
furniture. During the year ended December 31, 1995, the Company had two
primary operating subsidiaries, Broyhill Furniture Industries, Inc. and The
Lane Company, Incorporated. On December 29, 1995, the Company acquired
Thomasville Furniture Industries, Inc. ("Thomasville"). In conjunction with
the acquisition, the Company refinanced its Secured Credit Agreement and
amended its Receivables Securitization Facility.
Substantially all of the Company's sales are made to unaffiliated furniture
retailers. The Company has a diversified customer base with no one customer
accounting for 10% or more of consolidated sales and no particular
concentration of credit risk in one economic section. Foreign operations and
sales are not material.
On November 17, 1994, the Company simultaneously refinanced the majority of
its outstanding indebtedness and distributed to holders of its common stock
the common stock of The Florsheim Shoe Company and the common stock of
Converse Inc. (which, in aggregate, represented the Company's footwear
segment). Upon completion of this restructuring, the Company retained no
ownership interest or management control of the footwear businesses.
Accordingly, the financial results of the footwear businesses have been
reflected as discontinued operations for all applicable periods.
2. ACQUISITION OF BUSINESS
On December 29, 1995, the Company acquired all of the outstanding stock of
Thomasville Furniture Industries, Inc. The purchase price totaled $331,200
plus the assumption of $8,000 of long-term debt. The purchase price, including
capitalized expenses which approximated $4,200, was paid in cash. The
transaction was accounted for as a purchase and, since the acquisition
occurred as of the last business day of 1995, has been reflected in the
Company's consolidated balance sheet. The Company's results of operations for
1995 do not include any of the operations of Thomasville. The total
acquisition cost exceeded the estimated fair value of the net assets acquired
by $105,764 with such amount being recorded as an intangible asset.
The following unaudited summary, prepared on a pro forma basis, combines the
consolidated results of operations of the Company for 1994 and 1995 with those
of Thomasville as if the transaction occurred at the beginning of each year
presented.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Net sales.......................................... $1,599,339 $1,624,116
Net earnings from continuing operations............ 30,963 37,422
Net earnings....................................... 41,302 31,607
Net earnings per common share--fully diluted:
Continuing operations............................ 0.60 0.72
Total............................................ 0.80 0.61
</TABLE>
The pro forma data has been adjusted, net of income taxes, to reflect
interest expense and the amortization of the excess of cost over net assets
acquired. Such pro forma amounts are not necessarily indicative of what the
actual consolidated results of operations might have been if the acquisition
had been effective at the beginning of each year presented.
F-7
<PAGE>
INTERCO INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company are set forth below.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all its subsidiaries, the majority of which are wholly owned. All material
intercompany transactions are eliminated in consolidation. The Company's
fiscal year ends on December 31. The operating companies included in the
consolidated financial statements report their results of operations as of the
Saturday closest to December 31. Accordingly, the results of operations will
periodically include a 53 week fiscal year. 1993, 1994 and 1995 all represent
52 week fiscal years.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity
of three months or less to be cash equivalents. Short-term investments are
recorded at amortized cost, which approximates market.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost when acquired.
Expenditures for improvements are capitalized while normal repairs and
maintenance are expensed as incurred. When properties are disposed of, the
related cost and accumulated depreciation or amortization are removed from the
accounts, and gains or losses on the dispositions are reflected in results of
operations. For financial reporting purposes, the Company utilizes both
accelerated and straight-line methods of computing depreciation and
amortization. Such expense is computed based on the estimated useful lives of
the respective assets, which generally range from 3 to 45 years for buildings
and improvements and from 3 to 12 years for machinery and equipment.
Intangible Assets
The Company emerged from Chapter 11 reorganization effective with the
beginning of business on August 3, 1992. In accordance with generally accepted
accounting principles, the Company was required to adopt "fresh-start"
reporting which included adjusting all assets and liabilities to their fair
values as of the effective date. The ongoing impact of the adoption of fresh-
start reporting is reflected in the financial statements for all years
presented.
As a result of adopting fresh-start reporting, the Company recorded
reorganization value in excess of amounts allocable to identifiable assets of
approximately $146,000. This intangible asset is being amortized on a
straight-line basis over a 20 year period.
Also in connection with the adoption of fresh-start reporting, the Company
recorded approximately $156,800 in fair value of trademarks and trade names
based upon an independent appraisal. Such trademarks and trade names are being
amortized on a straight-line basis over a 40 year period.
F-8
<PAGE>
INTERCO INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The excess of cost over net assets acquired in connection with the
acquisition of Thomasville totaled approximately $105,764. This intangible
asset is being amortized on a straight-line basis over a 40 year period.
Income Tax Expense
Income tax expense is based on results of operations before discontinued
operations and extraordinary items. Deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in
which those temporary differences are expected to be recovered or settled. The
effect of a change in tax rates on deferred tax assets and liabilities is
recognized in income in the period that includes the enactment date.
Extraordinary Item
In conjunction with the December 29, 1995 acquisition of Thomasville, the
Company refinanced its Secured Credit Agreement and amended its Receivables
Securitization Facility. As a result thereof, the Company charged to results
of operations, as an extraordinary item, the deferred financing fees and
expenses pertaining to such credit facilities.
Net Earnings Per Common Share
Net earnings per common share is based on the weighted average number of
shares of common stock and common stock equivalents outstanding during the
year. The stock options and warrants outstanding (Note 10) are considered
common stock equivalents. Weighted average shares used in the calculation of
primary and fully diluted net earnings per common share for 1995 were
50,639,000 and 52,317,000, respectively.
Reclassification
Certain 1993 and 1994 amounts have been reclassified to conform to the 1995
presentation.
4. DISCONTINUED OPERATIONS
On November 17, 1994, the Company distributed the common stock of each of
The Florsheim Shoe Company and Converse Inc. (which, in aggregate, represented
the Company's footwear segment) to its shareholders. In accordance with
generally accepted accounting principles, the financial results for the
footwear segment are reported as "Discontinued Operations" and the Company's
financial results of prior periods were restated. Condensed results of the
discontinued operations were as follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, NOVEMBER 17,
1993 1994
------------ -------------
<S> <C> <C>
Net sales............................................ $ 676,282 $663,637
========= ========
Earnings before income tax expense................... $ 38,706 $ 40,047
Income tax expense................................... 14,680 14,604
--------- --------
Net earnings......................................... $ 24,026 $ 25,443
========= ========
Loss on distribution, net of taxes of $4,564......... $ -- $(15,104)
========= ========
</TABLE>
F-9
<PAGE>
INTERCO INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The loss on distribution reflects expenses related to: the distribution of
the common stock of The Florsheim Shoe Company and Converse Inc. to the
Company's shareholders, including certain expenses associated with
establishing the capital structure of each company; compensation expense
accrued as a result of adjustments required to be made to exercisable employee
stock options; interest expense on certain long-term debt defeased, net of
estimated interest income to be received from the trustees; and applicable
income taxes.
Prior to the distribution of the common stock of The Florsheim Shoe Company
to its shareholders, the Company had guaranteed certain of Florsheim's retail
store operating leases. At December 31, 1995, the Company had guarantees
outstanding on 101 retail store leases with a contingent liability totaling
approximately $37,400. The Florsheim Shoe Company has agreed to indemnify the
Company against any losses incurred as a result of the lease guarantees.
5. EXTRAORDINARY ITEM--EARLY EXTINGUISHMENT OF DEBT
In conjunction with the December 29, 1995 acquisition of Thomasville, the
Company refinanced its Secured Credit Agreement and amended its Receivables
Securitization Facility. As a result thereof, the Company charged to results
of operations $5,815, net of taxes of $3,478, representing the deferred
financing fees and expenses pertaining to such credit facilities. The charge
was recorded as an extraordinary item.
6. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Finished products.................................. $ 66,445 $114,857
Work-in-process.................................... 36,365 51,259
Raw materials...................................... 52,221 103,561
-------- --------
$155,031 $269,677
======== ========
</TABLE>
7. INTANGIBLE ASSETS
Intangible assets include the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Intangible assets, at cost:
Reorganization value in excess of amounts
allocable
to identifiable assets......................... $146,063 $146,063
Trademarks and trade names...................... 156,828 156,828
Excess of cost over net assets acquired......... -- 105,764
-------- --------
302,891 408,655
Less accumulated amortization..................... 27,124 38,348
-------- --------
$275,767 $370,307
======== ========
</TABLE>
8. SHORT-TERM FINANCING
In conjunction with the December 29, 1995 acquisition of Thomasville and
related refinancing of certain long-term debt, the Company entered into a
$630,000 Secured Credit Agreement which includes a $180,000
F-10
<PAGE>
INTERCO INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
revolving credit facility. The revolving credit facility allows for issuance
of letters of credit and cash borrowings. Letter of credit outstandings are
limited to no more than $60,000, with cash borrowings limited only by the
facility's maximum availability less letters of credit outstanding. On
December 29, 1995, $71,000 in cash borrowings were outstanding under the
revolving credit facility as a result of the acquisition of Thomasville. Cash
borrowings from the revolving credit facility have no fixed amortization and,
since the facility does not mature until December 2001, are classified as
long-term debt.
As part of the Secured Credit Agreement, the revolving credit facility is
secured by a first priority lien on and security interest in substantially all
of the Company's assets except for trade receivables. See Note 9--Long-Term
Debt for further information regarding the Secured Credit Agreement.
The outstanding cash borrowings under the revolving credit facility bear
interest at a base rate plus 1.125% or at an adjusted Eurodollar rate plus
2.125%, depending upon the type of loan the Company executes. The "spread" or
margin over the base rate and Eurodollar rate is subject to a "step-down" or
reduction when the Company achieves certain financial performance ratios. At
December 31, 1995, there was $71,000 of cash borrowings outstanding under the
revolving credit facility, all of which are classified as long-term debt.
Under the letter of credit facility, a fee of 2.125% per annum (subject to
the same "step-down" as noted earlier) is assessed for the account of the
lenders ratably. A further fee of 0.25% is assessed on stand-by letters of
credit representing a facing fee. A customary administrative charge for
processing letters of credit is also payable to the relevant issuing bank.
Letter of credit fees are payable quarterly in arrears. At December 31, 1995,
there were $28,300 in letters of credit outstanding under the revolving credit
facility.
9. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Secured credit agreement........................... $285,000 $521,000
Receivables securitization facility................ 130,000 185,000
Other.............................................. 11,253 17,679
-------- --------
426,253 723,679
Less current maturities............................ 16,574 18,639
-------- --------
$409,679 $705,040
======== ========
</TABLE>
On December 29, 1995, in conjunction with the acquisition of Thomasville,
the Company refinanced its Secured Credit Agreement by entering into a new
$630,000 facility with a group of financial institutions. The Company also
amended its Receivables Securitization Facility to increase its maximum
availability to $225,000. Proceeds from these loan facilities were used to
repay the existing secured credit facility and to acquire Thomasville.
The following discussion summarizes certain provisions of the long-term
debt.
Secured Credit Agreement
The common stock of the Company's principal subsidiaries, substantially all
of the Company's cash, working capital (other than trade receivables) and
property, plant and equipment, have been pledged or mortgaged as security for
the Secured Credit Agreement. The Secured Credit Agreement contains a number
of restrictive covenants and events of default, including covenants limiting
capital expenditures and incurrence of debt, and requires the Company to
achieve certain financial ratios, some of which become more restrictive over
time.
F-11
<PAGE>
INTERCO INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Secured Credit Agreement consists of the revolving credit facility
discussed in Note 8 and three term loan facilities with the following terms:
<TABLE>
<CAPTION>
INTEREST RATE MARGIN
-------------------------
DECEMBER 31, 1995 MATURITY
BALANCE DATE BASE RATE EURODOLLAR RATE
----------------- ----------------- --------- ---------------
<S> <C> <C> <C> <C>
Term loan "A" facility.. $250,000 December 29, 2001 1.125% 2.125%
Term loan "B" facility.. 100,000 March 29, 2003 1.625% 2.625%
Term loan "C" facility.. 100,000 March 29, 2004 2.125% 3.125%
</TABLE>
Similar to the revolving credit facility, the "spread" or margin over the
base rate and Eurodollar rate is subject to a "step-down" or reduction when
the Company achieves certain financial performance ratios. Interest is payable
based upon the type (base rate or Eurodollar rate) of the loan the Company
executes; however, interest is payable quarterly at a minimum. At December 31,
1995, all loans outstanding under the Secured Credit Agreement were based on
the Eurodollar rate.
Mandatory principal payments of the term loan "A" facility are semi-annual
(last business day of June and December). Mandatory principal payments of the
term loan "B" facility are semi-annual through 2001 and convert to quarterly
payments beginning in March 2002. Mandatory principal payments of the term
loan "C" facility are semi-annual through 2002 and convert to quarterly
payments beginning in June 2003. Annual mandatory principal payments are as
follows:
<TABLE>
<CAPTION>
TERM LOAN FACILITY
-----------------------
YEAR A B C TOTAL
---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
1996......................................... $15,000 $ 1,000 $ 1,000 $17,000
1997......................................... 20,000 1,000 1,000 22,000
1998......................................... 25,000 1,000 1,000 27,000
1999......................................... 50,000 1,000 1,000 52,000
2000......................................... 65,000 1,000 1,000 67,000
2001......................................... 75,000 1,000 1,000 77,000
2002......................................... -- 75,200 1,000 76,200
2003......................................... -- 18,800 69,750 88,550
2004......................................... -- -- 23,250 23,250
</TABLE>
In addition to mandatory principal payments, the term loan facilities
require principal payments from excess cash flow (as defined in the Secured
Credit Agreement), and a portion of the net proceeds realized from (i) the
sale, conveyance or other disposition of collateral securing the debt or (ii)
the sale by the Company for its own account of additional subordinated debt
and/or shares of its preferred and/or common stock. The revolving credit
facility has no mandatory principal payments prior to its maturity date.
Receivables Securitization Facility
The amended Receivables Securitization Facility is an obligation of the
Company which matures on December 29, 2000 and is secured by substantially all
of the Company's trade receivables. The facility operates through use of a
special purpose subsidiary (Interco Receivables Corp.) which "buys" trade
receivables from the operating companies and "sells" interests in same to a
third party financial institution, which uses the interests as collateral for
borrowings in the commercial paper market to fund the purchases. The Company
accounts for this facility as long-term debt.
The Company pays a commercial paper index rate on all funds received
(outstanding) on the facility. In addition, a program fee of 0.75% per annum
on the entire $225,000 facility is payable on a monthly basis. The balance
outstanding
F-12
<PAGE>
INTERCO INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
at December 31, 1995 was $185,000. The Company may increase or decrease its
use of the facility on a monthly basis subject to the availability of
sufficient trade receivables and the facility's maximum amount ($225,000). As
of December 31, 1995, the Company had $20,474 in excess availability under the
facility.
Other
Other long-term debt consists of various industrial revenue bonds and other
debt instruments with interest rates ranging from approximately 4.0% to 9.0%.
Annual mandatory principal payments are required through 2004.
Other Information
Maturities of long-term debt are $18,639, $23,709, $28,531, $52,800 and
$252,800 for years 1996 through 2000, respectively.
10. COMMON STOCK
The Company's restated certificate of incorporation includes authorization
to issue up to 100.0 million shares of common stock with a $1.00 per share
stated value. As of December 31, 1995, 50,120,079 shares of common stock were
issued and outstanding. It is not presently anticipated that dividends will be
paid on common stock in the foreseeable future and certain of the debt
instruments to which the Company is a party restrict the payment of dividends.
Shares of common stock were reserved for the following purposes at December
31, 1995:
<TABLE>
<CAPTION>
NUMBER
OF SHARES
----------
<S> <C>
Common stock options:
Granted......................................................... 2,498,000
Available for grant............................................. 740,000
Common stock warrants............................................. 6,907,198
----------
10,145,198
==========
</TABLE>
Under the Company's 1992 Stock Option Plan, certain key employees may be
granted nonqualified options, incentive options or combinations thereof.
Nonqualified and incentive options may be granted to expire up to ten years
after the date of grant. Options granted become exercisable at varying dates
depending upon the achievement of certain performance targets and/or the
passage of certain time periods.
The 1992 Stock Option Plan authorizes grants of options to purchase common
shares at less than fair market value on the date of grant. During 1993, an
option grant of 250 thousand common shares was made by the Company at less
than market value resulting in a credit to paid-in capital and a charge to
compensation expense of approximately $1.0 million.
Changes in options granted and outstanding are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1994 DECEMBER 31, 1995
------------------ ------------------- ------------------
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ------- ---------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Beginning of period..... 2,500,000 $7.00 2,915,000 $ 7.39 2,643,000 $4.64
Granted................. 461,000 9.58 917,000 7.85 125,000 6.42
Exercised............... (4,000) 7.00 (71,250) 7.00 (43,000) 3.38
Cancelled............... (42,000) 7.92 (1,117,750) 7.82 (227,000) 4.68
--------- ---------- ---------
End of period........... 2,915,000 $7.39 2,643,000 $ 4.64 2,498,000 $4.75
========= ===== ========== ====== ========= =====
Exercisable at end of
period................. 586,750 954,750 1,346,750
========= ========== =========
</TABLE>
F-13
<PAGE>
INTERCO INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As a result of the November 17, 1994 distribution of the common stock of The
Florsheim Shoe Company and Converse Inc. to the Company's shareholders,
options granted to the employees of those operating companies were cancelled.
In addition, the exercise prices of the remaining options were adjusted to
reflect the distribution in accordance with the antidilution provisions of the
1992 Stock Option Plan.
As of December 31, 1995, the Company had outstanding approximately 6.9
million warrants to purchase common stock. Each warrant entitles the holder
thereof to purchase one share of common stock at $7.13 per share (as adjusted
for the November 17, 1994 distribution to shareholders of the Company's former
footwear segment). The warrants, which expire on August 3, 1999, were issued
in two series; Series 1 warrants include a five year call protection, whereas
Series 2 warrants do not include such a feature. All other terms and
conditions of the two series of warrants are identical. The warrants trade on
the over-the-counter market.
11. INCOME TAXES
Income tax expense was comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal........................................... $11,788 $10,095 $20,499
State and local................................... 3,167 2,909 2,527
------- ------- -------
14,955 13,004 23,026
Deferred............................................ 969 7,904 (211)
------- ------- -------
$15,924 $20,908 $22,815
======= ======= =======
</TABLE>
The following table reconciles the differences between the Federal corporate
statutory rate and the Company's effective income tax rate:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Federal corporate statu-
tory rate.............. 35.0% 35.0% 35.0%
State and local income
taxes, net of Federal
tax benefit............ 4.2 2.9 2.6
Amortization of excess
reorganization value... 6.8 5.2 4.5
Other................... (3.3) (0.3) (2.1)
---- ---- ----
Effective income tax
rate................... 42.7% 42.8% 40.0%
==== ==== ====
</TABLE>
F-14
<PAGE>
INTERCO INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The sources of the tax effects for temporary differences that give rise to
the deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Employee postretirement benefits other than
pensions...................................... $ 833 $ 10,954
Expense accruals............................... 6,109 9,267
Valuation reserves............................. 3,027 5,147
Inventory costs capitalized.................... 1,534 1,785
Other.......................................... 1,571 919
-------- --------
Total gross deferred tax assets.............. 13,074 28,072
Valuation allowance............................ -- --
-------- --------
Total net deferred tax assets................ 13,074 28,072
Deferred tax liabilities:
Fair value adjustments......................... (70,690) (84,263)
Employee pension plans......................... (6,139) (1,990)
Depreciation................................... (4,441) (9,029)
Other.......................................... (7,575) (8,350)
-------- --------
Total deferred tax liabilities............... (88,845) (103,632)
-------- --------
Net deferred tax liabilities................. $(75,771) $(75,560)
======== ========
</TABLE>
The net deferred tax liabilities are included in the consolidated balance
sheets as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Prepaid expenses and other current assets.......... $ 11,292 $ 14,328
Other long-term liabilities........................ (87,063) (89,888)
-------- --------
$(75,771) $(75,560)
======== ========
</TABLE>
The Federal income tax returns of the Company and its major subsidiaries
have been examined by the Internal Revenue Service ("IRS") through February
23, 1991.
12. EMPLOYEE BENEFITS
The Company sponsors or contributes to retirement plans covering
substantially all employees. The total cost of all plans for 1993, 1994 and
1995 was $5,716, $6,303 and $7,070, respectively.
Company-Sponsored Defined Benefit Plans
Annual cost for defined benefit plans is determined using the projected unit
credit actuarial method. Prior service cost is amortized on a straight-line
basis over the average remaining service period of employees expected to
receive benefits.
It is the Company's practice to fund pension costs to the extent that such
costs are tax deductible and in accordance with ERISA. The assets of the
various plans include corporate equities, government securities,
F-15
<PAGE>
INTERCO INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
corporate debt securities and insurance contracts. The table below summarizes
the funded status of the Company-sponsored defined benefit plans.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation...................... $179,006 $217,879
======== ========
Accumulated benefit obligation................. $182,903 $222,256
======== ========
Projected benefit obligation................... $202,148 $254,815
Plan assets at fair value........................ 217,535 252,810
-------- --------
Projected benefit obligation less than (greater
than) plan assets............................... 15,387 (2,005)
Unrecognized net loss............................ 3,886 5,211
Unrecognized prior service cost.................. (515) 1,267
-------- --------
Prepaid pension cost............................. $ 18,758 $ 4,473
======== ========
</TABLE>
Net periodic pension cost for 1993, 1994 and 1995 includes the following
components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Service cost-benefits earned during the peri-
od.......................................... $ 4,575 $ 4,758 $ 3,544
Interest cost on the projected benefit obli-
gation...................................... 12,818 13,682 17,005
Actual return on plan assets................. (16,863) (159) (49,272)
Net amortization and deferral................ 1,377 (16,297) 31,566
-------- -------- --------
Net periodic pension cost.................... $ 1,907 $ 1,984 $ 2,843
======== ======== ========
</TABLE>
Employees are covered primarily by noncontributory plans, funded by Company
contributions to trust funds, which are held for the sole benefit of
employees. Monthly retirement benefits are based upon service and pay with
employees becoming vested upon completion of five years of service.
The expected long-term rate of return on plan assets was 8.0%-9.5% in 1993
and 1994 and 8.5% in 1995. Measurement of the projected benefit obligation was
based upon a weighted average discount rate of 7.25%, 8.0% and 7.25% and a
long-term rate of compensation increase of 4.5%, 4.5% and 4.5% for 1993, 1994
and 1995, respectively.
Other Retirement Plans and Benefits
In addition to defined benefit plans, the Company makes contributions to a
defined contribution plan and sponsors employee savings plans. The cost of
these plans is included in the total cost for all plans reflected above.
In addition to pension and other supplemental benefits, certain employees
and retirees are currently provided with specified health care and life
insurance benefits. Eligibility requirements generally state that benefits are
available to employees who retire after a certain age with specified years of
service if they agree to contribute a portion of the cost. The Company has
reserved the right to modify or terminate these benefits. Health care and life
insurance benefits are provided to both retired and active employees through
medical benefit trusts, third-party administrators and insurance companies.
F-16
<PAGE>
INTERCO INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the financial status of postretirement
benefits other than pensions as of December 31, 1995. Until the acquisition of
Thomasville as of December 29, 1995, postretirement benefits other than
pensions were considered immaterial and not previously reported.
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................... $ 9,546
Fully eligible plan participants............................ 2,094
Other active plan participants.............................. 20,181
-------
Total..................................................... 31,821
Plan assets at fair value..................................... --
-------
Accumulated postretirement benefit obligation in excess of
plan assets.................................................. 31,821
Unrecognized net gain......................................... 85
-------
Accrued postretirement benefit obligation..................... $31,906
=======
</TABLE>
For measurement purposes, a 11.0% annual rate of increase in the cost of
health care benefits for pre-age 65 retirees and 11.0% for post-age 65
retirees was assumed for 1995. For 1995, the rates are assumed to decrease
gradually to 6.0% in the year 2000 and remain at those levels thereafter.
Increasing the assumed health care cost trend rates by one point in each year
would have resulted in an increase in the accumulated postretirement benefit
obligation as of December 31, 1995 of approximately $3,098 and the net
periodic cost by $6 for the year.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% for 1995.
13. LEASE COMMITMENTS
Certain of the Company's real properties and equipment are operated under
lease agreements expiring at various dates through the year 2005. Leases
covering equipment generally require, in addition to stated minimums,
contingent rentals based on usage. Generally, the leases provide for renewal
for various periods at stipulated rates.
Rental expense under operating leases was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Basic rentals........................................ $10,704 $11,553 $11,516
Contingent rentals................................... 570 385 779
------- ------- -------
11,274 11,938 12,295
Less sublease rentals................................ 132 54 54
------- ------- -------
$11,142 $11,884 $12,241
======= ======= =======
</TABLE>
Future minimum lease payments under operating leases, reduced by minimum
rentals from subleases of $616 at December 31, 1995, aggregate $36,023. Annual
minimum payments under operating leases are $10,715, $7,840, $6,470, $5,005
and $2,852 for 1996 through 2000, respectively.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company considers the carrying amounts of cash and cash equivalents,
receivables and accounts payable to approximate fair value because of the
short maturity of these financial instruments.
F-17
<PAGE>
INTERCO INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Amounts outstanding under the Secured Credit Agreement and Receivables
Securitization Facility are also considered to be carried on the financial
statements at their estimated fair values because they were entered into
recently and both accrue interest at rates which generally fluctuate with
interest rate trends.
Amounts outstanding under the other long-term debt is considered special
purpose financing as an incentive to acquire specific real estate and for
settlement of certain claims. Accordingly, the Company believes the carrying
amounts approximate fair value given the circumstances under which such
financings were acquired.
15. GAIN ON INSURANCE SETTLEMENT
On November 20, 1994, an explosion and fire destroyed a particleboard plant
owned and operated by the Company. During 1995, the Company rebuilt the plant
with proceeds received from the insurance settlement. As a result thereof, a
gain on insurance settlement, totaling $7,882, was recorded during the fourth
quarter of 1995. The gain includes all costs associated with the claim with no
further expenses or liability anticipated.
16. LITIGATION
The Company is or may become a defendant in a number of pending or
threatened legal proceedings in the ordinary course of business. In the
opinion of management, the ultimate liability, if any, of the Company from all
such proceedings will not have a material adverse effect upon the consolidated
financial position or results of operations of the Company and its
subsidiaries.
F-18
<PAGE>
INTERCO INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Following is a summary of unaudited quarterly information:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1994:
Net sales............. $ 268,753 $ 272,203 $ 254,496 $ 277,244
Gross profit.......... 74,184 75,894 71,697 76,937
Net earnings:
Continuing opera-
tions.............. 5,908 5,863 5,366 10,796
Discontinued opera-
tions.............. 9,769 5,480 7,042 (11,952)
Total............. $ 15,677 $ 11,343 $ 12,408 $ (1,156)
Net earnings per
common share--primary
and fully diluted:
Continuing opera-
tions.............. $ 0.11 $ 0.12 $ 0.10 $ 0.21
Discontinued opera-
tions.............. 0.19 0.10 0.14 (0.23)
Total............. $ 0.30 $ 0.22 $ 0.24 $ (0.02)
Common stock price
range (High-Low)..... $15 3/4-13 1/8 $14 7/8-12 3/8 $15 3/4-13 3/4 $14 7/8-6 1/8
============== ============== ============== =============
Year ended December 31,
1995:
Net sales............. $ 285,904 $ 250,336 $ 258,626 $ 279,023
Gross profit.......... 76,349 67,399 70,557 76,932
Net earnings:
Continuing opera-
tions.............. 7,743 5,487 6,196 14,797
Extraordinary item.. -- -- -- (5,815)
Total............. $ 7,743 $ 5,487 $ 6,196 $ 8,982
Net earnings per com-
mon share--primary:
Continuing opera-
tions.............. $ 0.15 $ 0.11 $ 0.12 $ 0.29
Extraordinary item.. -- -- -- (0.11)
Total............. $ 0.15 $ 0.11 $ 0.12 $ 0.18
Net earnings per
common share--fully
diluted:
Continuing opera-
tions.............. $ 0.15 $ 0.11 $ 0.12 $ 0.27
Extraordinary item.. -- -- -- (0.11)
Total............. $ 0.15 $ 0.11 $ 0.12 $ 0.16
Common stock price
range (High-Low)..... $ 7 1/8-6 1/8 $ 6 7/8-5 3/4 $ 8 1/8-5 3/4 $ 9 1/8-7
============== ============== ============== ============= ===
</TABLE>
The 1994 fourth quarter common stock price range reflects the impact of the
November 17, 1994 distribution of the discontinued operations to the Company's
shareholders.
The Company has not paid cash dividends on its common stock during the two
years ended December 31, 1995. The closing market price of the Company's common
stock on December 31, 1995 was $9.00 per share.
F-19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN AS CONTAINED HEREIN AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO PURCHASE ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO,
OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT INFORMATION PROVIDED
HEREIN IS CORRECT AT ANY TIME SUBSEQUENT TO ITS DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 8
Thomasville Acquisition.................................................. 10
Use of Proceeds.......................................................... 11
Price Range of Common Stock and Dividend Policy.......................... 12
Capitalization........................................................... 13
Independent Accountants' Report.......................................... 14
Pro Forma Condensed Consolidated Financial Information................... 15
Selected Consolidated Historical and Pro Forma Financial Information..... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 25
Management............................................................... 37
Certain Transactions..................................................... 38
Principal Stockholders................................................... 38
Description of Capital Stock............................................. 39
Underwriting............................................................. 41
Legal Matters............................................................ 42
Experts.................................................................. 42
Available Information.................................................... 42
Incorporation of Certain Documents by Reference.......................... 43
Index to Consolidated Financial Statements............................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8,750,000 SHARES
[LOGO OF INTERCO CORPORATION APPEARS HERE]
To be renamed Furniture Brands International, Inc.
COMMON STOCK
[LOGOS OF BROYHILL, LANE AND THOMASVILLE APPEAR HERE]
-------
PROSPECTUS
, 1996
-------
SMITH BARNEY INC.
DEAN WITTER REYNOLDS INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
WHEAT FIRST BUTCHER SINGER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table shows the estimated expenses of the issuance and
distribution of the securities offered hereby, other than underwriting
discounts and commissions:
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee....................... $ 30,603
National Association of Securities Dealers, Inc. filing fee......... 9,375
Printing expenses................................................... 150,000
Legal fees and expenses............................................. 150,000
Accounting fees and expenses........................................ 150,000
Blue sky filing fees and expenses (including counsel fees).......... 5,000
Miscellaneous expenses.............................................. 5,022
--------
Total............................................................... $500,000
========
</TABLE>
15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 ("Section 145") of the Delaware General Corporation Law permits
indemnification of directors, officers, agents and controlling persons of a
corporation under certain conditions and subject to certain limitations.
Section 145 empowers 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 such person is or was a director,
officer or agent of the corporation or another enterprise if serving at the
request of the corporation. Depending on the character of the proceeding, a
corporation may indemnify against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with such action, suit or proceeding if the person
indemnified acted in good faith and in a manner such person reasonably
believed to be in or not opposed to, the best interests of the corporation,
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe such person's conduct was unlawful. In the case of an action
by or in the right of the corporation, no indemnification may be made with
respect to 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 of Chancery or the court in which such action or suit was brought
shall determine that despite the adjudication of liability such person is
fairly and reasonably entitled to indemnity for such expenses which the court
shall deem proper. Section 145 further provides that to the extent a director
or officer of a corporation has been successful in the defense of any action,
suit or proceeding referred to above or in the defense of any claim, issue or
matter therein, such person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
therewith.
The Company's By-laws contain provisions for indemnification of directors,
officers, employees and agents which are substantially the same as Section 145
and also permit the Company to purchase insurance on behalf of any such person
against any liability asserted against such person and incurred by such person
in any such capacity, or arising out of such person's status as such, whether
or not the Company would have the power to indemnify such person against such
liability under the foregoing provision of the By-laws. The Company maintains
such insurance.
Certain of the directors and former directors of the Company have entered
into and are the beneficiaries of indemnification agreements with the Company.
These agreements provide indemnity protection for such persons which is
substantially the same as that authorized by the Delaware General Corporation
Law and provided for in the Company's By-Laws.
II-1
<PAGE>
The Underwriting Agreement, included as Exhibit 1 hereto, provides that each
of the Underwriters will indemnify the directors and officers of the Company
against certain liabilities, including liabilities under the Securities Act
1933, as amended.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBITS
<TABLE>
<C> <S>
1 Form of Underwriting Agreement.
3(a) Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 4(a) to the Company's Report on Form 10-Q for the
quarter ended March 31, 1993).
3(b) By-Laws of the Company (incorporated by reference to Exhibit 4(b) to the
Company's Report on Form 10-Q for the quarter ended March 31, 1993).
Opinion of Morgan, Lewis & Bockius LLP as to the validity of the
5 securities.*
23.1 Consents of KPMG Peat Marwick LLP.
23.2 Consent of Morgan, Lewis & Bockius LLP (included in exhibit 5).*
24 Powers of Attorney.*
</TABLE>
- --------
* Previously filed.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan, annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the undersigned
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
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 registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective a mendment that contains a form of prospectus
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.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE COUNTY OF ST. LOUIS, STATE OF MISSOURI ON
FEBRUARY 21, 1996.
Interco Incorporated
/s/ Richard B. Loynd
By: _________________________________
RICHARD B. LOYND
CHAIRMAN OF THE BOARD AND PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THE DATES INDICATED BELOW.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Richard B. Loynd Chairman of the February 21, 1996
- ------------------------------------- Board, President
RICHARD B. LOYND and Director
(Principal
Executive Officer)
/s/ David P. Howard Vice President February 21, 1996
- ------------------------------------- (Principal
DAVID P. HOWARD Financial Officer)
/s/ Steven W. Alstadt Controller February 21, 1996
- ------------------------------------- (Principal
STEVEN W. ALSTADT Accounting Officer)
* Director February 21, 1996
- -------------------------------------
LEON D. BLACK
* Director February 21, 1996
- -------------------------------------
MICHAEL S. GROSS
* Director February 21, 1996
- -------------------------------------
JOHN J. HANNAN
* Director February 21, 1996
- -------------------------------------
JOSHUA J. HARRIS
* Director February 21, 1996
- -------------------------------------
BRUCE A. KARSH
* Director February 21, 1996
- -------------------------------------
JOHN H. KISSICK
* Director February 21, 1996
- -------------------------------------
DONALD E. LASATER
* Director February 21, 1996
- -------------------------------------
LEE M. LIBERMAN
* Director February 21, 1996
- -------------------------------------
JOHN J. RYAN, III
* Director February 21, 1996
- -------------------------------------
MICHAEL D. WEINER
/s/ Lynn Chipperfield
*By: ________________________________
LYNN CHIPPERFIELD, ATTORNEY-IN-FACT
FEBRUARY 21, 1996
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<C> <S> <C>
1 Form of Underwriting Agreement.
3(a) Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 4(a) to the Company's
Report on Form 10-Q for the quarter ended March 31, 1993).
3(b) By-Laws of the Company (incorporated by reference to
Exhibit 4(b) to the Company's Report on Form 10-Q for the
quarter ended March 31, 1993).
Opinion of Morgan, Lewis & Bockius LLP as to the validity
5 of the securities.*
23.1 Consents of KPMG Peat Marwick LLP.
Consent of Morgan, Lewis & Bockius LLP (included in exhibit
23.2 5).*
24 Powers of Attorney.*
</TABLE>
- --------
* Previously filed.
<PAGE>
EXHIBIT 1
8,750,000 Shares
INTERCO INCORPORATED
Common Stock
UNDERWRITING AGREEMENT
February [ ], 1996
SMITH BARNEY INC.
DEAN WITTER REYNOLDS INC.
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
WHEAT, FIRST SECURITIES, INC.
As Representatives of the Several Underwriters
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
INTERCO INCORPORATED, a Delaware corporation (the "Company"), proposes to
issue and sell an aggregate of 8,750,000 shares (the "Firm Shares") of its
common stock, no par value per share (the "Common Stock"), to the several
Underwriters named in Schedule I hereto (the "Underwriters"). The Company also
proposes to sell to the Underwriters, upon the terms and conditions set forth in
Section 2 hereof, up to an additional 1,250,000 shares (the "Additional Shares")
of Common Stock. The Firm Shares and the Additional Shares are hereinafter
collectively referred to as the "Shares".
The Company wishes to confirm as follows its agreement with you (the
"Representatives") and the other several Underwriters on whose behalf you are
acting, in connection with the several purchases of the Shares by the
Underwriters.
<PAGE>
1. Registration Statement and Prospectus. The Company has prepared and
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-3 under the Act (the "registration
statement"), including a prospectus subject to completion relating to the
Shares. The term "Registration Statement" as used in this Agreement means the
registration statement (including all financial schedules and exhibits), as
amended at the time it becomes effective, or, if the registration statement
became effective prior to the execution of this Agreement, as supplemented or
amended prior to the execution of this Agreement. If it is contemplated, at the
time this Agreement is executed, that a post-effective amendment to the
registration statement will be filed and must be declared effective before the
offering of the Shares may commence, the term "Registration Statement" as used
in this Agreement means the registration statement as amended by said post-
effective amendment. The term "Prospectus" as used in this Agreement means the
prospectus in the form included in the Registration Statement, or, if the
prospectus included in the Registration Statement omits information in reliance
on Rule 430A under the Act and such information is included in a prospectus
filed with the Commission pursuant to Rule 424(b) under the Act, the term
"Prospectus" as used in this Agreement means the prospectus in the form included
in the Registration Statement as supplemented by the addition of the Rule 430A
information contained in the prospectus filed with the Commission pursuant to
Rule 424(b). The term "Prepricing Prospectus" as used in this Agreement means
the prospectus subject to completion in the form included in the registration
statement at the time of the initial filing of the registration statement with
the Commission, and as such prospectus shall have been amended from time to time
prior to the date of the Prospectus. Any reference in this Agreement to the
registration statement, the Registration
<PAGE>
Statement, any Prepricing Prospectus or the Prospectus shall be deemed to refer
to and include the documents incorporated by reference therein pursuant to Item
12 of Form S-3 under the Act, as of the date of the registration statement, the
Registration Statement, such Prepricing Prospectus or the Prospectus, as the
case may be, and any reference to any amendment or supplement to the
registration statement, the Registration Statement, any Prepricing Prospectus or
the Prospectus shall be deemed to refer to and include any documents filed after
such date under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") which, upon filing, are incorporated by reference therein, as required by
paragraph (b) of Item 12 of Form S-3. As used herein, the term "Incorporated
Documents" means the documents which at the time are incorporated by reference
in the registration statement, the Registration Statement, any Prepricing
Prospectus, the Prospectus, or any amendment or supplement thereto.
2. Agreements to Sell and Purchase. The Company hereby agrees, subject to
all the terms and conditions set forth herein, to issue and sell to each
Underwriter and, upon the basis of the representations, warranties and
agreements of the Company herein contained and subject to all the terms and
conditions set forth herein, each Underwriter agrees, severally and not jointly,
to purchase from the Company, at a purchase price of $[ ] per Share (the
"purchase price per share"), the number of Firm Shares set forth opposite the
name of such Underwriter in Schedule I hereto (or such number of Firm Shares
increased as set forth in Section 10 hereof).
The Company also agrees, subject to all the terms and conditions set forth
herein, to sell to the Underwriters, and, upon the basis of the representations,
warranties and agreements of the Company herein contained and subject to all the
terms and conditions set forth herein, the Underwriters shall have the right to
purchase from the Company, at the purchase price per share, pursuant to an
option (the "over-allotment option") which may be exercised
<PAGE>
at any time and from time to time prior to 9:00 P.M., New York City time, on the
30th day after the date of the Prospectus (or, if such 30th day shall be a
Saturday or Sunday or a holiday, on the next business day thereafter when the
New York Stock Exchange is open for trading), up to an aggregate of 1,250,000
Additional Shares. Additional Shares may be purchased only for the purpose of
covering over-allotments made in connection with the offering of the Firm
Shares. Upon any exercise of the over-allotment option, each Underwriter,
severally and not jointly, agrees to purchase from the Company the number of
Additional Shares (subject to such adjustments as you may determine in order to
avoid fractional shares) which bears the same proportion to the number of
Additional Shares to be purchased by the Underwriters as the number of Firm
Shares set forth opposite the name of such Underwriter in Schedule I hereto (or
such number of Firm Shares increased as set forth in Section 10 hereof) bears to
the aggregate number of Firm Shares.
3. Terms of Public Offering. The Company has been advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable and initially to offer the
Shares upon the terms set forth in the Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to the
Underwriters of and payment for the Firm Shares shall be made at the office of
Smith Barney Inc., 388 Greenwich Street, New York, NY 10013, at 10:00 A.M., New
York City time, on February [ ], 1996 (the "Closing Date"). The place of
closing for the Firm Shares and the Closing Date may be varied by agreement
between you and the Company.
Delivery to the Underwriters of and payment for any Additional Shares to be
purchased by the Underwriters shall be made at the aforementioned office of
Smith Barney Inc. at such time on such date (the "Option Closing Date"), which
may be the same as the Closing Date but shall in no event be
<PAGE>
earlier than the Closing Date nor earlier than three nor later than ten business
days after the giving of the notice hereinafter referred to, as shall be
specified in a written notice from you on behalf of the Underwriters to the
Company of the Underwriters' determination to purchase a number, specified in
such notice, of Additional Shares. The place of closing for any Additional
Shares and the Option Closing Date for such Shares may be varied by agreement
between you and the Company.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request prior to 1:00 P.M., New York City time, on the third
business day preceding the Closing Date or any Option Closing Date, as the case
may be. Such certificates shall be made available to you in New York City for
inspection and packaging not later than 9:30 A.M., New York City time, on the
business day next preceding the Closing Date or the Option Closing Date, as the
case may be. The certificates evidencing the Firm Shares and any Additional
Shares to be purchased hereunder shall be delivered to you on the Closing Date
or the Option Closing Date, as the case may be, against payment of the purchase
price therefor by certified or official bank check or checks payable in New York
Clearing House (next day) funds to the order of the Company.
5. Agreements of the Company. The Company agrees with the several
Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
Company will endeavor to cause the Registration Statement or such post-effective
amendment to become effective as soon as possible and will advise you promptly
and, if requested by you, will confirm such advice in writing, when the
Registration Statement or such post-effective amendment has become effective.
<PAGE>
(b) The Company will advise you promptly and, if requested by you, will
confirm such advice in writing: (i) of any request by the Commission for
amendment of or a supplement to the Registration Statement, any Prepricing
Prospectus or the Prospectus or for additional information; (ii) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Shares for
offering or sale in any jurisdiction or the initiation of any proceeding for
such purpose; and (iii) within the period of time referred to in paragraph (f)
below, of any change in the Company's condition (financial or other), business,
prospects, properties, net worth or results of operations, or of the happening
of any event, which makes any statement of a material fact made in the
Registration Statement or the Prospectus (as then amended or supplemented)
untrue or which requires the making of any additions to or changes in the
Registration Statement or the Prospectus (as then amended or supplemented) in
order to state a material fact required by the Act or the regulations thereunder
to be stated therein or necessary in order to make the statements therein not
misleading, or of the necessity to amend or supplement the Prospectus (as then
amended or supplemented) to comply with the Act or any other law. If at any
time the Commission shall issue any stop order suspending the effectiveness of
the Registration Statement, the Company will make every reasonable effort to
obtain the withdrawal of such order at the earliest possible time.
(c) The Company will furnish to you, without charge (i) five copies of the
registration statement as originally filed with the Commission and of each
amendment thereto, including financial statements and all exhibits to the
registration statement, (ii) such number of conformed copies of the registration
statement as originally filed and of each amendment thereto, but without
exhibits, as you may
<PAGE>
reasonably request, (iii) such number of copies of the Incorporated Documents,
without exhibits, as you may reasonably request, and (iv) five copies of the
exhibits to the Incorporated Documents.
(d) The Company will not file any amendment to the Registration Statement
or make any amendment or supplement to the Prospectus or, prior to the end of
the period of time referred to in the first sentence in subsection (f) below,
file any document which, upon filing becomes an Incorporated Document, of which
you shall not previously have been advised or to which, after you shall have
received a copy of the document proposed to be filed, you shall reasonably
object.
(e) Prior to the execution and delivery of this Agreement, the Company has
delivered to you, without charge, in such quantities as you have requested,
copies of each form of the Prepricing Prospectus. The Company consents to the
use, in accordance with the provisions of the Act and with the securities or
Blue Sky laws of the jurisdictions in which the Shares are offered by the
several Underwriters and by dealers, prior to the date of the Prospectus, of
each Prepricing Prospectus so furnished by the Company.
(f) As soon after the execution and delivery of this Agreement as possible
and thereafter from time to time for such period as in the opinion of counsel
for the Underwriters a prospectus is required by the Act to be delivered in
connection with sales by any Underwriter or dealer, the Company will
expeditiously deliver to each Underwriter and each dealer, without charge, as
many copies of the Prospectus (and of any amendment or supplement thereto) as
you may reasonably request. The Company consents to the use of the Prospectus
(and of any amendment or supplement thereto) in accordance with the provisions
of the Act and with the securities or Blue Sky laws of the jurisdictions in
which the Shares are offered by the several Underwriters and by all dealers to
whom Shares may be sold, both in connection with the offering and sale of the
Shares and for such period of time thereafter as the Prospectus is required by
the Act to be delivered in connection with sales
<PAGE>
by any Underwriter or dealer. If during such period of time any event shall
occur that in the judgment of the Company or in the opinion of counsel for the
Underwriters is required to be set forth in the Prospectus (as then amended or
supplemented) or should be set forth therein in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or if it is necessary to supplement or amend the Prospectus (or to
file under the Exchange Act any document which, upon filing, becomes an
Incorporated Document) in order to comply with the Act or any other law, the
Company will forthwith prepare and, subject to the provisions of paragraph (d)
above, file with the Commission an appropriate supplement or amendment thereto
(or to such document), and will expeditiously furnish to the Underwriters and
dealers a reasonable number of copies thereof. In the event that the Company and
you, as Representatives of the several Underwriters, agree that the Prospectus
should be amended or supplemented, the Company, if requested by you, will
promptly issue a press release announcing or disclosing the matters to be
covered by the proposed amendment or supplement.
(g) The Company will cooperate with you and with counsel for the
Underwriters in connection with the registration or qualification of the Shares
for offering and sale by the several Underwriters and by dealers under the
securities or Blue Sky laws of such jurisdictions as you may designate and will
file such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification; provided that
in no event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action which would
subject it to service of process in suits, other than those arising out of the
offering or sale of the Shares, in any jurisdiction where it is not now so
subject.
(h) The Company will make generally available to its security holders a
consolidated earnings statement,
<PAGE>
which need not be audited, covering the period specified by Section 11(a) of the
Act and Rule 158 thereunder, as soon as reasonably practicable, which
consolidated earnings statement shall satisfy the provisions of Section 11(a) of
the Act and Rule 158 thereunder.
(i) During the period of five years hereafter, the Company will furnish to
you (i) upon your request, at such address as you may specify, as soon as
available, a copy of each report of the Company mailed to stockholders or filed
with the Commission, and (ii) from time to time such other information
concerning the Company as you may reasonably request.
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 10 hereof or by notice given by you terminating this
Agreement pursuant to Section 10 or Section 11 hereof) or if this Agreement
shall be terminated by the Underwriters because of any failure or refusal on the
part of the Company to comply with the terms or fulfill any of the conditions of
this Agreement, the Company agrees to reimburse the Representatives for all out-
of-pocket expenses (including reasonable fees and expenses of counsel for the
Underwriters) incurred by you in connection herewith.
(k) The Company will apply the net proceeds from the sale of the Shares
substantially in accordance with the description set forth in the Prospectus.
(l) If Rule 430A of the Act is employed, the Company will timely file the
Prospectus pursuant to Rule 424(b) under the Act and will advise you of the time
and manner of such filing.
(m) Except as provided in this Agreement, the Company will not sell,
contract to sell or otherwise dispose of any Common Stock (except shares issued
upon exercises of options outstanding under the Company's 1992 stock option
<PAGE>
plan or upon exercise of outstanding warrants) or any securities convertible
into or exercisable or exchangeable for Common Stock, or grant any options
(except any options granted under the Company's 1992 stock option plan) or
warrants to purchase Common Stock, for a period of 120 days after the date of
the Prospectus, without the prior written consent of Smith Barney Inc.
(n) The Company has furnished or will furnish to you "lock-up" letters, in
form and substance satisfactory to you, signed by each of its current officers,
directors and stockholders heretofore designated by you.
(o) Except as stated in this Agreement and in the Prepricing Prospectus and
Prospectus, the Company has not taken, nor will it take, directly or indirectly,
any action designed to or that might reasonably be expected to cause or result
in stabilization or manipulation of the price of the Common Stock to facilitate
the sale or resale of the Shares.
(p) The Company will use its best efforts to have the Shares listed,
subject to notice of issuance, on the New York Stock Exchange on or before the
Closing Date.
6. Representations and Warranties of the Company. The Company represents
and warrants to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the registration
statement as originally filed or as part of any amendment or supplement thereto,
or filed pursuant to Rule 424 under the Act, complied when so filed in all
material respects with the provisions of the Act. The Commission has not issued
any order preventing or suspending the use of any Prepricing Prospectus.
(b) The Company and the transactions contemplated by this Agreement meet
the requirements for using Form S-3 under the Act. The registration statement
in the form in which it became or becomes effective and also in such form
<PAGE>
as it may be when any post-effective amendment thereto shall become effective
and the prospectus and any supplement or amendment thereto when filed with the
Commission under Rule 424(b) under the Act, complied or will comply in all
material respects with the provisions of the Act and will not at any such times
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except that this representation and warranty does not apply to
statements in or omissions from the registration statement or the prospectus
made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by or on behalf of any
Underwriter through you expressly for use therein.
(c) The Incorporated Documents included in the Registration Statement
heretofore filed, when they were filed (or, if any amendment with respect to any
such document was filed, when such amendment was filed), conformed in all
material respects with the requirements of the Exchange Act and the rules and
regulations thereunder, and any further Incorporated Documents so filed will,
when they are filed, conform in all material respects with the requirements of
the Exchange Act and the rules and regulations thereunder; no such document when
it was filed (or, if an amendment with respect to any such document was filed,
when such amendment was filed), contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
in order to make the statements therein not misleading; and no such further
document, when it is filed, will contain an untrue statement of a material fact
or will omit to state a material fact required to be stated therein or necessary
in order to make the statements therein not misleading.
(d) All the outstanding shares of Common Stock of the Company have been
duly authorized and validly issued, are fully paid and nonassessable and are
free of any preemptive or similar rights; the Shares have been duly
<PAGE>
authorized and, when issued and delivered to the Underwriters against payment
therefor in accordance with the terms hereof, will be validly issued, fully paid
and nonassessable and free of any preemptive or similar rights; and the capital
stock of the Company conforms to the description thereof in the Registration
Statement and the Prospectus.
(e) The Company is a corporation duly organized and validly existing in
good standing under the laws of the State of Delaware with full corporate power
and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus, and is
duly registered and qualified to conduct its business and is in good standing in
each jurisdiction or place where the nature of its properties or the conduct of
its business requires such registration or qualification, except where the
failure so to register or qualify does not have a material adverse effect on the
condition (financial or other), business, properties, net worth or results of
operations of the Company and the Subsidiaries (as hereinafter defined) taken as
a whole (a "Material Adverse Effect").
(f) All the Company's subsidiaries (collectively, the "Subsidiaries") are
listed in an exhibit to the Company's Annual Report on Form 10-K which is
incorporated by reference into the Registration Statement. Each of Action
Industries, Inc., Broyhill Furniture Industries, Inc., The Lane Company,
Incorporated, and Thomasville Furniture Industries, Inc. (the "Material
Subsidiaries") is a corporation duly organized, validly existing and in good
standing in the jurisdiction of its incorporation, with full corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the Registration Statement and the Prospectus, and is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
<PAGE>
so to register or qualify does not have a Material Adverse Effect; all the
outstanding shares of capital stock of each of the Material Subsidiaries have
been duly authorized and validly issued, are fully paid and nonassessable, and
are owned by the Company, free and clear of any lien, adverse claim, security
interest, equity, or other encumbrance, except as described in the Registration
Statement.
(g) There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened, against the Company or any of the
Subsidiaries, or to which the Company or any of the Subsidiaries, or to which
any of their respective properties is subject, that are required to be described
in the Registration Statement or the Prospectus but are not described as
required, and there are no agreements, contracts, indentures, leases or other
instruments that are required to be described in the Registration Statement or
the Prospectus or to be filed as an exhibit to the Registration Statement or any
Incorporated Document therein that are not described or filed as required by the
Act or the Exchange Act.
(h) Neither the Company nor any of the Subsidiaries is in violation of its
certificate or articles of incorporation or by-laws, or other organizational
documents, or of any law, ordinance, administrative or governmental rule or
regulation applicable to the Company or any of the Subsidiaries or of any decree
of any court or governmental agency or body having jurisdiction over the Company
or any of the Subsidiaries, except any violations which will not have a Material
Adverse Effect, or in default in any material respect in the performance of any
material obligation, agreement or condition contained in any bond, debenture,
note or any other evidence of indebtedness or in any material agreement,
indenture, lease or other instrument to which the Company or any of the
Subsidiaries is a party or by which any of them or any of their respective
properties may be bound.
<PAGE>
(i) Neither the issuance and sale of the Shares, the execution, delivery or
performance of this Agreement by the Company nor the consummation by the Company
of the transactions contemplated hereby (i) requires any consent, approval,
authorization or other order of or registration or filing with, any court,
regulatory body, administrative agency or other governmental body, agency or
official (except such as may be required for the registration of the Shares
under the Act and the Exchange Act, listing of the Shares on the New York Stock
Exchange and compliance with the securities or Blue Sky laws of various
jurisdictions, all of which have been or will be effected in accordance with
this Agreement) or conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the certificate or articles of
incorporation or bylaws, or other organizational documents, of the Company or
any of the Subsidiaries or (ii) conflicts or will conflict with or constitutes
or will constitute a breach of, or a default under, any agreement, indenture,
lease or other instrument to which the Company or any of the Subsidiaries is a
party or by which any of them or any of their respective properties may be
bound, or violates or will violate any statute, law, regulation or filing
(except the securities or Blue Sky laws of the various jurisdictions, as to
which no representation or warranty is made) or judgment, injunction, order or
decree applicable to the Company or any of the Subsidiaries or any of their
respective properties, or will result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any of the
Subsidiaries pursuant to the terms of any agreement or instrument to which any
of them is a party or by which any of them may be bound or to which any of the
property or assets of any of them is subject.
(j) The accountants, KPMG Peat Marwick LLP, who have certified or shall
certify the financial statements included or incorporated by reference in the
Registration Statement and the Prospectus (or any amendment or supplement
thereto) are independent public accountants as required by the Act.
<PAGE>
(k) The financial statements, together with related schedules and notes,
included or incorporated by reference in the Registration Statement and the
Prospectus (and any amendment or supplement thereto), present fairly, in all
material respects, the consolidated financial position, results of operations
and changes in financial position of the Company and the Subsidiaries on the
basis stated in the Registration Statement at the respective dates or for the
respective periods to which they apply; such statements and related schedules
and notes have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved, except as
disclosed therein; and the other financial and statistical information and data
relating to the Company and the Subsidiaries included or incorporated by
reference in the Registration Statement and the Prospectus (and any amendment or
supplement thereto) are accurately presented in all material respects and
prepared on a basis consistent with such financial statements and the books and
records of the Company and the Subsidiaries.
(l) The execution and delivery of, and the performance by the Company of
its obligations under, this Agreement have been duly and validly authorized by
the Company, and this Agreement has been duly executed and delivered by the
Company and constitutes the valid and legally binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as rights
to indemnity and contribution hereunder may be limited by federal or state
securities laws and subject to the qualification that the enforceability of the
Company's obligations hereunder may be limited by bankruptcy, fraudulent
conveyance, insolvency, reorganization, moratorium, and other laws relating to
or affecting creditors' rights generally, and by general equitable principles.
(m) Except as disclosed in the Registration Statement and the Prospectus
(or any amendment or supplement
<PAGE>
thereto), subsequent to the respective dates as of which such information is
given in the Registration Statement and the Prospectus (or any amendment or
supplement thereto), neither the Company nor any of the Subsidiaries has
incurred any liability or obligation, direct or contingent, or entered into any
transaction, not in the ordinary course of business, that is material to the
Company and the Subsidiaries taken as a whole, and there has not been any change
in the capital stock of the Company, or material increase in the short-term debt
or long-term debt of the Company or any of the Subsidiaries, or any material
adverse change, or any development involving or which may reasonably be expected
to involve, a prospective material adverse change, in the condition (financial
or other), business, net worth or results of operations of the Company and the
Subsidiaries taken as a whole.
(n) With only such exceptions as would not have a Material Adverse Effect,
each of the Company and the Subsidiaries has good and, in the case of real
property, marketable title to all property (real and personal) described in the
Prospectus as being owned by it, free and clear of all liens, claims, security
interests or other encumbrances except such as are described in the Registration
Statement and the Prospectus or in a document filed as an exhibit to the
Registration Statement and all the property described in the Prospectus as being
held under lease by each of the Company and the Subsidiaries is held by it under
valid, subsisting and enforceable leases.
(o) The Company has not distributed and, prior to the later to occur of (i)
the Closing Date and (ii) completion of the distribution of the Shares, will not
distribute any offering material in connection with the offering and sale of the
Shares other than the Registration Statement, the Prepricing Prospectus, the
Prospectus or other materials, if any, permitted by the Act.
(p) The Company and each of the Subsidiaries has such material permits,
licenses, franchises and
<PAGE>
authorizations of governmental or regulatory authorities ("permits") as are
necessary to own its respective properties and to conduct its business in all
material respects in the manner described in the Prospectus, subject to such
qualifications as may be set forth in the Prospectus; the Company and each of
the Subsidiaries has fulfilled and performed all its material obligations with
respect to such permits and no event has occurred which allows, or after notice
or lapse of time would allow, revocation or termination thereof or results in
any other material impairment of the rights of the holder of any such permit,
subject in each case to such qualification as may be set forth in the
Prospectus; and, except as described in the Prospectus, none of such permits
contains any restriction that is materially burdensome to the Company or any of
the Subsidiaries.
(q) The properties, assets and operations of the Company and its
Subsidiaries comply with all applicable Environmental Laws (as defined below),
except to the extent that failure so to comply would not have a Material Adverse
Effect. Except as specifically described in the Prospectus, none of the
property, assets or operations of the Company or its Subsidiaries is the subject
of any investigation by any federal, state, local or foreign governmental agency
evaluating whether any remedial action is needed to respond to a release of any
Hazardous Materials (as defined below) into the environment or a release of any
Hazardous Materials that is in contravention of any federal, state, local or
foreign law, order or regulation, in each case that is likely to have a Material
Adverse Effect, and neither the Company nor any Subsidiary has received notice
of any such investigation. Except as described in the Prospectus, neither the
Company nor any Subsidiary has received any notice or claim, nor are there
pending, reasonably anticipated or, to the best knowledge of the Company,
threatened lawsuits against any of them, with respect to violations of an
Environmental Law or in connection with any release of any Hazardous Materials
into the environment that, if adversely determined, could have a Material
Adverse
<PAGE>
Effect. Except as disclosed in the Prospectus, with respect to the business of
the Company or its Subsidiaries, including any previously or currently owned,
leased, or used properties or operations, there are no past, present, or, to the
best knowledge of the Company, reasonably anticipated future events, conditions,
circumstances, activities, practices, incidents, actions or plans that may
interfere with or prevent compliance or continued compliance with the
Environmental Laws in any material respect. As used herein, "Environmental Laws"
means any federal, state, local or foreign law, common law, doctrine, rule,
order, decrees, judgment, injunction, license, permit or regulation relating to
environmental matters, and "Hazardous Materials" means those substances that are
regulated by or form the basis of liability under any Environmental Laws.
(r) The Company and each other person or entity that, together with the
Company, is treated as a single employer under Section 414 of the Internal
Revenue Code of 1986, as amended (the "Code") (each such person or entity being
an "ERISA Affiliate"), complies in all material respects with the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and the Code with
respect to each pension plan (as defined in Section 3(2) of ERISA) maintained by
the Company or such ERISA Affiliate, and none of the Company or any of its ERISA
Affiliates has incurred any material liability under Title IV of ERISA to any
pension plan or to the Pension Benefit Guaranty Corporation that has not been
fully paid as of the date hereof.
(s) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability
<PAGE>
for assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(t) To the Company's knowledge, neither the Company nor any of its
Subsidiaries nor any employee or agent of the Company or any Subsidiary has made
any payment of funds of the Company or any Subsidiary or received or retained
any funds in violation of any law, rule or regulation, which payment, receipt or
retention of funds is of a character required to be disclosed in the Prospectus.
(u) The Company and each of the Subsidiaries have filed all material tax
returns required to be filed, which returns are complete and correct in all
material respects, and neither the Company nor any Subsidiary is in default in
the payment of any taxes which were payable pursuant to said returns or any
assessments with respect thereto.
(v) No holder of any security of the Company has any right (except as has
been waived) to require registration of shares of Common Stock or any other
security of the Company because of the filing of the registration statement or
consummation of the transactions contemplated by this Agreement.
(w) The Company and the Subsidiaries own or possess all patents,
trademarks, trademark registrations, service marks, service mark registrations,
trade names, copyrights, licenses, inventions, trade secrets and rights
described in the Prospectus as being owned by them or any of them or to the
Company's knowledge necessary for the conduct of their respective businesses,
and the Company is not aware of any claim to the contrary or any challenge by
any other person to the rights of the Company and the Subsidiaries with respect
to the foregoing which will have a Material Adverse Effect.
<PAGE>
(x) The Company has complied with all provisions of Florida Statutes,
(S)517.075, relating to issuers doing business with Cuba.
7. Indemnification and Contribution. (a) The Company agrees to indemnify
and hold harmless each of you and each other Underwriter and each person, if
any, who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act from and against any and all losses, claims,
damages, liabilities and expenses (including reasonable costs of investigation)
arising out of or based upon any untrue statement or alleged untrue statement of
a material fact contained in any Prepricing Prospectus or in the Registration
Statement or the Prospectus or in any amendment or supplement thereto, or
arising out of or based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages,
liabilities or expenses arise out of or are based upon any untrue statement or
omission or alleged untrue statement or omission which has been made therein or
omitted therefrom in reliance upon and in conformity with the information
relating to such Underwriter furnished in writing to the Company by or on behalf
of any Underwriter through you expressly for use in connection therewith;
provided, however, that the indemnification contained in this paragraph (a) with
respect to any Prepricing Prospectus shall not inure to the benefit of any
Underwriter (or to the benefit of any person controlling such Underwriter) on
account of any such loss, claim, damage, liability or expense arising from the
sale of the Shares by such Underwriter to any person if a copy of the Prospectus
shall not have been delivered or sent to such person within the time required by
the Act and the regulations thereunder, and the untrue statement or alleged
untrue statement or omission or alleged omission of a material fact contained in
such Prepricing Prospectus was corrected in the Prospectus, provided that the
Company has delivered the Prospectus to the several Underwriters in requisite
quantity on a timely basis to permit such delivery
<PAGE>
or sending. The foregoing indemnity agreement shall be in addition to any
liability which the Company may otherwise have.
(b) If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Company, such Underwriter or such
controlling person shall promptly notify the Company in writing and the Company
shall assume the defense thereof, including the employment of counsel and
payment of all fees and expenses. Such Underwriter or any such controlling
person shall have the right to employ separate counsel in any such action, suit
or proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Underwriter or such
controlling person unless (i) the Company has agreed in writing to pay such fees
and expenses, (ii) the Company has failed to assume the defense and employ
counsel, or (iii) the named parties to any such action, suit or proceeding
(including any impleaded parties) include both such Underwriter or such
controlling person and the Company and such Underwriter or such controlling
person shall have been advised by its counsel in writing, with a copy furnished
to the Company upon request) that representation of such indemnified party and
the Company by the same counsel would be inappropriate under applicable
standards of professional conduct (whether or not such representation by the
same counsel has been proposed) due to actual or potential differing interests
between them (in which case the Company shall not have the right to assume the
defense of such action, suit or proceeding on behalf of such Underwriter or such
controlling person). It is understood, however, that the Company shall, in
connection with any one such action, suit or proceeding or separate but
substantially similar or related actions, suits or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of only one separate firm of
attorneys (in addition to any local counsel) at any time for all such
Underwriters and controlling persons not having
<PAGE>
actual or potential differing interests with you or among themselves, which firm
shall be designated in writing by Smith Barney Inc., and that all such fees and
expenses shall be reimbursed as they are incurred. The Company shall not be
liable for any settlement of any such action, suit or proceeding effected
without its written consent, but if settled with such written consent, or if
there be a final judgment for the plaintiff in any such action, suit or
proceeding, the Company agrees to indemnify and hold harmless any Underwriter,
to the extent provided in the preceding paragraph, and any such controlling
person from and against any loss, claim, damage, liability or expense by reason
of such settlement or judgment.
(c) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement, and any person who controls the Company within the meaning of Section
15 of the Act or Section 20 of the Exchange Act, to the same extent as the
foregoing indemnity from the Company to each Underwriter, but only with respect
to information relating to such Underwriter furnished in writing by or on behalf
of such Underwriter through you expressly for use in the Registration Statement,
the Prospectus or any Prepricing Prospectus, or any amendment or supplement
thereto. If any action, suit or proceeding shall be brought against the Company,
any of its directors, any such officer, or any such controlling person based on
the Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto, and in respect of which indemnity may be sought
against any Underwriter pursuant to this paragraph (c), such Underwriter shall
have the rights and duties given to the Company by paragraph (b) above (except
that if the Company shall have assumed the defense thereof such Underwriter
shall not be required to do so, but may employ separate counsel therein and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at such Underwriter's expense), and the Company, its directors, any
such officer, and any such controlling person shall have the rights and
<PAGE>
duties given to the Underwriters by paragraph (b) above. The foregoing indemnity
agreement shall be in addition to any liability which the Underwriters may
otherwise have.
(d) If the indemnification provided for in this Section 7 is unavailable to
an indemnified party under paragraphs (a) or (c) hereof in respect of any
losses, claims, damages, liabilities or expenses referred to therein, then an
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses (i) in such proportion
as is appropriate to reflect the relative benefits received by the Company on
the one hand and the Underwriters on the other hand from the offering of the
Shares, or (ii) if the allocation provided by clause (i) above is not permitted
by applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and the Underwriters on the other in connection with
the statements or omissions that resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by the
Company bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or by the Underwriters on the other hand
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
<PAGE>
(e) The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by a pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in paragraph (d) above. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages,
liabilities and expenses referred to in paragraph (d) above shall be deemed to
include, subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
any claim or defending any such action, suit or proceeding. Notwithstanding the
provisions of this Section 7, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price of the Shares
underwritten by it and distributed to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 7 are several in proportion to the
respective numbers of Firm Shares set forth opposite their names in Schedule I
hereto (or such numbers of Firm Shares increased as set forth in Section 10
hereof) and not joint.
(f) No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened action,
suit or proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such action, suit or proceeding.
<PAGE>
(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 7 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers, or any person
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter or any person controlling any Underwriter, or to the Company, its
directors or officers, or any person controlling the Company, shall be entitled
to the benefits of the indemnity, contribution and reimbursement agreements
contained in this Section 7.
8. Conditions of Underwriters' Obligations. The several obligations of the
Underwriters to purchase the Firm Shares hereunder are subject to the following
conditions:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
registration statement or such post-effective amendment shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by you, and all
filings, if any, required by Rules 424 and 430A under the Act shall have been
timely made; no stop order suspending the effectiveness of the registration
statement shall have been issued and no proceeding for that purpose shall have
been instituted or, to the knowledge of the Company or any Underwriter,
threatened by the Commission,
<PAGE>
and any request of the Commission for additional information (to be included in
the registration statement or the prospectus or otherwise) shall have been
complied with to your reasonable satisfaction.
(b) Subsequent to the effective date of this Agreement, there shall not
have occurred (i) any change, or any development involving a prospective change,
in or affecting the condition (financial or other), business, properties, net
worth, or results of operations of the Company or the Subsidiaries not
contemplated by the Prospectus, which in your reasonable opinion, as
Representatives of the several Underwriters, would materially, adversely affect
the market for the Shares, or (ii) any event or development relating to or
involving the Company or any officer or director of the Company which makes any
statement made in the Prospectus untrue or which, in the opinion of the Company
and its counsel or the Underwriters and their counsel, requires the making of
any addition to or change in the Prospectus in order to state a material fact
required by the Act or any other law to be stated therein or necessary in order
to make the statements therein not misleading, if amending or supplementing the
Prospectus to reflect such event or development would, in your reasonable
opinion, as Representatives of the several Underwriters, materially adversely
affect the market for the Shares.
(c) You shall have received on the Closing Date, an opinion of Morgan,
Lewis & Bockius LLP, counsel for the Company, dated the Closing Date and
addressed to you, as Representatives of the several Underwriters, to the effect
that:
(i) The Company is a corporation validly existing in good standing under
the laws of the State of Delaware with corporate power and authority to own,
lease and operate its properties and to conduct its business as described in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto);
<PAGE>
(ii) Each of the Material Subsidiaries is a corporation validly existing in
good standing under the laws of the jurisdiction of its organization, with full
corporate power and authority to own, lease, and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement thereto);
(iii) The authorized and outstanding capital stock of the Company is as set
forth under the caption "Capitalization" in the Prospectus; and the authorized
capital stock of the Company conforms in all material respects as to legal
matters to the description thereof contained in the Prospectus under the caption
"Description of Capital Stock";
(iv) All the shares of capital stock of the Company outstanding prior to
the issuance of the Shares have been duly authorized and validly issued, and are
fully paid and nonassessable;
(v) The Shares have been duly authorized and, when issued and delivered to
the Underwriters against payment therefor in accordance with the terms hereof,
will be validly issued, fully paid and nonassessable and free of any preemptive,
or to the knowledge of such counsel, similar rights that entitle or will entitle
any person to acquire any Shares upon the issuance thereof by the Company;
(vi) The form of certificates for the Shares conforms to the requirements
of the Delaware General Corporation Law;
(vii) The Registration Statement and all post-effective amendments, if any,
have become effective under the Act and, to the knowledge of such counsel, no
stop order suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose are pending before or contemplated by
the
<PAGE>
Commission; and any required filing of the Prospectus pursuant to Rule 424(b)
has been made in accordance with Rule 424(b);
(viii) The Company has corporate power and authority to enter into this
Agreement and to issue, sell and deliver the Shares to the Underwriters as
provided herein, and this Agreement has been duly authorized, executed and
delivered by the Company and is a valid, legal and binding agreement of the
Company, enforceable against the Company in accordance with its terms, except as
enforcement of rights to indemnity and contribution hereunder may be limited by
Federal or state securities laws or principles of public policy and subject to
the qualification that the enforceability of the Company's obligations hereunder
may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization,
moratorium, and other laws relating to or affecting creditors' rights generally,
and by general equitable principles;
(x) Neither the offer, sale or delivery of the Shares, the execution,
delivery or performance of this Agreement, compliance by the Company with the
provisions hereof nor consummation by the Company of the transactions
contemplated hereby conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the certificate or articles of
incorporation or bylaws, or other organizational documents, of the Company or
any of the Material Subsidiaries or any agreement, indenture, lease or other
instrument to which the Company or any of the Material Subsidiaries is a party
or by which any of them or any of their respective properties is bound that is
an exhibit to the Registration Statement or to any Incorporated Document, or is
known to such counsel, or will result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any of the
Material Subsidiaries, nor will any such action result in any violation of any
existing law, regulation, ruling (assuming compliance with all applicable state
<PAGE>
securities and Blue Sky laws), judgment, injunction, order or decree known to
such counsel, applicable to the Company, the Material Subsidiaries or any of
their respective properties;
(xi) No consent, approval, authorization or other order of, or registration
or filing with, any court, regulatory body, administrative agency or other
governmental body, agency, or official is required on the part of the Company
(except as have been obtained under the Act and the Exchange Act or such as may
be required under state securities or Blue Sky laws governing the purchase and
distribution of the Shares) for the valid issuance and sale of the Shares to the
Underwriters as contemplated by this Agreement;
(xii) The Registration Statement and the Prospectus and any supplements or
amendments thereto (except for the financial statements and the notes thereto
and the schedules and other financial and statistical data included therein, as
to which such counsel need not express any opinion) comply as to form in all
material respects with the requirements of the Act; and each of the Incorporated
Documents included in the Registration Statement (except for the financial
statements and the notes thereto and the schedules and other financial and
statistical data included therein, as to which counsel need not express any
opinion) complies as to form in all material respects with the Exchange Act and
the rules and regulations of the Commission thereunder;
(xiii) To the knowledge of such counsel, (A) other than as described or
contemplated in the Prospectus (or any supplement thereto), there are no legal
or governmental proceedings pending or threatened against the Company or any of
the Subsidiaries, or to which the Company or any of the Subsidiaries, or any of
their property, is subject, which are required to be described in the
Registration Statement or Prospectus (or any amendment or supplement thereto)
and (B) there are no agreements, contracts, indentures, leases
<PAGE>
or other instruments, that are required to be described in the Registration
Statement or the Prospectus (or any amendment or supplement thereto) or to be
filed as an exhibit to the Registration Statement or any Incorporated Document
that are not described or filed as required, as the case may be;
(xiv) The following statements in the Prospectus, insofar as they are
descriptions of contracts, agreements or other legal documents, or refer to
statements of law or legal conclusions, are accurate and present fairly the
information required to be shown: on page 8, under "Risk Factors - Significant
Leverage", the second sentence relating to the Secured Credit Agreement facility
amounts and the third sentence relating to the Receivables Securitization
Facility amount; on page 8, under "Risk Factors - Restrictive Covenants in
Certain Debt Instruments", the entire paragraph; on page 9, under "Risk Factors
- - Absence of Dividends", the first sentence relating to restrictions on the
payment of dividends under the Secured Credit Agreement; on page 9, under "Risk
Factors -Anti-Takeover Provisions", the entire paragraph; on page 12, under
"Price Range of Common Stock and Dividend Policy", the first sentence of the
fourth paragraph, relating to restrictions on the payment of dividends under the
Secured Credit Agreement; on page 20, under "Management's Discussion and
Analysis of Financial Condition and Results of Operations - General", the third
sentence of the fourth paragraph, relating to no ownership interest or
management control of the footwear businesses upon the completion of the
restructuring; on page 24, under "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition and
Liquidity", the first three sentences of the first paragraph relating to short-
term working capital and other financial requirements; on page 31, under
"Business - Products - Thomasville Furniture Industries", the second sentence of
the second full paragraph, relating to the Company's right to the use of the
Armstrong name for 18 months; on page 35, under "Business - Environmental
Matters", the entire first and
<PAGE>
second paragraphs; on page 38, under "Certain Transactions", the entire
paragraph; on page 39, under "Description of Capital Stock", the entire section;
on page 41, under "Underwriting", the first sentence of the second paragraph,
relating to the obligations of the several underwriters; and
(xv) Although counsel has not undertaken, except as otherwise indicated,
to determine independently, and does not assume any responsibility for, the
accuracy or completeness of the statements in the Registration Statement, such
counsel has participated in the preparation of the Registration Statement and
the Prospectus, including review and discussion of the contents thereof
(including review and discussion of the contents of all Incorporated Documents),
and nothing has come to the attention of such counsel that has caused them to
believe that the Registration Statement (including the Incorporated Documents)
at the time the Registration Statement became effective, or the Prospectus, as
of its date and as of the Closing Date or the Option Closing Date, as the case
may be, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading or that any amendment or supplement to the Prospectus, as
of its respective date, and as of the Closing Date or the Option Closing Date,
as the case may be, contained any untrue statement of a material fact or omitted
to state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading (it
being understood that such counsel need express no belief with respect to the
financial statements and the notes thereto and the schedules and other financial
and statistical data included in the Registration Statement or the Prospectus or
any Incorporated Document).
In rendering such opinion as aforesaid, counsel may limit their opinion to
the federal laws of the United States, the General Corporation Law of the State
of Delaware, and the laws of the States of New York and Pennsylvania, and may
assume that the laws of the
<PAGE>
Commonwealth of Virginia and the State of North Carolina are in all relevant
respects the same as the Delaware General Corporation Law.
(d) You shall have received on the Closing Date, an opinion of Lynn
Chipperfield, Esq., general counsel for the Company, dated the Closing Date and
addressed to you, as Representatives of the several Underwriters, to the effect
that:
(i) The Company and each of the Subsidiaries has corporate power and
authority, and, to such counsel's knowledge, all necessary governmental
authorizations, approvals, orders, licenses, certificates, franchises and
permits of and from all governmental regulatory officials and bodies (except
where the failure so to have any such authorizations, approvals, orders,
licenses, certificates, franchises or permits, individually or in the aggregate,
would not have a Material Adverse Effect), to own their respective properties
and to conduct their respective businesses as now being conducted, as described
in the Prospectus;
(ii) Each of the Company and the Material Subsidiaries is duly qualified to
transact business as a foreign corporation in good standing in the jurisdictions
listed in an attached schedule, which are all jurisdictions in which they own,
lease or operate manufacturing facilities;
(iii) Neither the Company nor any of the Material Subsidiaries is in
violation of its respective certificate or articles of incorporation or bylaws,
or other organizational documents, to the knowledge of such counsel, or is in
default in the performance of any material obligation, agreement or condition
contained in any bond, debenture, note or other evidence of indebtedness, to the
knowledge of such counsel, except as may be disclosed in the Prospectus;
<PAGE>
(iv) Except as disclosed in the Prospectus, the Company owns of record,
directly or indirectly, all the outstanding shares of capital stock of each of
the Subsidiaries free and clear of any lien, adverse claim, security interest,
equity, or other encumbrance, and all the outstanding shares of capital stock of
each of the Subsidiaries have been duly authorized and validly issued, are fully
paid and nonassessable;
(v) Other than as described or contemplated in the Prospectus (or any
supplement thereto), to such counsel's knowledge after reasonable inquiry, there
are no legal or governmental proceedings pending or threatened against the
Company or any of the Subsidiaries, or to which the Company or any of the
Subsidiaries, or any of their property, is subject, which are required to be
described in the Registration Statement or Prospectus (or any amendment or
supplement thereto);
(vi) To such counsel's knowledge after reasonable inquiry, there are no
agreements, contracts, indentures, leases or other instruments, that are
required to be described in the Registration Statement or the Prospectus (or any
amendment or supplement thereto) or to be filed as an exhibit to the
Registration Statement or any Incorporated Document therein that are not
described or filed as required, as the case may be;
(vii) The Company and the Subsidiaries own all patents, trademarks,
trademark registrations, service marks, service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets and rights described in the
Prospectus as being owned by them or any of them or, to the knowledge of such
counsel, necessary for the conduct of their respective businesses, and such
counsel is not aware of any claim to the contrary or any challenge by any other
person to the rights of the Company and the Subsidiaries with respect to the
foregoing;
<PAGE>
(viii) To such counsel's knowledge after reasonable inquiry, neither the
Company nor any of the Subsidiaries is in violation of any law, ordinance,
administrative or governmental rule or regulation applicable to the Company or
any of the Subsidiaries or of any decree of any court or governmental agency or
body having jurisdiction over the Company or any of the Subsidiaries except for
violations that would not, singly or in the aggregate, have a Material Adverse
Effect;
(ix) Except as described in the Prospectus, there are no outstanding
options, warrants or other rights calling for the issuance of, and such counsel
does not know of any commitment, plan or arrangement to issue, any shares of
capital stock of the Company or any security convertible into or exchangeable or
exercisable for capital stock of the Company; and
(x) Except as described in the Prospectus, there is no holder of any
security of the Company or any other person who has the right, contractual or
otherwise, to cause the Company to sell or otherwise issue to them, or to permit
them to underwrite the sale of, the Shares or the right to have any Common Stock
or other securities of the Company included in the registration statement or the
right, as a result of the filing of the registration statement, to require
registration under the Act of any shares of Common Stock or other securities of
the Company.
(e) You shall have received on the Closing Date an opinion of Cravath,
Swaine & Moore, counsel for the
<PAGE>
Underwriters, dated the Closing Date and addressed to you, as Representatives of
the several Underwriters, with respect to the matters as you may request.
(f) You shall have received letters addressed to you, as Representatives of
the several Underwriters, and dated the date hereof and the Closing Date from
KPMG Peat Marwick LLP, independent certified public accountants, substantially
in the forms heretofore approved by you.
(g)(i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been taken or, to the knowledge of the Company, shall be contemplated by the
Commission at or prior to the Closing Date; (ii) there shall not have been any
change in the capital stock of the Company nor any material increase in the
short-term or long-term debt of the Company (other than in the ordinary course
of business) from that set forth or contemplated in the Registration Statement
or the Prospectus (or any amendment or Supplement thereto); (iii) there shall
not have been, since the respective dates as of which information is given in
the Registration Statement and the Prospectus (or any amendment or supplement
thereto), except as may otherwise be stated in the Registration Statement and
Prospectus (or any amendment or supplement thereto), any material adverse change
in the condition (financial or other), business, prospects, properties, net
worth or results of operations of the Company and the Subsidiaries taken as a
whole; (iv) the Company and the Subsidiaries shall not have any liabilities
or obligations, direct or contingent (whether or not in the ordinary course of
business), that are material to the Company and the Subsidiaries, taken as a
whole, other than those reflected in the Registration Statement or the
Prospectus (or any amendment or supplement thereto); and (v) all the
representations and warranties of the Company contained in this Agreement shall
be true and correct on and as of the date hereof and on and as of the Closing
Date as if made on and as of the Closing Date, and you shall have received a
certificate of the Company, dated the Closing
<PAGE>
Date and signed on behalf of the Company by the chief executive officer and the
chief financial officer of the Company (or such other officers as are acceptable
to you), to the effect set forth in this Section 8(g) and in Section 8(h)
hereof.
(h) The Company shall not have failed at or prior to the Closing Date to
have performed or complied with any of its agreements herein contained and
required to be performed or complied with by it hereunder at or prior to the
Closing Date.
(i) Prior to the Closing Date the Shares shall have been listed, subject to
notice of issuance, on the New York Stock Exchange.
(j) The Company shall have furnished or caused to be furnished to you such
further certificates and documents as you shall have reasonably requested.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
in form and substance to you and your counsel.
Any certificate or document signed by any officer of the Company and
delivered to you, as Representatives of the Underwriters, or to counsel for the
Underwriters, shall be deemed a representation and warranty by the Company to
each Underwriter as to the statements made therein.
The several obligations of the Underwriters to purchase Additional Shares
hereunder are subject to the satisfaction on and as of any Option Closing Date
of the conditions set forth in this Section 8, except that, if any Option
Closing Date is other than the Closing Date, the certificates, opinions and
letters referred to in paragraphs (c) through (g) shall be dated the Option
Closing Date in question and the opinions called for by paragraphs (c), (d) and
(e) shall be revised to reflect the sale of Additional Shares.
<PAGE>
9. Expenses. The Company agrees to pay the following costs and expenses
and all other costs and expenses incident to the performance by it of its
obligations hereunder: (i) the preparation, printing or reproduction, and filing
with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the Prospectus,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight charges and charges
for counting and packaging) of such copies of the registration statement, each
Prepricing Prospectus, the Prospectus, the Incorporated Documents, and all
amendments or supplements to any of them, as may be reasonably requested for use
in connection with the offering and sale of the Shares; (iii) the preparation,
printing, authentication, issuance and delivery of certificates for the Shares,
including any stamp taxes in connection with the original issuance and sale of
the Shares; (iv) the printing (or reproduction) and delivery of this Agreement,
the preliminary and supplemental Blue Sky Memoranda and all other agreements or
documents printed (or reproduced) and delivered in connection with the offering
of the Shares; (v) the listing of the Shares on the New York Stock Exchange;
(vi) the registration or qualification of the Shares for offer and sale under
the securities or Blue Sky laws of the several states as provided in Section
5(g) hereof (including the reasonable fees, expenses and disbursements of
counsel for the Underwriters relating to the preparation, printing or
reproduction, and delivery of the preliminary and supplemental Blue Sky
Memoranda and such registration and qualification); (vii) the filing fees in
connection with any filings required to be made with the National Association of
Securities Dealers, Inc.; (viii) the transportation and other expenses incurred
by or on behalf of Company representatives in connection with presentations to
prospective purchasers of the Shares; and (ix) the fees and expenses of the
Company's accountants and the fees and expenses of counsel (including local and
special counsel) for the Company.
<PAGE>
10. Effective Date of Agreement. This Agreement shall become effective:
(i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at
the time this Agreement is executed and delivered, it is necessary for the
registration statement or a post-effective amendment thereto to be declared
effective before the offering of the Shares may commence, when notification of
the effectiveness of the registration statement or such post-effective amendment
has been released by the Commission. Until such time as this Agreement shall
have become effective, it may be terminated by the Company, by notifying you, or
by you, as Representatives of the several Underwriters, by notifying the
Company.
If any one or more of the Underwriters shall fail or refuse to purchase
Shares which it or they are obligated to purchase hereunder on the Closing Date,
and the aggregate number of Shares which such defaulting Underwriter or
Underwriters are obligated but fail or refuse to purchase is not more than one-
tenth of the aggregate number of Shares which the Underwriters are obligated to
purchase on the Closing Date, each non-defaulting Underwriter shall be
obligated, severally, in the proportion which the number of Firm Shares set
forth opposite its name in Schedule I hereto bears to the aggregate number of
Firm Shares set forth opposite the names of all non-defaulting Underwriters or
in such other proportion as you may specify in accordance with Section 20 of the
Master Agreement Among Underwriters of Smith Barney Inc., to purchase the Shares
which such defaulting Underwriter or Underwriters are obligated, but fail or
refuse, to purchase. If any one or more of the Underwriters shall fail or
refuse to purchase Shares which it or they are obligated to purchase on the
Closing Date and the aggregate number of Shares with respect to which such
default occurs is more than one-tenth of the aggregate number of Shares which
the Underwriters are obligated to purchase on the Closing Date and arrangements
satisfactory to you and the Company for the purchase of such Shares by one or
more non-defaulting Underwriters or other party or
<PAGE>
parties approved by you and the Company are not made within 36 hours after such
default, this Agreement will terminate without liability on the part of any non-
defaulting Underwriter or the Company. In any such case which does not result in
termination of this Agreement, either you or the Company shall have the right to
postpone the Closing Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and the
Prospectus or any other documents or arrangements may be effected. Any action
taken under this paragraph shall not relieve any defaulting Underwriter from
liability in respect of any such default of any such Underwriter under this
Agreement. The term "Underwriter" as used in this Agreement includes, for all
purposes of this Agreement, any party not listed in Schedule I hereto who, with
your approval and the approval of the Company, purchases Shares which a
defaulting Underwriter is obligated, but fails or refuses, to purchase.
Any notice under this Section 10 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
11. Termination of Agreement. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Underwriter to the Company by notice to the Company, if prior to the Closing
Date or any Option Closing Date (if different from the Closing Date and then
only as to the Additional Shares), as the case may be, (i) trading in securities
generally on the New York Stock Exchange, the American Stock Exchange or the
Nasdaq National Market shall have been suspended or materially limited, (ii) a
general moratorium on commercial banking activities in New York or Missouri
shall have been declared by either federal or state authorities, or (iii) there
shall have occurred any outbreak or escalation of hostilities or other
international or domestic calamity, crisis or change in political, financial or
economic conditions, the effect of which on the financial markets of the United
States is such as to make it, in your judgment, impracticable or inadvisable to
<PAGE>
commence or continue the offering of the Shares at the offering price to the
public set forth on the cover page of the Prospectus or to enforce contracts for
the resale of the Shares by the Underwriters. Notice of such termination may be
given to the Company by telegram, telecopy or telephone and shall be
subsequently confirmed by letter.
12. Information Furnished by the Underwriters. The statements set forth
in the last paragraph on the cover page, the stabilization legend on the inside
front cover, and the statements in the first and third paragraphs under the
caption "Underwriting" in any Prepricing Prospectus and in the Prospectus,
constitute the only information furnished by or on behalf of the Underwriters
through you as such information is referred to in Sections 6(b) and 7 hereof.
13. Miscellaneous. Except as otherwise provided in Sections 5, 10 and 11
hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered (i) if to the Company, at the office of the
Company at INTERCO INCORPORATED, 101 South Hanley Road, St. Louis, Missouri
63105, Attention: Lynn Chipperfield, Esq., General Counsel; or (ii) if to you,
as Representatives of the several Underwriters, care of Smith Barney Inc., 388
Greenwich Street, New York, New York 10013, Attention: Manager, Investment
Banking Division.
This Agreement has been and is made solely for the benefit of the several
Underwriters, the Company, its directors and officers, and the other controlling
persons referred to in Section 7 hereof and their respective successors and
assigns, to the extent provided herein, and no other person shall acquire or
have any right under or by virtue of this Agreement. Neither the term
"successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from any Underwriter of any of the Shares in his
status as such purchaser.
14. Applicable Law; Counterparts. This Agreement shall be governed by and
construed in accordance with the
<PAGE>
laws of the State of New York applicable to contracts made and to be performed
within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
INTERCO INCORPORATED
By ........................
Chairman of the Board
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Underwriters named in Schedule I
hereto.
SMITH BARNEY INC.
DEAN WITTER REYNOLDS INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
WHEAT, FIRST SECURITIES, INC.
As Representatives of the Several Underwriters
By SMITH BARNEY INC.
By ..........................
Managing Director
<PAGE>
SCHEDULE I
INTERCO INCORPORATED
<TABLE>
<CAPTION>
Number of
Underwriter Firm Shares
------------- -----------
<S> <C>
Smith Barney Inc.........................
Dean Witter Reynolds Inc.................
Donaldson, Lufkin & Jenrette
Securities Corporation..................
Wheat, First Securities, Inc.
___________
Total............................. 8,750,000
===========
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
INTERCO INCORPORATED:
We consent to the use of our reports included and incorporated by reference
in the registration statement and to the reference to our firm under the
headings "Experts" and "Selected Consolidated Historcial and Pro Forma
Financial Information" in the Prospectus.
KPMG Peat Marwick LLP
St. Louis, Missouri
February 21, 1996
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Thomasville Furniture Industries, Inc.:
We consent to the incorporation by reference in the registration statement
on Form S-3 of INTERCO INCORPORATED of our report dated January 20, 1995,
except as to note 1, which is as of April 7, 1995, with respect to the
consolidated balance sheets of Thomasville Furniture Industries, Inc. and
subsidiaries as of December 31, 1994 and 1993, and the related consolidated
statements of operations, shareholder's equity, and cash flows for each of the
years in the three-year period ended December 31, 1994, which report appears
in the Form 8-K/A-1 of INTERCO INCORPORATED dated January 16, 1996 and to the
reference to our firm under the heading "Experts" in the Prospectus.
Our report refers to changes in accounting for postemployment benefits,
postretirement benefits and income taxes.
KPMG Peat Marwick LLP
Greensboro, North Carolina
February 21, 1996
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Thomasville Furniture Industries, Inc.:
We consent to the incorporation by reference in the registration statement
on Form S-3 of INTERCO INCORPORATED of our report dated January 19, 1996, with
respect to the consolidated balance sheet of Thomasville Furniture Industries,
Inc. and subsidiaries ("Thomasville") as of December 29, 1995, and the related
consolidated statement of operations for the year then ended, which report
appears in the Form 8-K/A-2 of INTERCO INCORPORATED dated February 1, 1996 and
to the reference to our firm under the heading "Experts" in the Prospectus.
Our report refers to the omission in the consolidated financial statements
of Thomasville, of the consolidated statements of shareholder's equity and
cash flows for the year ended December 29, 1995 and notes to the consolidated
financial statements which are required by generally accepted accounting
principles and results in an incomplete presentation.
Our report also refers to Thomasville's acquisition by INTERCO INCORPORATED
on December 29, 1995. The acquisition was accounted for under the purchase
method of accounting. The accompanying consolidated financial statements do
not include the effects of push down accounting.
KPMG Peat Marwick LLP
Greensboro, North Carolina
February 21, 1996
