Item 1. Business
The Company is a Delaware corporation organized in February 1986 for the purpose of acquiring Triangle Pacific Corp., a New York corporation ("Old Triangle"), in a leveraged buyout transaction completed in May 1986. In September 1988, TPC Holding Corp. ("Holding") acquired the Company in a second leveraged buyout transaction pursuant to which the Company became a wholly-owned subsidiary of Holding.
On June 8, 1992, the Company successfully completed a capital restructuring (the "1992 Restructuring") pursuant to which substantially all of the Company's outstanding long-term indebtedness, redeemable preferred stock and common stock were exchanged for new debt with lower interest rates and new common stock, and Holding was merged into the Company.
The Company filed two registration statements with the Securities and Exchange Commission in 1993 and sold to the public 7,939,750 shares of the Company's Common Stock and $160 million aggregate principal amount of 10 1/2% Senior Notes due 2003 (collectively, "the Offerings"). The net proceeds of the Offerings together with borrowings under a new $90 million credit facility were used (i) to repay the entire unpaid balance under the Company's previously-existing senior debt financing agreements, redeem certain previously outstanding debentures and pay related accrued interest, for a total of approximately $227 million, and (ii) for working capital and general corporate purposes.
The Company's operations are conducted through a single business segment which consists of the manufacture and distribution of building products. The Company through its Bruce Hardwood Floors Division produces hardwood flooring and through its Cabinet Division manufactures and distributes kitchen and bathroom cabinets. The Company's products are used primarily in the residential new construction and remodeling. The Company through its Beltsville Division also operates a general building materials distribution center located in Beltsville, Maryland. The Company's business is seasonal, with demand for its products generally highest between April and November.
Presented below is a summary of sales results for each of the fiscal years 1989 through 1993.
Bruce Hardwood Floors Division
The Company's Bruce Hardwood Floors Division is the largest and best known manufacturer of hardwood flooring in the United States. The Company produces a complete line of hardwood flooring products and believes that it is generally recognized for its superior quality and service. The Company believes the Bruce name is the most recognized brand name in hardwood flooring.
Industry Overview
Sales of hardwood flooring have grown from 2.9% of total United States floorcovering sales in 1982 to an estimated 5.5% of estimated total United States floorcovering sales in 1993. The Company believes that the growth of hardwood flooring sales is due to increased consumer preference for the aesthetic appeal of hardwood flooring and technological advances in the production, installation and maintenance of hardwood flooring.
Hardwood flooring competes primarily with carpet, vinyl and ceramic tile in the floorcovering market. The increased sales of hardwood flooring during the last decade have been achieved at the expense of carpet and vinyl floorcovering. The Company believes that the principal competitive factors in the floorcovering market are aesthetic appeal, price, durability and ease of installation and maintenance.
Products and Product Development
The Company offers approximately 100 varieties of hardwood flooring products in three basic categories - 3/4" solid strip and plank, 3/8" laminated strip, plank and parquet and 5/16" solid parquet - in unfinished and a variety of pre-finished styles and colors. The Company's hardwood flooring products are generally available in various widths and lengths and are differentiated in terms of quality and price based primarily on whether the product is finished or unfinished and on the grade of the raw materials used to produce the product.
The Company has been a leader in developing a wide variety of new hardwood flooring products, including (i) 5/16" solid parquet flooring, (ii) 3/8" laminated flooring, (iii) 3/8" laminated, square-edge, pre- finished flooring, (iv) 3/8" acrylic-impregnated flooring for commercial applications (all of the above for glue-down installation) and (v) 3/4" square-edge, pre-finished flooring. The Company believes that new product development has enabled it to increase its sales and has contributed to the overall growth of hardwood flooring sales since the mid- 1970s. The Company's product innovations have improved the attractiveness of hardwood flooring for a variety of floorcovering applications.
The Company has been instrumental in the development of thinner hardwood flooring products which can be glued to the concrete slab foundations increasingly used in new home construction. Installation of 3/4" hardwood flooring over concrete slabs requires the construction of a false floor above the slab to which the hardwood flooring can be nailed, thereby increasing installation time and expense. The Company has developed 5/16" flooring products, which can be glued to wood or concrete slab foundations, eliminating the need for a false floor. The development of 3/8" laminated flooring (consisting of multiple layers of oak veneer, glued and pressed together), which can be glued to a wood or concrete sub-floor, further expanded the uses for hardwood flooring. The dimensional stability of laminated flooring permits its installation in kitchens and basements where the presence of moisture had previously rendered hardwood flooring impractical.
More recently, the Company has pioneered the development of new products with improved durability and ease of maintenance to meet the higher standards demanded by the commercial floorcovering users. The Company's new patent-pending Wear Master line of acrylic - impregnated laminated flooring, offering the only lifetime wear surface available in hardwood floor covering today, was introduced in 1993. These products make Bruce hardwood flooring a much more viable alternative for commercial applications such as office buildings, hotels, restaurants and retail establishments.
Manufacturing
The Company manufactures its 3/4" solid oak hardwood flooring products at its plants in Nashville, and Jackson, Tennessee; Beverly, West Virginia, and West Plains, Missouri. These plants have the capacity to produce a total of 1.55 million square feet of 3/4" flooring per week. The Company manufactures its 3/8" laminated hardwood flooring products at its plants in Center, Texas and Port Gibson, Mississippi. The Center plant has a capacity of 500,000 square feet of 3/8" flooring per week and produces sufficient 1/8" oak veneer to supply approximately one-half of its veneer requirements. The Port Gibson, Mississippi plant has a capacity of 200,000 square feet of 3/8" flooring per week and also supplies most of the remainder of the Center plant's veneer requirements for the production of 3/8" laminated products. The Company manufactures its 5/16" solid parquet products at its plant in Jackson, Tennessee, which has the capacity to produce 400,000 square feet of 5/16" flooring per week in addition to its production of 3/4" product.
To alleviate capacity limitations, the Company is currently in the process of further expanding the plants in Beverly, West Virginia and Port Gibson, Mississippi. The West Virginia project will enable that plant to increase its capacity to produce 3/4" product from 540,000 square feet per week to 690,000 square feet per week. The Port Gibson project will expand that plant's capacity to produce 3/8" laminated flooring from 200,000 square feet per week to 350,000 square feet per week, while maintaining the Port Gibson plant's ability to supply veneer to the Center plant. These capacity expansions, which are expected to be completed by mid-1994, will increase total hardwood flooring capacity from 2.65 million to 2.95 million square feet per week.
The Beverly, West Virginia facility is operated by the Company under an 18-year lease with the West Virginia Economic Development Corporation expiring 2007 (subject to extension until 2017 at the option of the Company). In connection with the Beverly, West Virginia plant expansion, the Company made capital expenditures of $7.5 million for the purchase of equipment in the name of the West Virginia Economic Development Corporation. Pursuant to the operating lease, the West Virginia Economic Development Corporation reimbursed the Company for $5.5 million of the cost of such equipment.
The following table sets forth certain information concerning the manufacturing facilities operated by the Bruce Hardwood Floors Division.
In 1994, the Company plans to construct a new 3/4" solid product plant, which will add approximately 360,000 square feet of capacity per week. The new facility is currently in the design stage and the Company is in the process of selecting a site for the new plant. Construction is expected to commence in the second quarter of 1994 and will take approximately nine to twelve months to complete.
Raw materials for the hardwood flooring products produced at the Nashville, Jackson, Beverly and West Plains plants consist primarily of rough cut oak lumber. Each plant obtains lumber from local independent sawmill operators, purchasing entire truckloads of ungraded, mixed specie lumber. The Company maintains an inventory of purchased lumber which is sufficient for approximately three to four months of operations. The quality and efficiency of lumber purchasing and grading operations are important determinants of manufacturing yields and productivity.
Purchased lumber is stacked for drying in the open air for 90 to 120 days, and then placed in dry kilns for approximately five to seven days to reduce moisture content. Where necessary, the Company operates pre-drying kilns, which shorten the required open-air drying time. The Company's drying processes are another important determinant of satisfactory product yields. Following drying, the flooring-grade lumber is cut into various sizes of strip, plank and parquet flooring. The products are then sanded and, in most cases, bevelled. A majority of the Company's products are pre-finished with a urethane or combination stain and wax finish. Pre-finished products are more durable and do not require a time-consuming sanding and finishing process at the installation site. Recently, the Company began treating a portion of its 3/8" laminated product with an acrylic impregnating process to produce its new Wear Master line of commercial flooring.
Raw materials for the laminated hardwood flooring products manufactured at the Company's plants in Center, Texas and Port Gibson, Mississippi consist of oak logs which are purchased primarily from independent loggers located within about 100 miles of the respective plants. Purchased logs are stored in soaking ponds until needed, and then debarked, soaked in hot water or steamed, cut into five-foot lengths, loaded into a lathe, and peeled to produce sheets of thin oak veneer. Layers of veneer are then pressed into plywood which is cut into strip, plank and parquet hardwood flooring and pre-finished. The Company employs advanced veneer manufacturing processes which substantially increase material yields, thereby reducing costs. The total conversion time for laminated products, from log to finished product, is approximately one week.
Sales
The Bruce Hardwood Floors Division sells its products to over 100 independent wholesale floorcovering distributors located throughout the United States and eight other countries. Most distributors handle a diverse line of floorcovering products in addition to hardwood flooring. The Company's distributors sell their products to retail floorcovering dealers, installation contractors, builders, remodelers and retail home center stores. The Company believes that new home construction and remodeling account for approximately 40% and 60%, respectively, of its hardwood flooring sales.
The Bruce trademark is a valuable asset because of its significant brand name recognition. Based on independent surveys, the Company believes that Bruce has the highest consumer brand name recognition of any hardwood flooring product. Sales and marketing efforts for Bruce hardwood floors are designed to further solidify its well-recognized position among resellers of hardwood flooring and to heighten Bruce's brand name recognition among end users. The Company advertises its Bruce hardwood flooring products in national and regional publications, including House Beautiful, Better Homes and Gardens, Sunset, Southern Living and others.
The Company has developed Bruce product displays, more than 50,000, of which have been placed in floorcovering dealer showrooms. These product displays are available in a variety of sizes designed to accommodate the varying floor spaces available in dealer showrooms. The Company has also developed marketing programs specifically tailored to retail home center stores and commercial users and has developed displays to demonstrate the ease of do-it-yourself installation of hardwood floors. The do-it-yourself installation displays have been placed in approximately 4,000 retail locations. More than half of these displays have been placed in the past two years. Management believes that both the product displays and the do-it-yourself installation displays are important sales promotion devices.
The Company operates a training facility at its Nashville plant to give its floorcovering distributors, dealers and contractors training in the sale, installation and maintenance of hardwood floors. The Company believes it is the only hardwood flooring manufacturer to offer installation training services to its distributors and their customers. Providing this training, results in better educated resellers and installers, which the Company believes should enhance their ability to sell more Bruce products and improve consumer satisfaction with the installed products.
The Bruce Hardwood Floors Division currently employs 44 salespersons who are assigned geographical sales territories. In addition to making direct sales to independent distributors, the sales force assists distributors in broadening their market penetration by making joint sales calls on dealers, conducting installation training for distributors and their customers, and advising on the use of advertising and special product promotions. Salespersons earn bonuses, in addition to their salaries, based on volume and sales mix.
Competition
The Bruce Hardwood Floors Division is currently the largest manufacturer of hardwood flooring in the United States.
The floorcovering industry, which includes carpeting, sheet vinyl, vinyl tile, hardwood flooring and ceramic tile, is highly competitive. The principal competitive factors in floorcovering are aesthetic appeal, price, durability and ease of installation and maintenance. Hardwood flooring is generally more durable than other floorcoverings. Thus, although the average initial selling price of hardwood flooring is higher than that of the initial selling price of some other floorcoverings, the Company believes that the overall cost is competitive after taking into account average product life, maintenance expenses and removal and replacement costs.
The Company believes it competes favorably based on the high quality of the Company's products and the additional product support services offered by the Company and on the Company's network of independent distributors, its production of a complete line of hardwood flooring products, its innovative product development and manufacturing technology, and its well-known Bruce trademark.
Cabinet Division
The Company estimates that new construction accounts for approximately one-third of the total cabinet industry sales with remodeling generating the remaining two-thirds. Residential new construction activity is more cyclical than remodeling activity, which has historically been relatively stable. Cabinet manufacturing is a highly fragmented industry with competitors of widely varying production capacities, distribution capabilities and financial resources. In recent years, contraction in the industry has resulted in smaller competitors leaving the market and more aggressive cost controls and marketing programs being implemented by the remaining participants. The Kitchen Cabinet Manufacturing Association estimates that there are 8,000 manufacturers of kitchen and bathroom cabinets competing for approximately 50% of the total cabinet market. The balance of the market is supplied by trim carpenters and job-site cabinet makers. The market is dependent on new home construction and remodeling activity.
The entire cabinet manufacturing industry is characterized by substantial excess capacity. In the late 1970's, new construction expanded to meet the demands of more than two million housing starts annually plus remodeling. Price competition is severe, due principally to the excess industry capacity.
Products
The Company manufactures kitchen and bathroom cabinets in approximately 100 different styles and colors. Cabinets are marketed under the brand names "TriPac", "IXL" and "Classic Bath Products." In addition, the Company recently began marketing cabinets under the well known Bruce name. The Company continues to develop new product styles. While the styles of the Company's cabinets vary from other manufacturers' brands, kitchen and bathroom cabinet construction is fundamentally the same throughout the industry. Differences in the price and quality of the Company's cabinets result from variations in basic materials (e.g., solid oak, plywood, particleboard or fiberboard doors), the type and quality of exterior and interior finish, the quality of the hardware and other features such as adjustable shelves and interior storage aids.
Manufacturing
The Company operates seven cabinet manufacturing plants, generally located within 500 miles of most major population centers in the United States. These regional plants enable the Company to compete with local and regional manufacturers on the basis of the cost of freight, speed of delivery and service to customers. The Company also operates a manufacturing facility at Jefferson City, Tennessee which supplies cultured marble vanity tops, primarily to the Cabinet Division, and to retail home center stores, and a dimension parts manufacturing facility at Nappanee, Indiana.
The plants are primarily cabinet assembly operations. The plant inventories consist of raw materials, component parts and a limited amount of work in process. Raw materials utilized by the plants consist of sheet stock of plywood, particleboard or fiberboard, and component parts consist of dimension parts (front frame parts, doors and drawer fronts), finished end panels, finishing materials and hardware. In the cabinet assembly operations, front frame parts, doors and drawer fronts are sanded smooth and color stained and finished. Then, end panels, tops, bottoms and shelves are glued and stapled to the front frames, drawers are assembled to drawer fronts and hardware is attached. The completed cabinet is inspected, packed and staged for shipment.
Sheet stock is a commodity product purchased from a variety of suppliers. The Company obtains its dimension parts, consisting of front frame parts, doors and drawer fronts, primarily from its manufacturing facility located at the Bruce hardwood flooring plant in Jackson, Tennessee. See "- Bruce Hardwood Floors Division - Manufacturing" above. The Jackson plant supplies 74% of the Cabinet Division's front frame parts requirements and, together with a similar but smaller facility located in Nappanee, Indiana, approximately 85% of its door and drawer front requirements. The Company manufacturers finished end panels at its Morristown, Tennessee cabinet plants. Finishing materials and hardware are purchased from several suppliers.
The Cabinet Division is not dependent on any single supplier for any of its raw materials or component parts, other than the Jackson dimension parts plant. The Company believes its sources of supply are adequate to meet its needs. Imports from foreign suppliers, which account for less than ten percent of the Company's cabinet materials, consist of wood veneer, laminated veneer door panels and certain hardware items. While the Company maintains insurance coverage on all of its properties, including the Jackson dimension parts plant, the loss of that plant could have an adverse effect on the Company's operations. See "- Properties" below.
Sales and Marketing
The Company distributes its cabinets directly from its regional factories and through 37 Company-operated cabinet distribution centers and approximately 22 independent distributors. Factory-direct shipments are made for full truckload orders which typically are sold to national and regional builders, retail home center chain stores and to a lesser extent, independent building materials distributors. The Company also sells its cabinets to builders, kitchen and bath dealers and remodeling contractors through its Company-operated cabinet distribution centers and its Beltsville building products distribution center. Factory- direct shipments accounted for approximately 56% of the Cabinet Division sales in 1993, with sales through the Company's distribution centers and independent distributors accounting for the balance.
The Company-operated distribution centers are also used to support sales to major builders and retail home centers by providing prompt replacements for lost or damaged cabinets and delivery and storage for truckload quantities of cabinets pending staged deliveries to job sites. The Company believes that its distribution centers are an important factor in maintaining and increasing its sales, and intends to open additional distribution centers in new geographic markets as conditions warrant.
Buyers Choice is an innovative marketing strategy developed to enable buyers to design semi-custom cabinets to meet their individual preferences. Buyers Choice product displays contain samples of the various types, colors and qualities of basic materials, hardware and other features available to complete a semi-custom cabinet design. The buyer chooses the preferred combination and the Cabinet Division assembles the cabinets in accordance with the buyer's specifications. The Buyers Choice program has been popular with single-family home builders, who use the displays in model homes in connection with their marketing efforts.
The Company provides personal computer software for use primarily by retail home center stores to create complete kitchen floor plans, including elevations and product specifications lists, with related prices, based on room measurements provided by customers. Management believes this software package to be a significant sales aid.
The Cabinet Division has one of the largest sales forces in the cabinet industry, currently employing approximately 164 salespersons. The sales force makes direct sales and service calls on builders, independent distributors and retail home center stores, and offers kitchen design, cabinet installation and cabinet display and marketing advice to retail home center stores and independent distributors. Most
sales personnel are affiliated with one of the Company's distribution centers and are responsible for sales to all customers within their sales area including sales of cabinets directly by the plant. The Cabinet Division maintains a competitive salary base and provides performance incentives by compensating its sales force with bonuses tied to volume and profitability.
Competition
The Company is the fourth largest manufacturer in the United States cabinet industry.
The cabinet industry is a mature, highly competitive, regionalized and highly fragmented industry with thousands of cabinet makers competing primarily on a local basis. There is a relatively high manual labor content in cabinet products. Because of the low capital requirements for cabinet assembly, it is relatively easy and inexpensive for small cabinet makers to enter the industry as manufacturing competitors. In addition, high transportation costs limit the area to which a manufacturer can ship cabinets and still remain competitive. This has led the Company, and more recently, some of its larger competitors, to open regional manufacturing plants and distribution centers. The Company's seven regional manufacturing plants and 37 Company-operated distribution centers are important factors in the Company's ability to maintain cost and price competitiveness with local and regional manufacturers.
Due to significant excess manufacturing capacity, the cabinet industry has been subject to severe price competition. Other competitive factors include quality of product, production capacity and speed of delivery. The Company believes it competes favorably because of its breadth and quality of product offerings, and its production capacity, regional manufacturing facilities, national sales force and distribution capabilities.
Beltsville Division
The Company operates a general building materials distribution center in Beltsville, Maryland, located between Baltimore and Washington, D.C. Principal products sold, primarily to builders, include lumber, doors, windows, kitchen and bathroom cabinets and custom millwork. The Beltsville Division is the largest customer of the Cabinet Division and also purchases hardwood flooring products from local distributors of the Bruce Hardwood Floors Division. Management believes that the Beltsville Division has a reputation in its market area for quality products and a high level of customer service.
Backlog
The Company generally sells its flooring products from inventories on hand. The company produces its cabinets primarily in response to firm orders and, to a lesser extent, to maintain a working inventory at distribution centers operated by the Company. The Company generally ships its cabinets within a short time (e.g., one week) after receipt of an order. Accordingly, the dollar amount of backlog orders believed to be firm is not significant or indicative of the Company's future sales and earnings.
Employees
As of December 31, 1993, the Company employed approximately 3,545 persons, of which 2,171 were employed by the Bruce Hardwood Floors Division, 1,230 by the Cabinet Division, 108 by the Beltsville Division and the remainder in the Company's headquarters and other operations. The Company has entered into collective bargaining agreements with hourly employees at three of its six hardwood flooring plants, and
three of its seven cabinet plants covering in the aggregate approximately 1,589 employees. Management considers its employee relations to be satisfactory.
Environmental Matters
The Company's operations are subject to extensive federal, state and local laws and regulations relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment. Permits are required for certain of the Company's operations, and these permits are subject to revocation, modification and renewal by issuing authorities. Governmental authorities have the power to enforce compliance with their regulations, and violations may result in the payment of fines or the entry of injunctions, or both. The Company does not believe it will be required under existing environmental laws and enforcement policies to expend amounts which will have a material adverse effect on its results of operations or financial condition. However, the requirements of such laws and enforcement policies have generally become stricter in recent years. Accordingly, the Company is unable to predict the ultimate cost of compliance with environmental laws and enforcement policies.
Item 2.
Item 2. Properties
The Company's principal manufacturing facilities are described under "- Bruce Hardwood Floors Division - Manufacturing" and "- Cabinet Division - Manufacturing" above. Management believes that the Company's plants and properties are generally well-maintained and in good operating condition.
The Company maintains blanket property insurance coverage on all its properties with aggregate limits of $100 million. The Company is also insured for losses arising from loss of inventory, business interruption and certain extra expense. Although this coverage is sufficient to replace any of the Company's manufacturing facilities, the complete loss of the dimension parts plant in Jackson, Tennessee for an extended period of time could adversely affect the Company's operations. See "- Cabinet Division - Manufacturing" above.
Item 3.
Item 3. Legal Proceedings
The Company is not a party to any material pending legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
Set forth below as of December 31, 1993 are the names, ages and principal occupations of the executive officers of the Company, as well as certain other information concerning their business experience.
Name and Positions held Principal Occupation with the Company and Other Information
Floyd F. Sherman Mr. Sherman has served as President Chairman of the Board of of the Company since 1981 and Directors, President and Chairman of the Board Chief Executive Officer Directors, President and since July 1992. Prior thereto he served as Executive Vice President of the Company. Mr. Sherman is 54 years old and became a director of the Company in 1986.
M. Joseph McHugh Mr. McHugh has served as Senior Director, Senior Executive Vice President and Treasurer Executive Vice President of the Company since 1981. Prior and Treasurer thereto he served as Executive Vice President of the Company. He became a director of the Company in 1986. Mr. McHugh is also a director of Pillowtex Corporation. He is 56 years old.
Robert J. Symon Mr. Symon has served as Vice President - Vice President - Controller of the Company since Controller 1978. Mr. Symon is 62 years old and served as a director of the Company from December 19
Darryl T. Marchand Mr. Marchand has served as Vice Vice President, Secretary President Secretary and General and General Counsel Counsel of the Company since 1986. Prior thereto he served as Vice President - Legal of the Company from 1981 to 1986 and as Treasurer from February to August, 1981. Mr. Marchand is 51 years old.
John G. Conklin Mr. Conklin has served as a Vice Vice President President of the Company since 1978. He has been President of the Cabinet Division since September 1993. Prior thereto he was responsible for cabinet manufacturing. Mr. Conklin is 60 years old.
Charles A. Engle Mr. Engle has served as a Vice Vice President President of the Company since 1979. His primary responsibility for the Company is Cabinet Division sales. Mr. Engle is 50 years old.
James T. Fidler Mr. Fidler has served as a Vice Vice President President of the Company since 1981. Mr. Fidler is primarily responsible for data processing for the Company. Mr. Fidler is 51 years old.
Michael J. Kearins Mr. Kearins has served as a Vice President of Vice President the Company since 1985. He had been a divisional Vice President of sales of the Bruce Hardwood Floors Division from December, 1983 to May, 1985. He is primarily responsible for sales and marketing in the Bruce Hardwood Floors Division. Prior to 1983, he had been a Regional Sales Manager of the Company. Mr. Kearins is 47 years old.
Allen Silver Mr. Silver has served as a Vice President of Vice President the Company since 1985. Prior to that time he had been a divisional Vice President of manufacturing of the Cabinet Division. Mr. Silver is 54 years old.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
A) Price range of common stock
The following table shows the range of high and low sales prices for the common stock on the NASDAQ National Market System. (Trading began August 11, 1993).
Market Price 1993 High Low
Third Quarter 12-1/4 10 Fourth Quarter 15-7/8 11-3/8
B) Approximate number of equity security holders (As of March 21, 1994)
Class of Security Number of Record Holders
Common Stock ($.01 par value) 1,585
C) Dividend Policy
The Company has not declared or paid any dividends on its Common Stock. Management currently intends to retain future earnings for the operation and expansion of the Company's business and does not anticipate paying any cash dividends in the foreseeable future. The payment of cash dividends is prohibited under the terms of the New Credit Facility and is restricted under the terms of the indenture relating to the Company's 10 1/2% Senior Notes due 2003.
Item 6.
Item 6. Selected Consolidated Financial Data (In thousands, except per share amounts)
Item 7.
Item 7. Management's Discussion and Analysis Of Financial Condition and Results of Operations
Results of Operations
The following table sets forth selected information concerning the Company's results of operations for fiscal 1991, 1992 and 1993. For clarity of presentation, the discussion of results of operations for fiscal 1992 reflects the combined results of operations for the five month period ended June 8, 1992, the date the 1992 Restructuring was completed, and the seven month period ended January 1, 1993.
Fiscal year 1993 compared to fiscal year 1992
Net sales for fiscal 1993 were $346.3 million, or 18.3% greater than the $292.8 million in net sales for fiscal 1992. Net sales for the Bruce Hardwood Floors Division increased 32.2% to $200.0 million from $151.3 million in the prior year. The increase in hardwood flooring sales resulted from increased unit sales and increased average sales prices. Cabinet Division net sales for the year were $125.6 million, or an increase of 1.9% over 1992 net sales of $123.2 million. During 1993, sales and marketing attention was focused on the stronger and more stable single-family housing markets, yet without deserting either the multi-family or home center business. Net sales of the Beltsville Division increased 7.8% to $20.7 million from $19.2 million in the prior year. The increased sales resulted primarily from an improved housing market in the Washington, D.C., Baltimore and Northern Virginia areas.
Gross profit for fiscal 1993 was $76.9 million, or 22.2% of net sales, compared to $64.4 million, or 22.0% of net sales in the previous year. All divisions experienced higher raw material prices, especially for lumber and logs. Increased sales prices, together with improved operations and plant utilization, especially in the Bruce Hardwood Floors Division, resulted in the modest improvement in gross profit as a percent of sales.
Selling, general and administrative expenses were $44.2 million, or 12.8% of net sales, in fiscal 1993 compared to $46.6 million, or 15.9% of net sales, in the prior year. The reduction in selling, general and administrative expenses was primarily in the Cabinet Division where salaried payroll and related expenses were reduced. Also in 1992, selling, general and administrative expenses included a $.9 million expense relating to the common stock issued to management in connection with the 1992 Restructuring.
Operating income was $31.1 million, or 9.0% of net sales, in fiscal 1993 compared to $20.1 million, or 6.9% of net sales, in the previous year. The improvement was $16.0 million before the gain in 1992 of $5 million from the Thompsontown cabinet plant fire insurance settlement. The improved results were attributable to higher net sales, slightly higher gross margins, lower selling, general and administrative expenses and lower goodwill amortization attributable to the 1992 Restructuring.
Interest expense was $19.4 million in fiscal 1993 compared to $37.1 million in the prior fiscal year due principally to the effects of the 1992 Restructuring.
Net income before an extraordinary item for fiscal 1993 was $7.2 million compared to a net loss of $16.1 million before an extraordinary item in fiscal 1992. Higher net sales, the reduction in interest expense, and increase in operating income were significant factors in this improvement.
Fiscal year 1992 compared to fiscal year 1991
Net sales for fiscal 1992 were $292.8 million, or 14.3% greater than the $256.1 million in net sales for fiscal 1991. Net sales for the Bruce Hardwood Floors Division increased 30.1% to $151.3 million from $116.3 million in the prior year. The sales growth in the Bruce Hardwood Floors Division was attributable to strong consumer demand for hardwood flooring, aggressive marketing programs and an improvement in general economic conditions. The increase in hardwood flooring sales resulted from increased unit sales, increased average sales prices and a favorable change in product mix resulting from increased sales of pre- finished strip and laminated plank and reduced sales of unfinished strip and parquet products. Cabinet Division sales for the year were $123.2 million, or 1.5% below the $125.1 million recorded in the prior year. Cabinet Division sales were impacted by substantial excess capacity in the industry, severe price competition, the limited availability of residential construction financing from traditional sources of such financing, the Company's decision not to pursue low-margin sales and the disruption caused by the Thompsontown plant fire discussed below. Sales of the Beltsville Division increased 18.9% to $19.2 million from $16.2 million in the prior year. That increase was attributable to a recovery in the residential construction economy in the Beltsville trade area.
Gross profit for fiscal 1992 was $64.4 million, or 22.0% of net sales, compared to $52.1 million, or 20.3% of net sales, in the previous year. The improvement in gross profit was attributable to higher sales, increased selling prices and improvements in manufacturing yields and productivity, partially offset by sharply higher lumber prices. Selling prices lagged lumber price increases in the latter half of fiscal 1992, which negatively impacted gross margins in that period.
Selling, general and administrative expenses were $46.6 million, or 15.9% of net sales, in fiscal 1992 compared to $41.6 million, or 16.2% of net sales, in the prior year. Of the increase, $.9 million was attributable to long-term compensation expense related to Common Stock issued to management in connection with the 1992 Restructuring. The lower expenses as a percent of net sales were attributable to greater operating efficiencies and reductions in salaried payroll. In both periods, the Cabinet and
Beltsville Divisions made substantial provisions to reserves for doubtful accounts because of the difficulty experienced in the collection of accounts receivable under depressed economic conditions in the housing industry.
On January 2, 1992, the Cabinet Division plant at Thompsontown, Pennsylvania was destroyed by fire. The Company was insured for the replacement cost, less a $100,000 deductible, as well as for losses arising from loss of inventory, business interruption and certain related expenses. The Company has rebuilt the plant and production there resumed in the second quarter of fiscal 1993. In fiscal 1992 the Company recorded a gain of $5.0 million, which is the settlement received from the insurance company less the net book value of the plant and equipment as of the date of the fire.
Operating income was $20.1 million, or 6.9% of net sales, in fiscal 1992 compared to $6.0 million, or 2.3% of net sales, in the previous year. The improvement was attributable to higher gross profit on increased net sales, reduced operating expenses as a percent of net sales and the $5.0 million gain related to the estimated insurance settlement for the Thompsontown plant fire.
Interest expense was $37.1 million in fiscal 1992 compared to $59.7 million in the prior fiscal year due principally to the effects of the 1992 Restructuring. Net income for fiscal 1992 was $185.3 million compared to a net loss of $43.7 million in fiscal 1991. An extraordinary of gain $201.3 million, net of tax benefits, arising from the extinguishment of debt pursuant to the 1992 Restructuring was the major reason for the substantial improvement in net income. The reduction in interest expense and increase in operating income were also factors in the improvement.
Liquidity and Capital Resources
On June 8, 1992, the Company successfully completed the 1992 Restructuring pursuant to which approximately $297.7 million of the Company's long-term indebtedness and redeemable preferred stock (including accrued interest and dividends) was exchanged for Common Stock. The 1992 Restructuring was necessitated by the highly- leveraged condition of the Company coupled with the protracted recession in the U.S. housing industry.
In 1993, the Company completed two public offerings for 7,939,750 shares of the Company's Common Stock and $160 million aggregate principal amount of 10-1/2% Senior Notes due 2003. The net proceeds of the Offerings, together with borrowings under a new $90 million bank credit facility were used (i) to repay the entire unpaid balance under the Company's previously existing senior debt financing agreements, redeem certain previously outstanding debentures and pay related accrued interest, for a total of approximately $227 million, and (ii) for working capital and general corporate purposes. As a result of this repayment of debt, the Company incurred an extraordinary loss of $11.3 million, net of tax, as a result of the original issue discount on certain of the repaid notes as well as the premium required to redeem the debentures. The New Credit Facility provides for up to $90 million of revolving credit loans for working capital and for letters of credit. Availability of borrowings under the New Credit Facility is based upon a formula related to inventory and accounts receivable.
For the fiscal year ended December 31, 1993, cash increased by $.2 million. The Company's primary source of liquidity during this period was cash flow from financing activities of $12.8 million, representing sale of stock and of notes of $239.4 million, offset by long-term debt payments of $217.7 million, refinancing costs of $14.9 million, and a $5.5 million reimbursement of construction deposits from the West Virginia Economic Development Authority for the Beverly, West Virginia plant expansion. Cash provided by financing activities was offset by capital expenditures of $7.6
million and $7.5 million for the construction deposits incurred in the Beverly, West Virginia plant expansion.
At December 31, 1993, the Company had working capital of $74.1 million, or 22.5% of total assets, and $52.5 million of unused bank borrowing capacity.
During the third quarter of 1993 the Company settled and paid the federal taxes and interest applicable to an examination of the tax returns for the years 1986 through 1990. The settlement had no material impact on the Company's financial position or results of operations.
The Company believes that borrowing availability under the New Credit Facility and cash generated from operations will be adequate to fund working capital requirements, debt service payments and the planned capital expenditures.
Item 8.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Triangle Pacific Corp.:
We have audited the accompanying consolidated balance sheets of Triangle Pacific Corp. and subsidiaries (a Delaware corporation) as of December 31, 1993 and January 1, 1993, and the related statements of operations, shareholders' investment and cash flows for the fiscal year ended December 31, 1993, the seven month period ended January 1, 1993, the five month period ended June 8, 1992 and for the fiscal year ended January 3, 1992. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Triangle Pacific Corp. and subsidiaries as of December 31, 1993 and January 1, 1993, and the results of their operations and their cash flows for the fiscal year ended December 31, 1993, the seven month period ended January 1, 1993, the five month period ended June 8, 1992, and for the fiscal year ended January 3, 1992, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. Schedules V, VI, VIII and X are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN & CO.
Dallas, Texas, February 15, 1994
TRIANGLE PACIFIC CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - 1993 RECAPITALIZATION:
The Company filed, in 1993, two registration statements with the Securities and Exchange Commission and sold to the public 7,939,750 shares of the Company's Common Stock and $160 million aggregate principal amount of 10-1/2% Senior Notes due 2003 ("the Offerings"). The net proceeds of the Offerings together with borrowings under a new $90 million bank credit facility were used (i) to repay the entire unpaid balance under the Company's previously-existing senior debt financing agreements, redeem certain previously outstanding debentures and pay related accrued interest, for a total of approximately $227 million, and (ii) for working capital and general corporate purposes. As a result of this repayment of debt the Company incurred an extraordinary loss of $11.3 million, net of tax, as a result of the original issue discount on certain of the repaid notes as well as the premium required to redeem the debentures.
On June 14, 1993, the Company's Board of Directors approved a reclassification pursuant to which each share of Series A Common Stock was changed and converted into .67 of a share of Common Stock. The transaction became effective upon completion of the Offerings described above and has been reflected retroactively in the accompanying consolidated financial statements.
NOTE 2 - 1992 RESTRUCTURING:
On June 8, 1992, the Company successfully completed a capital restructuring (the "1992 Restructuring") pursuant to which substantially all of the Company's then outstanding long-term indebtedness, redeemable preferred stock and common stock, were exchanged for new debt with lower interest rates and new common stock.
Under the 1992 Restructuring, the Company entered into amendments to its previously existing senior debt financing agreements pursuant to which $237.4 million principal amount of senior indebtedness outstanding prior to the restructuring plus accrued and unpaid interest through June 8, 1992 was restructured as approximately $150.0 million principal amount of Tranche I Term Notes, $30.0 million principal amount of Tranche I Revolving Notes, $57.4 million principal amount of Tranche II Notes and approximately 9% of the Company's new Series A Common Stock. In addition, approximately $11.6 million of letters of credit remained outstanding under a facility pursuant to which they could be renewed or replaced. The Tranche II Notes were recorded at $37.3 million, which the Company and its investment bankers estimated to be the market value. The difference was treated as original issue discount and amortized over the life of the Tranche II Notes, which were to have matured on June 30, 1999. (See Note 5)
The senior subordinated split coupon reset debentures, a note payable to the former principal shareholder, other obligations, the mandatory redeemable preferred stock and common stock outstanding prior to the 1992 Restructuring were exchanged for new shares of common stock. The mandatory redeemable preferred stock and the special preferred stock were retired in conjunction with the 1992 Restructuring.
In addition to the exchange for common stock, the principal shareholder prior to the 1992 Restructuring received warrants entitling the holder to purchase up to approximately .8 million shares of common stock at prices ranging from $22.39 to $37.31 per share. The warrants are currently exercisable and will terminate, if not previously exercised, on June 8, 1999.
In connection with the 1992 Restructuring, the Company entered into an agreement with certain members of management pursuant to which, shortly after the 1992 Restructuring, the Company issued to such members of management 200,990 shares of common stock and stock options to purchase 201,007 shares of common stock. The exercisability of such options is tied to the achievement of certain levels of operating income. A portion of the options became exercisable as a result of the Company's 1992 and 1993 operating results. In connection with the issuance of the common stock in 1992, management shareholders incurred ordinary income tax liability and were compensated by the Company for a portion of the tax liability arising from receipt of such shares and such incremental compensation. Such compensation was expensed in conjunction with the 1992 Restructuring.
NOTE 3 - QUASI-REORGANIZATION ELECTION:
In connection with the 1992 Restructuring, the Company's Board of Directors approved quasi-reorganization accounting procedures. Under these procedures, an entity restates its assets and liabilities at fair value and eliminates its accumulated deficit. Such adjustments are reflected entirely through the Company's capital accounts. None of the adjustments are recorded through the income statement. Such adjustments included both the quasi-reorganization related fair value restatements of assets, liabilities, and equity as well as the recognition of the 1992 Restructuring. Because the Company's historical and future expected operations exhibited an ability to cover amortization of its intangibles on an earnings before interest and tax basis, the partial write-down of such intangibles by approximately $98.4 million was reflected by the Company as a quasi-reorganization adjustment. Other principal adjustments made in conjunction with the quasi- reorganization election included (i) the extinguishment of senior bank debt of approximately $261.0 million, senior subordinated debentures of approximately $218.9 million, notes, obligations, and payables due to the former principal shareholder of Holding of approximately $10.3 million, mandatory redeemable preferred stock of approximately $44.9 million and the common stock of $15.0 million and (ii) the recording of new senior debt of approximately $217.3 million and new common stock of $20.0 million. This transfer resulted in a gain from extinguishment of debt of approximately $201.3 million, net of deferred financing costs and restructuring costs of $11.6 million. In addition, the property, plant and equipment was revalued resulting in a decrease in net book value of $3.0 million. An additional decrease in net book value of $6.5 million was recorded prior to January 1, 1993. The trademark was also reduced by approximately $4.3 million to fair value. In addition, a write-down of certain deferred financing costs of approximately $4.5 million and restructuring costs of approximately $5.9 million was included as part of the quasi-reorganization adjustments. Because the Company has adopted the provisions of SFAS No. 109, Accounting for Income Taxes, it is required to gross up the fair value of the net assets to, in effect, ignore the tax consequences of the differences between the market value and tax bases of its assets and liabilities. Such tax consequences are then recognized through the recording of a corresponding deferred tax asset or liability. The deferred tax liability was increased by approximately $20.3 million due to the loss of the net operating loss carryforwards, and by approximately $10.4 million for the tax effects of other quasi-reorganization adjustments. The final quasi-reorganization accounting adjustment was to eliminate the accumulated deficit of the Company.
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Consolidation:
The consolidated financial statements include the financial statements of Triangle Pacific Corp. and its subsidiaries. The Company maintains its records on a 52/53 week year.
Prior Period Reclassifications:
Certain reclassifications have been made to the January 1, 1993 balances, in order to conform to the current year presentation.
Cash and Cash Equivalents:
The Company considers all investments with an original maturity of less than three months to be a cash equivalent.
Inventories:
Inventories are valued at the lower of cost or market. The last- in, first-out (LIFO) method is used for certain lumber inventories and the first-in, first-out (FIFO) method is used for all other inventories. Inventories valued by the LIFO method were $23,965,000 at December 31, 1993 and $16,198,000 at January 1, 1993. Had all inventories been valued by the FIFO method, which approximates current cost, inventories would have been increased by $5,138,000 at December 31, 1993 and $2,745,000 at January 1, 1993. Raw materials inventories include purchased parts and supplies to be used in manufactured products. Work- in-process and finished goods inventories include material, labor and overhead costs incurred in the manufacturing process. The major components of inventories are as follows:
In connection with the reorganization and the related quasi- reorganization accounting, a new basis for the LIFO inventories was established at June 8, 1992. As a result, the LIFO inventories are greater than those reportable for federal income tax purposes by $6,935,000 at December 31, 1993.
Property, Plant and Equipment:
Property, plant and equipment are stated at fair value as of June 8, 1992, plus acquisition or construction cost subsequent thereto. Expenditures for maintenance, repairs, renewals and improvements which do not extend the useful lives of assets are charged to appropriate expense accounts in the year incurred. Upon disposition of an asset, cost and accumulated depreciation are removed from the accounts, and any gain or loss is included in the results of operations. Depreciation and amortization are computed on the straight-line basis using the following estimated useful lives:
Buildings 10 to 50 years Equipment, furniture and fixtures 3 to 22 years
Amortization of leasehold improvements is provided over the terms of the leases or the useful lives of the assets, whichever is shorter. For income tax purposes, all assets are depreciated under allowable tax depreciation methods.
Intangible Assets:
The Company annually evaluates its carrying value and expected period of benefit of trademark and goodwill in relation to results of operations. In determining the recoverability of these assets the Company analyzes its historical and future ability to generate earnings before interest and taxes using the non-discounted method. Deferred financing costs are being amortized on the effective interest method over the lives of the related debt. The trademark and goodwill are being amortized over 40 years. Accumulated amortization of trademark and goodwill is $1,267,000 and $2,497,000, respectively at December 31, 1993 and $467,000 and $884,000, respectively, at January 1, 1993.
Fair Value of Financial Instruments:
In conjunction with the offerings that took place during 1993, all debt was recorded at fair market value which was the current market rate of return to the holders of the debt. Warrants, issued to the former principal shareholder in conjunction with the 1992 Restructuring, to purchase up to approximately .8 million shares of common stock at prices ranging from $22.39 to $37.31 per share, were not assigned a value since the exercise prices are significantly higher than the current value of the common equity.
NOTE 5 - LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
Letters of credit outstanding at December 31, 1993 and January 1, 1993 were $9.8 million and $11.6 million, respectively, under a facility pursuant to which they can be renewed or replaced.
Senior Notes
The Senior Notes are senior unsecured obligations of the Company with an aggregate principal of $160 million. The Senior Notes mature in 2003 and bear interest at an annual rate of 10 1/2%, payable semi- annually. The Senior Notes were issued under an Indenture (the "Indenture") between the Company and Texas Commerce Trust Company NA, as Trustee (the "Trustee"). The Senior Notes rank pari passu with all
present and future senior indebtedness of the Company and senior to all present and future subordinated indebtedness of the Company. However, because borrowings under the New Credit Facility are secured by inventory and accounts receivable of the Company and the proceeds thereof, the Senior Notes are effectively subordinated to such borrowings to the extent of such security interest.
The Senior Notes are not redeemable prior to August 1, 1998. Thereafter, the Senior Notes are redeemable at the option of the Company at redemption prices specified in the Indenture. The Senior Notes are not subject to any mandatory sinking fund requirements.
Upon a "change of control" (as defined in the Indenture), the Company is required to offer to purchase all outstanding Senior Notes at 101% of the principal amount thereof, plus accrued interest to the date of repurchase. In addition, the Company may be required to offer to purchase the Senior Notes at 100% of the principal amount plus accrued interest with the net cash proceeds of certain sales or other dispositions of assets.
The Indenture contains covenants which restrict, among other things, the incurrence of additional indebtedness by the Company and its subsidiaries, the payment of dividends and other distributions in respect of the capital stock of the Company, the creation of liens on the assets of the Company and its subsidiaries, the creation of certain restrictions on the payment of dividends and other distributions by the Company's subsidiaries, the issuance of preferred stock by the Company's subsidiaries, and certain mergers, sales of assets and transactions with affiliates.
The Indenture specifies a number of events of default including, among others, the failure to make timely principal, premium and interest payments or to perform the covenants contained therein. The Indenture contains a cross-default to other indebtedness of the Company aggregating more than $5,000,000 and certain customary bankruptcy and insolvency defaults. Upon the occurrence of an event of default under the Indenture, the Trustee or the holders of not less than 25% in principal amount of the outstanding Senior Notes may declare all amounts thereunder immediately due and payable, except that such amounts automatically become immediately due and payable in the event of a bankruptcy or insolvency default.
New Credit Facility
The Company has entered into the New Credit Facility, which provides for up to $90 million of revolving loans for working capital and general corporate purposes and for letters of credit. Availability of borrowings under the New Credit Facility is based upon a formula related to inventory and accounts receivable. The Company had $52.5 million of unused borrowing capacity under this facility at December 31, 1993. Borrowings under the New Credit Facility bear interest at the agent's prime rate plus 1% (7.0% at December 31, 1993) or, at the Company's option, at certain alternate floating rates and is secured by a pledge of the Company's inventory and accounts receivable. The unpaid balance is due on August 4, 1996.
The New Credit Facility contains covenants which restrict, among other things, the incurrence of additional indebtedness and rental obligations by the Company and its subsidiaries, the payment of dividends and other distributions in respect of the capital stock of the Company, the creation of liens on the assets of the Company and its subsidiaries, the creation of certain restrictions on the payment of dividends and other distributions by the Company's subsidiaries, the making of investments and capital expenditures by the Company and its subsidiaries, the creation of new subsidiaries by the Company, and certain mergers, sales of assets and transactions with affiliates. The New Credit Facility also contains certain financial covenants relating
to the consolidated financial condition of the Company and its subsidiaries, including covenants relating to their net worth, the ratio of their earnings to their fixed charges, the ratio of their earnings to their interest expense, the ratio of their current assets to their current liabilities, and the ratio of their indebtedness to their total capitalization. At December 31, 1993, the Company was in compliance with all financial covenants.
The New Credit Facility specifies a number of events of default including, among others, the failure to make timely payments of principal, fees, and interest, the failure to perform the covenants contained therein, the failure of representations and warranties to be true, the occurrence of a "change of control" (as defined in the New Credit Facility, to include, among other things, the ownership by any person or group of more than 25% or, (in the case of The TCW Group, Inc. and its affiliates, 40%) of the total voting securities of the Company), and certain impairments of the security for the New Credit Facility. The New Credit Facility also contains a cross-default to other indebtedness of the Company aggregating more than $2,000,000 and certain customary bankruptcy, insolvency and similar defaults. Upon the occurrence of an event of default under the New Credit Facility, at least three of the lenders holding at least 60% in amount of the principal indebtedness outstanding under the New Credit Facility may declare all amounts thereunder immediately due and payable, except that such amounts automatically become immediately due and payable in the event of certain bankruptcy, insolvency or similar defaults.
The New Credit Facility generally prohibits the Company from prepaying the Senior Notes whether the prepayment would result from the redemption of the Senior Notes, an offer by the Company to purchase the Senior Notes following a change of control or a sale or other disposition of assets, or the acceleration of the due date for payment of the Senior Notes.
Mortgages payable represent various Industrial Revenue Bond (IRB) notes. The IRB notes vary in interest rate, with several notes dependent upon the prime rate. At December 31, 1993 and January 1, 1993, the interest rates ranged up to 9.0%.
These notes are payable through 2000 and are collateralized by the related underlying assets.
NOTE 6 - INCOME TAXES:
As of June 8, 1992, the date of the quasi-reorganization, the Company elected to adopt the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". The Company used the catch- up approach in adopting the provision; however, such adoption did not have a material effect on the Company's consolidated balance sheet. Prior years' financial statements have not been restated to apply this provision.
The components of the deferred tax liability and asset are as follows (in thousands):
The provision (benefit) for income taxes consists of the following (in thousands):
For the fiscal year ended January 3, 1992, deferred income tax benefits were provided for significant temporary differences in the recognition of revenue and expenses for tax and financial statement purposes. Principally, these benefits consisted of a net operating loss carryforward of $10.5 million for the year ended January 3, 1992.
The tax provision or benefit for the periods ending December 31, 1993, January 1, 1993, June 8, 1992 and January 3, 1992, is 38.5%, 47.28%, 0% and 18.7% of pre-tax income or losses, respectively. The factors causing the rate to vary from the U.S. Federal statutory rate are as follows (in thousands):
The Company has adjusted the deferred liability and current provision for taxes to reflect the change in tax rate from 34% to 35% enacted by the Revenue Reconciliation Act of 1993. At December 31, 1993, the Company has, for tax purposes, net operating loss carryforwards in the amount of $4.9 million.
During the third quarter of 1993 the Company settled, and paid the federal taxes and interest applicable to an examination of the tax returns for the years 1986 through 1990. The settlement had no material impact on the Company's financial position or results of operations. In connection with the 1992 quasi-reorganization, the Company recorded an additional reserve for this contingency. As a result of this settlement, the Company adjusted the reserve by $4.0 million and correspondinely reduced goodwill.
NOTE 7 - LEASE COMMITMENTS:
The Company rents certain real estate and equipment under leases expiring at various dates to 2008. Several leases include options for renewal or purchase and contain clauses for payment of real estate taxes and insurance. In most cases management expects that in the normal course of business, most leases will be renewed or replaced by other leases.
The following is a summary of minimum future rental payments required under operating leases that have initial non-cancellable lease terms in excess of one year:
Rental expense for operating leases amounted to $6,309,000, $3,562,000, $2,538,000, and $6,236,000 for the fiscal year ended December 31, 1993, for the seven months ended January 1, 1993, for the five months ended June 8, 1992, and for the fiscal year ended January 3, 1992, respectively.
The Company has an agreement with the West Virginia Economic Development Authority to lease land, buildings and equipment for the Bruce Hardwood Floors Division plant which is located in Beverly, West Virginia. Land and buildings have a lease term of 18 years and equipment has a term of 10 years, both with 10 year renewal options. In June, 1990, the Company was reimbursed $22,653,000 by the West Virginia Economic Development Authority for the Phase I construction cost, which included all costs advanced by the Company in 1989 and the first six months of 1990 except for 28% of the cost of equipment. In December, 1993, the Company was reimbursed $5,535,000 by the West Virginia Economic Development Authority for 72% of the Phase II equipment cost.
NOTE 8 - EMPLOYEE BENEFIT PLANS:
Pension and Profit Sharing Plans:
The Company sponsors several defined benefit pension plans and is required to contribute to several labor union-related defined contribution plans. Total pension expense was $967,000, $483,000, $217,000, and $898,000 for the year ended December 31, 1993, for the seven months ended January 1, 1993, for the five months ended June 8, 1992, and for the fiscal year ended January 3, 1992, respectively, including $481,000, $290,000, $207,000, and $722,000, respectively, for defined benefit plans, which includes amortization of prior service costs over the estimated average remaining service period of active employees. The Company does not have any requirement to provide life or health insurance coverage for retired employees. The following table sets forth the defined benefit pension plans' funded status at December 31, 1993, and January 1, 1993.
Net periodic pension costs for defined benefit pension plans for the year ended December 31, 1993, for the seven months ended January 1, 1993, for the five months ended June 8, 1992, and for the fiscal year ended January 3, 1992, includes the following components:
A weighted average discount rate of 8.50% at December 31, 1993, January 1, 1993 and January 3, 1992 was used to determine the benefit obligations of the Company's defined benefit pension plans. The plans do not provide for future compensation increases in calculating benefit obligations as the benefits do not derive from compensation levels but from length of service. The plans' assets are invested in a diversified portfolio of common stocks and fixed income securities. The expected long-term rate of return on plan assets was 8.0% in 1993, 1992, and 1991.
The Company has a profit sharing plan for salaried employees to which contributions are made at the discretion of its Board of Directors as long as the Company has met specified financial goals. The fiscal 1993 and 1992 contributions were $500,000 and $400,000, respectively. In fiscal 1991, such goals were not met, and as such, no contribution was made.
Deferred Compensation Plan:
A liability existed under the provision of the deferred compensation plan for the Company. Final payments under this plan were made in January 1993 and August 1993.
Long-Term Incentive Compensation Plan:
In June 1993, the Company adopted the Triangle Pacific Corp. Long- Term Incentive Compensation Plan, which authorizes grants of various incentive awards to all regular salaried full-time officers and key employees of the Company. There are 1,000,000 shares of common stock reserved for this plan. In February 1994, stock options were granted for 37,700 shares at 100% of fair market value at the date of grant. These options expire in ten years. Also granted in February 1994 were 28,200 stock bonus shares and $425,517 in deferred cash bonuses. These awards vested 25% at the date of grant and will vest 25% each year thereafter, with the vested amount payable on the third anniversary of the date of grant.
Stock Option Plan:
In connection with the 1992 Restructuring, certain members of management received options for 201,007 shares of common stock pursuant to a Stock Option Plan which was adopted by the Board of Directors of the Company and approved by its sole shareholder at the time. The management options are exercisable at a price of $2.99 per share. The exercisability of the management options is tied to the achievement of certain levels of operating income. Twenty percent of the management options become exercisable in each fiscal year in which the Company meets the annual target for such fiscal year. For the years ended December 31, 1993 and January 1, 1993, twenty percent each year became exercisable. In addition, if the Company fails to meet the annual target in any fiscal year but meets the cumulative target in such fiscal year or any subsequent fiscal year, the management options for such fiscal year and all prior fiscal years will become exercisable if they had not previously become exercisable.
Non-Employee Director Stock Option Plan:
In June 1993, the Company adopted a Non-employee Director Stock Option Plan for up to 50,000 shares of common stock. Options have been granted to six non-employee directors for an aggregate of 30,000 shares, with option prices at 100% of fair market value at the date of grant. These options are currently exercisable and generally expire 10 years from the date of grant.
Post-retirement and Post-employment Benefits:
The Company, as of December 31, 1993, does not provide post- retirement medical benefits or any post-employment benefits other than those previously discussed.
NOTE 9 - ACCRUED LIABILITIES:
Amounts included in accrued liabilities are as follows (in thousands):
NOTE 10 - PRO-FORMA INCOME DATA (Unaudited):
Pro-forma figures assume that the Company's third quarter 1993 Recapitalization and the 1992 Restructuring occurred on the first day of fiscal 1992.
NOTE 11 - SUPPLEMENTARY QUARTERLY FINANCIAL DATA (Unaudited) (In thousands, except per share amounts)
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
PART III
Item 10.
Item 10. Directors and Executive Officers of the Company
The section entitled "Election of Directors" appearing in the definitive proxy statement of the Registrant for the annual meeting of shareholders to be held May 4, 1994 sets forth certain information regarding the directors and is incorporated herein by reference. The section entitled "Certain Transactions-Compliance with Section 16(a) of the Exchange Act" appearing in the definitive proxy statement of the Registrant for the annual meeting of shareholders to be held May 4, 1994 sets forth certain information regarding reporting under Section 16 of the Securities Exchange Act of 1934, as amended, and is incorporated herein by reference. Certain information with respect to the executive officers of the Registrant is set forth in Part I of this Form 10-K under the caption "Executive Officers of the Registrant."
Item 11.
Item 11. Executive Compensation
Information regarding the compensation of management is contained in the definitive proxy statement of the Registrant for the annual meeting of shareholders to be held on May 4, 1994, under the caption "Executive Compensation" and, except for the report of the compensation committee of the Board of Directors and the information contained under the caption "Performance Graph," is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding ownership of the Company's Common Stock is contained in the definitive proxy statement of the Registrant for the annual meeting of shareholders to be held on May 4, 1994, under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is contained in the definitive proxy statement of the Registrant for the annual meeting of shareholders to be held on May 4, 1994, under the caption "Certain Transactions - Payments Pursuant to Previous Deferred Compensation Plan" and is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
Included in Part II of this report.
- Report of independent public accountants
- Consolidated balance sheets as of December 31, 1993 and January 1, 1993.
- Consolidated statements of operations for the fiscal year ended December 31, 1993, for the seven months ended January 1, 1993, for the five months ended June 8, 1992, and for the fiscal year ended January 3, 1992.
- Consolidated statements of changes in shareholders' investment for the fiscal year ended December 31, 1993, for the seven months ended January 1, 1993, for the five months ended June 8, 1992 and for the fiscal year ended January 3, 1992.
- Consolidated statements of cash flows for the fiscal year ended December 31, 1993, for the seven months ended January 1, 1993, for the five months ended June 8, 1992 and for the fiscal year ended January 3, 1992.
- Notes to consolidated financial statements.
(a)(2) Financial Statement Schedules
Included in Part IV of this report:
For the fiscal year ended December 31, 1993, for the seven months ended January 1, 1993, for the five months ended June 8, 1992 and for the fiscal year ended January 3, 1992.
- Schedule V - Property, plant and equipment.
- Schedule VI - Accumulated depreciation of property, plant and equipment.
- Schedule VIII - Valuation and qualifying accounts and reserves.
- Schedule X - Supplementary income statement information.
Information required by other schedules called for under Regulation S-X is either not applicable or is included in the consolidated financial statements or notes thereto.
(a)(3) Exhibits
The information required by this Item 14(a)(3) is set forth in the Index to Exhibits accompanying this annual report on Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 1993.
(c) Exhibits
3.1 - Restated Certificate of Incorporation the Registrant.
3.2 - Amended and Restated Bylaws of the Registrant.
4.1 - Form of 10 1/2% Senior Notes due 2003 (incorporated herein by reference to Exhibit 4.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-64598)).
4.2 - Indenture governing 10 1/2% Senior Notes due 2003.
4.3 - Credit Agreement dated as of August 4, 1993, as amended, among the Registrant, the Lenders listed therein and CitiCorp USA, Inc., as the Co-Agent for the Lenders, and the Bank of Nova Scotia, as the Agent for the Lenders (incorporated herein by reference to Exhibit 4.4 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-64530)).
4.4 - Amendment No. 7 dated as of June 5, 1992 amending the Credit and Guaranty Agreement dated as of September 9, 1988 by and among TPC Holding Corp., Pacific Corp., the Registrant, the Banks listed therein and Morgan Guaranty Trust Company of New York (incorporated herein by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-50724)).
4.5 - Amendment No. 5 dated as of June 5, 1992 amending the Security Agreement dated as of September 9, 1988 by and between the Registrant and J.P. Morgan (incorporated herein by reference to Exhibit 4.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-50724)).
4.6 - Subsidiary Security Agreement dated as of June 5, 1992 by and among each of the Subsidiary Guarantors listed herein and J.P. Morgan (incorporated herein by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-50724)).
4.7 - Amendment No. 1 dated as of June 5, 1992 to the Subsidiary Guaranty amending the Guaranty dated as of April 1, 1991 given by the Subsidiary Guarantor listed therein (incorporated herein by reference to Exhibit 4.4 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-50724)).
4.8 - Pledge Agreement dated as of June 5, 1992 by and between the Registrant and J.P. Morgan (incorporated herein by reference to Exhibit 4.5 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-50724)).
4.9 - Subsidiary Pledge Agreement dated as of June 5, 1992 by and between each of the Subsidiary Guarantors listed therein and J.P. Morgan (incorporated herein by reference to Exhibit 4.6 to the Registrant'sRegistration Statement on Form S-1 (Registration No. 33-50724)).
4.10 - Trademark Security Agreement dated as of June 5, 1992 by and between the Registrant and J.P. Morgan (incorporated herein by reference to Exhibit 4.7 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-50724)).
4.11 - Amendment No. 6 dated as of June 5, 1992 amending the Senior Note Purchase Agreement dated as of September 30, 1988 by and among the Registrant, TPC Holding Corp and the Insurance Company Lenders listed therein (incorporated herein by reference to Exhibit 4.8 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-50724)).
10.1 - Registration Rights Agreement, dated as of June 5, 1992 by and among the Registrant and the Persons listed therein (incorporated herein by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 33- 50724)).
10.2 - Lenders' Equity Agreement dated as of June 5, 1992 by and among the Registrant and the Banks and other financial institutions listed therein (incorporated herein by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-50724)).
10.3 - ESJ Exchange Agreement dated as of June 5, 1992 by and among the Registrant, TPC Holding Corp. and the ESJ Entities (incorporated herein by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 (Registration No. 33- 50724)).
10.4* - Management Equity Agreement dated as of June 5, 1992 by and among the Registrant and the individuals listed therein, and including a form of the Triangle Pacific Corp. Stock Option Plan (incorporated herein by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1 (Registration No. 33- 50724)).
10.5* - Form of Amended and Restated Employment Agreement (incorporated herein by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-1 (Registration No. 33- 50724)).
10.6* - Form of Services and Compensation Agreement (incorporated herein by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form S-1 (Registration No. 33- 50724)).
10.7* - Salaried Employees Profit Sharing Plan (as restated January 1, 1993) of the Registrant (incorporated herein by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-64530)).
10.8* - Salaried Employees Cash Bonus plan of the Registrant (incorporated herein by reference to Exhibit 10.8 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-50724)).
10.9*- Form of Stock Option Plan of the Registrant (incorporated herein by reference to Exhibit 10.12 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-64530)).
10.10*- Form of Stock Option Agreement of the Registrant (incorporated herein by reference to Exhibit 10.13 to the Registrant's Registration Statement on Form S-1 (Registration No. 33- 64530)).
10.11 - Lease dated as of June 1, 1988 by and between West Virginia Jobs and Development Corporation and Registrant (incorporated herein by reference to Exhibit 10.11 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-50724)).
10.12 - Amendment to Lease effective as of April 14, 1989 by and between West Virginia Jobs and Development Corporation and the Registrant (incorporated herein by reference to Exhibit 10.15 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-64530)).
10.13 - Second Amendment to lease effective as of November 1, 1991 by and between West Virginia Economic Development Authority, as successor to West Virginia Jobs and Development Corporation, and the Registrant (incorporated herein by reference to Exhibit 10.16 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-64530)).
10.14 - Third Amendment to Lease effective as of March 10, 1993 by and between West Virginia Economic Development Authority, as successor to West Virginia Jobs and Development Corporation, and the Registrant (incorporated herein by reference to Exhibit 10.17 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-64530)).
10.15*- Triangle Pacific Corp. 1993 Long-Term Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.18 to the Registration's Registration Statement on Form S-1 (Registration No. 33-64530)).
10.16*- Triangle Pacific Corp. Nonemployee Director Stock Option Plan (incorporated herein by reference to Exhibit 10.19 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-64530)).
10.17 - Form of Indemnity Agreement between the Registrant and each of its directors and executive officers.
10.18 - Amendment No. 8 dated as of January 7, 1993 amending the Credit and Guaranty Agreement dated as of September 9, 1988 by and among TPC Holding Corp., Pacific Corp, the Registrant and J.P. Morgan (incorporated herein by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 33-64530)).
10.19 - Amendment No. 6 dated as of August 15, 1992 amending the Security Agreement dated as of September 9, 1988 by and between the Registrant and J.P. Morgan (incorporated herein by reference to Exhibit 10.23 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-64570)).
23.1 - Consent of Arthur Andersen & Co.
27.1 - Financial Data Schedule.
__________ * Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
TRIANGLE PACIFIC CORP.
By: /s/ Floyd F. Sherman Floyd F. Sherman Chairman of the Board, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Floyd F. Sherman Chairman of the Board March 30, 1994 Floyd F. Sherman and President (Principal Executive Officer)
/s/ M. Joseph McHugh Director and Senior March 30, 1994 M. Joseph McHugh Executive Vice President (Principal Financial Officer)
/s/ Robert J. Symon Vice President and March 30, 1994 Robert J. Symon Controller (Principal Accounting Officer)
/s/ B. William Bonnivier Director March 30, 1994 B. William Bonnivier
/s/ Charles M. Hansen, Jr. Director March 30, 1994 Charles M. Hansen, Jr.
/s/ David R. Henkel Director March 30, 1994 David R. Henkel
Director March __, 1994 Jack L. McDonald
Director March __, 1994 Carson R. McKissick
/s/ Karen Gordon Mills Director March 30, 1994 Karen Gordon Mills
SCHEDULE V TRIANGLE PACIFIC CORP. AND SUBSIDIARIES PROPERTY, PLANT AND EQUIPMENT (in thousands)
SCHEDULE VI TRIANGLE PACIFIC CORP. AND SUBSIDIARIES ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT (in thousands)
SCHEDULE VIII TRIANGLE PACIFIC CORP. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (in thousands)