Item 1. Business ----------------
(a) General Development of Business
On February 10, 1998, Haverty Furniture Companies, Inc. and Furniture Brands International, Inc. jointly announced a strategic alliance whereby Havertys will allocate, upon full implementation of the program, up to one-half of its retail floor space in all of its stores to the prominent display of product manufactured by the Company.
(c) Narrative Description of Business
Furniture Brands International, Inc., the largest manufacturer of residential furniture in the United States, markets its products through its three operating subsidiaries: Broyhill Furniture Industries, Inc.; Lane Furniture Industries, Inc.; and Thomasville Furniture Industries, Inc.
PRODUCTS --------
The Company manufactures and distributes (i) case goods, consisting of bedroom, dining room and living room furniture, (ii) occasional furniture, consisting of wood tables and accent items and freestanding home entertainment centers and home office items, (iii) stationary upholstery products, consisting of sofas, loveseats, sectionals and chairs and (iv) recliners, motion furniture and sleep sofas. The Company's brand name positioning by price and product category are shown below.
UPHOLSTERY ---------------------------- MOTION/ PRICING CATEGORY CASE GOODS OCCASIONAL STATIONARY RECLINER ---------------- ---------- ---------- ---------- ----------- PREMIUM Thomasville Thomasville Thomasville Lane Lane Lane
BEST Thomasville Thomasville Thomasville Thomasville Lane Lane Lane Lane Broyhill
BETTER Lane Lane Lane Lane Broyhill Broyhill Broyhill Broyhill
GOOD Broyhill Broyhill Broyhill Lane
PROMOTIONAL Founders
RTA CreativeInteriors
BROYHILL FURNITURE INDUSTRIES
Broyhill produces collections of medium price bedroom, dining room, upholstered and occasional furniture aimed at middle-income consumers. Broyhill's wood furniture offerings consist primarily of bedroom, dining room and living room furniture, occasional tables, accent items and free-standing home entertainment centers. Upholstered products include sofas, sleep sofas, loveseats, sectionals, chairs, and fully reclining furniture all offered in a variety of fabrics and leathers. Broyhill's residential furniture divisions produce a wide range of furnishings in colonial, country, traditional, contemporary and lifestyle designs.
The widely recognized Broyhill trademarks include Broyhill, Broyhill Premier and Highland House. The flagship Broyhill product line concentrates on bedroom, dining room, upholstered and occasional furniture designed for the "good" and "better" price categories. The Broyhill Premier product line enjoys an excellent reputation for classically styled, complete furniture collections in the "better" price category. Highland House also manufactures upholstered products in the "better" and "best" price category.
LANE FURNITURE INDUSTRIES
Lane manufactures and markets a broad range of high quality furniture targeting the "better," "best" and "premium" price categories. Lane targets niche markets with its seven operating divisions, which participate in such segments of the residential furniture market as 19th century reproductions, motion furniture, wicker and rattan, cedar chests and finely tailored upholstered furniture.
Action Industries manufactures and markets reclining chairs and motion furniture in the "good," "better" and "best" price categories under the Lane brand name. Motion furniture consists of sofas and loveseats with recliner-style moving parts and comfort features, wall saver recliners, pad-over chaise recliners, hi-leg recliners, sleep sofas and motion sectionals. Royal Development Company designs and manufactures the mechanisms used in Action Industries' reclining furniture products.
The Lane division manufactures and sells cedar chests, occasional living room tables, bedroom and dining room furniture, wall systems, desks, console tables and mirrors and other occasional wood pieces. The Lane division furniture is sold in the "better" and "best" price categories.
The Hickory Chair division manufactures and markets traditional styles of upholstered furniture, dining room chairs and occasional tables in the "best" and "premium" price categories. The Hickory Chair division has been crafting fine reproductions of 18th century furniture for over 80 years. For example, Hickory Chair offers the James River collection which features reproductions of fine furnishings from Virginia plantations, and the Mount Vernon collection, which features reproductions from George Washington's home.
The Pearson division has been manufacturing and selling contemporary and traditional styles of finely tailored upholstered furniture including sofas, loveseats, chairs and ottomans for over 50 years. Pearson furniture sells in the "premium" price category and is distributed to high-end furniture stores and interior designers.
The Venture division manufactures and markets moderately priced wicker, rattan and bamboo upholstered furniture, tables, occasional wood pieces and other home furnishing accessories. Venture manufactures a line of outdoor and patio furniture featuring fast drying upholstered cushions under the names WeatherMaster and Weathercraft, which have developed significant consumer acceptance.
The Lane Upholstery division includes two product lines, one of which is composed of contemporary and modern upholstered furniture and metal and glass occasional and dining tables, and the other of which is composed of traditional and contemporary upholstered furniture, primarily sofas, loveseats, chairs and ottomans.
Hickory Business Furniture manufactures and sells a line of office furniture, including chairs, tables, conference tables, desks and credenzas, in the upper-medium price range.
THOMASVILLE FURNITURE INDUSTRIES
Thomasville manufactures and markets wood furniture, upholstered products and RTA/promotional furniture. Thomasville markets its products primarily under the Thomasville brand name. Thomasville offers an assortment of upholstery and wood under one brand name that targets the "best" and "premium" price categories. Upholstery is primarily marketed in three major styles: Traditional, American Traditional/Country and Casual/Lifestyle Contemporary. Upholstery style is determined by both frame style and fabric or leather selection. Thomasville's frame assortment allows the consumer to select from a wide variety of different styles within the general style categories, and as much as 45% of the Thomasville fabric and leather offering changes in a 12 month period, insuring that the latest colors and textures are available.
Wood furniture is primarily marketed in four major styles: American Traditional/Country, 18th Century, European Traditional and Casual Contemporary. To appeal to a younger generation, the Company has recently introduced products which feature smaller scale and lighter wood than Thomasville's traditional wood furniture.
Thomasville's Founders division offers assembled bedroom sets, bookcases and home entertainment centers as well as RTA (ready-to- assemble) furniture such as home entertainment centers, bookcases, bedroom and kitchen/utility furniture and computer desks. Thomasville's Founders division markets products under the CreativeInteriors (RTA)and Founders (assembled)brand names to a variety of retailers for sale to consumer end-users and certain
contract customers.
DISTRIBUTION ------------
The Company's strategy of targeting diverse distribution channels such as furniture centers, independent dealers, national and local chain stores, department stores, specialty stores and decorator showrooms is supported by dedicated sales forces covering each of these distribution channels. The Company continues to explore opportunities to expand international sales and to distribute through non-traditional channels such as electronic retailers, wholesale clubs, catalog retailers and television home shopping.
The Company's breadth of product and national scope of distribution enable it to service effectively national retailers such as J.C. Penney, Sears and Heilig-Meyers and key regional retailers such as Havertys, Breuner's Home Furnishings Corp. and Roberds. The consolidation of the retail residential furniture industry has made access to distribution channels an important competitive advantage for manufacturers. The Company has developed dedicated distribution channels by expanding its gallery program and the network of independently-owned dedicated retail locations, such as Thomasville Home Furnishings stores. The Company distributes its products through a diverse network of independently-owned retail locations, which includes 97 free-standing stores, 1,089 galleries and 443 furniture centers.
Haverty Furniture Companies, Inc. and the Company recently announced a strategic alliance whereby Havertys will allocate, upon full implementation of the program, up to one-half of its retail floor space in all of its stores to the prominent display of product manufactured by the Company. This alliance advances the Company's strategy of expanding distribution and dedicated display space.
Broyhill, Lane and Thomasville have all developed gallery programs with dedicated dealers displaying furniture in complete room ensembles. These retailers employ a consistent showcase gallery concept wherein products are displayed in complete and fully accessorized room settings instead of as individual pieces. This presentation format encourages consumers to purchase an entire room of furniture instead of individual pieces from different manufacturers. The Company offers substantial services to retailers to support their marketing efforts, including coordinated national advertising, merchandising and display programs and extensive dealer training.
The Thomasville Home Furnishings stores are dealer-owned, free-standing retail locations that exclusively feature Thomasville furniture. The Company believes distributing its products through dedicated, free-standing stores strengthens brand awareness, provides well-informed and focused sales personnel and encourages the purchase of multiple items per visit. Management is currently evaluating similar opportunities to jointly market Broyhill, Lane and Thomasville products in dealer-owned retail stores.
Showrooms for the national furniture market are located in High Point, North Carolina and for regional markets in Dallas, Texas; Atlanta, Georgia; Chicago, Illinois; and San Francisco, California.
BROYHILL FURNITURE INDUSTRIES
One of Broyhill's principal distribution channels is the Broyhill Showcase Gallery Program. This program, started in 1983, involves 348 domestic and international participating dealer locations. Each dealer in the Broyhill Showcase Gallery Program owns the gallery and the Broyhill furniture inventory. The program incorporates a core merchandise program, advertising material support, in-store merchandising events and educational opportunities for the retail store sales and management personnel. The average Broyhill Showcase Gallery consists of 7,500 square feet of dedicated display space. Furniture is displayed in complete and fully accessorized room settings instead of as individual pieces.
For the retailer that is currently not a participant in the gallery program, Broyhill offers the Independent Dealer Program. This concept, initiated in 1987, is designed to strengthen Broyhill's relationship with these retailers by assisting them in overcoming some of the significant difficulties in running an independent furniture business. Participating retailers in the Independent Dealer Program commit to a minimum, pre-selected lineup of Broyhill merchandise and, in return, receive a detailed, step-by-step, year-round advertising and merchandising plan. The program includes three major sales events per year, monthly promotional themes and professionally prepared advertising and promotional materials at nominal cost in order to help increase consumer recognition on the local level. As part of the Independent Dealer Program, Broyhill offers the Broyhill Furniture Center Program to 443 retailers that have committed at least 2,000 square feet exclusively to Broyhill products arranged in gallery-type room settings. This program includes all of the benefits of the Independent Dealer Program, plus additional marketing, design and advertising assistance. The Company seeks to develop these relationships so that some of these retailers may become participants in the Broyhill Showcase Gallery Program.
LANE FURNITURE INDUSTRIES
Lane distributes its products nationally through a well established network of approximately 16,000 retail locations. A diverse distribution network is utilized in keeping with Lane's strategy of supplying customers with highly specialized products in selected niche markets. This distribution network primarily consists of independent furniture stores, regional chains such as Havertys and Art Van, and department store companies such as J.C. Penney, Sears, May Department Stores, Federated Department Stores and Dillard Department Stores.
Lane has an established specialty gallery program with 485 participating dealers. This includes 234 dealer-owned Comfort Showcase Galleries established by Action Industries. The Action Industries galleries average approximately 4,200 square feet of retail
space specifically dedicated to the display, promotion and sale of Action Industries' products. Lane's other gallery programs call for the display of Lane case goods and upholstered furniture in settings that range from 200 square feet for a cedar chest boutique to 4,000 square feet for a Hickory Chair gallery.
THOMASVILLE FURNITURE INDUSTRIES
Thomasville products are offered at 684 independently-owned retail locations, including 256 Thomasville Galleries, 97 Thomasville Home Furnishings stores and 331 authorized dealers. The Thomasville Gallery concept was initiated in 1983. Thomasville Galleries have an average 7,500 square feet of retail space specifically dedicated to the display, promotion and sale of Thomasville products. The first Thomasville Home Furnishings store opened in 1988. The typical Thomasville Home Furnishings store is a 15,000 square foot independently-owned store offering a broad range of Thomasville products, presented in a home-like setting by specially trained salespersons.
Thomasville's Founders division sells promotional and RTA furniture to a variety of retailers for sale to consumer end-users and certain contract customers. Promotional furniture is sold to retail chains such as Value City and Levitz, as well as independent furniture stores. Promotional furniture is also sold in the hospitality and health care markets of Thomasville's contract business. RTA customers include national chains such as Wal-Mart and Target, catalog showrooms, discount mass merchandisers, warehouse clubs and home furnishings retailers.
MARKETING AND ADVERTISING -------------------------
Advertising is used to increase consumer awareness of the Company's brand names and is targeted to specific customer segments through leading shelter magazines and popular magazines such as Better Homes and Gardens, People and Good Housekeeping. Each operating company uses focused advertising in major markets to create buying urgency around specific sale and location information, enabling retailers to be listed jointly in advertisements for maximum advertising efficiency and shared costs. The Company seeks to increase consumer buying and strengthen relationships with retailers through cooperative advertising and selective promotional programs. The Company focuses its marketing efforts on prime potential customers utilizing information from databases and from callers to each operating company's toll-free telephone number. Each of the operating companies is developing and beginning to implement national and regional television advertising campaigns.
BROYHILL FURNITURE INDUSTRIES
Broyhill's advertising programs focus on translating its strong consumer awareness into increased sales. Broyhill's current marketing strategy features a national print advertising program in addition to
traditional promotional programs such as furniture "giveaways" on television game shows and dealer-based promotions such as product mailings and brochures. The national print advertising program, which consists of multi-page layouts, is designed to appeal to the consumer's desire for decorating assistance and increased confidence in making the decision to purchase a big ticket product such as furniture. These advertisements are run in publications such as Good Housekeeping and Better Homes and Gardens which appeal to Broyhill's customer base. Game show promotions, a long-standing Broyhill tradition, include popular programs such as Wheel of Fortune and The Price is Right. An extensive public relations campaign also exposes Broyhill products in leading magazine and newspaper editorial features.
LANE FURNITURE INDUSTRIES
Lane became a well-known brand name through The Lane Company, Incorporated's initial use in the 1920s of creative advertising to promote its cedar chests. Since then, Lane has continued to use advertising programs to generate consumer awareness of the Lane brand name. Through Lane's in-house advertising agency, recent programs have been developed for print campaigns in national publications such as Country Home, Country Living, House Beautiful and Architectural Digest. Action Industries is engaged in selective national and regional television advertising.
The Lane Keepsake program enables the 1,100 participating dealers to establish early personal contact with a large number of women who are about to enter the bridal market as potential buyers of home furnishings. Information regarding a graduation gift of a miniature Lane cedar chest, available at the local participating furniture store, is sent to the parents of graduating high school women. This Keepsake program is believed to be instrumental in building consumer recognition and promoting the Lane brand name.
Lane markets its products through the use of well-known designers and affiliation with institutions. For example, Lane has teamed up with widely recognized designers such as Raymond Waite and Mark Hampton as well as design institutions such as the American Museum of Folk Art in New York, to design and market furniture collections.
THOMASVILLE FURNITURE INDUSTRIES
Thomasville's current advertising campaign, appearing in household magazines and periodic television commercials, emphasizes Thomasville fashion and quality leadership through the use of dramatic photographs featuring individual, high quality wood and upholstery pieces. Thomasville ads appear in up-front positions in national household magazines, such as Better Homes and Gardens, Good Housekeeping and House Beautiful.
To help retailers sell its products through to consumers, Thomasville offers a full twelve month schedule of promotional support which includes promotional concepts, selected product discounts, cooperative
advertising funds for stores that sell only Thomasville products, and a complete advertising package with color newspaper layouts plus radio and television commercials dealers can use as supplied. Four times each year, Thomasville runs national sale events to coincide with major industry sale periods. These may include national print ads or Thomasville-designed newspaper inserts for dealer use.
MANUFACTURING -------------
Broyhill operates 18 finished case goods and upholstery production and warehouse facilities totalling over 5.0 million square feet of manufacturing and warehouse space. All finished goods plants are located in North Carolina. Broyhill pioneered the use of mass production techniques in the furniture industry and by utilizing longer production runs achieves economies of scale.
Lane operates 14 finished case goods and upholstery production and warehouse facilities in Virginia, North Carolina and Mississippi. Since the late 1980s, significant capital expenditures have been made to acquire technologically advanced manufacturing equipment which has increased factory productivity.
Thomasville manufactures or assembles its products at 16 finished case goods and upholstery production and warehouse facilities located in North Carolina, Virginia, and Tennessee, close to sources of raw materials and skilled craftsmen. Each plant is specialized, manufacturing limited product categories, allowing longer, more efficient production runs and economies of scale.
The manufacturing process for Thomasville's Founders division is highly automated. Large fiberboard and particleboard sheets are machine-finished in long production runs, then stored and held for assembly using highly automated assembly lines. Completed goods are stored in an automated warehouse to provide quicker delivery to customers. Ninety percent of CreativeInteriors products are shipped within 14 days of production.
RAW MATERIALS AND SUPPLIERS ---------------------------
The raw materials used by the Company in manufacturing its products are lumber, veneers, plywood, fiberboard, particleboard, paper, hardware, adhesives, finishing materials, glass, mirrored glass, fabrics, leathers and upholstered filling material (such as synthetic fibers, foam padding and polyurethane cushioning). The various types of wood used in the Company's products include cherry, oak, maple, pine and pecan, which are purchased domestically, and mahogany, which is purchased abroad. Fabrics, leathers and other raw materials are purchased both domestically and abroad. Management believes that its supply sources for those materials are adequate.
The Company has no long-term supply contracts and has experienced no significant problems in supplying its operations. Although the Company
has strategically selected suppliers of raw materials, the Company believes that there are a number of other sources available, contributing to its ability to obtain competitive pricing for raw materials. Raw materials prices fluctuate over time depending upon factors such as supply, demand and weather. Increases in prices may have a short-term impact on the Company's margins for its products.
The majority of supplies for RTA and promotional products are purchased domestically, although paper and certain hardware is purchased abroad. Management believes, however, that its proximity to and relationships with suppliers are advantageous for the sourcing of such materials. In addition, by combining the purchase of various raw materials (such as foam, cartons, springs and fabric) and services, Broyhill, Lane, and Thomasville have been able to realize cost savings.
ENVIRONMENTAL MATTERS ---------------------
The Company is subject to a wide-range of federal, state and local laws and regulations relating to protection of the environment, worker health and safety and the emission, discharge, storage, treatment and disposal of hazardous materials. These laws include the Clean Air Act of 1970, as amended, the Resource Conservation and Recovery Act, the Federal Water Pollution Control Act and the Comprehensive Environmental, Response, Compensation and Liability Act ("Superfund"). Certain of the Company's operations use glues and coating materials that contain chemicals that are considered hazardous under various environmental laws. Accordingly, management closely monitors the Company's environmental performance at all of its facilities. Management believes that the Company is in substantial compliance with all environmental laws. While the Company may be required to make capital investments at some of its facilities to ensure compliance, the Company believes that it will continue to meet all applicable requirements in a timely fashion and that the amount of money required to meet these requirements will not materially affect its financial condition or its results of operations.
The Company has been identified as a potentially responsible party ("PRP") at a number of superfund sites. The Company believes that its liability with respect to most of the sites is de minimis, and the Company is entitled to indemnification by others with respect to liability at certain sites. Management believes that any liability as a PRP with regard to the superfund sites will not have a material adverse effect on the financial condition or results of operations of the Company.
COMPETITION -----------
The furniture manufacturing industry is highly competitive. The Company's products compete with products made by a number of furniture manufacturers, including Lifestyle Furnishings International Ltd., La-Z-Boy Incorporated, Ladd Furniture, Inc., Bassett Furniture
Industries, Inc., and Ethan Allen Interiors, Inc. as well as approximately 600 smaller producers. The elements of competition include pricing, styling, quality and marketing.
EMPLOYEES ---------
As of December 31, 1997, the Company employed approximately 20,700 people. None of the Company's employees is represented by a union.
BACKLOG -------
The combined backlog of the Company's operating companies as of December 31, 1997 aggregated approximately $223 million, compared to approximately $205 million as of December 31, 1996.
Item 2.
Item 2. Properties -------------------
The Company owns or leases the following principal plants, offices and warehouses:
Floor Owned Type of Space or Division Location Facility (Sq. Ft.) Leased --------- -------- -------- --------- ------ Furniture Brands St. Louis, MO Headquarters 26,800 Leased
Broyhill Lenoir, NC Headquarters 136,000 Leased
Broyhill Lenoir, NC Plant/Warehouse 312,632 Owned
Broyhill Newton, NC Plant/Warehouse 382,626 Owned
Broyhill Lenoir, NC Plant/Warehouse 628,000 Owned
Broyhill Rutherfordton, NC Plant/Warehouse 575,656 Owned
Broyhill Lenoir, NC Plant/Warehouse 419,000 Owned
Broyhill Lenoir, NC Plant/Warehouse 381,820 Owned
Broyhill Conover, NC Plant/Warehouse 316,542 Owned
Broyhill Lenoir, NC Plant/Warehouse 516,439 Owned
Broyhill Lenoir, NC Plant/Warehouse 256,318 Owned
Broyhill Lenoir, NC Plant 56,250 Leased
Broyhill Lenoir, NC Plant/Warehouse 252,380 Owned
Floor Owned Type of Space or Division Location Facility (Sq. Ft.) Leased --------- -------- -------- --------- ------
Broyhill Taylorsville, NC Plant/Warehouse 212,754 Owned
Broyhill Lenoir, NC Plant 124,700 Leased
Broyhill Hickory, NC Plant/Warehouse 215,500 Leased
Broyhill Marion, NC Plant 22,712 Owned
Broyhill Lenoir, NC Warehouse 96,000 Owned
Broyhill Lenoir, NC Warehouse 252,250 Leased
Broyhill Lenoir, NC Warehouse 55,800 Leased
Lane Altavista, VA Plant/Warehouse 1,091,600 Owned
Lane Altavista, VA Headquarters 62,000 Owned
Lane Conover, NC Plant/Warehouse 212,000 Owned
Lane Conover, NC Plant/Warehouse 348,180 Owned
Lane Conover, NC Plant 195,130 Owned
Lane Hickory, NC Plant/Warehouse 641,214 Owned
Lane Hickory, NC Plant/Warehouse 169,902 Owned
Lane High Point, NC Plant 187,162 Owned
Lane High Point, NC Plant/Warehouse 156,000 Owned
Lane Pontotoc, MS Plant/Warehouse 352,740 Owned
Lane Rocky Mount, VA Plant/Warehouse 598,962 Owned
Lane Verona, MS Plant/Warehouse 395,050 Owned
Lane Saltillo, MS Plant/Warehouse 567,500 Owned
Lane Tupelo, MS Plant/Warehouse 396,175 Owned
Lane Rocky Mount, VA Plant 50,300 Owned
Thomasville Thomasville, NC Headquarters/ 256,000 Owned Showroom
Thomasville Thomasville, NC Plant/Warehouse 412,000 Owned
Floor Owned Type of Space or Division Location Facility (Sq. Ft.) Leased --------- -------- -------- --------- ------
Thomasville Thomasville, NC Plant 240,000 Owned
Thomasville Thomasville, NC Plant 325,000 Owned
Thomasville Thomasville, NC Plant 309,850 Owned
Thomasville Lenoir, NC Plant/Warehouse 828,000 Owned
Thomasville Winston-Salem, NC Plant/Warehouse 706,000 Owned
Thomasville West Jefferson, NC Plant/Warehouse 223,545 Owned
Thomasville Johnson City, TN Plant/Warehouse 284,120 Owned
Thomasville Statesville, NC Plant 158,600 Owned
Thomasville Troutman, NC Plant 238,200 Owned
Thomasville Conover, NC Plant 123,200 Owned
Thomasville Hickory, NC Plant 58,700 Owned
Thomasville Hickory, NC Plant 98,700 Owned
Thomasville Thomasville, NC Warehouse 731,000 Owned
Thomasville Appomattox, VA Plant/Warehouse 804,000 Owned
Thomasville Carysbrook, VA Plant 189,000 Owned
-----------------------
Substantially all of the owned properties listed above are encumbered by a first priority lien and mortgage pursuant to a secured credit agreement. In addition, the Tupelo, Mississippi facility is encumbered by a mortgage and first lien securing industrial revenue bonds.
The Company believes its properties are generally well maintained, suitable for its present operations and adequate for current production requirements. Productive capacity and extent of utilization of the Company's facilities are difficult to quantify with certainty because in any one facility maximum capacity and utilization varies periodically depending upon the product that is being manufactured, the degree of automation and the utilization of the labor force in the facility. In this context, the Company estimates that overall its production facilities were effectively utilized during 1997 at moderate to high levels of productive capacity and believes that in general its facilities have the capacity, if necessary, to expand production to meet anticipated product
requirements.
Item 3.
Item 3. Legal Proceedings --------------------------
The Company is or may become a defendant in a number of pending or threatened legal proceedings in the ordinary course of business. In the opinion of management, the ultimate liability, if any, of the Company from all such proceedings will not have a material adverse effect upon the consolidated financial position or results of operations of the Company and its subsidiaries.
The Company is also subject to regulation regarding environmental matters, and is a party to certain actions related thereto. For information regarding environmental matters, see "Item 1. Business -- Environmental Matters."
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders ------------------------------------------------------------
Not applicable.
PART II -------
Item 5.
Item 5. Market for The Registrant's Common Equity and Related -------------------------------------------------------------- Stockholder Matters --------------------
As of February 28, 1998, there were approximately 3,000 holders of record of Common Stock.
Shares of the Company's Common Stock are traded on the New York Stock Exchange. The reported high and low sale prices for the Company's Common Stock on the New York Stock Exchange is included in Note 16 to the consolidated financial statements of the Company.
The Company has not paid cash dividends on its Common Stock during the two years ended December 31, 1996 and December 31, 1997.
A discussion of restrictions on the Company's ability to pay cash dividends is included in Note 9 to the consolidated financial statements of the Company.
Item 6.
Item 6. Selected Financial Data -------------------------------
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition ------------------------------------------------------------------- and Results of Operations --------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following analysis of the results of operations and financial condition of the Company should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this document. In addition, management believes the following factors have had a significant effect on its recent financial statements.
Common stock repurchase. On June 27, 1997, the Company completed the repurchase of 10,842,299 shares of common stock and warrants to purchase 290,821 shares of common stock from Apollo Investment Fund, L.P. and Lion Advisors, L.P. for $170.5 million. The Company financed the repurchase by amending the Secured Credit Agreement to include a new term loan facility of $200.0 million.
Acquisition of Thomasville. During the year ended December 31, 1995, the Company had two primary operating subsidiaries, Broyhill and Lane. On December 29, 1995, the Company acquired Thomasville. The transaction was accounted for as a purchase and, since the acquisition occurred as of the last business day of 1995, was reflected in the Company's consolidated balance sheet as of December 31, 1995. The Company's results of operations for 1995 do not include any of the operations of Thomasville. The cash portion of the acquisition of Thomasville was originally financed through funds obtained by borrowing under the Company's Secured Credit Agreement and the Receivables Securitization Facility. On March 1, 1996, the Company completed a public offering of 10,000,000 shares of common stock, generating net cash proceeds of approximately $81.3 million, which were used to repay a portion of this debt.
1992 Asset Revaluation (Fresh-Start Reporting). Included in the Company's statements of operations are depreciation and amortization charges related to adjustments of assets and liabilities to fair value made in 1992. These adjustments are a result of the Company's 1992 reorganization and the adoption of AICPA SOP 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" (commonly referred to as "fresh-start" reporting) and are not the result of historical capital expenditures.
Results of Operations
As an aid to understanding the Company's results of operations on a comparative basis, the following table has been prepared to set forth certain statements of operations and other data for 1997, 1996 and 1995. The results for 1995 do not include any of the operations of Thomasville.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales for 1996 increased to $1,696.8 million from $1,073.9 million in 1995. The improved sales performance resulted primarily from the acquisition of Thomasville. Had Thomasville been acquired at the beginning of 1995, net sales for 1996 would have increased 4.5% over pro forma net sales for 1995. The increase in net sales was achieved through continued introductions of new products and emphasis on the Company's brand names.
Cost of operations for 1996 was $1,228.4 million compared to $760.4 million for 1995. The large increase was the result of the Company's acquisition of Thomasville. Cost of operations as a percentage of net sales increased from 70.8% for 1995 to 72.4% for 1996. This increase was due to the acquisition of Thomasville which had higher cost of operations as a percentage of net sales than the Company's other operating subsidiaries. Had Thomasville been included on a pro forma basis for 1995, cost of operations as a percentage of net sales would have been 73.3%.
Selling, general and administrative expenses increased to $283.4 million for 1996 from $198.3 million in 1995. The large increase was a result of the Company's acquisition of Thomasville. As a percentage of net sales, selling, general and administrative expenses were 16.7% for 1996 compared to 18.5% for 1995 reflecting the Company's acquisition of Thomasville.
Depreciation and amortization for 1996 was $54.1 million compared to $36.1 million in 1995. The large increase was a result of the Company's acquisition of Thomasville. The amount of depreciation and amortization attributable to the "fresh-start" reporting was $16.3 million and $15.9 million for 1996 and 1995, respectively.
Interest expense for 1996 totaled $45.2 million compared to $33.9 million for 1995. The increase in interest expense reflects additional debt incurred for the acquisition of Thomasville.
Other income, net for 1996 totaled $2.6 million compared to $3.9 million for 1995. For 1996, other income consisted of interest on short-term investments of $1.2 million and other miscellaneous income and expense items totaling $1.4 million.
For 1996, the Company provided for income taxes totaling $34.1 million on earnings before income tax expense and extraordinary item, producing an effective tax rate of 38.6% compared to an effective tax rate for 1995 of 40.0%. The effective tax rates for such periods were adversely impacted by certain nondeductible expenses incurred and provisions for state and local income taxes.
Net earnings per common share before extraordinary item on a diluted basis were $0.88 and $0.67 for 1996 and 1995, respectively. Net earnings per common share before extraordinary item and gain on insurance settlement, net of income tax expense, on a diluted basis was $0.58 for 1995. Weighted average shares outstanding used in the calculation of net earnings per common share on a basic and diluted basis were 59,172,000 and 61,946,000 in 1996, respectively, and 50,114,000 and 50,639,000 in 1995, respectively.
Gross profit for 1996 was $431.5 million, representing an increase of 48.2% over the gross profit of $291.2 million for 1995. The increase resulted primarily from the acquisition of Thomasville. The decrease in gross profit margin to 25.4% for 1996 from 27.1% in 1995 was due to the acquisition of Thomasville which had lower gross profit margins than the Company's other operating subsidiaries. Had Thomasville been included on a pro forma basis in 1995, gross profit margin would have been 24.6%.
Financial Condition and Liquidity
Liquidity
Cash and cash equivalents at December 31, 1997 totaled $12.3 million compared to $19.4 million at December 31, 1996. For 1997, net cash provided by operating activities totaled $103.7 million. Net cash used by investing activities totaled $39.3 million. Net cash used in financing activities totaled $71.5 million, including $173.2 million for the repurchase of common stock and warrants, partially offset by the net addition of $95.2 million of long-term debt and the receipt of $10.7 million from the exercise of warrants and stock options to purchase shares of common stock.
Working capital was $482.3 million at December 31, 1997 compared to $462.7 million at December 31, 1996. The current ratio was 4.5 to 1 at December 31, 1997 compared to 4.2 to 1 at December 31, 1996. The modest increase in working capital between years is primarily the result of the Company's focus on efficient management of individual working capital components.
At December 31, 1997, long-term debt totaled $667.8 million compared to $572.6 million at December 31, 1996. The increase in indebtedness was the result of additional borrowings to finance the repurchase of approximately 11 million shares of common stock and warrants to purchase common stock for $170.5 million, partially offset by repayments of approximately $80.0 million funded by cash flow from operations and warrant exercise proceeds. The Company's debt-to-capitalization ratio was 67.4% at December 31, 1997 compared to 57.7% at December 31, 1996.
Financing Arrangements
To meet short-term capital and other financial requirements, the Company maintains a $475.0 million revolving credit facility as part of its Secured Credit Agreement with a group of financial institutions. The revolving credit facility allows for both issuance of letters of credit and cash borrowings. Letter of credit outstandings are limited to no more than $60.0 million. Cash borrowings are limited only by the facility's maximum availability less letters of credit outstanding. At December 31, 1997, there were $235.0 million of cash borrowings outstanding under the revolving credit facility and $34.7 million in letters of credit outstanding, leaving an excess of $205.3 million available under the revolving credit facility.
On June 27, 1997, the Company completed the repurchase of 10,842,299 shares of its common stock and warrants to purchase 290,821 shares of common stock from Apollo Investment Fund, L.P. and Lion Advisors, L.P. for approximately $170.5 million. The Company financed the repurchase by amending its Secured Credit Agreement to include a new term loan facility of $200.0 million. The term loan facility is a non-amortizing ten-year facility, bearing interest at a base rate plus 0.75% or at an adjusted Eurodollar rate plus 1.75%, depending upon the type of loan the Company executes. Net cash proceeds received from the term loan facility in excess of the amount required for the stock and warrant repurchase and associated fees and expenses were used to reduce outstanding borrowings from the revolving credit facility under the Company's existing Secured Credit Agreement.
The Company also maintains a Receivables Securitization Facility totaling $225.0 million pursuant to which the Company sells interests in the trade receivables of its operating companies to a third party financial institution. The Company accounts for the Receivables Securitization Facility as long-term debt. The Company's cost of borrowing is based on a commercial paper index rate plus a program fee.
In February 1996, in order to reduce the impact of changes in interest rates on its floating rate long-term debt, the Company entered into three-year interest rate swap agreements having a total notional amount of $300.0 million. The swap agreements effectively convert a portion of the Company's floating rate long-term debt to a fixed rate. The Company pays the counterparties a fixed rate of 5.14% per annum and receives payment based upon the floating three-month Eurodollar rate.
The Company believes its Secured Credit Agreement and the Receivables Securitization Facility, together with cash generated from operations, will be adequate to meet liquidity requirements for the foreseeable future.
Other
The Company has commenced conversion of its computer programs and files in order to function in the year 2000. The Company believes the cost of conversion will not be material to its results of operations and financial position.
Item 8.
Item 8. Financial statements and Supplementary Data - -----------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
1. The Company
Furniture Brands International, Inc. (referred to herein as the "Company") is a major manufacturer of residential furniture. During the year ended December 31, 1997, the Company had three primary operating subsidiaries: Broyhill Furniture Industries, Inc.; The Lane Company, Incorporated; and Thomasville Furniture Industries, Inc.
Substantially all of the Company's sales are made to unaffiliated furniture retailers. The Company has a diversified customer base with no one customer accounting for 10% or more of consolidated net sales and no particular concentration of credit risk in one economic section. Foreign operations and net sales are not material.
2. Significant Accounting Policies
The significant accounting policies of the Company are set forth below.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all its subsidiaries. All material intercompany transactions are eliminated in consolidation. The Company's fiscal year ends on December 31. The operating companies included in the consolidated financial statements report their results of operations as of the Saturday closest to December 31. Accordingly, the results of operations will periodically include a 53-week fiscal year. Fiscal year 1997 includes 53 weeks of operations, while 1996 and 1995 each represented 52-week fiscal years.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity of three months or less to be cash equivalents. Short-term investments are recorded at amortized cost, which approximates market.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost when acquired. Depreciation is calculated using both accelerated and straight-line methods based on the estimated useful lives of the respective assets, which generally range from 3 to 45 years for buildings and improvements and from 3 to 12 years for machinery and equipment.
Intangible Assets
The excess of cost over net assets acquired in connection with the acquisition of Thomasville totaled $93,110. This intangible asset is being amortized on a straight-line basis over a 40-year period.
The Company emerged from Chapter 11 reorganization effective with the beginning of business on August 3, 1992. In accordance with generally accepted accounting principles, the Company was required to adopt "fresh-start" reporting which included adjusting all assets and liabilities to their fair values as of the effective date. The ongoing impact of the adoption of fresh-start reporting is reflected in the financial statements for all years presented.
As a result of adopting fresh-start reporting, the Company recorded reorganization value in excess of amounts allocable to identifiable assets of approximately $146,000. This intangible asset is being amortized on a straight-line basis over a 20-year period.
Also in connection with the adoption of fresh-start reporting, the Company recorded approximately $156,800 in fair value of trademarks and trade names based upon an independent appraisal. Such trademarks and trade names are being amortized on a straight-line basis over a 40-year period.
Long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate the carrying value of the assets may not be recoverable. Impairment losses are recognized if expected future cash flows of the related assets are less than their carrying values.
Fair Value of Financial Instruments
The Company considers the carrying amounts of cash and cash equivalents, receivables and accounts payable to approximate fair value because of the short maturity of these financial instruments.
Amounts outstanding under long-term debt agreements are considered to be carried on the financial statements at their estimated fair values because they were entered into recently and/or accrue interest at rates which generally fluctuate with interest rate trends.
Interest rate swap agreements used by the Company to fix the interest rate on a portion of its floating rate long-term debt are accounted for on the accrual basis. Amounts to be paid or received under the interest rate swap agreements are recognized in income as adjustments to interest expense. The fair value of the interest rate swap agreements at December 31, 1997 exceed the book value by approximately $2.6 million. The fair value of the interest rate swap agreements is based upon market quotes from the counterparties.
Revenue Recognition
The Company recognizes revenue when finished goods are shipped with appropriate provisions for returns and uncollectible accounts.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
Net Earnings Per Common Share
Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No. 128 requires the presentation of basic and diluted net earnings per common share for 1997 interim and annual periods, and restatement of all prior periods presented. The adoption of SFAS No. 128 did not have a material effect on the consolidated financial statements. Restated interim net earnings per common share information for 1997 and 1996 interim periods is contained in Note 13, "Quarterly Financial Information (Unaudited)."
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Had compensation expense been determined in accordance with Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation," net earnings and net earnings per common share would not materially differ from reported amounts.
Reclassification
Certain 1996 and 1995 amounts have been reclassified to conform to the 1997 presentation.
3. Acquisition of Business
On December 29, 1995, the Company acquired all of the outstanding stock of Thomasville Furniture Industries, Inc. The purchase price totaled $331,200 plus the assumption of $8,000 of long-term debt. The purchase price, including capitalized expenses which approximated $4,200, was paid in cash. The transaction was accounted for as a purchase and, since the acquisition occurred as of the last business day of 1995, was reflected in the Company's consolidated balance sheet as of December 31, 1995. The Company's results of operations for 1995 do not include any of the operations of Thomasville.
4. Inventories
Inventories are summarized as follows:
--------------------------------------------------------------------- December 31, December 31, 1997 1996 --------------------------------------------------------------------- Finished products $118,385 $127,292 Work-in-process 53,536 51,587 Raw materials 115,125 102,228 --------------------------------------------------------------------- $287,046 $281,107 =====================================================================
5. Intangible Assets
Intangible assets include the following:
--------------------------------------------------------------------- December 31, December 31, 1997 1996 --------------------------------------------------------------------- Intangible assets, at cost: Reorganization value in excess of amounts allocable to identifiable assets $146,063 $146,063 Trademarks and trade names 156,828 156,828 Excess of cost over net assets acquired 93,110 93,110 --------------------------------------------------------------------- 396,001 396,001 Less accumulated amortization 65,452 51,900 --------------------------------------------------------------------- $330,549 $344,101 =====================================================================
6. Long-Term Debt
Long-term debt consists of the following:
--------------------------------------------------------------------- December 31, December 31, 1997 1996 --------------------------------------------------------------------- Secured credit agreement: Revolving credit facility $235,000 $359,000 Term loan facility 200,000 - Receivables securitization facility 220,000 200,000 Other 12,800 13,600 --------------------------------------------------------------------- $667,800 $572,600 =====================================================================
The following discussion summarizes certain provisions of the long-term debt.
Secured Credit Agreement
The Secured Credit Agreement, amended and restated as of June 27, 1997, consists of a revolving credit facility and a term loan facility. The revolving credit facility is a five-year reducing revolving credit facility with an initial commitment of $475,000. The revolving credit facility allows for issuance of letters of credit and cash borrowings. Letter of credit outstandings are limited to no more than $60,000, with cash borrowings limited only by the facility's maximum availability less letters of credit outstanding.
Under the letter of credit facility, a fee of 0.875% per annum (subject to reduction based upon the Company achieving certain leverage ratios) is assessed for the account of the lenders ratably. A further fee of 0.125% is assessed on stand-by letters of credit representing a facing fee. A customary administrative charge for processing letters of credit is also payable to the relevant issuing bank. Letter of credit fees are payable quarterly in arrears.
Cash borrowings under the revolving credit facility bear interest at a base rate or at an adjusted Eurodollar rate plus an applicable margin which varies, depending upon the type of loan the Company executes. The applicable margin over the base rate and the Eurodollar rate is subject to adjustment based upon achieving certain leverage ratios. At December 31, 1997, all loans outstanding under the revolving credit facility were based on the Eurodollar rate.
At December 31, 1997, there were $235,000 of cash borrowings and $34,681 in letters of credit outstanding under the revolving credit facility, leaving an excess of $205,319 available under the facility.
The revolving credit facility has no mandatory principal payments; however, the commitment is reduced to $400,000 on September 30, 1999 and $300,000 on September 29, 2000, with the remaining commitment maturing on September 15, 2001. In addition, the facility requires principal payments from a portion of the net proceeds realized from (i) the sale, conveyance or other disposition of collateral securing the debt, or (ii) the sale by the Company for its own account of additional subordinated debt and/or shares of its preferred and/or common stock.
On June 27, 1997, the Company amended the Secured Credit Agreement to include a new term loan facility of $200,000. The term loan facility is a non-amortizing ten-year facility, bearing interest at a base rate plus 0.75% or at an adjusted Eurodollar rate plus 1.75%, depending upon the type of loan the Company executes. At December 31, 1997, all loans outstanding under the term loan facility were based on the Eurodollar rate.
The common stock of the Company's principal subsidiaries, substantially all of the Company's cash, working capital (other than trade receivables) and property, plant and equipment, have been pledged or mortgaged as security for the Secured Credit Agreement. The Secured Credit Agreement contains a number of restrictive covenants and events of default, including covenants limiting capital expenditures and incurrence of debt, and requires the Company to achieve certain financial ratios, some of which become more restrictive over time.
Receivables Securitization Facility
The Receivables Securitization Facility is an obligation of the Company which matures on December 29, 2000 and is secured by substantially all of the Company's trade receivables. The facility operates through use of a special purpose subsidiary (Interco Receivables Corp.) which "buys" trade receivables from the operating companies and "sells" interests in same to a third party financial institution, which uses the interests as collateral for borrowings in the commercial paper market to fund the purchases. The Company accounts for this facility as long-term debt.
The Company pays a commercial paper index rate on all funds received (outstanding) on the facility. In addition, a program fee of 0.55% per annum on the entire $225,000 facility is payable on a monthly basis. The balance outstanding at December 31, 1997 was $220,000. The Company may increase or decrease its use of the facility on a monthly basis subject to the availability of sufficient trade receivables and the facility's maximum amount ($225,000).
Other
Other long-term debt consists of various industrial revenue bonds with interest rates ranging from approximately 4.0% to 9.0%. Mandatory principal payments are required through 2004.
Interest Rate Swap Agreements
In February 1996, the Company entered into interest rate swap agreements with two financial institutions to reduce the impact of changes in interest rates on its floating rate long-term debt. The two agreements, which mature in February 1999, have a total notional principal amount of $300,000. The swap agreements effectively convert a portion of the Company's floating rate long-term debt to a fixed rate. The Company pays the counterparties a fixed rate of 5.14% per annum and receives payments based upon the floating three-month Eurodollar rate. The Company is exposed to credit loss in the event of nonperformance by the counterparties; however, the Company does not anticipate nonperformance by the counterparties.
Other Information
Maturities of long-term debt are $0, $0, $220,000, $235,000 and $0 for years 1998 through 2002, respectively.
7. Common Stock
The Company's restated certificate of incorporation includes authorization to issue up to 100.0 million shares of common stock with a $1.00 per share stated value. As of December 31, 1997, 52,003,520 shares of common stock were issued and outstanding. It is not presently anticipated that dividends will be paid on common stock in the foreseeable future and certain of the debt instruments to which the Company is a party restrict the payment of dividends.
Shares of common stock were reserved for the following purposes at December 31, 1997:
---------------------------------------------------------------------- Number of Shares ---------------------------------------------------------------------- Common stock options: Granted 3,897,930 Available for grant 972,306 ---------------------------------------------------------------------- 4,870,236 ======================================================================
Under the Company's 1992 Stock Option Plan, certain key employees may be granted nonqualified options, incentive options or combinations thereof. Nonqualified and incentive options may be granted to expire up to ten years after the date of grant. Options granted become exercisable at varying dates depending upon the achievement of certain performance targets and/or the passage of certain time periods.
The 1992 Stock Option Plan authorizes grants of options to purchase common shares at less than fair market value on the date of grant. During 1996, option grants totaling 217,978 common shares were
made by the Company at less than market value. These options were issued to Thomasville employees as compensation for forfeited deferred compensation plans due to the acquisition; therefore, the cost of issuing the options at less than market value was included in determining the excess of cost over net assets acquired.
Changes in options granted and outstanding are summarized as follows:
The weighted average fair value of options granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rate of 6%; expected dividend yield of 0%; expected life of seven years and expected volatility of 31%.
Summarized information regarding stock options outstanding and exercisable at December 31, 1997 follows:
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per Share." SFAS No. 128 requires a reconciliation of the numerator and denominator of the net earnings per common share calculations for all periods presented. The numerator for basic and diluted net earnings per common share is net earnings for all periods presented. The denominator for basic and diluted net earnings per common share for 1997, 1996 and 1995 follows:
Excluded from the computation of diluted net earnings per common share were options to purchase 55,000, 250,000 and 43,000 shares at an average price of $21.00, $14.25 and $7.37 per share during 1997, 1996 and 1995, respectively, and warrants to purchase 7,394,249 shares at $7.13 per share during 1995. The securities were excluded from the calculation of diluted earnings per share because the exercise price was greater than the average market price of the common stock.
At December 31, 1996, the Company had outstanding approximately 2.0 million warrants to purchase common stock at $7.13 per share. The warrants, which included a five-year call protection which expired on August 3, 1997, were redeemed on August 15, 1997.
8. Income Taxes
9. Employee Benefits
The Company sponsors or contributes to retirement plans covering substantially all employees. The total cost of all plans for 1997, 1996 and 1995 was $8,412, $9,450 and $7,070, respectively.
Company-Sponsored Defined Benefit Plans
Annual cost for defined benefit plans is determined using the projected unit credit actuarial method. Prior service cost is amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits.
It is the Company's practice to fund pension costs to the extent that such costs are tax deductible and in accordance with ERISA. The assets of the various plans include corporate equities, government securities, corporate debt securities and insurance contracts. The table below summarizes the funded status of the Company-sponsored defined benefit plans.
Employees are covered primarily by noncontributory plans, funded by Company contributions to trust funds, which are held for the sole benefit of employees. Monthly retirement benefits are based upon service and pay with employees becoming vested upon completion of five years of service.
The expected long-term rate of return on plan assets was 8.5% in 1997, 1996 and 1995. Measurement of the projected benefit obligation was based upon a weighted average discount rate of 7.25% and a long-term rate of compensation increase of 4.5% for all years presented.
Other Retirement Plans and Benefits
In addition to defined benefit plans, the Company makes contributions to defined contribution plans and sponsors employee savings plans. The cost of these plans is included in the total cost for all plans reflected above.
10. Extraordinary Item - Early Extinguishment of Debt
In conjunction with the September 6, 1996 refinancing of the Secured Credit Agreement, the Company charged to results of operations $7,417, net of tax benefit of $4,469, representing the deferred financing fees and expenses pertaining to the refinanced facility. The charge was recorded as an extraordinary item.
In conjunction with the December 29, 1995 acquisition of Thomasville, the Company refinanced its Secured Credit Agreement and amended its Receivables Securitization Facility. As a result thereof, the Company charged to results of operations $5,815, net of tax benefit of $3,478, representing the deferred financing fees and expenses pertaining to such credit facilities. The charge was recorded as an extraordinary item.
11. Gain on Insurance Settlement
On November 20, 1994, an explosion and fire destroyed a particleboard plant owned and operated by the Company. During 1995, the Company rebuilt the plant with proceeds received from the insurance settlement. As a result thereof, a gain on insurance settlement totaling $7,882 was recorded during the fourth quarter of 1995. The gain includes all costs associated with the claim with no further expenses or liability anticipated.
12. Commitments and Contingent Liabilities
Certain of the Company's real properties and equipment are operated under lease agreements. Rental expense under operating leases totaled $15,699, $14,758 and $12,241 for 1997, 1996 and 1995, respectively. Annual minimum payments under operating leases are $11,929, $9,195, $5,925, $2,596 and $797 for 1998 through 2002, respectively.
Prior to the distribution of the common stock of The Florsheim Shoe Company (a former subsidiary) to its shareholders on November 17, 1994, the Company had guaranteed certain of Florsheim's retail store operating leases. At December 31, 1997, the Company had guarantees outstanding on 71 retail store leases with a contingent liability totaling approximately $24,132. The Florsheim Shoe Company has agreed to indemnify the Company against any losses incurred as a result of the lease guarantees.
The Company is or may become a defendant in a number of pending or threatened legal proceedings in the ordinary course of business. In the opinion of management,the ultimate liability, if any, of the Company from all such proceedings will not have a material adverse effect upon the consolidated financial position or results of operations of the Company and its subsidiaries.
13. Quarterly Financial Information (Unaudited)
The Company has not paid cash dividends on its common stock during the three years ended December 31, 1997. The closing market price of the Company's common stock on December 31, 1997 was $20.50 per share.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting --------------------------------------------------------------------- and Financial Disclosure -------------------------
Not applicable.
PART III --------
Item 10.
Item 10. Directors and Executive Officers of the Registrant -----------------------------------------------------------
The section entitled "Nominees" of the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders on May 6, 1998 is incorporated herein by reference.
Executive Officers of the Registrant
----------------------------------- * Member of the Executive Committee
There are no family relationships between any of the executive officers of the Registrant.
The executive officers are elected at the organizational meeting of the Board of Directors which follows the annual meeting of stockholders and serve for one year and until their successors are elected and qualified.
Each of the executive officers has held the same position or other positions with the same employer during the past five years.
Item 11.
Item 11. Executive Compensation -----------------------------------
The sections entitled "Executive Compensation", "Executive Compensation and Stock Option Committee Report on Executive Compensation", "Compensation Committee Interlocks and Insider Participation", "Stock Options", "Retirement Plans", "Incentive Agreements" and "Performance Graph" of the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders on May 6, 1998 are incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and --------------------------------------------------------------- Management -----------
The section entitled "Security Ownership" of the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders on May 6, 1998, is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions --------------------------------------------------------
The section entitled "Certain Business Relationships" of the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders on May 6, 1998, is incorporated herein by reference.
PART IV -------
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form ---------------------------------------------------------------------- 8-K ----
(a) List of documents filed as part of this report:
1. Financial Statements:
Consolidated balance sheets, December 31, 1997 and 1996.
Consolidated statements of operations for each of the years in the three-year period ended December 31, 1997.
Consolidated statement of cash flows for each of the years in the three-year period ended December 31, 1997.
Consolidated statement of shareholders' equity for each of the years in the three-year period ended December 31, 1997.
Notes to consolidated financial statements.
Independent Auditors' Report
2. Financial Statement Schedules:
Valuation and qualifying accounts (Schedule II).
All other schedules are omitted as the required information is presented in the consolidated financial statements or related notes or are not applicable.
3. Exhibits:
3(a) Restated Certificate of Incorporation of the Company, as amended. (Incorporated by reference to Exhibit 3(a) to Furniture Brands International, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.)
3(b) By-Laws of the Company revised and amended to April 23, 1996. (Incorporated by reference to Exhibit 3(b) to Furniture Brands International, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.)
4(a) Credit Agreement, dated as of November 17, 1994, as amended and restated as of December 29, 1995; September 6, 1996; and June 27, 1997, among the Company, Broyhill Furniture Industries, Inc., The Lane Company, Incorporated, Thomasville Furniture Industries, Inc., Various Banks, Credit Lyonnais New York Branch, as Documentation Agent, Nationsbank, N.A., as Syndication Agent and Bankers Trust Company, as Administration Agent. (Incorporated by reference to Exhibit 4(a) to Furniture Brands International, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.)
4(b) Purchase and Contribution Agreement, dated as of November 15, 1994, as amended and restated as of December 29, 1995 among The Lane Company, Incorporated, Action Industries, Inc., Broyhill Furniture Industries, Inc. and Thomasville Furniture Industries as Sellers and Interco Receivables Corp. as Purchaser. (Incorporated by reference to Exhibit 4(b) to Furniture Brands International, Inc.'s Annual Report on Form 10-K for the period ended December 31, 1995.)
4(c) Amendment No. 1, dated as of June 27, 1996, to the Purchase and Contribution Agreement, dated as of November 15, 1994, as amended and restated as of December 29, 1995, among The Lane Company, Incorporated, Action Industries, Inc., Broyhill Furniture Industries, Inc. and Thomasville Furniture Industries, Inc. as Sellers and Interco Receivables Corp. as Purchaser. (Incorporated by reference to Exhibit 4(b) to Furniture Brands International Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.)
4(d) Amendment No. 2, dated as of September 6, 1996, to the Purchase and Contribution Agreement, dated as of November 15, 1994, as amended and restated as of December 29, 1995, and June 27, 1996, among The Lane Company, Incorporated, Action Industries, Inc., Broyhill Furniture Industries, Inc. and Thomasville Furniture Industries, Inc. as Sellers and Interco Receivables Corp. as Purchaser. (Incorporated by reference to Exhibit 4(c) to Furniture Brands International Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.)
4(e) Amendment No. 3, dated as of June 27, 1997, to the Purchase and Contribution Agreement, dated as of November 15, 1994, as amended and restated as of December 29, 1995; June 27, 1996; and September 6, 1996 among The Lane Company, Incorporated, Action Industries, Inc., Broyhill Furniture Industries, Inc. and Thomasville Furniture Industries, Inc. as
Sellers and INTERCO Receivables Corp. as Purchaser. (Incorporated by reference to Exhibit 4(b) to Furniture Brands International, inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.)
4(f) Amendment No. 4 dated as of January 1, 1998, to the Purchase and Contribution Agreement, dated as of November 15, 1994, as amended and restated as of December 29, 1995; June 27, 1996; September 6, 1996 and June 27, 1997 among The Lane Company, Incorporated, Action Industries, Inc., Broyhill Furniture Industries, Inc. and Thomasville Furniture Industries, Inc. as Sellers and INTERCO Receivables Corp. as Purchaser.
4(g) Receivables Purchase Agreement, dated as of November 15, 1994, as amended and restated as of December 29, 1995, among Interco Receivables Corp. as the Seller and Atlantic Asset Securitization Corp. as an Investor and Credit Lyonnais New York Branch as the Agent. (Incorporated by reference to Exhibit 99(b) to Furniture Brands International, Inc.'s Current Report on Form 8-K, dated January 12, 1996.)
4(h) Amendment No. 1, dated as of June 27, 1996, to the Receivables Purchase Agreement, dated as of November 15, 1994, as amended and restated as of December 29, 1995, among Interco Receivables Corp. as Seller, Atlantic Asset Securitization Corp., as Issuer, and Credit Lyonnais New York Branch, as Agent for the Investors. (Incorporated by reference to Exhibit 4(d) to Furniture Brands International Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.)
4(i) Amendment No. 2, dated as of September 6, 1996, to the Receivables Purchase Agreement, dated as of November 15, 1994, as amended and restated as of December 29, 1995, and June 27, 1996, among Interco Receivables Corp. as Seller, Atlantic Asset Securitization Corp. as Issuer, and Credit Lyonnais New York Branch, as Agent for the Investors. (Incorporated by reference to Exhibit 4(e) to Furniture Brands International Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.)
4(j) Amendment No. 3, dated as of June 27, 1997, to the Receivables Purchase Agreement, dated as of November 15, 1994, as amended and restated as of December 29, 1995; June 27, 1996; and September 6, 1996 among INTERCO Receivables Corp. as Seller,
Atlantic Asset Securitization Corp., as Issuer, and Credit Lyonnais New York Branch, as Agent for the investors. (Incorporated by reference to Exhibit 4(c) to Furniture Brands International, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.)
4(k) Amendment No. 4 dated as of January 1, 1998 to the Receivables Purchase Agreement, dated as of November 15, 1994, as amended and restated as of December 29, 1995; June 27, 1996; September 6, 1996 and June 27, 1997 among INTERCO Receivables Corp. as Seller, Atlantic Asset Securitization Corp., as Issuer, and Credit Lyonnais New York Branch, as Agent for the investors.
4(l) Agreement to furnish upon request of the Commission copies of other instruments defining the rights of holders of long-term debt of the Company and its subsidiaries which debt does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. (Incorporated by reference to Exhibit 4(c) to Furniture Brands International, Inc.'s Annual Report on Form 10-K for the year ended February 28, 1981.)
10(a) Furniture Brands International, Inc.'s 1992 Stock Option Plan, as amended. (Incorporated by reference to Exhibit 4(c) to Furniture Brands International, Inc.'s S-8 Registration Statement, No. 333-39355.
10(b) Form of Indemnification Agreement between the Company and Richard B. Loynd, Donald E. Lasater and Lee M. Liberman. (Incorporated by reference to Exhibit 10(h) to Furniture Brands International, Inc.'s Annual Report on Form 10-K for the year ended February 29, 1988.)
10(c) Written description of bonus plan for management personnel of the Lane Company, Incorporated. (Incorporated by reference to Exhibit 10(e) to Furniture Brands International, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995.)
10(d) Retirement Plan for directors. (Incorporated by reference to Exhibit 10(g) to Furniture Brands International, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994.)
10(e) First Amendment to Retirement Plan for Directors.
10(f) Furniture Brands International, Inc. Executive Incentive Plan. (Incorporated by reference to Exhibit 10(b) to Furniture Brands International, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.)
10(g) Broyhill Furniture Industries, Inc. Executive Incentive Plan. (Incorporated by reference to Exhibit 10(i) to Furniture Brands International, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994.)
10(h) Thomasville Furniture Industries, Inc. ExecutiveIncentive Plan (Incorporated by reference to Exhibit 10(j) to Furniture Brands International, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996.)
10(i) Employment Agreement, dated as of April 29, 1997, between Action Industries, Inc. and John T. Foy. (Incorporated by reference to Exhibit 10(d) to Furniture Brands International Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.)
10(j) Written description of employment agreement between the Company and Wilbert G. Holliman. (Incorporated by reference to Exhibit 10(b) to Furniture Brands International Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.)
10(k) Employment Agreement, dated as of August 1, 1996, between the Company and Lynn Chipperfield. (Incorporated by reference to Exhibit 10(c) to Furniture Brands International Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.)
10(l) Employment Agreement, dated as of August 1, 1996, between the Company and David P. Howard. (Incorporated by reference to Exhibit 10(d) to Furniture Brands International Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.)
10(m) Employment Agreement, dated as of August 1, 1996, between Broyhill Furniture Industries, Inc. and Brent B. Kincaid. (Incorporated by reference to Exhibit 10(e) to Furniture Brands International Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.)
10(n) Employment Agreement, dated as of April 30, 1997 between the Company and Richard B. Loynd. (Incorporated by reference to Exhibit 10(c) to Furniture Brands International, Inc.'s Quarterly Report on form 10-Q for the quarter ended March 31, 1997.)
10(o) Employment Agreement, dated as of January 29, 1998, between Thomasville Furniture Industries, Inc. and Christian J. Pfaff.
10(p) Employment Agreement, dated as of August 1, 1996, between The Lane Company, Incorporated and K. Scott Tyler, Jr. (Incorporated by reference to Exhibit 10(g) to Furniture Brands International Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.)
10(q) Consulting Agreement, dated as of May 15, 1995, and Addendum thereto, dated January 29, 1998, between Broyhill Furniture Industries, Inc. and Brent B. Kincaid.
21 List of Subsidiaries of the Company.
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
99(a) Distribution and Services Agreement, dated November 17, 1994, between the Company and Converse Inc. (Incorporated by reference to Exhibit 99(a) to Furniture Brands International, Inc.'s Annual Report on Form 8-K, dated December 2, 1994.)
99(b) Tax Sharing Agreement, dated November 17, 1994, between the Company and Converse Inc. (Incorporated by reference to Exhibit 99(b) to Furniture Brands International, Inc.'s Annual Report on Form 8-K, dated December 2, 1994.)
99(c) Distribution and Services Agreement, dated November 17, 1994, among the Company, The Florsheim Shoe Company and certain of its subsidiaries. (Incorporated by reference to Exhibit 99(c) to Furniture Brands International, Inc.'s Annual Report on Form 8-K, dated December 2, 1994.)
99(d) INTERCO/Florsheim Tax Sharing Agreement, dated November 17, 1994, among the Company, The Florsheim Shoe Company and certain of its subsidiaries. (Incorporated by reference to Exhibit 99(d) to Furniture Brands International, Inc.'s Annual Report on Form 8-K, dated December 2, 1994.)
99(e) Amendment to Tax Sharing agreement, dated as of February 21, 1996, between the Company and Converse, Inc. (Incorporated by reference to Exhibit 99(e) to Furniture Brands International, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996.)
(b) Reports on Form 8-K.
A Form 8-K was not required to filed during the quarter ended December 31, 1997.
SHAREHOLDERS REQUESTING COPIES OF EXHIBITS TO FORM 10-K WILL BE SUPPLIED ANY OR ALL SUCH EXHIBITS AT A CHARGE OF TEN CENTS PER PAGE.
FURNITURE BRANDS INTERNATIONAL, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedule
Page No. ------ Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996 18
Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 1997 19
Consolidated Statement of Cash Flows for each of the years in the three-year period ended December 31, 1997 20
Consolidated Statement of Shareholders' Equity for each of the years in the three-year period ended December 31, 1997 21
Notes to Consolidated Financial Statements 22
Financial Statement Schedule 39
Independent Auditors' Report 41
Consolidated Financial Statement Schedules: Schedule Valuation and qualifying accounts II 40
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders Furniture Brands International, Inc.:
We have audited the consolidated financial statements of Furniture Brands International, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompany index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Furniture Brands International, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
St. Louis, Missouri January 29, 1998
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.
Furniture Brands International, Inc. ------------------------------------ (Registrant)
By Wilbert G. Holliman -------------------------------- Wilbert G. Holliman President and Chief Executive Officer
Date: March 27, 1998
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 27, 1998.
Signature Title --------- -----
Wilbert G. Holliman President and Director ----------------------- (Principal Executive Officer) (Wilbert G. Holliman)
Katherine Button Bell Director ----------------------- (Katherine Button Bell)
Michael S. Gross Director ----------------------- (Michael S. Gross)
Bruce A. Karsh Director ----------------------- (Bruce A. Karsh)
Brent B. Kincaid Director ----------------------- (Brent B. Kincaid)
Donald E. Lasater Director ------------------------ (Donald E. Lasater)
Lee M. Liberman Director ------------------------ (Lee M. Liberman)
Richard B. Loynd Director ------------------------ (Richard B. Loynd)
Albert E. Suter Director ------------------------ (Albert E. Suter)
David P. Howard Vice President and Treasurer ------------------------- (Principal Financial Officer) (David P. Howard)
Steven W. Alstadt Controller -------------------------- (Principal Accounting Officer) (Steven W. Alstadt)