SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report: June 12, 1998
(Date of earliest event reported)
Armstrong World Industries, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 1-2116 23-0366390
(State of Organization) (Commission File Number) (IRS Employer Identification
No.)
313 West Liberty Street, P.O. Box 3001, Lancaster, Pennsylvania 17604
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (717) 397-0611
Item 5. Other Events.
On June 13, 1998, Armstrong World Industries, Inc. ("Armstrong" or the
"Company") announced that it had entered into an Agreement and Plan of Merger
(the "Merger Agreement"), dated as of June 12, 1998, by and among Triangle
Pacific Corp. ("Triangle Pacific"), a Delaware corporation, Armstrong and
Sapling Acquisition, Inc. ("Sapling"), a Delaware corporation and a wholly-owned
subsidiary of the Company. Triangle Pacific is a leading U.S. manufacturer of
hardwood flooring and other flooring and related products and a substantial
manufacturer of kitchen and bathroom cabinets. Pursuant to the Merger Agreement,
the Company has commenced a cash tender offer for all of the outstanding shares
of common stock of Triangle Pacific at $55.50 per share. The tender will be
followed by a merger in which any shares not tendered into the offer will be
converted into the right to receive the same price in cash. As of May 15, 1998,
there were approximately 16.95 million shares of Triangle Pacific stock
outstanding on a diluted basis, making the total equity value of the transaction
equal to approximately $890 million (including the proceeds from the exercise of
outstanding stock options and warrants) and implying a total Triangle Pacific
enterprise value of approximately $1,150 million, including Triangle Pacific's
net indebtedness of approximately $260 million as of April 3, 1998. Consummation
of the tender offer is subject to a number of conditions including the condition
that at least a majority of Triangle Pacific's outstanding shares, on a diluted
basis, be tendered into the offer. Shareholders of Triangle Pacific representing
approximately 35% of Triangle Pacific's common stock on a diluted basis have
agreed, subject to certain exceptions, to tender (and not thereafter withdraw)
their shares pursuant to and in accordance with the terms of the offer. For the
year ended January 2, 1998, Triangle Pacific had total sales of approximately
$652.9 million and net income of approximately $31.8 million. At April 3, 1998,
Triangle Pacific had total assets of approximately $575.8 million.
On June 5, 1998, Armstrong announced its intention to commence,
through an indirect wholly-owned subsidiary, a cash tender offer for all of
the outstanding shares of DLW Aktiengesellschaft ("DLW"). DLW, which is
headquartered in Bietigheim-Bissingen, Germany, is the leading flooring
manufacturer in Germany and the third largest flooring manufacturer in Europe.
Armstrong is offering to purchase the outstanding shares of DLW for a purchase
price of DM350 per share ($194 per share, based on the exchange rate prevailing
on June 5, 1998). As of May 31, 1998, there were approximately 1.41 million
shares of capital stock of DLW outstanding. The offer has received the
unanimous support of the Management Board of DLW. Consummation of the offer is
subject to a number of conditions, including the condition that at least 75% of
DLW's outstanding shares tender into the offer, as well as receipt of certain
regulatory approvals. The transaction has already received the approval of two
of DLW's major shareholders, holding an aggregate of 23.36% of DLW's outstanding
shares. For the year ended December 31, 1997, DLW had total sales of DM1,184
million (approximately $680 million) and net income of DM13.6 million
(approximately $7.6 million). At December 31, 1997, DLW had total assets of
DM788.7 million (approximately $438.2 million).
Armstrong intends to finance the acquisition of DLW and Triangle Pacific,
including the refinancing of a portion of DLW's and Triangle Pacific's
outstanding indebtedness, through the use of a combination of one or more of the
following: (i) internally generated funds; (ii) the issuance of short-term debt
pursuant to a new note program which will be secured by a new $1 billion credit
facility; (iii) the issuance of up to $500 million of long-term debt under
Armstrong's currently effective shelf registration statements on Form S-3; and
(iv) borrowings under Armstrong's currently existing $300 million credit
facility. It is anticipated that the indebtedness incurred by Armstrong in
connection with the acquisitions will be repaid from funds generated internally
by Armstrong and its subsidiaries and through the issuance of public and/or
private short and long-term debt securities. No final decision has been made,
however, concerning the method Armstrong will employ to repay such indebtedness.
Standard & Poors has indicated that if the DLW & Triangle Pacific
transactions are consummated as currently structured it will lower its corporate
credit and senior unsecured debt ratings to single 'A' minus from 'A' and its
commercial paper rating to 'A-2' from 'A-1'. Armstrong expects that Moody's will
announce its ratings shortly. Armstrong expects to complete the DLW and Triangle
Pacific transactions in the third quarter of 1998. Armstrong expects the
transactions to be dilutive to earnings in 1998, but accretive beginning in
1999.
Additional information regarding Triangle Pacific and Armstrong's proposed
acquisition of Triangle Pacific is contained in the Schedule 14D-1 filed by
Armstrong and Sapling with the Securities and Exchange Commission (the
"Commission") on June 19, 1998 and in the Schedule 14D-9 filed by Triangle
Pacific with the Commission on June 19, 1998, as such may be amended from time
to time.
This Current Report on Form 8-K contains certain forward-looking statements
regarding Armstrong including statements regarding the acquisition of DLW and
Triangle Pacific and the impact of those transactions on Armstrong and its debt
ratings and earnings. These statements are based largely on the Company's
expectations, which are believed to be reasonable, but are subject to a number
of risks and uncertainties, many of which are beyond Armstrong's control. Such
risks include the successful completion of the transactions, the successful
integration of DLW and Triangle Pacific with the Company's operations, the
achievement of anticipated economies and profitability margins, and the
continued strength of the domestic and international economies and financial
markets. These risks and uncertainties could cause actual results to differ
materially from those in the forward-looking statements.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
The following financial statements, pro forma financial information and
exhibits are filed as part of this report.
(a) Financial statements of the business to be acquired, prepared pursuant to
Rule 3.05 of Regulation S-X and provided to Armstrong by Triangle Pacific:
Item Page
----- -----
Audited financial statements of the Triangle Pacific business:
Report of Arthur Andersen LLP, Independent Public Accountants................................................. F-5
Consolidated Balance Sheets - As of January 2, 1998 and January 3, 1997....................................... F-6
Consolidated Statements of Operations - Years ended January 2, 1998 and January 3, 1997....................... F-7
Consolidated Statements of Cash Flows - Years ended January 2, 1998 and January 3, 1997....................... F-8
Consolidated Statements of Changes in Shareholders' Investment................................................ F-9
Notes to Financial Statements................................................................................. F-10
Unaudited interim financial statements of Triangle Pacific business:
Review Report of Arthur Andersen LLP, Independent Public Accountants.......................................... F-20
Consolidated Balance Sheet - As of April 3, 1998.............................................................. F-21
Consolidated Statements of Operations - Three months ended April 3, 1998 and April 4, 1997.................... F-22
Consolidated Statements of Cash Flows - Three months ended April 3, 1998 and April 4, 1997.................... F-23
Consolidated Statement of Changes in Shareholders' Investment................................................. F-24
(b) Pro forma financial information required pursuant to Article 11 of
Regulation S-X:
Item Page
----- ------
Armstrong and Triangle Pacific Condensed Combined Pro Forma Financial Statements (Unaudited)
Description of Transaction.................................................................................... F-26
Basis of Presentation......................................................................................... F-26
Condensed Combined Pro Forma Balance Sheet - As of March 31, 1998............................................. F-27
Condensed Combined Pro Forma Statement of Earnings - Year ended December 31, 1997............................. F-28
Condensed Combined Pro Forma Statement of Earnings - Three months ended March 31, 1998........................ F-29
Notes to Condensed Combined Pro Forma Financial Statements.................................................... F-30
(c) Exhibits
The following is a list of all exhibits filed as part of this Form 8-K.
Exhibit No. Description of Exhibit
- ----------- ----------------------
23.01 Consent of Arthur Andersen LLP, Independent Public
Accountants, dated June 23, 1998 (filed herewith).
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARMSTRONG WORLD INDUSTRIES, INC.
(Registrant)
Dated: July 13, 1998 By: /s/ Deborah K. Owen
------------------------------------
Deborah K. Owen
Senior Vice President, Secretary
and General Counsel
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 January 2, 1998,
and January 3, 1997, and the related consolidated statements of operations,
changes in shareholders' investment, and cash flows for the fiscal years ended
January 2, 1998, and January 3, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion of 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 January 2, 1998, and January 3, 1997 and
the results of their operations and their cash flows for the fiscal years ended
January 2, 1998, and January 3, 1997, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Dallas, Texas,
February 2, 1998
Triangle Pacific Corp. and Subsidiaries
Consolidated Balance Sheet
---------------------------
(in thousands)
January 2, January 3,
1998 1997
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 3,790 $ 19,638
Receivables (net of allowance of $3,662 and $3,053, respectively) 70,399 59,236
Inventories 128,988 95,096
Prepaid expenses 4,561 3,713
----------- --------
Total current assets 207,738 177,683
----------- --------
Property, plant and equipment
Land 16,809 15,537
Buildings 65,050 56,274
Equipment, furniture and fixtures 161,076 133,197
----------- --------
Less: accumulated depreciation 242,935 205,008
53,294 40,258
----------- --------
189,641 164,750
----------- --------
Other assets:
Goodwill 97,375 70,986
Trademarks 38,876 28,333
Deferred financing costs 4,437 5,290
Other 5,154 2,921
----------- --------
Total assets $ 543,221 $449,963
=========== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Current portion of long-term debt $ 3,957 $ 2,437
Accounts payable 28,831 18,520
Accrued liabilities 45,970 40,226
Income taxes payable 1,499 1,991
----------- --------
Total current liabilities 80,257 63,174
----------- --------
Long-term debt, net of current portion 232,241 190,604
Other long-term liabilities 3,565 2,331
Deferred income taxes 40,246 39,217
----------- --------
Total liabilities 356,309 295,326
----------- --------
Shareholders' investment:
Common stock - $0.01 par value, authorized shares - 30,000,000 issued and
outstanding shares - 14,740,538 at January 2, 1998 and 14,686,558 at
January 3, 1997 147 147
Additional paid-in capital 93,728 93,212
Retained earnings 93,037 61,278
----------- --------
Total shareholders' investment 186,912 154,637
----------- --------
Total liabilities and shareholders' investment $ 543,221 $449,963
=========== ========
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
Triangle Pacific Corp. and Subsidiaries
Consolidated Statement of Operations
--------------------------------------
(In thousands, except per share amounts)
Fiscal Years Ended
January 2, January 3,
1998 1997
----- ----
Net Sales $652,866 $534,261
-------- --------
Costs and expenses:
Cost of sales 495,256 402,759
Selling, general and administrative 80,503 68,611
Amortization of goodwill 2,638 1,739
Interest 22,863 19,719
-------- --------
601,260 492,828
-------- --------
Income before income taxes 51,606 41,433
Provision for income taxes 19,847 15,809
-------- --------
Net income $ 31,759 $ 25,624
======== ========
Net income per share
Basic $ 2.16 $ 1.75
Diluted $ 2.07 $ 1.71
Weighted common shares outstanding
Basic 14,716 14,670
Diluted 15,321 15,005
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Triangle Pacific Corp. and Subsidiaries
Consolidated Statements of Cash Flows
--------------------------------------
(amounts in thousands)
Fiscal Years Ended
January 2, January 3,
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 31,759 $ 25,624
Adjustments:
Depreciation 14,699 11,946
Deferred income taxes 1,029 (313)
Amortization of goodwill and trademarks 3,645 2,539
Amortization of deferred financing costs 941 898
Provision for doubtful accounts 850 422
Changes in assets and liabilities:
Receivables (5,548) (1,562)
Inventories (20,629) (6,306)
Prepaid expenses (805) 1,291
Accounts payable 8,417 (365)
Accrued liabilities -- other 2,353 5,107
Accrued liabilities -- interest 173 (204)
Income taxes payable (493) 1,991
Other (1,614) (575)
-------- --------
Net cash provided by operating activities 34,777 40,493
-------- --------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 199 4,341
Additions to property, plant and equipment (29,147) (13,506)
Acquisition of Hartco Flooring --- (36,140)
Acquisition of KREDA Bonds --- (5,012)
Acquisition of Robbins Flooring (55,627) --
Acquisition of Bruce Floor Care Products Trademark (1,550) --
-------- --------
Net cash (used in) investing activities (86,125) (50,317)
-------- --------
Cash flows from financing activities:
Long-term debt borrowings 39,400 --
Long-term debt payments (4,416) (3,213)
Exercise of stock options 130 94
Stock incentive bonus shares issued 386 --
-------- --------
Net cash provided by (used in) financing activities 35,500 (3,119)
-------- --------
Net (decrease) in cash and cash equivalents $(15,848) $(12,943)
Cash and cash equivalents, beginning of period 19,638 32,581
-------- --------
Cash and cash equivalents, end of period $ 3,790 $ 19,638
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 20,706 $ 18,352
Income taxes 16,084 13,391
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Triangle Pacific Corp. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Investment
--------------------------------------------------------------
(amounts in thousands)
Additional
Common Paid-In Retained
Stock Capital Earnings Total
------- ----------- -------- ----------
Balance, December 29, 1995 $147 $93,100 $35,654 $128,901
Net income 25,624 25,624
Stock incentive bonus shares issued
18 18
Exercise of stock options -- 94 -- 94
---- ------- ------- --------
Balance, January 3, 1997 $147 $93,212 $61,278 $154,637
Net income 31,759 31,759
Stock incentive bonus shares issued
386 386
Exercise of stock options -- 130 -- 130
---- ------- ------- --------
Balance, January 2, 1998 $147 $93,728 $93,037 $186,912
==== ======= ======= ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Notes to Consolidated Financial Statements
------------------------------------------
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Triangle Pacific Corp. (the "Company") conducts its operations through a single
business segment which consists of the manufacture and distribution of hardwood
flooring products and kitchen and bathroom cabinets. The Company's products are
used primarily in residential new construction and remodeling. Flooring products
accounted for approximately 72%, and kitchen cabinets 28%, of the Company's
revenues during 1997. The Company's products are sold throughout the U.S. and a
portion of the flooring products are sold worldwide.
Basis of Consolidation:
- -----------------------
The consolidated financial statements include the financial statements of
Triangle Pacific and its subsidiaries. All intercompany balances and
transactions have been eliminated. The Company maintains its records on a 52/53
week year.
Net Income Per Share:
- -------------------------
Net income per share is computed using the weighted-average number of common
shares and common stock equivalents outstanding during each period. Common stock
equivalents represent the dilutive effect of outstanding stock options and
warrants.
The Company adopted Statement of Financial Accounting Standards No. 128 (SFAS
128) "Earnings Per Share" in the fourth quarter of 1997. Under SFAS 128, the
Company has reported two net income per share amounts. Basic net income per
share is calculated based on income available to common shareholders and the
weighted-average number of shares outstanding during the period. Diluted net
income per share includes additional dilution attributable to stock options and
warrants. For comparative purposes, both basic and diluted net income per share
are presented for the two fiscal years ended January 2, 1998 and January 3,
1997. Diluted net income per share in each of these two years are
approximately the same as the previously reported net income per share.
Cash and Cash Equivalents:
- ------------------------------
The Company considers all investments with an original maturity of less than
three months to be cash equivalents. All cash equivalents are investment grade
such as U.S. Government or A-1 or better securities rated by Standard & Poor's
Corporation.
Inventories:
- ------------
Inventories are valued at the lower of cost or market. The last-in, first-out
(LIFO) method is used primarily for lumber and certain other inventories and the
first-in, first-out (FIFO) method is used for all other inventories.
Inventories valued by the LIFO method were $65,407,000 at January 2, 1998 and
$35,311,000 at January 3,1997. Had all inventories been valued by the FIFO
method, which approximates current cost, inventories would have been increased
by $9,463,000 at January 2, 1998 and $2,851,000 at January 3, 1997. 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:
January 2, January 3,
1998 1997
---- ----
(in thousands)
Raw materials $ 64,808 $50,873
Work-in-process 13,747 7,259
Finished goods 50,433 36,964
-------- -------
Total $128,988 $95,096
======== =======
Property, Plant and Equipment:
- ------------------------------
Property, plant and equipment were restated to fair value as of June 8, 1992,
when the Company successfully completed a capital restructuring. All additions,
subsequent thereto, are stated at acquisition or construction cost. 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 trademarks 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. Deferred
financing costs are being amortized on the straight-line method over the lives
of the related debt. Trademarks and goodwill are being amortized over 40 years.
Accumulated amortization of trademarks and goodwill is $4,674,000 and
$9,919,000, respectively, at January 2, 1998 and $3,667,000 and $7,281,000,
respectively, at January 3, 1997.
Fair Value of Financial Instruments:
- ------------------------------------
The Company's cash equivalents and long-term debt are recorded at cost, which
approximates fair market value at January 2, 1998.
Use of Estimates:
- -----------------
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 at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
NOTE 2 - LONG-TERM DEBT:
Long-term debt consists of the following:
January 2, January 3,
1998 1997
---- ----
(in thousands)
Senior Notes, 10 1/2% due 8/1/2003 $160,000 $160,000
Revolving note - bank 39,400
Capitalized lease obligations 15,088 16,996
Industrial revenue bonds 21,710 16,045
-------- --------
236,198 193,041
Less: Current portion of long-term
debt (3,957) (2,437)
-------- --------
$232,241 $190,604
======== ========
Letters of credit outstanding were $18.6 million at January 2, 1998 and $15.0
million at January 3, 1997, 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 amount of $160 million. The Senior Notes mature on August
1, 2003 and bear interest at an annual rate of 10 1/2%, payable in two equal
semi-annual installments of $8,400,000 each, with each semi-annual period deemed
to have 180 days. The Senior Notes are issued under an Indenture (the
"Indenture") between the Company and Comerica Bank, as the present 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 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 limit, among other things, the incurrence
of additional indebtedness by the Company and its subsidiaries, the payment of
dividends on, or the purchase of the capital stock of the Company ("Restricted
Payments"), 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.
Based on the Company's operations through January 2, 1998, the amount of
Restricted Payments that the Company could make under the Indenture was
$55,134,000.
The Indenture specifies a number of events of default including, among others,
the failure to make timely principal and interest payments or to meet 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.
Credit Facility:
- ----------------
In December 1995, the Company entered into a 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 Credit
Facility is based upon a formula related to inventory and accounts receivable.
At January 2, 1998, the Company had $39.4 million of borrowings under the Credit
Facility and had an additional $32.0 million of borrowing capacity under this
facility. Borrowings under the Credit Facility bear interest at the agent's
prime rate plus 0.375% (8.875% at January 2, 1998) or, at the Company's option,
at certain alternate floating rates, and are secured by a pledge of the
Company's inventory and accounts receivable. The Credit Facility expires on
December 21, 2000.
The 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 related to
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,
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 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 January 2, 1998, the Company was
in compliance with all financial covenants.
The 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 warrants to be true, the occurrence of a "change of
control"(as defined in the 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, 50%) of the total voting securities of the
Company), and certain impairments of the security for the Credit Facility. The
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 Credit Facility, at least three of the lenders holding at least 60% of
the principal indebtedness outstanding under the 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 Credit Facility generally prohibits the Company from prepaying in excess of
$50.0 million of 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.
Capitalized Lease Obligations:
- ----------------------------------
During the fourth quarter of 1995, the operating lease agreement relating to the
Company's Beverly, West Virginia, plant and related equipment was amended to
allow for a purchase option of $1 until 2018. As a result, the Company recorded
the present value of the remaining future minimum lease payments as a
capitalized lease asset and related capitalized lease obligation.
Industrial Revenue Bonds:
- -----------------------------
On June 28, 1996, in connection with the acquisition of Hartco Flooring Company,
the Company acquired $10,000,000, in floating interest rate, City of Somerset,
Kentucky, Industrial Revenue Bonds, due in full on August 1, 2009. These bonds
were used to finance the Somerset, Kentucky hardwood flooring plant and are
collateralized by a $10,000,000 letter of credit. At January 2, 1998, the
various Industrial Revenue Bond (IRB) notes have interest rates that ranged up
to 8.25% and at January 3, 1997, the interest rates ranged up to 7.87%.
These IRB notes are payable through 2009 and are collateralized by the related
underlying assets.
Maturities for all long-term debt are as follows:
(In thousands)
1998 $ 3,957
1999 4,111
2000 45,011
2001 4,800
2002 1,198
Thereafter 177,121
--------
Total $236,198
========
NOTE 3 - INCOME TAXES:
The components of the deferred tax liability and asset are as follows:
January 2, January 3,
1998 1997
---------- ----------
(In thousands)
Deferred Tax Liability:
Property, plant and equipment $26,925 $27,824
Trademarks 10,108 11,022
Other 7,856 7,338
------- -------
Total $44,889 $46,184
------- -------
Deferred Tax Asset:
Other $ 4,643 $ 6,967
------- -------
Total $ 4,643 $ 6,967
------- -------
Net Deferred Tax Liability
$40,246 $39,217
======= =======
The provision for income taxes consists of the following:
Fiscal Years Ended
January 2, January 3,
1998 1997
---- ----
(In thousands)
Current:
Federal $13,097 $12,338
State and local 2,736 2,625
------- -------
$15,833 $14,963
------- -------
Deferred:
Federal $ 3,687 $ 722
State and local 327 124
------- -------
$ 4,014 $ 846
------- -------
Total $19,847 $15,809
======= =======
The tax provision for the fiscal years ended January 2, 1998 and January 3, 1997
was 38.5% and 38.2% of pre-tax income, respectively. The factors causing the
rate to vary from the U.S. Federal Statutory rate are as follows:
Fiscal Years Ended
January 2, January 3,
1998 1997
---- ----
(In thousands)
Computed (expected) tax provision $18,062 $14,502
Increase (decrease) from:
State and local taxes 2,023 1,830
Amortization of goodwill 685 609
Foreign sales (463) (394)
Other book to tax differences, net (460) (738)
------- -------
Total $19,847 $15,809
======= =======
NOTE 4 - OPERATING LEASE COMMITMENTS:
The Company rents certain real estate and equipment under operating leases
expiring at various dates to 2015. 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, 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-cancelable lease terms in excess of one
year:
(In thousands)
1998 $1,928
1999 1,143
2000 670
2001 236
2002 118
Thereafter 122
------
Total $4,217
======
Rental expense for operating leases amounted to $7,062,000 and $6,682,000 for
the fiscal years ended January 2, 1998, and January 3, 1997, respectively.
NOTE 5 - 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 $1,268,000 and $1,169,000 for the fiscal years ended January
2, 1998, and January 3, 1997, respectively, including $647,000 and $517,000,
respectively, for defined benefit plans, which includes amortization of prior
service costs over the estimated average remaining service period of active
employees.
The following table sets forth the defined benefit pension plans' funded
status at January 2, 1998 and January 3, 1997.
Fiscal Years Ended
January 2, January 3,
1998 1997
---- ----
(In thousands)
Actuarial present value of benefit obligation:
Vested $10,566 $10,519
Non-vested 695 566
------- -------
Accumulated and projected benefit obligation 11,261 11,085
Plan assets at fair value 11,066 10,538
------- -------
Projected benefit obligation in excess of
plan assets (195) (547)
Unrecognized prior service costs 842 598
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions 724 1,235
Adjustment to recognize minimum liability (1,071) (1,761)
------- -------
Prepaid (accrued) pension expense $ 300 $ (475)
======= =======
Net periodic pension costs for defined benefit pension plans for the
fiscal years ended January 2, 1998 and January 3, 1997, include the following
components:
Fiscal Years Ended
January 2, January 3,
1998 1997
---- ----
(In thousands)
Service cost - benefits earned during the period $ 317 $ 277
Interest cost on projected benefit obligation 897 818
Actual return on plan assets (1,483) (1,129)
Net amortization and deferral 916 551
------- -------
Net periodic pension cost $ 647 $ 517
======= =======
A weighted average discount rate of 8.5% was used in 1997 and 1996 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 1997 and 1996.
The Company has a profit sharing plan for salaried employees, and a supplemental
profit sharing plan for certain 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 year 1997 and 1996 contributions were
$1,250,000 and $1,250,000, respectively.
Long-Term Incentive Plans:
- --------------------------
In June 1993, the Company adopted the Triangle Pacific Long-Term Incentive
Compensation Plan, (the "Long-Term Incentive Plan") which authorizes grants of
various incentive awards to all regular salaried full-time officers and key
employees of the Company. There are 1,400,000 shares of common stock authorized
for issue under this plan. In February 1994, March 1994, February 1996, April
1996 and May 1997 stock options were granted for an aggregate of 1,072,700
shares at 100% of fair market value at the respective dates of grant.
The following summarizes the Company's stock option activity:
Weighted
Number Average
of Exercise Price Exercise Price
Shares Per Share Per Share
Outstanding, December 29, 1995 730,449 $ 2.99 - $15.13 $11.57
1996
Granted 237,500 $16.38 $16.38
Exercised (22,093) $ 2.99 - $14.44 $ 4.29
Forfeited (14,200) $14.44 - $15.13 $14.64
---------
Outstanding, January 3, 1997 931,656 $ 2.99 - $16.38 $12.99
1997
Granted 277,500 $28.38 $28.38
Exercised (28,455) $ 2.99 - $14.44 $ 4.58
Forfeited (8,750) $14.44 - $28.38 $16.38
---------
Outstanding, January 2, 1998 1,171,951 $ 2.99 - $28.38 $16.68
All stock options are granted with exercise prices equal to the fair market
value of the Company's common stock at the date of grant. The weighted average
exercise prices of the stock options granted during 1997 was $28.38. Stock
options expire ten years from date of grant and vest equally over a four year
period. The number of stock options exercisable at January 2, 1998, was 601,376
shares. These stock options have a weighted average exercise price of $11.98
per share and a weighted average contractual life of 6.0 years.
The Company accounts for stock options in accordance with Accounting Principles
Board Opinion No. 25, under which no compensation cost has been recognized for
stock option awards. Had compensation cost for the stock options issued
subsequent to January 1, 1995 been determined consistent with Statement of
Financial Accounting Standards No. 123, "Accounting for Stock- Based
Compensation" (SFAS 123), the Company's pro forma net income and net income per
share for 1997 and 1996 would not have been materially different from reported
net income and net income per share. Because the SFAS 123 method of accounting
has not been applied to options granted prior to January 1, 1995, pro forma
compensation cost may not be representative of that to be expected in future
years.
The value of each stock option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for 1997 grants: risk free interest rate of 6.88%, expected
dividend yield of 0%; expected life of ten years; and expected volatility of
29.06%.
The Company has a performance-based cash incentive plan for officers and other
key employees to make annual bonus awards based upon pre-established criteria
which were approved by the Board of Directors. The expense under this plan was
$3,743,000 and $3,282,000 in 1997 and 1996, respectively.
Non-Employee Director Stock Option Plan:
- ----------------------------------------
The Company has a Non-Employee Director Stock Option Plan for up to 100,000
shares of common stock. Options have been granted to six non-employee directors
for an aggregate of 48,000 shares, with exercise prices equal to the 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 January 2, 1998, generally does not provide post-retirement
life or health insurance benefits or any post-employment benefits other than
those previously discussed.
NOTE 6 - ACCRUED LIABILITIES:
Amounts included in accrued liabilities are as follows:
January 2, January 3,
1998 1997
---------- ----------
Payroll $ 9,874 $8,187
Pension and profit sharing 1,766 1,919
Taxes 3,780 3,311
Insurance 8,911 9,340
Interest 7,202 7,029
Marketing 9,232 5,363
Other 5,205 5,077
------- -------
Total $45,970 $40,226
======= =======
NOTE 7 - SUPPLEMENTARY QUARTERLY FINANCIAL DATA (unaudited):
(In thousands, except per share amounts)
Net Income Per Share
Net Gross Net ----------------------
Quarters Sales Profit Income Basic Diluted
- ---------------------------------------------------------------------------
1997
First Quarter $145,205 $ 36,237 $ 5,859 $ 0.40 $ 0.38
Second Quarter 175,249 41,738 9,058 0.62 0.59
Third Quarter 165,795 40,485 8,415 0.57 0.55
Fourth Quarter 166,617 39,150 8,427 0.57 0.55
1996
First Quarter $110,525 $ 25,926 $ 3,904 $ 0.27 $ 0.26
Second Quarter 131,471 34,364 7,433 0.51 0.50
Third Quarter 142,941 34,755 6,762 0.46 0.45
Fourth Quarter 149,324 36,457 7,525 0.51 0.50
NOTE 8 - ACQUISITION OF RESIDENTIAL FLOORING DIVISION OF ROBBINS, INC. AND
SEARCY FLOORING, INC.
On March 28, 1997, Robbins Hardwood Flooring Inc., a newly formed wholly- owned
subsidiary of Triangle Pacific Corp., acquired from Robbins Inc. and its
affiliate Searcy Flooring, Inc., substantially all the assets and assumed
certain liabilities (primarily IRB financing and trade payables) associated with
their residential flooring operations. The purchase price was $64.2 million
consisting of $55.6 in cash and the balance in assumed liabilities.
The acquisition has been accounted for using the purchase method of accounting,
and accordingly, the purchase price has been allocated to the assets purchased
and the liabilities assumed based upon the fair values at the date of
acquisition. The excess of the purchase price over the fair values of the net
assets acquired was $36.9 million and has been recorded as goodwill, which is
being amortized on a straight-line basis over 40 years. Sales and earnings for
the residential flooring operations acquired by Robbins Hardwood Flooring Inc.,
are included in the reported results for the period since the acquisition on
March 28, 1997.
The net purchase price was allocated as follows:
(in
thousands)
Net working capital $ 14,661
Net property, plant and equipment 11,295
Other assets 2,923
Goodwill 36,941
Other non-current liabilities (10,193)
--------
Cash paid for Robbins Hardwood Flooring $ 55,627
========
NOTE 9 - ACQUISITION OF HARTCO FLOORING COMPANY:
On June 28, 1996, the Company acquired all of the outstanding shares of Hartco
Flooring Company ("Hartco"), formerly a wholly-owned subsidiary of Premark
International, Inc. The total value of the acquisition was $63 million,
consisting of $36.1 million in cash and the balance representing the assumption
of liabilities.
The acquisition has been accounted for using the purchase method of accounting,
and accordingly, the purchase price has been allocated to the assets purchased
and the liabilities assumed based upon the fair values at the date of
acquisition. The excess of the purchase price over the fair values of the net
assets acquired was $17.5 million and has been recorded as goodwill, which is
being amortized on a straight-line basis over 40 years. The accompanying
consolidated financial statements reflect the operations of Hartco for the
period subsequent to June 28, 1996.
The net purchase price was allocated as follows:
(in thousands)
Net working capital $ 13,589
Net property, plant and equipment 22,717
Other assets 712
Goodwill 17,530
Other non-current liabilities (18,408)
--------
Cash paid for Hartco $ 36,140
========
The unaudited pro forma results below assume the acquisition occurred at the
beginning of the year ended January 3, 1997. (In thousands, except per share
amounts)
Fiscal Year
Ended
January 3,
1997
----
Net sales $574,680
Net income 25,958
Net income per share $ 1.73
The above pro forma results include adjustments to give effect to
amortization of goodwill, interest expense on acquisition debt and certain
other adjustments, together with related income tax effects. The pro forma
results above are not necessarily indicative of the operating results that
would have occurred had the acquisition been consummated as of the beginning
of the periods presented, nor are they necessarily indicative of future
operating results.
NOTE 10 - EVENT SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On June 13, 1998, the Company announced that it had entered into an Agreement
and Plan of Merger (the "Merger Agreement"), dated as of June 12, 1998, by and
among the Company, Armstrong World Industries, Inc. ("Armstrong") and Sapling
Acquisition, Inc., a wholly-owned subsidiary of Armstrong. Pursuant to the
Merger Agreement, Armstrong has commenced a cash tender offer for all of the
outstanding shares of common stock of the Company at $55.50 per share. The
tender will be followed by a merger in which any shares not tendered into the
offer will be converted into the right to receive the same price in cash. As of
May 15, 1998, there were approximately 16.95 million shares of Company stock
outstanding on a diluted basis, making the total equity value of the transaction
equal to approximately $890 million (including the proceeds from the exercise of
outstanding stock options and warrants) and implying a total Company enterprise
value of approximately $1,150 million, including the Company's indebtedness of
approximately $260 million as of April 3, 1998. Consummation of the tender offer
is subject to a number of conditions including the condition that at least a
majority of the Company's outstanding shares, on a diluted basis, be tendered
into the offer.
ACCOUNTANTS' REVIEW REPORT
To the Board of Directors of
Triangle Pacific Corp.:
We have reviewed the accompanying consolidated balance sheet of Triangle Pacific
Corp. and Subsidiaries (a Delaware corporation) as of April 3, 1998, and the
related consolidated statements of operations, changes in shareholders'
investment, and cash flows for the three-month period ended April 3, 1998. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Dallas, Texas,
June 23, 1998
Triangle Pacific Corp. and Subsidiaries
Consolidated Balance Sheet
--------------------------
(in thousands)
April 3, January 2,
1998 1998
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,744 $ 3,790
Receivables (net of allowance of $3,686 and $3,662, respectively) 77,486 70,399
Inventories 146,613 128,988
Prepaid expenses 4,278 4,561
----------- --------
Total current assets 233,121 207,738
----------- --------
Property, plant and equipment
Land 16,926 16,809
Buildings 68,533 65,050
Equipment, furniture and fixtures 170,165 161,076
----------- --------
255,624 242,935
Less: accumulated depreciation 57,187 53,294
----------- --------
198,437 189,641
Other assets:
Goodwill 97,176 97,375
Trademarks 38,604 38,876
Deferred financing costs 4,228 4,437
Other 4,202 5,154
----------- --------
Total assets $ 575,768 $543,221
=========== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Current portion of long-term debt $ 3,947 $ 3,957
Accounts payable 29,565 28,831
Accrued liabilities 38,160 45,970
Income taxes payable 6,209 1,499
----------- --------
Total current liabilities 77,881 80,257
----------- --------
Long-term debt, net of current portion 261,139 232,241
Other long-term liabilities 3,589 3,565
Deferred income taxes 39,292 40,246
----------- --------
Total liabilities 381,901 356,309
----------- --------
Shareholders' investment:
Common stock - $0.01 par value, authorized shares - 30,000,000
issued and outstanding shares - 14,752,345 at April 3, 1998 148 147
Additional paid-in capital 93,848 93,728
Retained earnings 99,871 93,037
----------- --------
Total shareholders' investment 193,867 186,912
----------- --------
Total liabilities and shareholders' investment $ 575,768 $543,221
=========== ========
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
Triangle Pacific Corp. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
-------------------------------------------------
(In thousands, except per share amounts)
Three Months Ended
April 3, April 4,
1998 1997
---- ----
Net Sales $173,442 $145,205
-------- --------
Costs and expenses:
Cost of sales 133,463 108,968
Selling, general and administrative 22,173 20,944
Amortization of goodwill 718 490
Interest 6,151 4,993
-------- --------
162,505 135,395
-------- --------
Income before income taxes 10,937 9,810
Provision for income taxes 4,103 3,951
-------- --------
Net income $ 6,834 $ 5,859
======== ========
Net income per share
Basic $ 0.46 $ 0.40
Diluted $ 0.44 $ 0.38
Weighted common shares outstanding
Basic 14,745 14,704
Diluted 15,502 15,274
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
Triangle Pacific Corp. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
-------------------------------------------------
(amounts in thousands)
Three Months Ended
April 3, April 4,
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 6,834 $ 5,859
Adjustments:
Depreciation 3,951 3,365
Deferred income taxes (954) (21)
Amortization of goodwill and trademarks 990 690
Amortization of deferred financing costs 237 231
Provision for doubtful accounts 92 130
Changes in assets and liabilities:
Receivables (7,179) (7,880)
Inventories (17,624) (3,147)
Prepaid expenses 283 (24)
Other Assets 404 (347)
Accounts payable 733 3,600
Accrued liabilities -- Other (3,865) (31)
Accrued liabilities -- Interest (3,945) (4,014)
Income taxes payable 4,710 3,295
Other 25 35
-------- --------
Net cash (used by) provided by operating activities (15,308) 1,741
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (12,747) (4,698)
Acquisition of Robbins Flooring -- (55,627)
-------- --------
Net cash (used for) investing activities (12,747) (60,325)
-------- --------
Cash flows from financing activities:
Long-term debt borrowings 29,600 43,100
Long-term debt payments (712) (1,117)
Exercise of stock options 121 2
Stock incentive bonus shares issued --- 386
-------- --------
Net cash provided by financing activities 29,009 42,371
-------- --------
Net increase (decrease) in cash and cash equivalents $ 954 $(16,213)
Cash and cash equivalents, beginning of period 3,790 19,638
-------- --------
Cash and cash equivalents, end of period $ 4,744 $ 3,425
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 9,586 $ 8,516
Income taxes 470 641
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Triangle Pacific Corp. and Subsidiaries
Consolidated Statement of Changes in Shareholders' Investment (Unaudited)
-------------------------------------------------------------------------
(amounts in thousands)
Additional
Common Paid-In Retained
Stock Capital Earnings Total
----- ------- -------- -----
Balance, January 2, 1998 $147 $93,728 $93,037 $186,912
Net income 6,834 6,834
Exercise of stock options 1 120 -- 121
---- ------- ------- --------
Balance, April 3, 1998 $148 $93,848 $99,871 $193,867
==== ======= ======= ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
NOTE 1 - INTRODUCTION:
The accompanying consolidated financial statements of Triangle Pacific Corp.
(the "Company") as of April 3, 1998 and for the three-month periods ended April
3, 1998 and April 4, 1997, included herein have been prepared by the Company
without audit. They contain all adjustments which are, in the opinion of the
management, necessary to a fair presentation of financial position and results
of operations for the interim periods. The operating results for the interim
periods are not necessarily indicative of results to be expected for a full
year. It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes thereto,
included in the Company's Form 10-K as of January 2, 1998.
NOTE 2 - INVENTORIES:
Inventories are valued at the lower of cost or market. The last-in, first-out
(LIFO) method is used primarily for lumber and certain other inventories and the
first-in, first-out (FIFO) method is used for all other inventories.
Inventories valued by the LIFO method were $55,745,000 at April 3, 1998 and
$42,622,000 at January 2,1998. Had all inventories been valued by the FIFO
method, which approximates current cost, inventories would have increased by
$11,944,000 at April 3, 1998 and $9,463,000 at January 2, 1998. 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:
April 3, January 2,
1998 1998
---- ----
(in thousands)
Raw materials $ 71,646 $ 64,808
Work-in-process 15,221 13,747
Finished goods 59,746 50,433
-------- --------
Total $146,613 $128,988
======== ========
NOTE 3 - LONG-TERM DEBT:
Long-term debt consists of the following:
April 3, January 2,
1998 1998
---- ----
(in thousands)
Senior Notes, 10 1/2% due 8/1/2003 $160,000 $160,000
Revolving note - bank 69,000 39,400
Capitalized lease obligations 14,593 15,088
Industrial revenue bonds 21,493 21,710
-------- --------
265,086 236,198
Less: Current portion of long-term
debt (3,947) (3,957)
-------- --------
$261,139 $232,241
======== ========
Letters of credit outstanding were $18.7 million at April 3, 1998 and $18.6
million at January 2, 1998, under a facility pursuant to which they can be
renewed or replaced.
NOTE 4 - INCOME TAXES:
The components of the deferred tax liability and asset are as follows:
April 3, January 2,
1998 1998
---- ----
(in thousands)
Deferred Tax Liability:
Property, plant and equipment $27,258 $26,925
Trademarks 10,021 10,108
Goodwill 1,629
Other 7,023 7,856
------- -------
Total $45,931 $44,889
------- -------
Deferred Tax Asset:
Other $ 6,639 $ 4,643
------- -------
Total $ 6,639 $ 4,643
------- -------
Net Deferred Tax Liability $39,292 $40,246
======= =======
The provision for income taxes consists of the following:
Three Months Ended
------------------
April 3, April 4,
1998 1997
---- ----
(in thousands)
Current:
Federal $3,801 $3,005
State and local 229 618
------ ------
$4,030 $3,623
Deferred:
Federal $ 66 $ 290
State and local 7 38
------ ------
$ 73 $ 328
------ ------
Total $4,103 $3,951
====== ======
The tax provision for the periods ending April 3, 1998 and April 4, 1997 was
37.5% and 40.3% of pre-tax income, respectively. The factors causing the rate
to vary from the U.S. Federal Statutory rate are as follows:
Three Months Ended
-------------------
April 3, April 4,
1998 1997
---- ----
(in thousands)
Computed (expected) tax provision $3,828 $3,434
Increase (decrease) from:
State and local taxes 150 426
Amortization of goodwill 193 171
Foreign sales (62) (98)
Other book to tax differences, net (6) 18
------ ------
Total $4,103 $3,951
====== ======
NOTE 5 - SUBSEQUENT EVENT:
On June 13, 1998, the Company announced that it had entered into an Agreement
and Plan of Merger (the "Merger Agreement"), dated as of June 12, 1998, by and
among the Company, Armstrong World Industries, Inc. ("Armstrong") and Sapling
Acquisition, Inc., a wholly-owned subsidiary of Armstrong. Pursuant to the
Merger Agreement, Armstrong has commenced a cash tender offer for all of the
outstanding shares of common stock of the Company at $55.50 per share. The
tender will be followed by a merger in which any shares not tendered into the
offer will be converted into the right to receive the same price in cash. As of
May 15, 1998, there were approximately 16.95 million shares of Company stock
outstanding on a fully diluted basis, making the total equity value of the
transaction equal to approximately $890 million (including the proceeds from the
exercise of outstanding stock options) and implying a total Company enterprise
value of approximately $1,155 million, including the Company's indebtedness of
approximately $265.0 million as of April 3, 1998. Consummation of the tender
offer is subject to a number of conditions including the condition that at least
a majority of the Company's outstanding shares, on a fully diluted basis, be
tendered into the offer.
Description of Transaction:
On June 13, 1998, Armstrong World Industries, Inc. ("Armstrong" or the
"Company") announced that it had entered into an Agreement and Plan of Merger
(the "Merger Agreement"), dated as of June 12, 1998, by and among Triangle
Pacific Corp. ("Triangle Pacific"), a Delaware corporation, Armstrong and
Sapling Acquisition, Inc. ("Sapling"), a Delaware corporation and a wholly-owned
subsidiary of Armstrong. Triangle Pacific is a leading U.S. manufacturer of
hardwood flooring and other flooring and related products and a substantial
manufacturer of kitchen and bathroom cabinets. Pursuant to the Merger Agreement,
Armstrong has commenced a cash tender offer for all of the outstanding shares
of common stock of Triangle Pacific at $55.50 per share. The tender will be
followed by a merger in which any shares not tendered into the offer will be
converted into the right to receive the same price in cash. As of May 15, 1998,
there were approximately 16.95 million shares of Triangle Pacific stock
outstanding on a diluted basis, making the total equity value of the transaction
equal to approximately $890 million (including the proceeds from the exercise of
outstanding stock options and warrants) and implying a total Triangle Pacific
enterprise value of approximately $1,150 million, including Triangle Pacific's
net indebtedness of approximately $260 million as of April 3, 1998. Consummation
of the tender offer is subject to a number of conditions including the condition
that at least a majority of Triangle Pacific's outstanding shares, on a diluted
basis, be tendered into the offer. Shareholders of Triangle Pacific representing
approximately 35% of Triangle Pacific's common stock on a diluted basis have
agreed, subject to certain exceptions, to tender (and not thereafter withdraw)
their shares pursuant to and in accordance with the terms of the offer.
Basis of Presentation
The Unaudited Condensed Combined Pro Forma Balance Sheet as of March 31, 1998,
gives effect to the acquisition of Triangle Pacific's business by Armstrong as
if the acquisition, accounted for as a purchase, had occurred on that date. The
Unaudited Pro Forma Condensed Combined Statements of Earnings for the year ended
December 31, 1997, and three months ended March 31, 1998, give effect to the
acquisition of Triangle Pacific's business by Armstrong as if the acquisition,
had occurred on January 1, 1997 and 1998, respectively. The pro forma
information is based on historical financial statements of Triangle Pacific and
Armstrong after giving effect to the proposed transaction using the purchase
method of accounting and the assumptions and adjustments in the accompanying
notes to the pro forma financial statements. Armstrong will continue its study
to determine the fair value of the acquired assets and liabilities. The pro
forma financial statements have been prepared on the basis of preliminary
estimates.
The pro forma statements have been prepared by Armstrong based upon the
financial statements of Triangle Pacific (filed with this report under Item 7
(a)). These pro forma statements may not be indicative of the results that
actually would have occurred if the combination had been in effect on the dates
indicated or which may be obtained in the future. The pro forma financial
statements should be read in conjunction with the audited financial statements
and notes of Triangle Pacific and the audited financial statements and notes of
Armstrong.
Armstrong World Industries, Inc. and Subsidiaries
Pro Forma Balance Sheet (Unaudited)
as of March 31, 1998 (amounts in millions)
Armstrong Triangle Pro-Forma Armstrong
Consolidated Pacific Adjustments Pro-Forma
Assets
Current assets:
Cash and cash equivalents $ 48.9 $ 4.7 $ (7.8) (d) $ 45.8
Accounts receivable less allowance 293.0 77.5 --- 370.5
Inventories 217.9 146.6 11.9 (a) 376.4
Income tax benefits 22.5 24.5 (a) 47.0
Other current assets 35.8 4.3 --- 40.1
-------- ------ ------- --------
Total current assets 618.1 233.1 28.6 879.8
-------- ------ ------- --------
Property, plant and equipment 1,990.8 255.6 --- 2,246.4
Less: accumulated depreciation and amortization
-------- 57.2 ------- --------
1,022.5 ------ --- 1,079.7
-------- ------- --------
Net property, plant and equipment 968.3 198.4 --- 1,166.7
Insurance for asbestos-related liabilities
291.6 0.0 --- 291.6
Investment in affiliates 173.4 0.0 --- 173.4
Goodwill 97.2 (97.2) (a)
787.4 (a) 787.4
Trademarks 38.6 --- 38.6
Deferred financing fees 4.3 (4.3) (a) 0.0
Other noncurrent assets 357.2 4.2 --- 361.4
-------- ------ ------- --------
Total assets $2,408.6 $575.8 $ 714.5 $3,698.9
======== ====== ======= ========
Liabilities and Shareholders' Equity
Current Liabilities
Short-term debt $ 135.7 $ --- $ --- $ 135.7
Current installments of long-term debt 3.5 3.9 --- 7.4
Accounts payable and accrued expenses 333.5 67.8 --- 401.3
Income taxes 39.4 6.2 --- 45.6
-------- ------ ------- --------
Total current liabilities 512.1 77.9 --- 590.0
-------- ------ ------- --------
Long-term debt 223.8 261.1 899.2 (d)
6.3 (a) 1,390.4
ESOP loan guarantee 201.8 --- --- 201.8
Postretirement and postemployment benefits 248.7 --- --- 248.7
Asbestos-related liabilities 149.9 --- --- 149.9
Other long-term liabilities 171.6 3.6 1.4 (a) 176.6
Deferred income taxes 56.2 39.3 1.5 (a) 97.0
Minority interest in subsidiaries 14.5 --- --- 14.5
-------- ------ ------- --------
Total noncurrent liabilities 1,066.5 304.0 908.4 2,278.9
-------- ------ ------- --------
Shareholder's equity:
Common stock 51.9 0.1 (0.1) (a) 51.9
Capital in excess of par value 169.0 93.9 (93.9) (a) 169.0
Reduction for ESOP loan guarantee (205.8) --- --- (205.8)
Retained earnings 1,369.0 99.9 (99.9) (a) 1,369.0
Other comprehensive income (14.5) --- --- (14.5)
Treasury stock (539.6) --- --- (539.6)
-------- ------ ------- --------
Total shareholders' equity 830.0 193.9 (193.9) 830.0
-------- ------ ------- --------
Total liabilities and shareholders' equity $2,408.6 $575.8 $ 714.5 $3,698.9
======== ====== ======= ========
The accompanying notes to unaudited condensed combined pro forma financial
statements are an integral part of these statements.
Armstrong World Industries, Inc. and Subsidiaries
Pro Forma Statements of Earnings (Unaudited)
for the Year Ended December 31, 1997
(amounts in millions)
Armstrong Triangle Pro-Forma Armstrong
Consolidated Pacific Adjustments Pro Forma
NET SALES $2,198.7 $652.9 $ --- $2,851.6
Cost of goods sold 1,461.7 495.3 --- 1,957.0
Selling, general and administrative expense 385.3 80.5 19.7 (e) 485.5
Goodwill Amortization 2.6 (2.6) (f) 0.0
Equity (Earnings) loss from
affiliates 29.7 --- --- 29.7
-------- ------ ------ --------
Operating income 322.0 74.5 (17.1) 379.4
Interest expense 28.0 22.9 58.4 (g) 109.3
Other (income) expenses, net (2.2) --- --- (2.2)
-------- ------ ------ --------
Earnings before income taxes 296.2 51.6 (75.5) 272.3
Income taxes 111.2 19.8 (19.5) (h) 111.5
-------- ------ ------ --------
NET EARNINGS $ 185.0 $ 31.8 $(56.0) $ 160.8
======== ====== ====== ========
Net earnings per share of common stock:
Basic $ 4.55 $ 3.96
Diluted $ 4.50 $ 3.92
Average number of common shares outstanding
Basic 40.6 40.6
Diluted 41.0 41.0
The accompanying notes to unaudited condensed combined pro forma financial
statements are an integral part of these statements.
Armstrong World Industries, Inc. and Subsidiaries
Pro Forma Statements of Earnings (Unaudited)
for the Three Months Ended March 31, 1998
(amounts in millions)
Armstrong Triangle Pro-Forma Armstrong
Consolidated Pacific Adjustments Pro Forma
NET SALES $543.1 $173.4 $ --- $716.5
Cost of goods sold 362.7 133.5 --- 496.2
Selling, general and administrative expense 104.0 22.2 4.9 (e) 131.1
Goodwill Amortization 0.7 (0.7) (f) 0.0
Equity (Earnings) from affiliates (0.7) --- --- (0.7)
------ ------ ------ ------
Operating income 77.1 17.0 (4.2) 89.9
Interest expense 6.6 6.2 14.6 (g) 27.4
Other (income) expenses, net (1.0) --- --- (1.0)
------ ------ ------ ------
Earnings before income taxes 71.5 10.8 (18.8) 63.5
Income taxes 25.0 4.1 (4.9) (h) 24.2
------ ------ ------ ------
NET EARNINGS $ 46.5 $ 6.7 $(13.9) $ 39.3
====== ====== ====== ======
Net earnings per share of common stock:
Basic $ 1.17 $ 0.99
Diluted $ 1.15 $ 0.97
Average number of common shares outstanding
Basic 39.8 39.8
Diluted 40.5 40.5
The accompanying notes to unaudited condensed combined pro forma financial
statements are an integral part of these statements.
Notes to Unaudited Condensed Combined Pro Forma Financial Statements
a) The acquisition is to be accounted for as a purchase business combination.
The purchase price, including acquisition costs, has been allocated as follows
(see note b):
(in millions) March 31, 1998
---------------
Purchase price:
Acquisition of outstanding shares of common stock $ 818.8
Effect of assumed exercise of employee and
director stock options and outstanding
warrants 70.1
Tax benefit on exercise of options and
warrants (24.5)
Acquisition expenses 18.1
Book value of net assets acquired (193.9)
-------
Excess of purchase price over net assets acquired $ 688.6
=======
Allocation of purchase price:
Increase in inventory value to convert from LIFO to current cost $ 11.9
Elimination of deferred financing fees (4.3)
Elimination of acquired goodwill (97.2)
Adjust senior notes to redemption price (at August 1, 1998) (6.3)
Adjustment to pension liability to reflect projected benefit obligation and
a change in discount rate assumptions (1.4)
Net increase in deferred tax liabilities (1.5)
Goodwill 787.4
-------
$ 688.6
=======
The purchase price allocation is preliminary and further refinements are likely
to be made based on the completion of final valuation studies.
b) Represents the cash purchase of 100% of Triangle Pacific's outstanding
common stock (14,752,345 shares at March 31, 1998 at $55.50 per share, or
$818.8 million).
c) In accordance with the merger agreement, Triangle Pacific will cancel all
outstanding options and warrants and pay to the holders of such options and
warrants cash equal to the difference between the offer price and the
exercise price. As of March 31, 1998, 2,183,540 options and warrants with an
average fair value of $32.10 were held by officers and directors of Triangle
Pacific. Triangle Pacific will record an expense of $70.1 million before tax
($45.6 million after tax) related to these options and warrants. In
addition, Armstrong will pay Triangle Pacific for the payments
related to the cancellation of these options.
The total amount of cash payments related to outstanding shares of common
stock and the options held by officers and directors of Triangle Pacific and
warrants is as follows:
March 31,
1998
----
(millions)
Cash purchase of Triangle Pacific outstanding common stock $818.8
Expense for cancellation of outstanding options and warrants 70.1
------
Total $888.9
======
(d) The acquisition financing is expected to include the issuance by Armstrong
of public and/or private short and long-term debt securities. The long-term
debt issued is expected to be comprised of short-term notes, which will be
characterized as long-term debt for accounting purposes because the notes
will be backed by a long-term debt facility, and term debt.
March 31, 1998
(millions)
Details of acquisition financing:
Uses of cash requirements:
Acquisition of outstanding shares of common stock $818.8
Reimbursement for payment for exercise of
officers and directors options and
outstanding warrants 70.1
Acquisition costs 18.1
------
Total cash requirements $907.0
======
Sources of cash requirements:
Long-term debt issuance, estimated interest rate 6.5% $899.2
Cash from internal sources 7.8
------
Total cash requirements $907.0
======
(e) Represents the amortization of goodwill of $787.4 million over a 40 year
amortization period, or $19.7 million per year.
(f) Represents an adjustment to general expenses to eliminate amortization of
the goodwill acquired from Triangle Pacific.
(g) Represents interest expense related to the long-term debt identified in (d)
above.
(h) Represents income tax benefits related to pro forma adjustments at the
effective rate.
(i) The unaudited condensed combined pro forma financial statements exclude the
effect of the potential acquisition of DLW Aktiengesellschaft announced on
June 5, 1998.