ITEM 1. Business
GENERAL
WinsLoew Furniture, Inc. (the "Company" or "WinsLoew") designs, manufactures and distributes casual furniture, contract seating and ready-to- assemble ("RTA") furniture.
Casual Furniture. WinsLoew produces and distributes casual furniture for both the residential and contract markets. WinsLoew's residential products are constructed of extruded and tubular aluminum, wrought iron and cast aluminum. WinsLoew markets its residential products through independent sales representatives primarily to specialty patio stores, department stores and furniture stores. WinsLoew's contract products are constructed of extruded, tubular and cast aluminum, steel, wrought iron, wood and fiberglass. Contract products are marketed primarily through an in-house sales force, primarily to apartment developers and management companies, hospitality providers (hotel, motel, restaurants, country clubs and resorts), and city and state municipalities. During the third quarter of 1997, the Company disposed of certain assets of its Lyon Shaw wrought iron furniture manufacturing business in the casual furniture product line (See Note 3 of Notes to the Financial Statements).
Contract Seating. WinsLoew assembles and distributes contract seating products constructed of contemporary, traditional and transitional styles of wood and metal. Products include upholstered chairs, sofas and love seats offered in a variety of finish and fabric options. Products are designed for use in the restaurant, lodging, office, healthcare facilities and retail stores. These products are assembled pursuant to specific orders and are distributed to a broad customer base which includes architectural design firms, office furniture dealers, and restaurant and lodging chains through independent sales organizations.
RTA Furniture. WinsLoew's RTA products consist of a promotionally priced product line, upper priced ergonomically designed products and extensive line of futons and related accessories. Futons (as used herein) consists of a frame, mattress and cover which easily converts from a comfortable sofa to a bed. WinsLoew designs, manufactures, and distributes RTA promotionally priced "spindle" and "flatline" furniture designed for household use. Products include coffee tables, end tables, wall units, desks, children's furniture and rolling carts. Distribution is primarily through mass merchants and catalog wholesalers. WinsLoew's upper priced ergonomically designed "space savers" include computer desks, work stations and modular units. Marketing of these products is through in-house and independent sales representatives to office furniture wholesalers and catalog firms. Futons are manufactured in a variety of styles and finishes, and are constructed of selected hardwood and pine. The Company manufactures the futons and accessories, including coffee tables and end tables. In addition, the Company imports a line of frames from Indonesia. Futon products are distributed through specialty retailers, selected mass merchants, and national accounts.
During 1997, the Company adopted a plan to dispose of its "RTA" operations and recorded a pretax non-cash charge totaling $12.4 million in the fourth quarter of 1997 relating to the disposal of the "RTA" operations (See Note 2 of Notes to the Financial Statements for a summary of the charges). The Company plans to sell two of the businesses and is in the process of liquidating the assets related to the futon business.
PRODUCT LINES
WinsLoew has two principal product lines (Casual Furniture and Contract Seating) that are produced or distributed in 4 manufacturing locations as follows:
DIVISION AND LOCATION PRINCIPAL PRODUCTS PRINCIPAL CUSTOMERS
CASUAL FURNITURE:
Winston Residential casual Specialty patio stores, Haleyville, Alabama furniture constructed department stores and of aluminum furniture stores
Texacraft Contract casual Apartment developers Houston, Texas furniture constructed and management of aluminum, wrought companies, hospitality iron, wood and fiberglass providers and manufactures
Winston International Imported residential Specialty patio stores, Haleyville, Alabama casual furniture department stores and constructed of cast furniture stores aluminum and wrought iron
CONTRACT SEATING:
Loewenstein Contemporary, transitional Architectural design Pompano Beach, Florida and traditional seating for firms, restaurant and hospitality, office and lodging chains, office other institutional uses furniture dealers and retail store planners
Gregson Traditional office and Office furniture dealers Liberty, North Carolina other institutional seating and lodging chains
The Company's third product line, RTA, was produced and distributed out of three manufacturing facilities during 1997 as follows:
Southern Wood Promotional RTA furniture Mass merchandisers and Sparta, Tennessee catalog wholesalers
Continental Ergonomically designed Catalog firms and office Irwindale, California space savers for home and furniture wholesalers office use
New West Futons, frames, covers, and Specialty retailers and Cookeville, Tennessee related accessories selected mass merchandisers
COMPETITIVE STRENGTHS
WinsLoew believes that it has the following competitive strengths.
Casual Furniture. Management attributes casual furniture's historical success to its: (i) commitment to producing a quality product delivered "in time and on time", (ii) emphasis on providing extensive customer service, (iii) cost- efficient manufacturing operations, (iv) innovatively styled products and merchandising programs, and (v) results-oriented management, team philosophy and culture. Management believes that WinsLoew can continue the growth it has experienced in the casual furniture line by capitalizing on its existing distribution channels, manufacturing capabilities and reputation for quality and customer service. Specifically, WinsLoew intends to grow in its existing market through: (i) continued leadership in new products and merchandising programs, (ii) expanding existing market penetration, (iii) broadening distribution channels, (iv) developing off season products for its distribution channel and other channels, (v) expanding the Winston International division's product line.
Contract Seating. WinsLoew is committed to providing value to its contract seating customers by offering innovative designs, a broad range of high quality products at competitive prices and responsive customer service with quick and timely delivery. WinsLoew ensures that its products provide both superior structural integrity and aesthetic styling through its adherence to strict manufacturing and quality control standards and through its long-standing and frequently exclusive relationships with a number of leading Italian designers and manufacturers. These suppliers have extensive experience in the design, engineering and production of contemporary and transitional-styled chairs. The suppliers use steam-bending of solid wood components, intricate joinery and other sophisticated manufacturing techniques generally unavailable in the United States. In addition, WinsLoew's electrostatically applied, ultraviolet cured wood finishing system produces one of the most consistent, durable and vibrant finishes in the industry. The system also increases manufacturing efficiency and reduces waste and air emissions. WinsLoew's commitment to providing high levels of customer service is also typified by its policies of paying freight charges if a guaranteed shipping date is missed and, under its "Quick Ship" program, guaranteeing shipment of a significant portion of its product line within 10 working days from receipt of a customer's order.
WinsLoew offers a broad selection of wood, metal and upholstered chairs, sofas and love seats designed for restaurant, lodging, office and other institutional uses, with prices generally ranging from $150 to $550. WinsLoew's custom design capabilities also allow it to modify styles, materials and production in order to provide customers with products that meet particular specifications. WinsLoew's strategy of offering a broad selection of product styles and price ranges provides it with access to distribution channels serving a variety of end users, including restaurants, hotels, healthcare facilities, retail store planners, corporate offices, schools, sports facilities, airport lounges and cruise lines.
RTA Furniture. WinsLoew's RTA furniture product line consists of three products: (i) promotionally priced RTA products sold directly to mass merchandisers and catalog wholesalers under the Southern Wood name, (ii) upper priced ergonomically designed "space savers", consisting of modular computer workstations, sold to catalog firms and office furniture wholesalers under the MicroCentre name, and (iii) futons, frames, covers and accessories under the New West name. Southern Wood's low cost structure is based on its use of inexpensive raw materials, its relatively low labor rates and its use of equipment to achieve cost savings. WinsLoew believes that its focused price strategy will allow the Company to maintain or increase market share and provide opportunities for product line extensions. WinsLoew believes Continental increases its opportunities for growing furniture distribution channels without incurring significant marketing and selling expenses. During 1997, the Company decided to discontinue the operation of its RTA product line and currently has the Continental and Southern Wood businesses for sale.
Also during 1997, the Company discontinued the manufacturing and distribution of futons and accessories and started the process of liquidating the assets of this operation.
BUSINESS STRATEGY
Casual Furniture
The business strategy of the Casual Division emphasizes the following elements:
Expansion of Sales and Market Share. WinsLoew's growth objectives for the casual furniture line are primarily focused on areas where WinsLoew can capitalize on its existing distribution channels, manufacturing capabilities and reputation for quality and customer service, including: (i) new product introductions in WinsLoew's extruded and tubular aluminum and International divisions, (ii) expansion into new geographic areas, particularly west of the Rocky Mountains, and (iii) increased sales to commercial customers such as hotels, restaurants, country clubs, interior designers and apartment and hotel developers.
Provide Value to Customers. WinsLoew is committed to providing value to its retailing customers by designing and manufacturing high quality, competitively priced products and responding to its customers' needs for "in time and on time" delivery. WinsLoew maintains a strong customer service orientation that is typified by its PDQ shipping program, where WinsLoew either ships within 15 business days after credit approval or pays for the freight costs. Quick delivery is particularly important to casual furniture retailers because of the short selling season and the retailer's general desire to minimize inventory levels. Another principal component of WinsLoew's marketing strategy is its focus on special sales programs for customers. These programs also reduce the effects of seasonality on WinsLoew's operations and minimize WinsLoew's finished good inventory.
Commitment to Product and Industry Leadership. Management believes that the high fashion style and variety of WinsLoew's casual furniture designs provide a strong competitive advantage and WinsLoew therefore devotes significant resources to new product development and introductions.
Enhanced Use of Manufacturing Capabilities. WinsLoew operates approximately 295,000 square feet of manufacturing space for casual furniture products and produces most of such products from basic raw materials using strict quality control measures. WinsLoew's vertical integration permits WinsLoew to: (i) produce a variety of chairs, tables and other furniture products, (ii) manufacture cushions and (iii) cut and assemble the fabric covers that are combined with preassembled poles to produce outdoor umbrellas. WinsLoew also maintains strict cost containment measures in order to ensure that its products are manufactured in a cost-efficient manner.
Develop or Acquire Complementary Product Lines. WinsLoew continues to seek opportunities to develop or acquire complementary product lines in order to capitalize on its existing distribution channels, manufacturing capabilities and reputation for quality and customer service.
Contract Seating
The business strategy of the contract seating divisions emphasizes the following elements:
Historical Base Business. WinsLoew's base contract seating business has historically been concentrated within the hospitality market. This market has fluctuated with general economic cycles because many end users defer expenditures for building new or refurbishing existing restaurant and lodging facilities during economic downturns. Based upon its past experience, the management believes that WinsLoew's core hospitality business will grow as expenditures by the hospitality industry increase for new construction and refurbishment of restaurants and lodging facilities.
Private Label Program. WinsLoew offers a "private label" program through which contract seating products are marketed to nationally recognized designers and manufacturers of office furniture systems. WinsLoew believes that its success in generating private label business is primarily attributable to its proven ability to produce a quality product on short lead time, its state-of-the-art finishing capabilities, its competitive prices and the direct involvement of its senior executives in private label marketing.
Develop or Acquire Complementary Product Lines. WinsLoew continues to seek opportunities to develop or acquire complementary product lines in order to capitalize on its existing distribution channels, manufacturing capabilities and reputation for quality and customer service.
RTA Furniture
The business strategy of the RTA division emphasizes the following elements:
WinsLoew seeks to increase its promotional RTA product sales by marketing its products to its core customer base and to broader channels of distribution within the furniture industry, including national accounts and selected mass merchants. The Company has increased its independent sales representative force and prepared new sales literature. Continental Engineering is in the process of increasing its product offering of ergonomically designed furniture, strengthening its in-house sales force and making its products available through broader channels of distribution. In each of these operations, WinsLoew seeks to take advantage of its position as a low cost producer.
During 1997, the Company adopted a plan to dispose of its "RTA" operations and recorded a pretax non-cash charge totaling $12.4 million in the fourth quarter of 1997 relating to the disposal of the "RTA" operations (See Note 2 of Notes to the Financial Statements for a summary of the charges). The Company plans to sell two of the businesses and is in the process of liquidating the assets related to the futon business.
PRODUCTS
WinsLoew designs, manufactures and distributes two principal product lines: (i) casual furniture for both the residential and contract markets and (ii) contract seating designed for restaurant, lodging, office or other general institutional use. During 1997, the Company decided to discontinue its RTA product line.
Casual Furniture
WinsLoew's casual furniture products for residential use consist principally of medium to upper-medium priced indoor and outdoor furniture sold under three brand names: "Winston" residential extruded and tubular aluminum furniture, "Texacraft" contract casual furniture, and "Winston International" imports casual furniture. WinsLoew currently manufactures and sells numerous style collections that include traditional, European, and contemporary design patterns. Within each style collection there are multiple products including chairs, tables, chaise lounges and accessory pieces such as ottomans, cocktail tables, end tables, tea carts and umbrellas. WinsLoew offers extruded and tubular aluminum with glider action, adjustable positions and rocking and swivel motions. WinsLoew's casual seating products feature cushions and vinyl strapping in a variety of colors and patterns. All of WinsLoew's casual furniture products feature a durable painted finish which is also offered in a wide selection of colors. The suggested retail prices for a table and four chairs currently range from approximately $600 to $1,400.
WinsLoew's casual contract products include chairs, chaise lounges, tables and umbrellas constructed of extruded, tubular and cast aluminum, steel, wrought iron, wood and fiberglass. WinsLoew's casual contract products include a selection of restaurant and outdoor seating and site furnishings. Casual contract products are marketed through Company and independent sales representatives, primarily to apartment developers and management companies, hospitality providers (hotel, motel, restaurants, country clubs, and resorts) and city and state municipalities.
WinsLoew continually reviews and evaluates its casual furniture designs, and annually adds and discontinues designs it deems appropriate. WinsLoew identifies trends in shapes, colors and patterns through independent research, contacts with WinsLoew's dealers and the occasional use of independent designers. Management also solicits opinions from its manufacturer's representatives, dealers and employees prior to final design selection. WinsLoew has generally replaced or modified approximately one-third to one-half of its casual furniture product lines annually. The costs of implementing these annual changes have historically included certain: (i) research and development costs; (ii) capital expenditures for tooling; and (iii) advertising and catalog expenses. Shipments of WinsLoew's new designs generally begin in September of each year.
Contract Seating
WinsLoew's contract seating products (other than the casual contract products described above) include wood, metal and upholstered chairs, as well as reception area love seats and sofas. WinsLoew's broad product line consists of numerous distinct models of chairs in contemporary, traditional and transitional styles. WinsLoew's general merchandising strategy for contract seating is to provide innovative seating products that are practical, comfortable, sturdy and moderately priced.
Wood frames are produced from a variety of wood species and are finished with one of WinsLoew's numerous standard colors or can be finished to customer's specification. WinsLoew's metal chairs are available in chrome or in a selection of standard powder coat finishes. For upholstered products, the customer may select from a number of catalog fabrics, vinyls and leathers or may specify or supply its choice of materials. WinsLoew maintains an inventory of unassembled chair components that enables it to respond quickly to large quantity orders in a variety of finish and fabric combinations. See " --- Manufacturing."
WinsLoew believes that an important element of its success in the contract seating business is its long-standing and frequently exclusive relationships with leading Italian design firms, as well as its proven ability to offer innovative products that are sturdy, aesthetically appealing and scaled for the United States market. This belief is based upon WinsLoew's extensive industry experience and discussions with key customers, sales representatives and competitors. WinsLoew continually reviews and reconsiders its contract furniture designs, and annually adds and deletes designs as it deems appropriate to address perceived marketing opportunities. WinsLoew generally begins the design process by identifying marketing needs and conceptualizing product ideas through regular meetings of its senior management team. Reflecting its focus on both sales and manufacturing, WinsLoew also solicits opinions with respect to trends in styles, colors and other design elements from its sales representatives, customers, and employees prior to final design selection. Preliminary sketches are provided to either WinsLoew's manufacturing personnel or WinsLoew's European suppliers, who in turn engineer the product's construction and produce one or more prototypes in preparation for actual full-scale production. New products are generally introduced at national or regional furniture markets. WinsLoew's custom design capabilities also allow it to modify styles, materials and production in order to provide customers with products that meet their particular needs.
RTA Furniture
WinsLoew's promotionally priced RTA furniture "spindle" products include coffee tables, end tables, wall units, desks, chairs, children's furniture and rolling carts. Promotionally priced furniture products also include "flatline" products such as bookcases and wall units. RTA products also include ergonomically designed "space savers", including modular desk and computer workstations. WinsLoew's futon products consisted of futons (mattresses), frames, covers and related accessories. Frames were constructed of hardwood and pine, and came in a variety of sizes. Hardwood frames were finished in a variety of stains, while pine frames were unfinished. Futons were constructed of fabric shells stuffed with foam and cotton. Covers for futons were available in a variety of fabrics. Accessories included ottomans, end tables and cocktail tables. Frames were sold unassembled in a box containing all components, hardware, and instructions necessary for assembly. In addition to manufactured frames, the Company imported and distributed frames that accounted for approximately one half of the frames sold.
RTA furniture products are sold unassembled in a box that contains all components and hardware necessary for home-assembly. WinsLoew's merchandising approach for RTA furniture products emphasizes products with a stable, predictable demand, as well as self-service convenience. For example, the lithographed product boxes include color pictures, a listing of product features and assembly instructions that allow retailers to utilize available floor space and shelf space efficiently.
MANUFACTURING
Casual Furniture
WinsLoew has manufacturing facilities for casual furniture products in Haleyville, Alabama, and Houston, Texas. The facilities in Haleyville manufacture extruded and tubular aluminum casual furniture and most related accessories, including cushions and umbrellas. In the Houston facility, the Company manufactures extruded and tubular aluminum, steel and wood furniture. WinsLoew's goal at its facilities is to produce a high quality product at the lowest possible manufacturing cost and deliver it in a timely manner to dealers. WinsLoew's international products are manufactured in Mexico. See "-- - -Marketing and Sales."
Winston Division - Haleyville, Alabama. WinsLoew's aluminum furniture manufacturing facility in Haleyville manufactures goods exclusively to order. Products are normally shipped on the day completed, eliminating the need to maintain finished goods inventory. WinsLoew provides timely delivery service by typically shipping goods within three weeks after credit approval.
In the manufacturing process, extruded aluminum tubes are cut to size and shaped or bent in specially designed machinery. The aluminum is then welded to form a solid frame, and the frame is subjected to a grinding and buffing process to eliminate any rough spots that may have been caused during welding. After this process is completed, the frame is cleaned, painted in a state-of- the-art powder coating system and heat cured. WinsLoew then adds vinyl strapping, cushions, fabric slings, or other accessories to the finished frame, as appropriate. The product is then packaged with umbrellas, tempered glass and other accessories, as applicable, and shipped to the customer.
WinsLoew's Haleyville facilities were extensively refurbished and modernized in late 1984 and significantly expanded in 1990 and 1993. WinsLoew believes that its Haleyville facilities are some of the most modern in the casual aluminum furniture industry, and that the efficiencies attributable to these plants are a significant factor in WinsLoew's relatively low manufacturing costs.
WinsLoew's vertical integration provides additional manufacturing efficiencies. WinsLoew manufactures cushions for its aluminum furniture in Haleyville, and, in addition, cuts, sews and assembles the fabric covers that are combined with pre-assembled poles to produce outdoor umbrellas.
WinsLoew believes that it manufactures the highest quality aluminum casual furniture in its price range. The major frame components of the aluminum furniture are welded, and not riveted or bolted, thereby increasing the durability and enhancing the appearance of the aluminum product line. The powder coated painting process results in an attractive and durable finish. To ensure that only the highest quality products are shipped to customers, WinsLoew's quality control department has established control check points where the quality of 100% of its aluminum products is examined during the manufacturing process. These processes allow WinsLoew to offer a two-year frame and finish guarantee on all of its aluminum products for residential use. Warranty expense to date has been negligible.
Texacraft Division - Houston, Texas. WinsLoew's Houston facility includes an aluminum furniture manufacturing facility with processes essentially the same as WinsLoew's aluminum line in Haleyville. Additionally, the Houston facility manufactures steel and wood furniture and includes a fiberglass manufacturing facility for tables, umbrellas, and accessories.
Contract Seating
WinsLoew currently utilizes approximately 226,000 square feet of manufacturing space for contract seating production in facilities located in Florida and North Carolina.
Loewenstein Division - Pompano Beach, Florida. This facility assembles and finishes to customer order most of WinsLoew's contract seating products (other than the casual contract products described above). Component parts are either purchased from a variety of suppliers, including a number of European manufacturers, or manufactured by WinsLoew's Gregson division. The principal elements of wood chair assembly include: (i) frame glue-up, (ii) sanding, (iii) seat assembly (in which upholstered seats are constructed from component bottoms, foam padding and cloth coverings) and (iv) painting/lacquering. To provide consistency and speed in this finishing process, WinsLoew utilizes a state-of-the-art conveyorized paint line with electrostatic spray guns and a three-dimensional ultraviolet drying system. For upholstered products, the specified fabric cloth is stretched to the chair frame over foam padding. Metal chairs are generally assembled from imported components. After rework and leveling, chairs are cartoned to prevent damage in transportation. The manufacturing process also includes a number of product inspections and other quality control procedures.
Gregson Division - Liberty, North Carolina. This manufacturing facility is vertically integrated and includes such operations as kiln-drying, cutting, planing, gluing, veneering, sanding, routing, carving, shaping, assembling, upholstering, and finishing. Based on WinsLoew's experience during the past several years, WinsLoew believes that this manufacturing flexibility minimizes the risks of relying on third-party suppliers for component parts and frequently permits a faster response to customer needs. While styling is continuously updated, the basic construction process does not change significantly from year to year, which reduces the need for substantial modifications to the production process.
RTA Furniture
Southern Wood Division - Sparta, Tennessee. This facility constructs RTA furniture from high density particle board, dowels and wood scrap materials. The particle board is available from various manufacturers. For "spindle" furniture, the dowels and wood scrap materials are available from various sources and are generally the by-product of other processes such as the production of wooden tool handles and dimension stock. WinsLoew is generally able to purchase these scrap materials at an attractive cost because the primary alternative use for such materials is as a waste fuel source. A wood grain pattern is imprinted on the particle board using a laminating process, and these boards are then cut to the proper length and width, shaped and completed with plastic molding. Spindles are produced by automated lathes, sanded, stained and lacquered. Each piece of furniture is individually boxed and includes board, spindles, bolts and assembly instructions. This business is currently being held for sale.
Continental - Irwindale, California. This facility designs and manufactures ergonomically designed "space savers", modular computer desks and workstations. The particle board is laminated and then cut and drilled, if necessary, on automated machinery. The board moves from station to station on a conveyor system, which moves material through the facility. The individual pieces then have the appropriate hardware attached, and then are boxed along with assembly instructions. This business is currently being held for sale.
New West Futon Division - Sparta, Tennessee. During 1997, this facility manufactured futons, chairs, tables and related accessories marketed under the New West trademark. The futon unit consisted of three distinct components: frame, mattress and cover. Each of these components were manufactured, although WinsLoew purchased some items both domestically and overseas. Dimension stock was then assembled as a frame and one of a variety of finishes was applied to the frame. The mattress was produced with specialized equipment and was usually filled with cotton. however, upgrades included polyurethane foam and pocketed coil springs. Finally, covers, in a wide variety of fabric options (including the customer's own materials), were cut and sewn to fit the mattress. Each of these components were then boxed and sold separately or in combination. As of November 21, 1997, this operation was closed down and its assets are in the process of being liquidated.
Manufacturing Capacity
Management believes that the Company's manufacturing facilities in the casual and contract seating product lines are currently operating, in the aggregate, at approximately 75% of capacity, assuming a one-shift basis. Management considers the Company's present manufacturing capacity to be sufficient for the foreseeable future and believes that, by adding multiple shift operations, the Company can significantly increase the total capacity of its facilities to meet growing product demand with minimal additional capital expenditures. In addition, the Company engages in an ongoing maintenance and upgrading program, and considers its machinery and equipment to be in good condition and adequate for the purposes for which they are currently used.
The Company plans to dispose of its futon division facilities in Tennessee.
MARKETING AND SALES
Casual Furniture
WinsLoew markets its residential casual furniture products throughout the United States, Canada and the Caribbean. Substantially all of WinsLoew's residential sales are currently made to customers located east of the Rocky Mountains. WinsLoew's residential products are marketed to approximately 800 active customers, including specialty patio stores, full-line furniture retailers, and department stores. WinsLoew also sells its contract casual products to certain commercial end-users such as hotels, restaurants, country clubs, exporters, interior designers and developers of apartments and motels.
Substantially all of WinsLoew's residential products are sold through approximately 30 independent manufacturer's representatives. Each representative: (i) is assigned a territory in which to promote, solicit and sell WinsLoew's products, (ii) agrees to assist in the collection of receivables and adjustment of any complaints with regard to his or her sales and (iii) receives commissions based on the net sales made in his or her territory. WinsLoew determines the prices at which its products will be sold and may refuse to accept any orders submitted by a sales representative for credit-worthiness or other reasons. WinsLoew's representatives may carry other products which do not directly compete with WinsLoew's product lines. WinsLoew has long-standing relationships with most of its representatives.
WinsLoew's marketing program assists its representatives in various ways, including: (i) holds exhibitions at national and regional furniture shows and leases a year-round showroom at the Merchandise Mart in Chicago, Illinois, (ii) provides retailers with annual four-color catalogs of its products, sample materials illustrating available colors and fabrics, point of sale materials and special sales brochures, (iii) provides information directly to representatives at annual sales meetings attended by senior management and manufacturing personnel, (iv) maintains a customer service department which ensures that WinsLoew promptly responds to the needs and orders of WinsLoew's customers, (v) maintains regular contact with key retailers and (vi) conducts ongoing surveys to determine dealer satisfaction. WinsLoew's casual contract products are marketed nationally through a team of company and independent sales representatives.
The Winston International division of WinsLoew was organized primarily for the purpose of distributing casual furniture products that are not manufactured by WinsLoew. Winston International's current product offerings include a line of cast aluminum products. This product line is inventoried, distributed and administered in Haleyville, Alabama.
Contract Seating
WinsLoew's hospitality and other institutional contract seating products are sold primarily to architectural design firms, restaurant, lodging chains, office furniture dealers and retail store planners. WinsLoew's office and other institutional seating products are sold primarily to office furniture dealers and lodging chains. Substantially all of WinsLoew's contract seating products are sold through approximately 40 independent sales representative organizations that employ approximately 100 sales associates. Each sales representative: (i) promotes and sells WinsLoew's products in an assigned territory, (ii) assists WinsLoew in responding to customer service request and (iii) receives commissions based on the net sales made in his or her territory. WinsLoew determines the prices at which its products will be sold, and may refuse to accept any orders submitted by a sales representative for creditworthiness or other reasons.
WinsLoew's marketing program assists its representatives in various ways, including: (i) holds exhibitions at national shows, (ii) provides its representatives and customers with four color catalogs of its products, (iii) provides information to representatives at sales meetings and (iv) maintains a customer service department that ensures WinsLoew promptly responds to the needs and orders of customers.
RTA Furniture
WinsLoew's promotional RTA furniture products are sold primarily by outside sales representatives. The Company distributes price lists and catalogs of its products. Promotionally priced RTA products are sold primarily to mass merchandisers, discounters and warehouse clubs.
Upper priced "space savers" are sold by a team of in-house and independent representatives primarily to catalog and office furniture wholesalers. Product catalogs, brochures and price lists are prepared by the Company as sales material for its salespersons. Additionally the Company purchases "pages" in catalogs issued by the wholesalers as a means of marketing its products to retailers. The Company holds exhibitions at national shows and maintains a customer service department to ensure WinsLoew promptly responds to the needs and orders of customers.
BACKLOG
As of December 31, 1997, WinsLoew's backlog of orders was approximately $17.6 million, compared to $13.1 million at December 31, 1996. WinsLoew, in accordance with industry practice, generally permits orders to be canceled prior to shipment without penalty. Management does not consider backlog to be predictive of future sales activity because of WinsLoew's short manufacturing cycle and delivery time, and, especially in the case of casual furniture, the seasonality of sales.
RAW MATERIALS AND FOREIGN SOURCING
WinsLoew manufactures most of its products to order from basic raw materials, and, consequently, is able to avoid carrying large amounts of finished goods inventory particularly in its casual and contract seating product lines. WinsLoew also attempts to maintain minimum levels of raw material inventory. WinsLoew's principal raw materials consist of extruded aluminum tubes, steel rods, woven vinyl fabrics, paint/finishing materials, vinyl strapping, cushion filler materials, cartons, glass table tops, component parts for contract seating, particle board and other lumber products and hardware. Although WinsLoew has no long-term supply contracts, it generally has a number of sources for its raw materials and has not experienced any significant problems in obtaining adequate supplies for its operations. Nevertheless, the purchase of aluminum is, from time to time, highly competitive, and its price, as a commodity, is subject to market conditions beyond WinsLoew's control. In addition, fluctuations in lumber prices and the costs of other raw materials have not historically had a material adverse effect on WinsLoew's results of operations.
However, there can be no assurance that future price increases will not have a material adverse effect on WinsLoew's financial condition and results of operations. Management believes that WinsLoew's policy of maintaining several sources for most supplies contributes to its ability to obtain competitive pricing.
A significant portion of the Loewenstein raw materials consist of component chair parts purchased from several Italian manufacturers. WinsLoew views its suppliers as "partners" and works with such suppliers on an ongoing basis to design and develop new products. WinsLoew believes that these cooperative efforts, its long-standing relationships with these suppliers and its experience in conducting on-site, quality control inspections provide it with a competitive advantage over many other furniture manufacturers, including a competitive purchasing advantage in times of product shortages. In addition, in the case of Italian and European suppliers, WinsLoew generally contracts for its purchases of such component parts in such manner as to minimize its exposure to foreign currency fluctuations. Although WinsLoew has close working relationships with its foreign suppliers, WinsLoew's future success may depend, in part, on maintaining such or similar relationships. Given the special nature of the manufacturing capabilities of these suppliers, in particular certain wood-bending capabilities, and sources of specialized wood types, the Loewenstein division could experience a disruption in their operations in the event of any required replacement of such suppliers. There can also be no assurance that situations beyond WinsLoew's control, including political instability, significant and prolonged foreign currency fluctuations, economic disruptions, the imposition of tariffs and import and export controls, changes in government policies and other factors will not have a material adverse effect on WinsLoew.
FURNITURE INDUSTRY AND COMPETITION
The furniture industry is cyclical and affected by changes in general economic conditions, consumer confidence and discretionary income, interest rate levels, and credit availability. Sales of casual furniture products are also affected by weather conditions during the peak retail selling season and the resulting impact on consumer purchases of outdoor furniture products.
The furniture industry is highly competitive and includes a large number of manufacturers, none of which dominate the market. Certain of the companies which compete directly with WinsLoew may have greater financial and other resources than WinsLoew. Based on its extensive industry experience, management believes that competition in casual furniture and contract seating is generally a function of product design, construction quality, prompt delivery, product availability, customer service and price. Management similarly believes that competition in WinsLoew's promotional price niche of the RTA furniture industry is limited, and is based primarily on prompt delivery, product availability, customer service and price.
WinsLoew believes that it successfully competes in the furniture industry primarily on the basis of its innovatively styled product offerings and merchandising programs, the quality of its products, and WinsLoew's emphasis on providing high levels of customer service. While sales of imported, foreign- produced casual furniture have increased significantly in recent years, WinsLoew's sales have not been adversely affected because such foreign products are generally: (i) limited in design, styles and colors, (ii) of lesser quality than WinsLoew's products, (iii) marketed in the lower-end price range and (iv) not supported with competitive customer service and responsiveness to customers' needs for quick delivery.
TRADEMARKS AND PATENTS
WinsLoew has registered the following trademarks with the United States Patent and Trademark Office: Winston, Lyon-Shaw, Loewenstein/Oggo, From the Source, Gregson, Southern Wood Products, and LeCasso. Management believes that WinsLoew's trademark position is adequately protected in all markets in which WinsLoew does business. WinsLoew also believes that its various trade names are generally well recognized by dealers and distributors, and are associated with a high level of quality and value.
WinsLoew holds several design and utility patents, and has applications pending for issuance of other design and utility patents. Since WinsLoew believes that it is an innovator of styles and designs, it is the Company's policy to apply for design and utility patents for those designs which it believes may be of significance to WinsLoew.
EMPLOYEES
At December 31, 1997, WinsLoew had approximately 797 full-time employees, of whom 25 were employed in management, 125 in sales, general, and administrative positions, and 647 in manufacturing, shipping, and warehouse positions.
The only employees subject to collective bargaining agreements are approximately 144 of WinsLoew's hourly employees in Haleyville, Alabama, who are represented by the Retail, Wholesale, and Department Store Union. The labor agreement between WinsLoew and such union, which expires on July 31, 2001, provides that there shall be no strikes, slowdowns or lockouts. WinsLoew considers its employee relations to be good.
ENVIRONMENTAL MATTERS
WinsLoew's management believes that WinsLoew complies in all material respects with all applicable federal, state and local provisions relating to the protection of the environment. The principal environmental regulations that apply to WinsLoew govern air emissions, water quality and the storage and disposition of solvents. Compliance with environmental protection laws and regulations has not had a material adverse impact on WinsLoew's financial condition or results of operations in the past and is not expected to have a material adverse impact in the future.
On November 23, 1993, WinsLoew was named as a potentially responsible party by the United States Environmental Protection Agency ("EPA") for cleanup at the Carolawn Superfund Site in Ft. Lawn, Chester County, South Carolina. WinsLoew denied it sent any waste to the site, nor is responsible in any way for its cleanup. The EPA has produced documents showing that in 1972 (prior to the acquisition of WinsLoew's former Lyon-Shaw division), Lyon-Shaw may have had Southeastern Pollution Control, Inc. ("SEPCO") pick up waste for disposal at another site, and suspects that SEPCO may have moved some waste from that site to the Carolawn site, which it also operated. In 1987, WinsLoew purchased certain assets of Lyon-Shaw from a seller which is still in existence. The agreement did not provide for an assumption of this type of liability. Based on the percentage of the Lyon-Shaw waste to the total waste, it would appear that if WinsLoew did have any liability at the Carolawn Superfund Site, it would not exceed $4,000. In January 1998, the EPA proposed complete and final settlement at it relates to PRP where the PRP's responsibility is de mininis, and Lyon Shaw fell into this group. The Company intends to accept this settlement.
ITEM 2.
ITEM 2. Properties
The following table provides information with respect to each of the Company's facilities:
________________________________________________________________________________ | | | |Approximate| | | | | | | |Building |Approximate| | | | | | |Area | Land Area | Owned| Lease | | | | |(square) | Owned | or |Expiration| | Location | Division | Primary Use | feet) | (acres) |Leased| Date | |-----------|----------|-------------|-----------|-----------|------|----------| |Pelham, | | | | | | | | AL | All |Headquarters | 11,500 | 1.8 | Owned| N/A | |-----------|----------|-------------|-----------|-----------|------|----------| |Haleyville,| |Manufacturing| | | | | | AL | Winston | and Offices | 155,000 | 17 | Owned| N/A | |-----------|----------|-------------|-----------|-----------|------|----------| |Haleyville,| | | | | | | | AL | Winston | Warehouse | 20,000 | 1 | Owned| N/A | |-----------|----------|-------------|-----------|-----------|------|----------| |Haleyville,| | | | | | | | AL | Winston |Sewing Plant | 30,000 | 1 | Owned| N/A | |-----------|----------|-------------|-----------|-----------|------|----------| |Chicago, | Casual |Merchandise | | | | | | IL | Division |Mart Showroom| 12,000 | N/A |Leased| 8/31/02 | |-----------|----------|-------------|-----------|-----------|------|----------| |Houston, | |Manufacturing| | | | | | TX |Texacraft | and Offices | 89,500 | N/A |Leased| 4/15/05 | |----------------------|-------------|-----------|-----------|------|----------| |Pompano | |Manufacturing| | | | | |Beach, FL |Loewenstein| and Offices | 100,000 | 13.8 | Owned| N/A | |----------|-----------|-------------|-----------|-----------|------|----------| |Pompano | | | | | | | |Beach, FL |Loewenstein| Warehouse | 6,500 | N/A |Leased| 12/2/95 | |----------|-----------|-------------|-----------|-----------|------|----------| |Liberty, | |Manufacturing| | | | | | NC |Gregson | and Offices | 126,000 | 9.5 | Owned| N/A | |----------|-----------|-------------|-----------|-----------|------|----------| |Sparta, |Southern | | | | | | | TN | Wood |Manufacturing| 94,300 | 10.0 | Owned| N/A | |----------|-----------|-------------|-----------|-----------|------|----------| |Sparta/ | | |(three | | | | |Cookeville| | |facilities)| | | | | TN |New West |Manufacturing| 190,400 | 43.5 | Owned| N/A | |----------------------|-------------|-----------|-----------|------|----------| |Irwindale,| |Manufacturing| | | | | | CA |Continental| and Offices | 91,655 | N/A |Leased| 6/30/02 | |__________|___________|_____________|___________|___________|______|__________|
__________________________
	For additional information with respect to the Company's lease obligations, see Note 9 of Notes to the Company's Consolidated Financial Statements included in this Annual Report on Form 10-K.
Substantially all of the company's assets are currently pledged as collateral for a credit facility. See Note 4 of Notes to the Company's Consolidated Financial Statements included in this Annual Report on Form 10-K.
ITEM 3.
ITEM 3. Legal Proceedings
	From time to time, the Company is subject to legal proceedings and other claims arising in the ordinary course of its business. The Company maintains insurance coverage against potential claims in an amount which it believes to be adequate. Based primarily on discussions with counsel and management familiar with the underlying disputes, the Company believes that it is not presently a party to any litigation, the outcome of which would have a material adverse effect on its business or operations.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders
None
PART II
ITEM 5.
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has been listed for quotation on the Nasdaq National Market System under the symbol "WLFI" since January 1, 1995. The following table sets forth, for the period indicated, the high and low sales prices per share of Common Stock as reported by the Nasdaq National Market System:
High Low
First Quarter.......... $6 $4 7/8
Second Quarter......... $6 $5
Third Quarter.......... $8 $5
Fourth Quarter......... $10 1/8 $6 7/8
First Quarter.......... $11 7/8 $8 1/8
Second Quarter......... $11 $8 3/8
Third Quarter.......... $15 $10 15/16
Fourth Quarter......... $16 13/16 $13 5/16
As of February 27, 1998, there were approximately 117 holders of record of Common Stock. The closing sale price for the Common Stock on February 27, 1998, was $19.
The Company has not declared nor paid any cash dividends on its Common Stock, does not anticipate that any dividends will be declared nor paid in the foreseeable future, and intends to retain earnings to finance the development and expansion of the Company's operations. In addition, the Company's payment of dividends is also restricted under the terms of its credit facilities (see Note 4 of Notes to the Company's Consolidated Financial Statements).
Item 6.
Item 6. Selected Financial Data
The following selected financial data are derived from the Consolidated Financial Statements of Winsloew included elsewhere herein. The following data should be read in conjunction with WinsLoew's Consolidated Financial Statements and related notes, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other financial information included herein.
Years Ended December 31, --------------------------------------------------- 1997 1996 1995 1994 1993 (1) --------------------------------------------------- (In thousands, except per share amounts)
Income Statement Data: Net sales $114,749 $106,695 $ 95,443 $ 83,284 $77,789 Cost of sales 73,329 68,757 64,999 55,878 51,265 -------- -------- -------- -------- ------- Gross profit 41,420 37,938 30,444 27,406 26,524 Selling, general and administrative expenses 20,548 20,082 17,719 14,731 14,263 Amortization 976 1,426 2,077 2,000 1,922 Non-recurring charges -- -- 917 1,814 -------- -------- -------- -------- ------- Operating income 19,896 16,430 10,648 9,758 8,525 Interest expense 2,296 3,083 3,841 2,795 3,136 -------- -------- -------- -------- ------- Income from continuing operations before income taxes and extraordinary items 17,600 13,347 6,807 6,963 5,389 Provision for income taxes 6,686 4,822 2,739 3,068 2,172 -------- -------- -------- -------- ------- Income from continuing operations before extraordinary items 10,914 8,525 4,068 3,895 3,217 Income (loss) from discontinued operations net of taxes (471) (241) (7,519) 2,457 2,001 (Loss) from sale of discontinued operations, (8,200) -- -- -- -- net of taxes Extraordinary items -- -- (593) -- (1,223) -------- -------- -------- -------- ------- Net income (loss) $2,243 $8,284 ($4,044) $6,352 $3,995 ======== ======== ======== ======== =======
Basic earnings (loss) per share: Income (loss) from continuing operations before extraordinary items $1.46 $0.98 $0.45 $0.40 $0.40 Income (loss) from discontinued operations, (0.06) (0.03) (0.83) 0.26 0.25 net of taxes (Loss) from sale of discontinued operations, (1.10) -- -- -- -- net of taxes Extraordinary items -- -- (0.07) -- (0.15) -------- -------- -------- -------- ------ Net income (loss) per share $0.30 $0.95 ($0.45) $0.66 $0.50 ======== ======== ======== ======== =====
Weighted average shares 7,484 8,724 9,029 9,655 8,075 ======== ======== ======== ======== =======
Years Ended December 31, --------------------------------------------------- 1997 1996 1995 1994 1993(1) --------------------------------------------------- (In thousands, except per share amounts)
Dilutive earnings (loss) per share:
Income (loss) from continuing operations before extraordinary items $1.44 $0.98 $0.45 $0.40 $0.40 Income (loss) from discontinued operations, net of taxes (0.06) (0.03) (0.83) 0.26 0.25 Gain (loss) from sale of discontinued operations, net of taxes (1.08) -- -- -- -- -------- -------- -------- -------- -------
Net income (loss) per share $0.30 $0.95 ($0.45) $0.66 $0.50 ======== ======== ======== ======== =======
Weighted average shares and common share equivalents outstanding 7,563 8,730 9,029 9,655 8,075 ======== ======== ======== ======== =======
December 31, --------------------------------------------------- 1997 1996 1995 1994 1993(1) --------------------------------------------------- (In thousands) Balance Sheet Data:
Working capital $29,337 $40,102 $43,677 $51,957 $33,984 Total Assets 79,339 99,624 104,608 110,261 89,457 Long-term debt (less current portion) 15,908 38,726 40,130 39,094 21,221 Total debt 16,423 40,681 41,941 40,893 24,160 Stockholders' equity 51,026 48,400 53,228 60,680 56,536
(1)	Represents the combined results of Winston and Loewenstein, which are the predecessor companies to WinsLoew.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
General
WinsLoew is comprised of companies engaged in the design, manufacture and distribution of casual furniture and contract seating furniture. WinsLoew's casual furniture products are distributed through independent manufacturer's representatives and are constructed of extruded and tubular aluminum and cast aluminum. These products are distributed through fine patio stores, department stores and full line furniture stores nationwide. WinsLoew's contract seating products are distributed to a broad customer base which includes architectural design firms and restaurant and lodging chains.
During 1997 the Company adopted a plan to dispose of its RTA operations. WinsLoew's RTA products include ergonomically-designed computer workstations, which the Company denotes as "space savers", promotionally-priced coffee and end tables, wall units and rolling carts and an extensive line of futons, futon frames and related accessories. Distribution of RTA furniture products is primarily through mass merchandisers, catalogue wholesalers and specialty retailers. As a result of this decision, the Company recorded a pre-tax non-cash charge totaling $12.4 million in the fourth quarter of 1997 relating to the disposal of the RTA operations. The charge can be summarized as follows:
Write-off of goodwill in connection with sale of assets $ 3,902,000 Reduction of inventory value 2,791,000 Reduction of property to net realizable value 2,067,000 Reduction of accounts receivable value 1,390,000 Other liabilities / reserves 1,050,000 Accrual for losses through disposition 1,200,000 ----------- Total $12,400,000 ===========
The Company plans to sell two of the businesses and is in the process of liquidating the assets related to the futon business.
During 1995 the Company's Board of Director's adopted a plan to redirect the marketing and operations of certain of the Company's businesses. As a result of the changes to be implemented, the Company recorded a charge of $7.1 million for restructuring. This charge was the result of management's plan to make changes in the product lines, management, marketing focus and operational strategy in the Company's RTA product line. The plan included exiting certain markets and products.
The table below summarizes the charges for restructuring recorded in 1995:
Reduction in carrying value of promotionally-priced seating subsidiary held for sale $2,526,000
Reduction in carrying values of manufacturing facilities held for sale and other asset write-downs 848,000
Reduction in inventory values from exiting certain futon products 3,372,000
Severance costs for certain former management 390,000 ----------- Total $7,136,000 ===========
Management's 1995 review also identified other operating and financial issues related to ongoing operations of the Company, which were not recorded as part of the charges for restructuring. The review resulted in additional operating charges totaling $2.1 million (6.2% of net sales). These additional charges include $1.4 million for inventory which was considered excess, unusable or obsolete and $650,000 for accounts receivable which were considered uncollectable. These charges have been included in the net loss from discontinued operations in 1995. The balance of the following discussion focuses on the Company's continuing operations.
Results of Operations
The following table sets forth net sales, gross profit and gross margin as a percent of net sales for the years ended December 31, 1997, 1996 and 1995 for each of the Company's product lines (in thousands, except for percentages):
1997 1996 1995 ---------------------- ---------------------- ---------------------- Net Gross Gross Net Gross Gross Net Gross Gross Sales Profit Margin Sales Profit Margin Sales Profit Margin ------- ------- ------ ------- ------- ------ ------- ------- ------ Casual furniture $56,363 $24,164 42.9% $58,066 $23,812 41.0% $55,758 $19,681 35.3%
Contract seating 58,386 17,256 29.6% 48,629 14,126 29.0% 39,685 10,763 27.1% --------- ------- --------- ------- -------- ------- Total $114,749 $41,420 36.1% $106,695 37,938 35.6% $95.443 $30,444 31.9% ========= ======= ========= ======= ======== =======
The following table sets forth certain information relating to the Company's operations expressed as a percentage of the Company's net sales:
For the Years Ended December 31,
1997 1996 1995 Gross profit 36.1% 35.6% 31.9% Selling, general and administrative expense 17.9% 18.8% 18.6% Amortization 0.9% 1.3% 2.2% Operating income 17.3% 15.4% 11.2% Interest expense 2.0% 2.9% 4.0% Provision for income taxes 5.8% 4.5% 2.9% Income from continuing operations before extraordinary item 9.5% 8.0% 4.3% (Loss) from discontinued operations, net of taxes (0.4%) (0.2%) (7.9%) (Loss) from sale of discontinued operations, net of taxes (7.1%) --- --- Extraordinary item --- --- (0.6%) Net income (loss) 2.0% 7.8% (4.2%)
Comparison of Years Ended December 31, 1997 and 1996
Net Sales: WinsLoew's consolidated net sales for 1997 increased $8.0 million or 7.5% to $114.7 million, compared to $106.7 million in 1996. The casual product line sales increased by 7.6%, after excluding sales for the Company's wrought iron business sold during 1997. The Company believes that due to its high quality and innovative designs, existing retail customers have allocated more floor space, requiring larger inventories of the Company's casual aluminum furniture. The contract seating product line experienced a sales increase of 20.1% due to growth in the core business and increased demand from the lodging industry.
Gross Margin: Consolidated gross margin increased $3.5 million in 1997 to $41.4 million compared to $37.9 million in 1996. The casual and contract seating product lines improved gross margins in 1997 due to greater operating efficiencies, increased sales volumes and improved raw material costs.
Selling, General and Administrative Expenses: Selling, general and administrative expenses increased $466,000 in 1997, compared to 1996, due to commissions expense and other variable costs related to the increased sales volume in 1997.
Amortization: Amortization expense decreased due to the intangible assets that became fully amortized in 1996.
Operating Income: As a result of the above, WinsLoew recorded operating income of $19.9 million (17.3% of net sales) in 1997, compared to operating income of $16.4 million (15.4% of net sales) in 1996.
Interest Expense: WinsLoew's interest expense decreased $787,000 in 1997, compared to 1996. The Company has reduced its debt by $24.3 million from December 31, 1996.
Provision for Income Taxes: WinsLoew's effective tax rate from continuing operations of 38.0% in 1997 and 36.1% in 1996 is greater than the federal statutory rate due to the effect of state income taxes and non-deductible goodwill amortization.
Comparison of Years Ended December 31, 1996 and 1995
Net Sales: The Company's consolidated net sales increased $11.3 million, or 11.8% to $106.7 million in 1996 from $95.4 million in 1995. Net sales increased in both product lines. Net sales increased in the casual furniture product line 4.1%. The Company believes that due to its high quality and innovative designs, existing retail customers have allocated more floor space, requiring larger inventories of the Company's casual aluminum furniture. The contract seating product line experienced a sales increase of 22.5% due to increased demand resulting from construction in the lodging industry.
Gross Profit: The consolidated gross margin increased to 35.6% in 1996, compared to 31.9% in 1995. The casual and contract seating product lines improved gross margins in 1996, due to greater operating efficiencies and increased sales volumes. The casual product line also experienced favorable raw material costs in 1996.
Selling, General and Administrative Expenses: Selling, general and administrative expenses increased by $2.4 million in 1996, compared to 1995, due to increased commissions and other variable selling costs related to the higher volume in 1996 and an increased provision for doubtful accounts.
Amortization: Amortization expense decreased due to the intangible assets that became fully amortized in 1996
Operating Income: As a result of the above, the Company's operating income was $16.4 million (15.4% of net sales) in 1996, compared to $10.6 million (11.2% of net sales) in 1995.
Interest Expense: The Company's net interest expense decreased by $758,000 in 1996, compared to 1995. The Company had reduced its debt by $10.7 million until December 31, 1996, when it purchased $9.3 million of its common stock. This stock purchase resulted in a net debt reduction in 1996 of $1.4 million. These reductions in debt levels and the Company's increased profitability have led to improved financial ratios and, in turn, allowed the Company to pay lower spreads between the base rate and LIBOR and the rates which the Company is obligated to pay its lenders. These lower spreads decreased the Company's effective interest rate below those incurred in 1995.
Income Tax Expense: WinsLoew's 1996 effective tax rate from continuing operations of 36.1% and 40.2% in 1995 is greater than the federal statutory rate due to the effect of state income taxes and non-deductible goodwill amortization.
Extraordinary item: The Company incurred an extraordinary charge of $593,000 (net of an income tax benefit of $360,000) related to prepayment penalties and the write-off of unamortized deferred loan costs associated with the retirement of the separate credit facilities in the first quarter of 1995.
Seasonality and Quarterly Information
The furniture industry is cyclical and sensitive to changes in general economic conditions, consumer confidence, and discretionary income, interest rate levels and credit availability.
Sales of casual products are typically higher in the second quarter and fourth quarters of each year, primarily as a result of the following: (i) high retail demand for casual furniture in the second quarter, preceding the summer months and (ii) the impact of special sales programs on fourth quarter sales. The Company's casual product sales can also be affected by weather conditions during the peak retail selling season and the resulting impact on consumer purchases of outdoor furniture products. During the third quarter of 1997, the Company sold its Lyon Shaw wrought iron division (See Note 3 of the Notes to the Financial Statements).
The following table presents the Company's unaudited quarterly data for 1997 and 1996. Such operating results are not necessarily indicative of results for future periods. WinsLoew believes that all necessary and normal recurring adjustments have been included in the amounts in order to present fairly and in accordance with generally accepted accounting principles the selected quarterly information when read in conjunction with WinsLoew's Consolidated Financial Statements included elsewhere herein.
(In thousands, except per share amounts)
1997 Quarters First Second Third Fourth -------- -------- -------- -------- Net sales $23,136 $37,524 $27,985 $26,104 Gross profit 7,353 14,511 9,864 9,692 Operating Income 2,667 8,047 4,432 4,750 Interest expense 857 645 590 204 Income from continuing operations 1,093 4,565 2,350 2,906 (Loss) from discontinued operations (275) (61) (68) (67) (Loss) on sale of discontinued operations -- -- -- (8,200) -------- -------- -------- -------- Net income (loss) $ 818 $4,504 $2,282 ($5,361) ======== ======== ======== ======== Basic earnings per share: Income from continuing operations $0.15 $0.61 $0.31 $0.39 (Loss) from discontinued operations (1) (0.04) (0.01) (0.01) (0.01) (Loss) on sale of discontinued operations (1) -- -- -- (1.09) -------- -------- -------- -------- Net income (loss) $0.11 $0.60 $0.30 ($0.71) ======== ======== ======== ======== Weighted average shares 7,443 7,456 7,508 7,524 ======== ======== ======== ======== Diluted earnings per share: Income from continuing operations (1) $0.15 $0.61 $0.31 $0.38 (Loss) from discontinued operations (1) (0.04) (0.01) (0.01) (0.01) (Loss) on sale of discontinued operations (1) -- -- -- (1.07) Net income (loss) (1) $0.11 $0.60 $0.30 ($0.70) ======== ======== ======== ======== Weighted average shares and common share equivalents outstanding 7,495 7,502 7,602 7,630 ======== ======== ======== ========
1996 Quarters First Second Third Fourth -------- -------- -------- -------- Net sales $21,021 $34,539 $25,110 $26,025 Gross profit 6,256 13,594 8,384 9,704 Operating Income 1,186 6,856 3,301 5,087 Interest expense 1,187 647 682 567 Income from continuing operations 4 3,846 1,757 2,918 Income (loss) from discontinued operations 86 (228) 363 (462) -------- -------- -------- -------- Net income $ 90 $ 3,618 $ 2,120 $ 2,456 ======== ======== ======== ======== Basic earnings per share: Income from continuing operations (1) $0.00 $0.43 $0.21 $0.35 Income (loss) from discontinued operations (1) 0.01 (0.03) 0.04 (0.06) -------- -------- -------- -------- Net income $0.01 $0.40 $0.25 $0.29 ======== ======== ======== ======== Weighted average shares 8,967 8,967 8,589 8,383 ======== ======== ======== ======== Diluted earnings per share: Income from continuing operations (1) $0.00 $0.43 $0.21 $0.35 Income (loss) from discontinued operations (1) 0.01 (0.03) 0.04 (0.06) -------- -------- -------- -------- Net income $0.01 $0.40 $0.25 $0.29 ======== ======== ======== ======== Weighted average shares and common share equivalents outstanding 8,967 8,967 8,595 8,413 ======== ======== ======== ======== (1) Quarter amounts do not add to annual figures due to rounding.
Liquidity and Capital Resources
The Company's short-term cash needs are primarily for working capital to support its debt service, accounts receivable and inventory requirements. The Company has historically financed its short-term liquidity needs with internally generated funds and revolving line of credit borrowings. At December 31, 1997 the Company had $29.3 million of working capital and $18 million of unused and available funds under its credit facilities.
The Company has a senior credit facility with a consortium of banks and other institutional lenders. The facility, which matures in February 2001 and is collateralized by substantially all of the assets of the Company, consists of a revolving line of credit, term loan and an acquisition line of credit. The working capital revolving line of credit allows the Company to borrow funds up to a certain percentage of eligible inventory and accounts receivable. The $12.5 million acquisition line of credit can be used for capital expenditures and purchases of the Company's common stock.
In June 1996, WinsLoew amended its senior credit facility to provide the Company with a variable amount available under the revolving line of credit (see Note 4 to the Consolidated Financial Statements). Due to the seasonal nature of the casual furniture product line, WinsLoew's cash requirements are usually greater in the first quarter of each year. The June 1996 amendment allows the amount available to fluctuate with the seasonal nature of the Company's business. After the first quarter of each year, the Company's cash requirements from its credit line decline. By use of a variable amount of credit availability, the Company can avoid the cost of an available but unused line of credit. At December 31, 1997, from an available maximum line of credit of $40 million, WinsLoew has elected to set the amount available at $25 million.
In July 1996, WinsLoew amended its senior credit facility to allow the Company to borrow under its line of credit to purchase shares of the Company's common stock (see Note 5 to the Consolidated Financial Statements). As of December 31, 1997, there was $2.1 million available for such repurchases.
Cash Flows From Operating Activities: Net cash provided by operations increased to $22.6 million in 1997 primarily due to improved profitability from continuing operations.
Cash Flows From Investing Activities: During 1997, the Company spent $1.0 million on capital expenditures and received $2.1 million in proceeds related to the disposition of certain assets of its wrought iron business.
At December 31, 1997, the Company had no material commitments for capital expenditures.
Cash Flows From Financing Activities: The Company used the cash generated by operations and from investing activities to repay $24.3 million of debt during 1997.
Foreign Exchange Fluctuations and Effects of Inflation
WinsLoew purchases some raw materials from several Italian suppliers. These purchases expose the Company to the effects of fluctuations in the value of the U.S. dollar versus the Italian lira. If the U.S. dollar declines in value versus the Italian lira, the Company will pay more in U.S. dollars for these purchases. To reduce its exposure to loss from such potential foreign exchange fluctuations, the Company will occasionally enter into foreign exchange forward contracts. These contracts allow the Company to buy Italian lira at a predetermined exchange rate, thereby transferring the risk of subsequent exchange rate fluctuations to a third party. However, if the Company is unable to continue such forward contract activities, and the Company's inventories increase in connection with expanding sales activities, a weakening of the U.S. dollar against the Italian lira could result in reduced gross margins. The Company elected to hedge a portion of its exposure to purchases made in 1997 by entering into foreign currency forward contracts with a value of $2.2 million at December 31, 1997. The Company did not incur significant gains or losses from these foreign currency transactions.
Inflation has not had a significant impact on the Company in the past three years, nor is it expected to have a significant impact in the foreseeable future.
Year 2000
The Company began an assessment of Year 2000 issues on its computer system in mid-1995 and began the process of updating hardware and software at each of its facilities. The Company is completing the software and hardware installation at the last facility which is expected to be completed during the first half of 1998.
The Company has no plans to address these issues with its discontinued operations as the expected date of disposition is mid-1998.
The Company estimates the cost to complete the project for the 1995 to 1998 period at approximately $550,000 of which approximately $310,000 was capitalized and approximately $150,000 was expensed through December 1997. From an ongoing cost standpoint, the Year 2000 issues are not expected to have a significant impact on the Company's financial position, results of operations or liquidity.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data
	INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Ernst & Young LLP, Independent Auditors.................... 27
Consolidated Balance Sheets as of December 31, 1997 and 1996................................... 28
Consolidated Statements of Income For the Years Ended December 31, 1997, 1996, and 1995........ 29
Consolidated Statements of Stockholders' Equity For the Years Ended December 31, 1997, 1996 and 1995......... 30
Consolidated Statements of Cash Flows For the Years Ended December 31, 1997, 1996, and 1995........ 31
Notes to Consolidated Financial Statements........................... 32
REPORT OF INDEPENDENT AUDITORS
Stockholders of WinsLoew Furniture, Inc.
We have audited the accompanying consolidated balance sheets of WinsLoew Furniture, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of WinsLoew Furniture, Inc. and Subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
Birmingham, Alabama February 6, 1998
WinsLoew Furniture, Inc. and Subsidiaries Consolidated Balance Sheets
(In thousands except per share amounts)
December 31, -------------------------- 1997 1996 ---------- ----------
Assets Cash and cash equivalents $ 707 $ 897 Accounts receivable, less allowances for doubtful accounts of $2,702 and $1,531 at December 31, 1997 and 1996, respectively 21,124 22,851 Inventories 9,096 10,716 Prepaid expenses and deferred income taxes 7,391 3,748 Net assets of discontinued operations 2,057 12,711 -------- -------- Total current assets 40,375 50,923
Net assets of discontinued operations 6,860 13,937 Property, plant and equipment, net 10,320 11,954 Goodwill, net 21,021 21,699 Other assets 763 1,111 -------- -------- $ 79,339 $ 99,624 ======== ========
Liabilities and Stockholders' Equity Current portion of long-term debt $ 515 $ 1,955 Accounts payable 3,187 3,926 Other accrued liabilities 7,336 4,940 -------- -------- Total current liabilities 11,038 10,821
Long-term debt, net of current portion 15,908 38,726 Deferred income taxes 1,367 1,677 -------- -------- Total liabilities 28,313 51,224 -------- -------- Commitments and contingencies (note 9)
Stockholders' equity: Preferred stock, par value $.01 per share, 5,000,000 shares authorized, none issued -- -- Common stock; par value $.01 per share, 20,000,000 shares authorized, 7,481,783 and 8,967,112 shares issued and outstanding at December 31, 1997 and 1996, respectively 75 75 Additional paid-in capital 24,926 24,543 Retained earnings 26,025 23,782 -------- -------- Total stockholders' equity 51,026 48,400 -------- -------- $ 79,339 $ 99,624 ======== ========
See accompanying notes.
WinsLoew Furniture, Inc. and Subsidiaries Consolidated Statements of Income
(In thousands, except per share amounts)
Year Ended December 31 ----------------------------------------- 1997 1996 1995 ------------ ---------- ------------- Net sales $114,749 $106,695 $ 95,443 Cost of sales 73,329 68,757 64,999 -------- -------- -------- Gross profit 41,420 37,938 30,444
Selling, general and administrative expenses 20,548 20,082 17,719 Amortization 976 1,426 2,077 -------- -------- -------- Operating income 19,896 16,430 10,648
Interest expense 2,296 3,083 3,841 -------- -------- -------- Income (loss) before income taxes and extraordinary item 17,600 13,347 6,807 Provision for income taxes 6,686 4,822 2,739 -------- -------- -------- Income (loss) before extraordinary item 10,914 8,525 4,068 (Loss)from discontinued operations, net of taxes (471) (241) (7,519) (Loss)from sale of discontinued operations, net of taxes (8,200) -- -- Extraordinary item -- -- (593) -------- -------- --------
Net income (loss) $2,243 $8,284 $(4,044) ======== ======== ======== Basic Earnings (loss) per share: Income from continuing operations before extraordinary item $1.46 $0.98 $0.45 (Loss) from discontinued operations, net of taxes (0.06) (0.03) (0.83) (Loss) from sale of discontinued operations, (1.10) -- -- net of taxes Extraordinary item -- -- (0.07) ------- ------- -------- Net income (loss) $0.30 $0.95 ($0.45) ======== ======== ========
Weighted average number of shares 7,484 8,724 9,029 ======== ======== ========
Diluted earnings (loss) per share: Income from continuing operations before extraordinary item $1.44 $0.98 $0.45 (Loss) from discontinued operations, net of taxes (0.06) (0.03) (0.83) (Loss) from sale of discontinued operations, (1.08) -- -- net of taxes Extraordinary item -- -- (0.07) ------- ------- -------- Net income (loss) $0.30 $0.95 ($0.45) ======== ======== ========
Weighted average number of shares 7,563 8,730 9,029 ======== ======== ======== See accompanying notes.
WinsLoew Furniture, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity
(In thousands, except share amounts)
Common Stock Additional ------------------ Paid-in Retained Shares Amount Capital Earnings Total --------- ------ ---------- -------- ------- Balance, December 31, 1994 9,541,135 $95 $41,043 $19,542 $60,680 Repurchase and cancellation of stock (574,023) (5) (3,403) -- (3,408) Net income -- -- -- (4,044) (4,044) --------- ------ ---------- -------- ------- Balance, December 31, 1995 8,967,112 90 37,640 15,498 53,228
Exercise of stock options 25,100 -- 187 -- 187 Repurchase and cancellation of stock (576,925) (6) (3,958) -- (3,964) Repurchase and cancellation stock from affiliated company (933,504) (9) (9,326) -- (9,335) Net Income -- -- -- 8,284 8,284 --------- ------ ---------- -------- ------- Balance, December 31, 1996 7,481,783 $75 $24,543 $23,782 $48,400
Exercise of stock options 94,725 1 872 -- 873 Repurchase and cancellation of stock (50,000) (1) (489) -- (490) Net loss -- -- -- 2,243 2,243 --------- ------ ---------- -------- ------- Balance, December 31, 1997 7,526,508 $75 $24,926 $26,025 $51,026
========= ====== ========== ======== =======
See accompanying notes.
WinsLoew Furniture, Inc. and Subsidiaries Consolidated Statements of Cash Flows
(In thousands) Year ended December 31, --------------------------------- 1997 1996 1995 ------- -------- -------
Cash flows from operating activities: Net income (loss) $2,243 $8,284 ($4,044) Adjustments to reconcile net income to net cash provided (used in) operating activities: Depreciation and amortization 2,293 2,630 3,258 Provision for losses on accounts receivable 11 1,699 240 Change in net assets held for sale 17,731 4,249 4,894 Write-off of loan costs related to early retirement of debt -- -- 953 Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable 1,716 (1,731) (2,340) Inventories 657 8 1,826 Prepaid expenses and deferred income taxes (3,870) 64 (781) Other assets 50 (144) (21) Accounts payable (654) 2,022 (1,390) Other accrued liabilities 2,700 (1,608) 2,501 Deferred income taxes (310) 690 (360) -------- -------- -------- Total adjustments 20,324 7,879 8,780 -------- -------- -------- Net cash provided by (used in) operating activities 22,567 16,163 4,736 ------- -------- --------
Cash flows from investing activities: Capital expenditures, net of disposals (1,001) (1,290) (1,649) Proceeds from disposition of business 2,119 -- -- -------- -------- -------- Net cash provided by (used in) investing activities 1,118 (1,290) (1,649) -------- -------- -------- Cash Flows from financing activities: Net borrowings under revolving credit agreements (19,872) (65) 329 Payments on long-term debt (4,386) (4,225) (1,861) Proceeds from issuance of common stock, net 873 187 --
Repurchase and cancellation of stock (490) (3,964) (3,408) Repurchase and cancellation of stock from affiliated company -- (9,335) -- Proceeds from issuance of long-term debt -- 3,030 1,020 Increase in term loan upon refinancing -- -- 1,560 Loan costs -- -- (1,385) -------- -------- -------- Net cash provided by (used in) financing activities (23,875) (14,372) (3,745) -------- -------- -------- Net increase (decrease) in cash and cash equivalents (190) 501 (658)
Cash and cash equivalents at beginning of year 897 396 1,054 -------- -------- -------- Cash and cash equivalents at end of period $707 $897 $1,054 ======== ======== ======== Supplemental disclosures: Interest paid $2,318 $3,296 $4,010 Income taxes paid $6,048 $3,937 $1,347
See accompanying notes.
WinsLoew Furniture, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1997
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of WinsLoew Furniture, Inc. and its subsidiaries. All material intercompany balances and transactions have been eliminated.
Business
WinsLoew is comprised of companies engaged in the design, manufacture and distribution of casual furniture and contract seating furniture. WinsLoew's casual furniture products are distributed through independent manufacturer's representatives, and are constructed of extruded and tubular aluminum, wrought iron and cast aluminum. These products are distributed through fine patio stores, department stores and full line furniture stores nationwide. WinsLoew's contract seating products are distributed to a customer base which includes architectural design firms, and restaurant and lodging chains. The Company performs periodic credit evaluations of its customers' financial condition and determines if collateral is needed on a customer by customer basis. The Company has one lodging customer that accounted for 17%, 11% and 6% of revenues in the years ended December 31, 1997, 1996 and 1995.
Cash and Cash Equivalents
The Company classifies as cash and cash equivalents all highly liquid investments which have maturities at the date of purchase of three months or less. The Company maintains its cash in bank deposit accounts which, at times, may exceed the federally insured limits. The Company has not experienced any losses in such accounts.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined utilizing the first-in, first-out ("FIFO") and weighted average methods.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The Company provides for depreciation on a straight-line basis over the following estimated useful lives: building and improvements, 8 to 40 years; manufacturing equipment, 2 to 10 years; office furniture and equipment, 3 to 7 years; and vehicles, 3 to 5 years.
Goodwill
Goodwill is amortized on a straight-line basis over forty years from the date of the respective acquisition. The carrying value of goodwill is reviewed if the facts and circumstances suggest it may be impaired. If the review, using undiscounted cash flows over the remaining amortization period, indicates that the cost of goodwill will not be recoverable, the Company's carrying value will be reduced.
Deferred Costs (Other Assets)
Loan acquisition costs and related legal fees, included in other assets, are deferred and amortized over the respective terms of the related debt.
Income Taxes
Deferred income taxes are provided for temporary differences between the basis of assets and liabilities for financial reporting purposes and the related basis for income tax purposes in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements.
The numerators for the earnings per share calculation are set forth on the face of the accompanying income statement. The only difference between the denominator for the basic and dilutive calculations are the number of shares added to basic for the dilutive effect of employee stock options.
Revenue Recognition
Sales are recorded at time of shipment from the Company's facilities to customers.
Use of Estimates
The preparation of the consolidated financial statements requires the use of estimates in the amounts reported. Actual results could differ from those estimates.
Accounting for Stock-Based Compensation Plans
The Company follows the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations to account for its stock option plan. Under provisions of APB No. 25, no compensation expense has been recognized for stock option grants.
Foreign Currency Forward Contracts
The Company has exposure to losses which may result from settlement of certain raw materials purchases denominated in a foreign currency. To reduce this exposure, the Company enters into forward contracts to buy foreign currency. These forward contracts are accounted for as hedges, therefore, gains and losses from settlement of the forward contracts are used to offset gains and losses from settlement of the liability for the purchased raw materials. Gains and losses are recognized in the same period in which gains or losses from the raw material purchases are recognized. The Company is exposed to losses on the forward contracts in the event it does not purchase the raw materials, however, the Company does not anticipate this event.
At December 31, 1997 the Company had forward contracts to purchase 3.8 billion lira for $2.2 million. There were no significant deferred gains or losses and actual gains included in cost of sales were $30,000, $15,000 and $178,000 for the years ended December 31, 1997, 1996 and 1995. Impact of Recently Issued Accounting Standard
Statement of Financial Accounting Standard No. 131, Disclosures about Segment of an Enterprise and Related Information establishes standards for the disclosure of information about operating segments in financial statements. The standard will be applicable to the Company's December 31, 1998 financial statements. The Company has not yet determined whether the Statement will result in any change in financial statement disclosure, however, the Statement will have no effect on the Company's consolidated financial position, results of operations or liquidity.
2. Discontinued Operations
As of November 21, 1997, the Company's Board of Directors adopted a plan to discontinue the Company's ready to assemble ("RTA") operations. Of the three businesses comprising these operations, two are being held for sale and one is in the process of being liquidated. It is expected the plan will be completed by July 1998. As a result during the fourth quarter the Company recorded a loss on the disposition of its RTA operations of $12,400,000, or $8,200,000 after taxes, including a provision for estimated losses prior to disposal, which is summarized below:
Write-off of goodwill in connection with sale of assets $ 3,902,000 Reduction of inventory value 2,791,000 Reduction of property to net realizable value 2,067,000 Reduction of accounts receivable value 1,390,000 Other liabilities / reserves 1,050,000 Accrual for losses through disposition 1,200,000 ----------- Total $12,400,000 ===========
The operating results of the discontinued operations are summarized as follows (dollars in thousands, except for per share amounts):
For the year ended December 31, ------------------------------- 1997 1996 1995
Net sales $23,317 $37,284 $51,759 Income before taxes (779) (355) (9,973) Net (loss) (471) (241) (7,519) Net (loss) per share ($0.06) ($0.03) ($0.83)
During 1995, management reviewed the products, markets and strategy of the combined operations of the Company. The review culminated with decisions to redirect the marketing and operations of certain of the Company's businesses. As a result of the changes to be implemented, the Company recorded a charge of $7.1 million for restructuring. This charge was the result of management's plan to make changes in the product lines, management, marketing focus and operational strategy in the Company's RTA product line. The plan included exiting certain markets and products.
In connection with the restructuring charge, the Company recorded other adjustments in 1995, primarily to increase inventory reserves and allowances for uncollectable accounts receivable. These adjustments resulted in charges of $1.4 million to cost of sales and $650,000 to selling, general and administrative expenses. These have also been included above.
The net assets of the discontinued operations at December 31, 1997 and 1996 are as follows:
(In thousands) 1997 1996 ------- -------- Current assets $5,711 $14,495 Current liabilities, including reserve for estimated losses through disposal date (3,654) (1,784) ------- -------- Net assets of discontinued operations, current $2,057 $12,711 ======= ========
Property, net 2,781 5,771 Goodwill, net 4,018 8,127 Other assets 61 39 ------- -------- Net assets of discontinued operations, non-current $6,860 $13,937 ======= ========
As a result of the Board approval of the plan, the consolidated financial statements of the Company have been restated to reflect the results of operations and net assets of the RTA operations as a discontinued operation in accordance with generally accepted accounting principles.
3. Acquisition and Disposition
During the third quarter of 1997 the Company disposed of certain assets of its wrought iron business in the casual furniture product line. The sale generated proceeds of $2.1 million. This business accounted for net sales of $5.7 million, $11.0 million and $11.6 million in the years ended December 31, 1997, 1996, and 1995 respectively. The operating income of this business was not material to consolidated operating income. During the third quarter of 1997, the Company recorded approximately $230,000 of costs associated with the sale in selling, general and administrative expenses.
In March 1995, the Company purchased all of the stock of Continental Engineering Group, Inc. for $7,345,000. Continental is a manufacturer of ergonomically designed "space-savers" (computer workstations, desks, chairs, modular systems and accessories). The acquisition resulted in goodwill of $4,248,000. Funds for the acquisition were provided under WinsLoew's credit facility. The acquisition was accounted for under the purchase method and, accordingly, the operating results of Continental have been included in discontinued operations since the date of acquisition.
4. Long-Term Debt
Long-term debt consisted of the following at December 31, 1997 and 1996:
(In thousands) 1997 1996 ------- ------- Revolving line of credit $ 1,546 $21,418 Term loan 2,287 5,471 Acquisition line of credit 12,500 12,500 Other 90 1,292 ------- ------- 16,423 40,681 Less: current portion 515 1,955 ------- ------- $15,908 $38,726 ======= =======
Senior Credit Facilities
The Company's senior credit facility, as amended, provides for $62.5 million which matures in February 2001, and is collateralized by substantially all of the assets of the Company. The facility consists of a working capital revolving line of credit (maximum of $40 million), a term loan (originally $10 million) and an acquisition line of credit (maximum of $12.5 million). The working capital revolving line of credit allows the Company to borrow funds up to a certain percentage of eligible inventory and accounts receivable. The term loan currently requires quarterly repayments of $190,000. The acquisition line of credit converts to a term loan with principal payments due in quarterly installments totaling 15% in 1998, 35% in 1999 and 50% in 2000. Additionally, a payment equal to 50% of cash flow, as defined, is required for each year within 90 days of year-end. This is estimated to be $11.7 million for 1997 and will be financed on the revolver. In June 1996, WinsLoew amended its senior credit facility to provide the Company with a variable amount available under the revolving line of credit. The amendment reduced the amount available under its revolving line of credit to $20 million effective each June 30. The Company may, at its option, elect to increase the revolving line of credit at each December 31 through the following June 30 to a maximum of $40 million. As of December 31, 1997, WinsLoew elected to increase the revolving line of credit to $25 million.
In July 1996, the Company amended its senior credit facility to allow the Company to borrow up to $6.6 million under its line of credit to purchase shares of the Company's common stock (see Note 5 below). Currently there is $2.1 million available for this purpose.
The interest rates on the components of the senior credit facility are either the base rate plus a spread, or the LIBOR rate plus a spread, as elected by the Company. The spread is determined by the leverage ratio, as defined, for the twelve month period ending each quarter. At December 31, 1997, the loans are priced at the base rate plus .25% (8.75% at December 31, 1997) and the LIBOR rate plus 1.25% (7.14% at December 31, 1997). In addition, WinsLoew pays an unused facility fee of .375% per annum on a quarterly basis in arrears.
The agreement requires the Company to meet certain financial ratios for leverage, interest coverage, tangible net worth and includes other provisions generally common in such agreements including restrictions on dividends, additional indebtedness and capital expenditures. At December 31, 1997, the Company was in compliance with its debt covenants. The carrying values of the revolving line of credit, term loan and acquisition loan approximate their fair value at December 31, 1997.
The Company incurred an extraordinary charge of $593,000 (net of an income tax benefit of $360,000) related to prepayment penalties and the write-off of unamortized deferred loan costs associated with the retirement of the separate credit facilities in 1995. In connection with the new senior credit facility, the Company incurred loan costs and related fees of $1,385,000.
5. Capital Stock
During 1997, the Company retired 50,000 shares of common stock purchased for $490,000. On January 23, 1998, the Board approved a plan authorizing the repurchase of 1,000,000 shares of the Company's stock in the open market at times and prices deemed advantageous.
During 1996 and 1995, the Company's Board of Directors approved plans to repurchase the Company's stock. During 1996, the Company repurchased 576,925 shares of stock at a cost of $3,964,000. Also during 1996, the Company retired 933,504 shares of its common stock purchased from an affiliated company at $10 per share. During 1995, the Company retired 574,023 shares of common stock for $3,408,000.
7. Income Taxes
The provision (benefit) for income taxes consisted of the following:
(In thousands) 1997 1996 1995 ------- ------- ------- Provision for taxes related to continuing operations $6,686 $4,822 $2,739 (Benefit) for taxes related to discontinued operations (223) (114) (2,454) (Benefit) for taxes related to loss on sale of discontinued operations (4,200) -- -- (Benefit) related to extraordinary item -- -- (360) ------- ------- ------- Total provision (benefit) for taxes $2,263 $4,708 ($75) ======= ======= =======
For the Years Ended December 31, -------------------------------- (In thousands) 1997 1996 1995 ------ ------ ------- Federal: Current $3,985 $4,478 $821 Deferred (1,936) (251) (945) State: Current 496 542 389 Deferred (282) (61) (340) ------- -------- -------- $2,263 $4,708 ($75)
At December 31, 1997 and 1996, deferred tax assets and liabilities consisted of the following:
(In thousands) 1997 1996 Deferred tax assets: Capitalized inventory costs $ 415 $ 461 Reserves and accruals 3,660 1,842 State net operating loss carryforwards 344 301 ------ ------ 4,419 2,604 Less: valuation reserve -- (80) ------ ------- Deferred tax assets 4,419 2,524
Deferred tax liabilities: Intangible asset basis difference (98) (247) Excess of tax over book depreciation (1,194) (1,283) Prepaid expenses (93) (135) Other (75) (20) ------- ------- Deferred tax liabilities (1,460) (1,685) ------- ------- Deferred income taxes, net $2,959 $ 839 ======= =======
Included in: Other current assets $4,326 $2,516 Deferred income taxes (1,367) (1,677) ------- ------- $2,959 $ 839 ======= =======
The following table summarizes the differences between the federal income tax rate and the Company's effective income tax rate for financial statement purposes:
For the Years Ended December 31,
1997 1996 1995 ----- ------ ------- Federal income tax rate 34.0% 34.0% (34.0%) State income taxes 4.7% 2.2% 3.5% Goodwill amortization 9.3% 2.0% 35.4% Other 2.2% (2.0%) 4.1% ----- ------ ------- Effective tax rate 50.2% 36.2% 9.0% ===== ====== =======
8. Related Party Transactions
In October 1994, WinsLoew entered into a ten-year agreement (the "Investment Services Agreement") with Trivest, Inc. ("Trivest"). Trivest and the Company have certain common shareholders, officers and directors. Pursuant to the Investment Services Agreement, Trivest provides corporate finance, financial relations, strategic and capital planning and other management advice to the Company. The base compensation is $500,000, subject to cost of living increases and increases for additional businesses acquired. For 1997, 1996 and 1995, the amount expensed was $628,000, $604,000 and $564,000, respectively. Included in loan acquisition costs is $375,000 paid to Trivest in 1995 for negotiations on the Company's behalf for the senior credit facility. In 1996, the Company retired 933,504 shares of its common stock purchased from an affiliated company at $10 per share (see Note 5 above).
9. Commitments and Contingencies
Leases
The Company leases certain office space, manufacturing facilities and various items of equipment under operating leases. Some leases for office and manufacturing space contain renewal options and provisions for increases in minimum payments based on various measures of inflation. Rental expense amounted to approximately $763,000, $728,000, and $733,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Operating lease agreements in effect at December 31, 1997, have the following remaining minimum payment obligations:
(In thousands) 1998 $ 744 1999 714 2000 718 2001 722 2002 466 2003 - 2006 1,069
Employment Agreements
The Company has employment agreements with certain employees. The agreements provide for minimum salary levels and bonuses based on a percentage of pre-tax operating income, as defined in the agreements.
Employee Benefit Plans
The Company has an employee benefit plan established under the provisions of Section 401(k) of the Internal Revenue Code. Full- time employees who meet various eligibility requirements may voluntarily participate in the plan. The plan provides for voluntary employee contributions through salary reduction, as well as discretionary employer contributions. No significant Company contributions were made in the years 1997, 1996 and 1995.
Stock Option Plan
In 1994, the Company established a Stock Option Plan (the "Plan") as a means to retain and motivate key employees and directors. The Compensation Committee of the Board of Directors administers and interprets the Plan and is authorized to grant options to all eligible employees of the Company and non-employee directors. The Plan provides for both incentive stock options and non- qualified stock options. Options are granted under the Plan on such terms and at such prices as determined by the Compensation Committee, except that the per share exercise price of incentive stock options cannot be less than the fair market value of the Company's common stock on the date of grant. The Company has reserved 1,500,000 shares of common stock for issuance upon exercise of stock options. All options which have been granted have a term of ten years and vest ratably over five years.
Pro forma net income and earnings per share have been determined as if the Company had accounted for its employee stock options as compensation expense based on their fair value. Fair value was estimated at the date of grant using a Black-Scholes option pricing model for 1997 and 1996 assuming a risk-free interest rate of 6.45% for 1997 and 6.2% for 1996, a volatility factor for the Company's common stock of .411 in 1997 and .532 in 1996 and a weighted-average expected life of the options of six years. The pro forma information is not likely to be representative of the effects of options on pro forma net income in future years because the Company is required to include only options granted since 1994 in the pro forma information.
For the Years Ended December 31, -------------------------------- 1997 1996 1995 (In thousands) ------ ------ ------- Pro forma net income (loss) $2,068 $8,198 ($4,127) ====== ====== ========
Pro forma income (loss) per share, diluted:
Income from continuing operations $1.41 $0.97 $0.44 (Loss) from discontinued operations, net of taxes (0.06) (0.03) (0.83) (Loss) from sale of discontinued operations, net of taxes (1.08) -- -- Extraordinary item -- -- (0.07) ------ ------ ------- Net income (loss) $0.27 $0.94 ($0.46) ====== ====== =======
Information with respect to WinsLoew's Plan is as follows:
---------------------------- Weighted Average Exercise Options Price 1996 1995 ------- ---------------- -------- -------- Options outstanding at January 1 671,550 $ 8.34 738,450 525,575 Granted 250,000 $11.14 25,000 305,250 Exercised (94,725) $ 7.97 (25,100) -- Canceled (41,975) $ 9.99 (66,800) (92,375) -------- --------- -------- Options outstanding at December 31 784,850 $ 9.19 671,550 738,450 ======= ======== ======== Exercise prices per share $5.88-$16.06 $5.88-$11.63 $5.88-$11.63
Options exercisable at December 31 407,100 $ 9.12 480,400 488,450 ======= ======== ========
Options available for grant at December 31 595,325 803,350 761,550 ======= ======== ========
Information with regard to options outstanding and exercise price at December 31 is as follows:
								 Options Exercisable at December 31, 1997 -------------------- Weighted Weighted Average Average Options Outstanding Remaining Weighted Exercise Exercise ------------------------ Life Average Price Price 1997 1996 1995 at 12/31/97 Shares Price - ----------- ----- ------- ------- ------- ----------- ------- -------- $5.88-$6.67 $6.19 291,850 356,250 411,150 7.0 160,250 $6.34 8.66 8.66 10,250 10,250 10,250 7.2 4,100 8.66 10.00-10.50 10.32 284,750 158,550 158,550 8.0 99,750 10.00 11.13-11.63 11.56 163,000 146,500 158,500 6.4 143,000 11.63 12.63 12.63 20,000 -- -- 9.6 -- -- 16.06 16.06 15,000 -- -- 9.8 -- -- ------- ------- ------- ------- Total 9.19 784,850 671,550 738,450 7.4 407,100 9.12 ===== ======= ======= ======= === ======= ====
The estimated weighted average fair value of options granted in 1997 is $5.56 per option. The weighted average remaining contractual life for options granted in 1997 is 9.4 years.
Litigation and Liability Claims
The Company is, from time to time, involved in routine litigation including general liability and worker's compensation claims. It is the opinion of management that sufficient insurance has been purchased to cover current and potential general liability and worker's compensation claims. None of such litigation in which the Company is presently involved is believed to be material to its liquidity, financial position or results of operations.
10. Supplemental Information
The following balance sheet captions are comprised of the items specified below :
December 31, ----------------- 1997 1996 (In thousands) ------- ------- Inventories: Raw materials $ 7,597 $ 7,569 Work in process 1,038 2,657 Finished goods 461 490 ------- ------- $ 9,096 $10,716 ======= ======= Property, plant and equipment: Land $ 1,751 $ 1,751 Building and improvements 8,745 8,745 Manufacturing equipment 6,682 9,693 Office equipment 1,731 1,529 Construction in progress 67 19 Vehicles 107 128 ------- ------- 19,083 21,865 Accumulated depreciation (8,763) (9,911) -------- -------- $10,320 $11,954 ======== ======== Other accrued liabilities: Compensation, commissions and employee benefits $ 2,254 $ 2,397 Customer deposits 1,559 882 Income taxes 971 1,031 Interest 88 110 Other 2,464 520 -------- -------- $ 7,336 $ 4,940 ======= ========
Depreciation expense for continuing operations was $1,317,000, $1,204,000, and $1,181,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Accumulated amortization at December 31, 1997 and 1996 related to goodwill was $5,564,000 and $4,886,000, respectively. Accumulated amortization at December 31, 1997 and 1996 related to other intangible assets was $773,000 and $475,000, respectively.
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
No events nor occurrences required to be disclosed in this Item 9 have occurred.
PART III
ITEM 10.
ITEM 10. Directors and Executive Officers of the Registrant
The information required in this Item 10 is incorporated by reference to the registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this report.
ITEM 11.
ITEM 11. Executive Compensation
The information required in this Item 11 is incorporated by reference to the registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this report.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required in this Item 11 is incorporated by reference to the registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this report.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions
The information required in this Item 11 is incorporated by reference to the registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this report.
PART IV
ITEM 14.
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)	Documents filed as part of this report:
(1)	Financial Statements:
Reference is made to the index set forth on page 26 of this Annual Report on Form 10-K
(2)	Financial Statements Schedules:
The following consolidated financial statement schedule is filed herewith:
Sequential Page Number ----------- Schedule II -- Valuation and Qualifying Accounts 48
Any required information not included in the above-described schedule is included in the consolidated financial statements and notes thereto contained herein. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are otherwise not applicable and therefore have been omitted.
(3) Exhibits: (An asterisk to the left of an exhibit number denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit to the Annual Report on Form 10-K)
Exhibit Description
2.1 Agreement and Plan of Merger, dated as of September 30, 1994, by and among Registrant, Old Winston and Old Loewenstein (1)
3.1 Registrant's Articles of Incorporation (1)
3.2 Registrant's Bylaws (1)
*10.1 Registrant's 1994 Stock Option Plan, As Amended and Restated Effective January 23, 1997(6)
10.2 Form of Indemnification agreement between the Registrant and certain of its directors and executive officers, and schedule of parties thereto (10.2) (2)
*10.3 Employment Agreements between the Registrant and each of Bobby Tesney, R. Craig Watts, Stephen C. Hess, and Vincent A. Tortorici, Jr.(10.3) (2)
*10.4 Investment Services Agreement, dated December 16, 1994, between the Registrant and Trivest, Inc. (10.6) (2)
10.5 Agreement, dated August 1, 1996, between Winston and the Retail, Wholesale, and Department Store Union, AFL-CIO (10.8) (1)
	 10.6 Lease, dated May 24, 1996, between LaSalle National Bank and Winston (10.7) (6)
10.7 Business Lease, dated November 18, 1993, between Loewenstein and Emanuel Vanzo (10.21) (2)
10.8 Lease Agreement by and between Teacher Insurance and Annuity Association and Winston Furniture Company of Alabama, Inc., commencing December 15, 1995 (10.23) (4)
10.9 Lease Agreement, dated as of January 11, 1989, between W. Leslie Pelio and Michael Haworth d/b/a Simworth, as amended (10.29) (2)
10.10 Standard Industrial Lease Milti-tenant, dated as of June 1997, between The Mutual Life Insurance Company of New York and Continental Engineering Group, Inc., d/b/a Microcenter (7)
10.11 Stock Purchase Agreement among WinsLoew Furniture, Inc., Continental Engineering Group, Inc., and certain Shareholders, dated February 15, 1995 (10.31) (3)
10.12 Credit Agreement, dated February 2, 1995, among the Registrant, its subsidiaries, and Heller Financial, Inc. (10.32) (3)
10.13 First Amendment to Credit Agreement, dated February 22, 1995, among the Registrant, its subsidiaries, and Heller Financial, Inc. (10.17) (4)
10.14 Second Amendment to Credit Agreement, dated May 8, 1995, among the Registrant, its subsidiaries, and Heller Financial, Inc. (10.18) (4)
10.15 Third Amendment to Credit Agreement, dated November 15, 1995, among the Registrant, its subsidiaries, and Heller Financial, Inc. (10.19) (4)
10.16 Fourth Amendment to Credit Agreement, dated November 20, 1995, among the Registrant, its subsidiaries, and Heller Financial, Inc. (10.20) (4)
10.17 Fifth Amendment to Credit Agreement, dated June 30, 1996 among the registrants, its subsidiaries, and Heller Financial, Inc. (10.21) (5)
10.18 Sixth Amendment to Credit Agreement, dated July 1, 1996, among the registrants, its subsidiaries, and Heller Financial, Inc. (10.22) (5)
10.19 Seventh Amendment to Credit Agreement, dated January 27, 1997, among the registrants, its subsidiaries, and Heller Financial, Inc. (10.20) (6) 	 *10.20 Registrant's Non-Qualified Supplemental Retirement Plan for Key Employees (10.22) (6)
21.1 Registrant's Subsidiaries (7)
23.1 Consent of Ernst & Young LLP, Independent Auditors (7)
__________________________
(1) Incorporated by reference to the exhibits, shown in parentheses and filed with the Registrant's Registration Statement on Form S-4 (No. 33-85476).
(2) Incorporated by reference to the exhibits, shown in parentheses and filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994
(3) Incorporated by reference to the exhibits, shown in parentheses and filed with the Registrant's Report on Form 8-K filed April 7, 1995.
	 (4) Incorporated by reference to the exhibits, shown in parentheses and filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995.
(5) Incorporated by reference to the exhibits, shown in parentheses and filed with the Registrant's Report on Form 10-Q for the quarter ended June 28, 1996. 	 (6) Incorporated by reference to the exhibits, shown in parentheses and filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.
(7) Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the last quarter of the period covered by this report.
(c) Exhibits required by Item 601 of Regulation S-K
The index to exhibits that are listed in Item 14 (a) (3) of this report and not incorporated by reference follows the "Signatures" section hereof and is incorporated herein by reference.
(d) Financial Statements Schedules required by Regulation S-X
The financial statement schedules required by Regulation S-X which are excluded from the Registrant's Annual Report to Shareholders for the year ended December 31, 1997, by Rule 14a-3 (b)(1) are included above. See Item 14(a)2 for index.
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, thereunto duly authorized.
WINSLOEW FURNITURE, INC.
							 Date: March 27, 1998 By: /s/ Bobby Tesney --------------------- Bobby Tesney 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 in the capacities, and on the dates indicated.
Signature Title Date
/s/ Bobby Tesney President, Chief Executive - ----------------- Officer and Director March 27, 1998 Bobby Tesney (Principal Executive Officer)
/s/ Vincent A. Tortorici, Jr. Vice President and Chief - ----------------------------- Financial Officer (Principal March 27, 1998 Vincent A. Tortorici, Jr. Financial and Accounting Officer)
/s/ Earl W. Powell Chairman of the Board March 27, 1998 - ------------------ Earl W. Powell
/s/ Phillip T. George, M.D. Director March 27, 1998 - --------------------------- Phillip T. George, M.D.
/s/ William F. Kaczynski, Jr. Director March 27, 1998 - ---------------------------- William F. Kaczynski, Jr.
/s/ Peter W. Klein Director March 27, 1998 - ------------------ Peter W. Klein
/s/ M. Miller Gorrie Director March 27, 1998 - --------------------- M. Miller Gorrie
/s/ James S. Smith Director March 27, 1998 - ------------------ James S. Smith
/s/ Henry C. Cheek Director March 27, 1998 - ------------------ Henry C. Cheek
/s/ William H. Allen, Jr. Director March 27, 1998 - ------------------------- William H. Allen, Jr.
/s/ Sherwood M. Weiser Director March 27, 1998 - ---------------------- Sherwood M. Weiser
EXHIBIT 10.10
STANDARD INDUSTRIAL LEASE-MULTI-TENANT
1. 	Basic Provisions (the "Basic Provisions").
	I .1 Parties: This Lease (the "Lease"), dated for reference purposes only June _, 1997, is made by and between THE MUTUAL LIPE INSURANCE COMPANY OP NEW YORK, a New York corporation ("Landlord), and CONTINENTAL ENGINEERING GROUP, INC., California corporation, dba "MicroCentre" ("Tenant).
	1.2 Premises: That certain real property, including all improvements therein or to be provided by Landlord under the terms of this Lease, commonly known as 530J N. Irwindale Avenue, and consisting of approximately 91,655 square feet of rentable area located in Irwindale, California, as depicted on Exhibit A hereto (the "Premises"). (See Paragraph 2 for further provisions.) The Premises are a portion of a building consisting of approximately 148,953 square feet of rental area, herein referred to as the "Building." The Premises, the Building, the Common Areas (as defined in Paragraph 2.3 below), and the land upon which the same are located, along with all other buildings and improvements thereon, are herein collectively referred to as the "Industrial Center," as more particularly depicted on the site plan attached hereto as Exhibit B.
	1.3	Term: five (5) years and two (2) months (the Original Terms) commencing on May 1, 1997 ("Commencement Date"), and ending June 30, 2002 (the Expiration Date), as the same may be adjusted pursuant to Paragraph 3 below.
	1.4	Base Rent: $29,329.60 per month (the "Base Rent") ($0.32 per rental square foot per month), payable on the 1st day of each month commencing on the Commencement Date. (See Paragraph 4 for further provisions.) 	See Addendum Paragraph C.
1.5	Base Rent Paid Upon Execution: None.
1.6	Deposits: $21,857.00 (the "Security Deposit"), and $0.00 (the "Cleaning Deposits). (See Paragraph 5 for further provisions.)	See Addendum Paragraph D.
	1.7	Permitted Use: Manufacturing and distribution of computer workstations, furniture and related items, and for sales and general office administration in connection therewith. (See Paragraph 6 for further provisions.)
1.8	-Real Estate Brokers: The following real estate brokers (collectively, the "Broker") and brokerage relationships exist in this transaction and are consented to by the parties (check applicable boxes): N/A
	 __Landlord exclusively ("Landlord's Broker"); _ both Landlord and Tenant, and __ Tenant exclusively (tenants Broker). (See Paragraph 15 for further provisions.)
	1.9	Guarantor. The obligations of the Tenant under this Lease are to be guaranteed by	N/A
	(Guarantor") pursuant to a Guaranty of Obligations of Tenant pursuant to Lease in the form attached hereto as Exhibit E. (See paragraph 37 for funkier provisions.)
	1.10	Addenda. Attached hereto is an Addendum, consisting of Paragraphs A. through E., and Exhibits A through E, all of which constitute a part of this Lease.
2.	Premises, Parking and Common Areas.	See Addendum Paragraph A. 2.1 Premises. Landlord hereby leases to Tenant and Tenant leases from Landlord the Premises for the term, at the rental, and upon all of the conditions set forth herein. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental, is an approximation which Landlord may adjust from time to time in accordance with the standard method for measuring floor area in comparable premises established by the Building Owners and Managers Association International ("BOMA"). Upon any such remeasurement, Landlord shall notify Tenant of the new square footage of the Premises and the Base Rent, which change in Base Rent shall be effective as of the date of Landlord's notice.
	2.2 Vehicle Parking. Tenant shall be entitled to Tenant's prorate share of vehicle parking spaces for the Building, unreserved and unassigned, on those portions of the Common Areas designated by Landlord for parking. Tenant shall not use more parking spaces than said number. Said parking spaces shall be used only for parking by vehicles no larger than full size passenger automobiles or pick-up trucks, herein called "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized Vehicles."
	2.2.1 Tenant shall not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant's employees, suppliers, shippers, customers, or invitees to be loaded, unloaded, or parked in areas other than those designated by Landlord for such activities.
	2.2.2 If Tenant permits or allows any of the prohibited activities described in Paragraph 2.2 of this Lease, then Landlord shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Tenant, which cost shall be immediately payable upon demand by Landlord.
	2.3 Common Areas-Definition. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Industrial Center that are provided and designated by the Landlord from time to time for the general non-exclusive use of Landlord, Tenant and of other tenants of the Industrial Center and their respective employees, suppliers, shippers, customers and invitees, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways and landscaped areas.
	2.4 Common Areas - Tenant's Rights. Landlord hereby grants to Tenant, for the benefit of Tenant and its employees, suppliers, shippers, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Landlord under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Industrial Center. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Landlord or Landlord's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Landlord shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Tenant, which cost shall be immediately payable upon demand by Landlord.
2.5	Common Areas-Rules and Regulations. Landlord or such other person(s) as Landlord may appoint shall have the exclusive 	I
control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable rules and regulations with respect thereto. Tenant agrees to abide by and conform to all such rules and regulations, and to cause its employees, suppliers, shippers, customers, and invitees to so abide and conform. Landlord shall not be responsible to Tenant for the non-compliance with said rules and regulations by other tenants of the Industrial Center.
2.6	Common Areas-Changes. Landlord shall have the right, in Landlord's sole discretion, from time to time:
	(a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas and walkways; provided, however, that permanent: changes made by Landlord (other than as n may be required by law) shall not materially interfere with Tenant's use of the Premises for the permitted Use;
(b)	To close temporarily any of the Common Areas for maintenance purposes, so long as reasonable access to the Premises
remains available;
(c)	To designate other land outside the boundaries of the Industrial Center to be a part of the Common Areas; (d)	To add additional buildings and improvements to the Common Areas;
	(e)	To use the common areas while engaged in making additional improvements, repairs or alterations to the industrial Center, or any portion thereof;
	(f)	To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Industrial Center as Landlord may, in the exercise of sound business judgment, deem to be appropriate.
3.	Term. 1'	See Addendum Paragraph B. 	3.1 	Term. The Commencement Date, the Expiration Date and the Original Term of this Lease are as specified in Paragraph 1.3.
	3.2 Delay in Possession. Notwithstanding said Commencement Date, if for any reason Landlord cannot deliver possession of the Premises to Tenant on said date, Landlord shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Tenant hereunder or extend the term hereof, but in such case, Tenant shall not be obligated to pay rent or perform any other obligation of Tenant under the terms of this Lease, except as may be otherwise provided in this Lease, until possession of the Premises is tendered to Tenant.
	3.3 Early Possession. If Tenant occupies the Premises prior to said Commencement Date, such occupancy shall be subject to all provisions of this Lease, such occupancy shall not advance the Expiration Date, and Tenant shall pay rent for such period at the initial monthly rates set forth below.
4.	Rent.		See Addendum Paragraph C. 	4.1	Base Rent. Commencing on the Commencement Date, Tenant shall pay to Landlord Base Rent for the Premises, in advance on the first day of each month during the Term, without any offset or deduction. Rent for any period during the term hereof which is for less than one month shall be a pro rata portion of the Base Rent. Rent shall be payable in lawful money of the United States to Landlord at the address stated herein or to such other persons or at such other places as Landlord may designate in writing.
	4.2 Additional Rent; Rent. As used in this Lease, the term "rent" shall mean Base Rent and additional rent, and the term additional rent" shall mean personal property taxes and all other amounts payable by Tenant to Landlord pursuant to this Lease other than Base Rent. Where no other time is stated herein for payment, payment of any amount due from Tenant to Landlord hereunder shall be made within ten (10) days after Tenant's receipt of Landlord's invoice or statement therefor.
5.	Deposits.	See Addendum Paragraph D. 	Tenant shall deposit with Landlord upon execution hereof the Deposits set forth in Paragraph 1.6. The Security Deposit shall be held as security for Tenant's faithful performance of Tenant's obligations hereunder. If Tenant fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Landlord may use, apply or retain all or any portion of the Security Deposit for the payment of any rent or other charge in default or for the payment of any other sum to which Landlord may become obligated by reason of Tenant's default, or to compensate Landlord for any loss or damage which Landlord may suffer thereby. If Landlord so uses or applies all or any portion of the Security Deposit, Tenant shall within ten (10) days are written demand therefor deposit cash with Landlord in an amount sufficient to restore said deposit to the full amount then required of Tenant. If the monthly rent shall, from time to time, increase during the term of this Lease, Tenant shall, at the time of such increase, deposit with Landlord additional money as an additional security deposit so that the total amount of the Security Deposit held by Landlord shall at all times bear the same proportion to the then current Base Rent as the initial Security Deposit bears to the initial Base Rent set forth in Paragraph 1.4. Landlord shall not be required to keep any Deposit separate from its general accounts. If Tenant performs all of Tenant's obligations hereunder, the Security Deposit (only), or so much thereof as has not therefore been applied by Landlord, shall be returned, without payment of interest or other increment for its use, to Tenant (or, at Landlord's option, to the last assignee, if any, of Tenant's interest hereunder) at the expiration of the term hereof, and after Tenant has vacated the Premises. If Tenant fails to surrender the Premises to Landlord in the condition required hereunder, including without limitation the provisions of Paragraph 7.2(c) below, Landlord shall be entitled to have the Premises cleaned and repaired to restore them to the condition so required, and may retain the cost of such cleaning and repairing from the Cleaning Deposit. No trust relationship is created herein between Landlord and Tenant with respect to any Deposit.
6.	Use.		See Addendum Paragraph E. 	6.1	Use. The Premises shal1 be used and occupied only for the purpose set forth in Paragraph 1.7 and for no other purpose. Tenant shall not use or permit the use of the Premises in a manner that creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to, neighboring premises or properties.
6.2 	Compliance with Covenants, Conditions and Building Restrictions.
	(a) If and to the extent that the improvements on the Premises do not comply with any applicable covenant or restriction of record or applicable building code, regulation or ordinance in effect on the Commencement Date (other than those which apply because of the nature of Tenant or its business or the use to which Tenant will put the Premises or to any alterations or Utility installations (as defined in Paragraph 7.3(a)) made or to be made by Tenant) then Landlord shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Tenant setting forth with specificity the nature and extent of such non-compliance given within thirty (30) days after the Commencement Date, rectify the same at Landlord's expense. If Tenant does not give Landlord written notice of a non-compliance within thirty (30) days following the Commencement Date, correction of that non-compliance shall be the obligation of Tenant at Tenant's sole cost and expense.
	(b) Except as provided in Paragraph 6.2(a) Tenant shall, at Tenant's expense, promptly comply with all applicable statutes, ordinances, rules, regulations, orders, covenants and restrictions of record, and requirements of any fire insurance underwriters or rating bureaus, now in effect or which may thereafter come into effect, whether or not they reflect a change in policy from that now existing, during the term or any part of the term hereof, relating in any manner to the Premises and the occupation and use by Tenant of the Premises and of the Common Areas. Tenant shall not use or permit the use of the Premises or the Common Areas in any manner that will tend to create waste or a nuisance or shall tend to disturb other occupants of the Industrial Center.
6.3	Condition of Premises. 	See Addendum Paragraph B.
	(a) Landlord shall deliver the Premises to Tenant clean and free of debris on the Commencement Date (unless Tenant is already in possession thereof). If the plumbing, fire sprinkler system, lighting, air conditioning, heating, or loading doors, of any, in the Premises as of the Commencement Date, other than those constructed by Tenant, shall not be in good operating condition on the Commencement Date, Landlord shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Tenant setting forth with specificity the nature and extent of such noncompliance and given within fifteen (1S) days after the Commencement Date, rectify same at Landlord's expense. If Tenant does not give Landlord written notice of a non- compliance within fifteen (1 S) days after the Commencement Date, correction of that noncompliance shall be the obligation of Tenant at Tenant's sole cost and expense.
	(b) except as otherwise provided in subparagraph (a) above or exhibit C to this Lease, Tenant hereby accepts the Premises in their condition existing as of the Lease Commencement Date or the date that Tenant takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and any covenants or restrictions of record and accepts this Lease subject thereto and to al1 matters disclosed thereby and by any exhibits attached hereto. Tenant acknowledges that neither Landlord nor Landlord's agent has made any representation or warranty as to the condition of the Premises, or the present or future suitability of the Premises, the Building or the Industrial Center for the conduct of Tenant's business.
6.4 	Hazardous Materials.
	(a) Tenant covenants and agrees that it shall not cause or permit any Hazardous Material (as defined below) to be brought upon, kept, or used in or about the Premises by Tenant or Tenant's agents, employees, contractors, invitees or any other party for whom Tenant is responsible (tenant's Agents). The foregoing covenant shall not extend to materials typically found or used in general office applications so long as (I) such materials and any equipment which generates such materials are maintained only in such quantities as are reasonably necessary for Tenant's operations in the Premises, (ii) such materials are used strictly in accordance with the manufacturers' instructions therefor, (iii) such materials are not disposed of in or about the Premises in a manner which would constitute a release or discharge thereof, and (iv) all such materials and any equipment which generates such materials are removed from the Premises by Tenant upon the expiration or earlier termination of this Lease. Any use, storage, generation, disposal, release or discharge by Tenant of Hazardous Materials in or about the Premises as is permitted hereunder shall be carried out in compliance with all applicable federal, state and local laws, ordinances, rules and regulations. Moreover, no hazardous waste resulting from any operations by Tenant shall be stored or maintained by Tenant in or about the Premises for more than ninety (90) days prior to removal by Tenant. Tenant shall, annually within thirty (30) days after Tenant's receipt of Landlord's written request therefor, provide to Landlord a written list identifying any Hazardous Materials then maintained by Tenant in the Premises, the use of each such Hazardous Material and the approximate quantity of each such Hazardous Material so maintained by tenant, together with written certification by Tenant stating, in material, that neither Tenant nor any person for whom tenant is responsible has released or discharged any Hazardous Materials in or about the Premises.
	(b) In the event that Tenant proposes to conduct any use or to operate any equipment which will or may utilize or generate a Hazardous Material other than as specified in subparagraph (a) above, tenant shall first in writing submit such use or equipment to Landlord for approval. No approval by Landlord shall relieve tenant of any obligation of Tenant pursuant to this Paragraph 6.4, including the removal and cleanup and indemnification obligations imposed upon tenant by this Paragraph 6.4. Tenant shall, within five (5) days after receipt thereof, furnish to Landlord copies of all notices or other communications received by tenant with respect to any actual or agreed release or discharge of any Hazardous Material in or about the Premises and shall, whether or not Tenant receives any such notice or communication, notify Landlord in writing of any discharge or release of Hazardous Material by Tenant or anyone for whom Tenant is responsible in or about the Premises. In the event that Tenant is required to maintain any Hazardous Materials license or permit in connection with any use conducted by Tenant or any equipment operated by Tenant in the Premises, copies of each such license or permit, each renewal or revocation thereof and any communication relating to suspension, renewal or revocation thereof Shall be furnished to Landlord within five (5) days after receipt thereof by Tenant. Compliance by tenant with the two immediately preceding sentences shall not relieve Tenant of any other obligation of tenant pursuant to this Paragraph 6.4.
(c) Upon any violation of the foregoing covenants, Tenant shall be obligated, at Tenant's sole cost, to clean-up and remove from the Premises all Hazardous Materials introduced into the Premises by Tenant or any person or entity for whom tenant is responsible. Such clean-up and removal shall include all testing and investigation required by any governmental authorities having jurisdiction and preparation and implementation of any remedial action plan required by any governmental authorities having jurisdiction. AH such clean-up and removal activities of Tenant shall, in each instance, be conducted to the satisfaction of Landlord and all governmental authorities having jurisdiction. Landlord's right of entry pursuant to Paragraph 32 shall include the right to enter and inspect the Premises for violations of tenant's covenants herein.
	(d) Tenant shall indemnify, defend and hold harmless Landlord, its partners, and its and their successors, assigns, partners, officers, employees, agents, lenders and attorneys from and against any and all claims, liabilities, losses, actions, costs and expenses (including attorneys' fees and costs of defense) incurred by such indemnified persons, or any of them, as the result of (i) the introduction into or about the Premises by Tenant or anyone for whom tenant is responsible of any Hazardous Materials, (ii) the usage, storage, maintenance, generation, disposition or disposal by Tenant or anyone for whom Tenant is responsible of Hazardous Materials in or about the Premises, (iii)) the discharge or release in or about the Premises by Tenant or anyone for whom Tenant is responsible of any Hazardous Materials, (iv) any injury to or death of persons or damage to or destruction of property resulting from the use, introduction, maintenance, storage, generation, disposal, disposition, release or discharge by Tenant or anyone for whom Tenant is responsible of Hazardous Materials in or about the Premises, and (v) any failure of tenant or anyone for whom Tenant is responsible to observe the foregoing covenants of this Paragraph 6.4.
	(e) Upon any violation of the foregoing covenants, Landlord shall be entitled to exercise all remedies available to a landlord against a defaulting tenant, including, but not limited to, those set forth in Paragraph 13.2. Without limiting the generality of the foregoing, tenant expressly agrees that upon any such violation Landlord may, at its option, (i) immediately terminate this Lease or (iii) continue this Lease in effect until compliance by Tenant with its clean-up and removal covenant notwithstanding any earlier expiration date of the term of this Lease. No action by Landlord hereunder shall impair the obligations of tenant pursuant to this Paragraph 6.4.
	(f) As used in this Paragraph 6.4, "Hazardous Materials" is used in its broadest sense and shall include any petroleum based products, pesticides, paints and solvents, polychlorinated biphenyl, lead, cyanide, DDT, acids, ammonium compounds and other chemical products and any material or material defined or designated as hazardous or toxic, or other similar term, by any federal, state or local environmental statute, regulation, or ordinance affecting the Premises presently in effect or that may be promulgated in the future, as such statutes, regulations and ordinances may be amended from time to time, including, but not limited to, the following statutes: (i) Resource Conservation and Recovery AS of 1976, 42 U.S.C. * 6901 et seq., (iii) Comprehensive Environmental Response, Compensation, and Liability AS of 1980, 42 U.S.C. * 9601 CT seq., (iii) Clean Air Act, 42 U.S.C. * 7401-7626, (iv) Water pollution Control Act (Clean Water Act of 1977), 33 U.S.C. * 1251 CT seq., (v) Insecticide, Fungicide, and Rodenticide Act (Pesticide Act of 1987), 7 U.S.C. * 135 et seq., (vi) Toxic Materials Control Act, 15 U.S.C. * 2601 ct seq., (vii) Safe Drinking Water Act, 42 U.S.C. * 300(f) ct seq., (viii) National Environmental Policy Act (NEPA) 42 U.S.C. * 4321 et seq., (ix) Refuse Act of lA99, 33 U.S.C. * 407 et seq., and (x) California Health and Safety Code * 25316 ct seq.
	(g) By its signature to this Lease, tenant confirms that it has conducted its own examination of the Premises and the Industrial Center with respect to Hazardous Materials and accepts the same "AS IS" and with no Hazardous Materials present thereon. Tenant acknowledges that incorporation of any material containing asbestos into the Premises is absolutely prohibited. Tenant agrees, represents and warrants that it Shall not incorporate or permit or suffer to be incorporated, knowingly or unknowingly, any material containing asbestos into the Premises.
	6.5 Tenant's Compliance with Law. Tenant Shall not use the Premises in any way (or permit or suffer anything to be done in or about the same) which Will conflict with any law, statute, ordinance or governmental rule or regulation or any covenant, condition or restriction (whether or not of public record) affecting the Premises, now in force or which may hereafter be enacted or promulgated, including, the provisions of any city or county zoning codes regulating the use thereof. Tenant shall, at its sole cost and expense, promptly comply with (i) all laws, statutes, ordinances and governmental rules and regulations, now in force or which may hereafter be in force, applicable to Tenant or its use of or business or operations in the Premises, including without limitation Prop. 65, if applicable, (ii) all requirements, and other covenants, conditions and restrictions, now in force or which may hereafter be in force, which affect the Premises, and (iii) all requirements, now in force or which may hereafter be in force, of any board of free underwriters or other similar body now or hereafter constituted relating to or affecting the condition, use or occupancy of the Premises (collectively, "Applicable Laws "). The judgment of any court of competent jurisdiction or the admission by tenant in any action against tenant, whether Landlord be a party thereto or not, that Tenant has violated any law, statute, ordinance, governmental rule or regulation or any requirement, covenant, condition or restriction shall be conclusive of the fact as between Landlord and Tenant. It is expressly understood and agreed that, subject to performance by Landlord of the work described in the Work Letter, if any, attached as an exhibit hereto, Tenant is accepting the Premises "AS Is, in its present state and condition, without any representations or warranties from Landlord of any kind whatsoever, either express or implied, with respect to the Premises, including compliance of the Premises with The Americans With Disabilities Act, Title 24 and the rules and regulations promulgated thereunder, as amended from time to time (Collectively, the "Agent). Except as otherwise provided for in the Work Lenore, ff. Tenant's use of the Premises or operations therein cause Landlord to incur any obligation under the ADA, as reassemble determined by Landlord, then Tenant Shall reimburse Landlord for Landlord's costs and expenses in connection therewith. If Tenant's initial use of the Premises is nor a place of public accommodation" within the meaning of the ADA, then Tenant may not thereafter change the use of the Premises to cause the Premises to become a "place of public accommodation." In the event that tenant desires or is required hereby to make alteration, improvements, additions or Utility installations (as defined in Paragraph 7.3(a) below) to the Premises in order to satisfy its obligation under the ADA, then all such alteration, improvements, additions or Utility Installations shall be subject to Paragraph 7.3 below, and shall be performed at Tenant's sole cost and expense. Tenant shall be responsible for insuring that the Premises and Tenant's use thereof and operation therein fully and completely comply with the ADA.
	6.6 Inspection; Compliance. Landlord and Landlord's lender(s) Shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by tenant with this Lease and all Applicable Laws (as defined in Paragraph 6.5), and to employ experts and/or consultants in connection therewith and/or to advise Landlord with respect to Tenant's activities, including, but not limited to, the installation, operation, use, monitoring, maintenance or removal of any Hazardous Material or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a default or breach of this Lease, violation of Applicable Law or a contamination, caused or materially contributed to by tenant, is found to exist or be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination, in which case Tenant shall upon request reimburse Landlord's lender, as the case may be, for the costs and expense of such inspections with interest at the rate set forth in Paragraph 13.5(a) below accruing from and after such cost or expire was incurred by Landlord or Landlord's lender through the date of payment in full thereof.
	 7. 	Maintenance, Repairs, Alterations and Common Area Services.
	7.1 Landlord's Obligations. Subject to the provision of Paragraphs 6 (Use), 7.2 (Tenant's Obligations) and 9 (Damage or Destruction) and except for damage caused by any negligent or intentional act or omission of Tenant, Tenant's employees, suppliers, shippers, customers, or invitees, in which event Tenant shall repair the damage, Landlord, at Landlord's expense, shall keep in good condition and repair the foundation, exterior walls, structural condition of interior bearing walls, the heating, ventilating and air conditioning system outside the Premises but serving the Premises, and roof of the Premises, as well as the parking lots, walkways, driveways, landscaping, fences, signs and utility installation of the Common Areas and all parts thereof. Landlord shall not, however, be obligated to paint the exterior or interior surface of exterior walls, nor shall landlord be required to maintain, repair or replace windows, doors or plate glass of the Premises. Landlord shall have no obligation to make repairs under this Paragraph 7.1 until a reasonable time after receipt of written notice from Tenant of the need for such repairs. tenant expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford Tenant the right to make repairs at Landlord's expire or to terminate this Lease because of Landlord's failure to keep the Premises in good order, condition and repair. Landlord shall not be liable for damages or loss of any kind or mature by reason of Landlord's failure to furnish any Common Area services when such failure is caused by accident, breakage, repairs, strikes, lockout, or other labor disturbances or disputes of any character, or by any other cause beyond the reasonable control of Landlord.
7.2 	Tenant's Obligations.
	(a) Subject to the provisions of Paragraphs 6 (Use), 7.1 (Landlord's Obligations), and 9 (Damage or Destruction), Tenant, at Tenant's expense, shall keep in good order, condition and repair the Premises and every part thereof (whether or not the damaged portion of the Premises or the means of repairing the same are reasonably or readily accessible to tenant) including, without limiting the generality of the foregoing, all plumbing, electrical and lighting facilities and equipment within the Premises, fixtures, interior walls and interior surfaces of exterior walls, ceilings, windows, doors, plate glass and skylights located within the Premises.
	(b) If Tenant fails to perform Tenant's obligations under this Paragraph 7.2 or under any other paragraph of this Lease, Landlord may enter upon the Premises after prior written notice to Tenant (except in the case of emergency dept., a situation involving a threat of property damage or personal injury), in which case no notice shall be required)), perform such obligations on Tenant's behalf and put the Premises in good order, condition and repair, and the cost thereof together with interest thereon from and after Landlord incurs the same at the maximum rate then allowable by law shall be due and payable as additional rent to Landlord together with Tenant's next Base Rent installment.
	(c) On the last day of the term hereof, or on any sooner termination, tenant shall surrender the Premises to Landlord in the same condition as received, ordinary wear and tear excepted, clean and free of debris. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices. Tenant shall repair any damage to the Premises occasioned by the installation or removal of tenant's trade fixtures, alterations, furnishings and equipment. Notwithstanding anything to the contrary otherwise stated in this Lease, subject to Landlord's right to require Tenant to remove the same pursuant to Paragraph 7.3(a) below, Tenant shall leave all Utility Installations" (as defined in such Paragraph 7.3(a)) on the Premises in good operating condition.
7.3 	Alterations and Additions.
	(a) Tenant Shall not, without Landlord's prior written consent, make any alteration, improvements, additions, or Utility Installation in, on or about the Premises, or the Industrial Center. except for interior, nonstructural alterations to the Premises, consistent in All respects with the initial tenant improvements made in the Premises, not exceeding S2,500 in cumulative costs during the term of the Lease. In any event, whether or not in excess of $2,500 in cumulative cost, Tenant shall make no change or alteration to the exterior (or visible from the exterior) of the Premises, the Building or the Industrial Center without Landlord's prior written consent. As used in this Paragraph 7.3, the term "Utility installation" shall mean carpeting, window coverings, air lines, telephone, data and other cabling, power panels, electrical distribution systems, lighting fixtures, space heaters, air condition, plumbing and fencing. Landlord may require that tenant remove any or all of said alterations, improvements, additions or Utility installations, regardless of when installed and whether at Tenant's or Landlord's expense, at the expiration of the term, and restore the Premises and the Industrial Center to their prior condition. Landlord may require Tenant to provide Landlord, at Tenant's sole cost and expose, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Landlord against any liability for mechanic's and materialmen's liens and to insure completion of the work. Should Tenant make any alterations, improvements, addition or Utility installations without the prior approval of Landlord, Landlord may, at any time during the term of this Lease, require that Tenant remove any or all of the same.
	(b) Any alteration, improvement, addition or Utility installations in or about the Premises or the Industrial Center that tenant shall desire to make and which requires the comment of the Landlord shall be presented to Landlord in written form, with proposed detailed plan and the name of the contractor Tenant proposes to perform the same. If Landlord shall give its consent, the consent shall be deemed conditioned upon Tenant acquiring a permit to do so from appropriate governmental agencies, the furnishing of a copy thereof to Landlord prior to the commencement of the work and the compliance by tenant of all conditions of said permit in a prompt and expeditious manner.
	(c) Tenant shall pay, when due, all claims for labor or materials furnished or agreed to have been furnished to or for Tenant at or for use in the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises, or the Industrial Center, or any interest therein. Tenant shall give Landlord not less than twenty (20) days' notice prior to the commencement of any work in the Premises, and Land lord shall have the right to post notices of non-responsibility in or on the Premises or the Building as provided by law. If Tenant Shall, in good faith, contest the validity of any such lien, claim or demand, then Tenant shall, at its sole expense defend itself and Landlord against the same and Shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Landlord or the Premises or the Industrial Center, upon the condition that Tenant Shall furnish to Landlord a surety bond satisfactory to Landlord in an amount equal to such contested lien claim or demand indemnifying Landlord against liability for the same and holding the Premises and the Industrial Center free from the effect of such lien or claim. In addition, Landlord may require Tenant to pay Landlord's attorneys' fees and costs in participating in such action if Land lord shall decide it is to Landlord's best interest to do so.
	(d) All alterations, improvements, additions and Utility installations (whether or not such Utility installations constitute trade fixtures of Tenant), which may be made on the Premises shall be the property of Landlord and shall remain upon and be surrendered with the Premises at the expiration of the Lease term, unless Landlord requires their removal pursuant to Paragraph 7.3(a). Notwithstanding the provision of this Paragraph 7.3(d), Tenant's machinery and equipment, other than Utility Installations and other than that which is affixed to the Premises so that it cannot be removed without damage to the Premises, shall remain the property of Tenant and may be removed by Tenant subject to the provisions of Paragraph 7.2.
	(e) Tenant Shall surrender the Premises by the end of the last day of the Term or any earlier termination date, with All of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" Shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Tenant performing All of its obligations under this Lease. Except as otherwise agreed or specified in writing by Landlord, the Premises, as surrendered, Shall include the Utility Installations. The obligation of Tenant Shall include the repair of any damage occasioned by the Installation, maintenance or removal of Tenant's trade fixtures, furnishings, equipment, and alterations and/or Utility Installation, as Well as the removal of any storage tank Installed by or for Tenant, and the removal, replacement, or redemption of any soil, material or groundwater contaminated by Tenant, all as may then be required by Applicable Law and/or good practice. Tenant's trade fixtures shall remain the property of tenant and shall be removed by Tenant subject to its obligation to repair and restore the Premises per this Lease.
	7.4 Utility Additions. Landlord reserves the right to install new or additional utility facilities throughout the Building and the Common Areas for the benefit of Landlord or Tenant, or any other tenant of the Industrial Center, including, but not by way of limitation, such utilities as plumbing, electrical systems, security systems, communication systems, and fire protection and detection systems, so long as such installation do not unreasonably interfere with Tenant's use of the Premises.
8. 	Insurance; Indemnity.
	8.1	Liability Insurance-Tenant. Tenant Shall, at Tenant's expense, obtain and keep in force during the term of this Lease a policy of combined single limit bodily injury and property damage insurance insuring Tenant and Landlord against any liability arising out of the use, occupancy or maintenance of the Premises and the Industrial Center. Such insurance Shall be on an occurrence basis with single limit coverage in an amount not less than S1,000,000.00 per occurrence. The policy Shall insure performance by Tenant of the indemnity Provision of this Paragraph 8. The limits of said insurance shall not, however, limit the liability of Tenant hereunder nor relieve Tenant of any obligation hereunder. Any insurance to be carried by Tenant Shall be primary to and not contributory with any similar insurance carried by Landlord, whose insurance Shall be excess insurance only. Tenant Shall carry workers' compensation insurance in the amount required by law, and such other coverage (whether property, liability or other) as Landlord Shall deem necessary or desirable from time to time.
	8.2 Property Insurance - Tenant. Subject to the requirements of Paragraph 8.5, Tenant at its cost Shall either by separate policy or, with comment of Landlord, by endorsement to a policy already carried, maintain insurance coverage on all of Tenant's personal property, tenant owned alteration and Utility installations in, on, or about the Premises with full replacement cost coverage with a deductible of not to exceed S5,000 per occurrence. The proceeds from any such insurance shall be used by Tenant for the replacement of personal property or the restoration of tenant owned alterations and Utility installations. tenant shall, from time to time upon Landlord's request, provide Landlord with written evidence that such insurance is in force.
	8.3 Property Insurance. Landlord shall obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Industrial Center improvements, but not Tenant's personal property, fixtures, equipment or tenant improvements, in an amount not less than eighty percent (80 %) of the full replacement value thereof, as the same may exist from time to time, providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, nood (in the event same is required by a lender having a lien on the Premises), special extended perils (at risk", as such term is used in the insurance industry), plate glass insurance and such other insurance as Land lord deems advisable.
8.4 	Payment of Premium Increase.
	(a) tenant shall pay the entirety of any increase in the property insurance premium for the Industrial Center over what it was immediately prior to the commencement of the Term of this Lease ff. the increase is specified by Landlord's insurance carrier as being caused by the nature of Tenant's occupancy or any act or omission of Tenant.
	(b) If the Premises are part of a larger building, or ff. the Premises are part of a group of buildings owned by Landlord which are adjacent to the Premises, then Tenant shall pay for any increase in the premiums for the property insurance of such building or buildings ff. said increase is caused by Tenant's acts, omissions, use or occupancy of the Premises.
	8.5 Insurance Policies. Insurance required hereunder Shall be in companies holding a General Policyholders Rating" of at least A or such other rating as may be required by a lender having a lien on the Premises, as set forth in the most current issue of Best's Insurance Guide.. Tenant Shall not do or permit to be done anything which Shall invalidate the insurance policies carried by Land lord. Tenant Shall deliver to Landlord copies of liability and property insurance policies required under Paragraphs 8.1 and 8.2 or certificates evidencing the existence and amounts of such insurance within seven (7) days after the Commencement Date. No such policy shall be cancelable or subject to reduction of coverage or other modification except after thirty (30) days' prior written notice to Landlord. tenant shall, at least thirty (30) days prior to the expiration of such policies, and without the requirement of further notice, furnish Landlord with renewals or "binders" thereof.
	8.6 Waiver of Subrogation. tenant and Landlord each hereby release and relieve the other, and waive their entire right of recovery against the other, for loss or damage arising out of or incident to the perils insured against under policies of property insurance carried hereunder (or required to be insured against under property insurance hereunder, whether or not such insurance required hereunder is actually obtained and/or maintained) which perils occur in, on or about the Premises, whether due to the negligence of Land lord or Tenant or their agents, employees, contractors and/or invitees. Tenant and Land lord shall, upon obtaining the policies of insurance required hereunder, give notice to the insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease.
	8.7 Indemnity. tenant shall indemnify and hold harmless Landlord and its agents, Landlord's master or ground lessor, partners and lenders from and against any and all claims, loss of rents and/or damages, losses, costs, liens, judgments, penalties, permits, causes of action, attorneys' and consultant's fees, expenses and/or liabilities arising out of, involving, or dealing with tenant's use of the Premises or the Industrial Center, or from the conduct of tenant's business or from any activity, work or things done, permitted or suffered by tenant in or about the Premises or elsewhere and shall further indemnify and hold harmless such indemnified parties from and against any and all claims arising from any breach or default in the performance of any obligation on tenant's part to be performed under the terms of this Lease, or arising from any act or omission of Tenant, or any of Tenant's agents, contractors, employees or invitees, and from and against All costs, attorneys' fees, expenses and liabilities incurred in the defense of any such claim or any action or proceeding brought thereon, and in case any action or proceedings be brought against any such indemnified any by reason of any such claim, Tenant upon notice from Land lord shall defend the same at tenant's expense by counsel reasonably satisfactory to Land lord and Landlord shall cooperate with Tenant in such defense. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Land lord) litigated and/or reduced to judgment, and whether well founded or not. In case any action or proceeding be brought against Landlord by reason of any of the foregoing matters, Tenant upon notice from Landlord shall defend the same at Tenant's expense by counsel reasonably satisfactory to Land lord and Landlord shall cooperate with Tenant in such defense. Landlord need not have first paid any such claim in order to be so indemnified. Tenant, as a material pan of the consideration to Landlord, hereby assumes all risk of damage to property of tenant or injury to persons, in, upon or about the Industrial Center arising from any cause and Tenant hereby waives all claims in respect thereof against Landlord.
	8.8 Exemption of Landlord from Liabilities. Tenant hereby agrees that Landlord shall not be liable for injury to Tenant's business or any loss of income therefrom or for damage to the goods, wares, merchandise or other property of Tenant, Tenant's employees, invitees, customers, or any other person in or about the Premises or the Industrial Center, nor Shall Landlord be liable for injury to the person of Tenant, Tenant's employees, agents or contractors, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the Industrial Center, or from other sources or places and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Tenant. Landlord shall not be liable for any damages arising from any act or neglect of any other tenant, occupant or user of the Industrial Center, nor from the failure of Land lord to enforce the provisions of any other lease of the Industrial Center. Notwithstanding Landlord's negligence, willful misconduct or breach of this Lease, Landlord shall under no circumstances be liable for consequential damages, or for injury to Tenant's business or for any loss of income or profit therefrom.
	8.9 Limitation of Liability. Tenant agrees that. in the event Tenant shall! have any claim against landlord under this T ease 2~.S'-g out of the subject manner of this Lease, Tenant's sole recourse shall be against the Landlord's interest in the Industrial Center for the satisfaction of any claim, judgment or decree requiring the payment of money by Landlord as a result of a breach hereof or otherwise in connection with this Lease, and no other property or assets of Land lord, its successors or assigns, shall be subject to the levy, execution or other enforcement procedure for the satisfaction of any such claim, judgment, injunction or decree. In addition, in no event shall Landlord be liable for any consequential damages. Tenant funkier hereby waives any and all right to assess any claim against or obtain any damages from, for any reason whatsoever, the directors, officers and partners of Landlord, including all injuries, damages or losses to tenant's property, real and personal, whether known, unknown, foreseen, unforeseen, patent or latent, which tenant may have against Landlord or its directors, officers or partners. Tenant understands and acknowledges the significance and consequence of such specific waiver.
9. 	Damage or Destruction.
9.1 	Definitions.
	(a)	Premises Partial Damage Shall mean if the Premises are damaged or destroyed to the extent that the cost of repair is less than fifty percent (50%) of the then replacement cost of the Premises.
	(b)	"Premises Total Destruction" shall mean if the Premises are damaged or destroyed to the extent that the cost of repair is fifty percent (SO 9G) or more of the then replacement cost of the Premises.
	(c)	"Premises Building Partial Damage" Shall mean if the Building of which the Premises are a pan is damaged or destroyed to the tenant that the cost to repair is less than fifty percent (50%) of the then replacement cost of the Building. 	(d)	"Premises Building Total Destruction" shall mean if the Building of which the Premises are a pan is damaged or destroyed to the extent that the cost to repair is twenty-five percent (25 %) or more of the then replacement cost of the Building.
(e) 	"Industrial Center Buildings " shall mean all of the buildings on the Industrial Center site depicted on Exhibit B hereto.
	(f)	"Industrial Center Buildings Total Destruction" shall mean if the Industrial Center Buildings are damaged or destroyed to the extent that the cost of repair is twenty- five percent (25%) or more of the then replacement cost of the Industrial Center Buildings.
	(g) "Insured Loss ~ Shall mean damage or destruction which was caused by an event required to be covered by the insurance described in Paragraph 8, or for which insurance coverage is otherwise available. The fact that an Insured Loss has a deductible amount Shall not make the loss an uninsured loss.
	(h)	"Replacement Cost" Shall mean the amount of money necessary to be spent in order to repair or rebuild the damaged area to the condition that existed immediately prior to the damage occurring excluding All improvements made by tenants.
9.2 	Premises Partial Damage; Premises Building Partial Damage.
	(a) Insured Loss: Subject to the provisions of Paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is an Insured Loss and which falls into the classification of either Premises Partial Damage or Premises Building Partial Damage, then Land lord shall, at Landlord's expense, repair such damage to the Premises, but not Tenant's fixtures, equipment or tenant improvements, as soon as reasonably possible and this Lease shall continue in full force and effect.
	(b) Uninsured Loss: Subject to the provisions of Paragraphs 9.4 and 9.5, ff. at any time during the term of this Lease there is damage which is not an Insured Loss and which falls within the classification of Premises Partial Damage or Premises Building Partial Damage, unless caused by a negligent or willful act of Tenant (in which event tenant shall make the repairs at tenant's expense), which damage prevents Tenant from using the Premises, Land lord may at Landlord's option either (i) repair such damage as soon as reasonably possible at Landlord's expense, in which event this Lease shall continue in full force and effect, or (iii) give written notice to Tenant within sixty (60) days after the date of the occurrence of such damage of Landlord's intention to cancel and terminate this Lease as of the date of the occurrence of such damage. In the event Landlord elects to give such notice of Landlord's intention to cancel and terminate this Lease, Tenant shall have the right within ten (10) days after the receipt of such notice to give written notice to Landlord of Tenant's intention to repair such damage at Tenant's expense, without reimbursement from Land lord, in which event this Lease Shall continue in Full force and effect, and Tenant Shall proceed to make such repairs as soon as reasonably possible. If Tenant does not give such notice within such ten (10) day period this Lease Shall be canceled and terminated as of the date of the occurrence of such damage.
9.3 	Premises Total Destruction; Premises Building Total Destruction; Industrial Center Buildings Total Destruction.
	(a) Subject to the provisions of Paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage, whether or not it is an Insured Loss, and which falls into the classifications of either (i) Premises Total Destructio4 or (u) Premises Building Total Destructio4 or (iii) Industrial Center Buildings Total Destruction, then Landlord may at Landlord's option either (i) repair such damage or destructio4 but not Tenant's fixtures, equipment or tenant improvements, as soon as reasonably possible at Landlord's expense, and this Lease shall continue in full force and effect, or (u) give written notice to Tenant within sixty (60) days after the date of occurrence of such damage of Landlord's intention to cancel and terminate this Lease, in which case this Lease shall be canceled and terminated as of the date of the occurrence of such damage.
9.4 	Damage Near End of Term.
	(a) Subject to Paragraph 9.4(b), if at any time during the last twelve (12) months of the term of this Lease there is substantial damage, whether or not an Insured Loss, which falls within the classification of Premises Partial Damage or Premises Building Panial Damage, Landlord may at Landlord's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Tenant of Landlord's election to do so within sixty (60) days after the date of occurrence of such damage.
	(b) Notwithstanding Paragraph 9.4(a), in the event that tenant has an option to extend or renew this Lease, and as of the occurrence of the damage the time within which said option may be exercised has not yet expired, Tenant shall exercise such option, if it is to be exercised at all, no later than twenty (20) days after the occurrence of an Insured Loss falling within the classification of Premises Panial Damage, during the last twelve (12) months of the term of this Lease. If Tenant duly exercises such option during said twenty (20) day period, Landlord shall, at Landlord's expense, repair such damage, but not Tenant's fixtures, equipment or tenant improvements, as soon as reasonably possible and this Lease shall' continue in Full force and effect. If tenant fails to exercise such option during said twenty (20) day period, then Landlord may at Landlord's option terminate and cancel this Lease as of the expiration of said twenty (20) day period by giving written notice to tenant of Landlord's election to do so within thirty (30) days after the expiration of said twenty (20) day period, notwithstanding any term or provision in the grant of option to the contrary.
	9.5 Abatement of Rent; Tenant's Remedies. In the event Landlord repairs or restores the Premises pursuant to the provisions of this Paragraph 9, the Base Rent payable hereunder for the period during which such damage, repair or restoration continues shall be abated in proportion to the degree to which tenant's use of the Premises is impaired to the extent that Landlord is reimbursed therefor by proceeds of rental interruption insurance, if any, carried by Landlord or Tenant. Except for abatement of Base Rent, if any, Tenant shall have no claim against Landlord for any damage suffered by reason of any such damage, destruction, repair or restoration.
	9.6 Termination-Advance Payments. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance rent and any advance payments made by Tenant to Landlord. Landlord shall, in addition, so long as tenant is not in default hereunder, return to Tenant so much of Tenant's security deposit as has not therefore been applied by Landlord.
	9.7	Waiver. Landlord and Tenant waive the provisions of any statute which relate to termination of leases when leased property is destroyed and agree that such event shall be governed by the terms of this Lease.
10.	Real Property Taxes.
	10.1 (a) Landlord shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Premises. Notwithstanding the foregoing, Tenant shall pay to Landlord upon demand therefor the entirety of any increase in Real Property Taxes assessed by reason of Alterations or Utility Installations placed upon the Premises by Tenant or at Tenant's request.
	10.2 Definition of "Real Property Taxes". As used herein, the term "Real Property Taxes" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, persoM1 income or estate taxes) imposed upon the Industrial Center by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other Improvement district thereof, levied against any legal or equitable interest of Landlord in the Premises or in the real property of which the Premises are a part, Landlord's right of rent or other income therefrom, and/or Landlord's business of leasing the Premises, or otherwise imposed on Landlord as an owner of real property in lieu of or in addition to real property taxes. The term "Real Property Taxes " shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in applicable law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Premises or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties.
10.3 	Personal Property Taxes.
	(a) Tenant shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Tenant contained in the Premises or elsewhere. When possible, Tenant shall cause said trade fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Landlord.
	(b)	If any of Tenant's said personal property shall be assessed with Landlord's real property, Tenant shall pay to Landlord the taxes attributable to Tenant within ten (10) days after receipt of a written statement setting forth the taxes applicable to Tenant's property.
11. Utilities. Tenant shall pay for all water, gas, heat, light, power, telephone and other utilities and services supplied to the Premises, together with any Taxes thereon, including hook-up charges and/or penalties. If any such services are not separately metered to the Premises, Tenant shall pay a reasonable proportion to be determined by Landlord of all charges jointly metered with other premises in the Building.
12.1 	Landlord's Consent Required.
	(a) Tenant shall not, directly or indirectly, voluntarily or by operation of law, sell, assign, encumber, pledge or otherwise transfer or hypothecate all or any part of the Premises or Tenant's leasehold estate hereunder (collectively "Assignment.), or permit the Premises to be occupied by anyone other than Tenant or sublet the Premises (Sublease") or any opinion thereof without Landlord's prior written consent being had and obtained in each instance, subject to the terms and conditions contained in this Paragraph.
	(b) If Tenant desires at any time to enter into an Assignment of this Lease or a Sublease of the Premises or any opinion thereof, Tenant shall request, in writing, at least sixty (60) days prior to the effective date of the Assignment or Sublease, Landlord