Interest income is received on short-term investments and notes receivable. In the second quarter of 2007, we discontinued hedge accounting treatment on a treasury lock agreement, in anticipation of refinancing the Note Purchase Agreement and recorded a gain of $4.1 million. In the second quarter of 2006, we discontinued hedge accounting treatment on an interest rate swap agreement, in anticipation of refinancing our revolving credit facility and recorded a gain of $8.5 million.
The effective income tax rate was 40.1% and 38.1% for the three months ended June 30, 2007 and 2006, respectively, and 40.0% and 34.8% for the six months ended June 30, 2007 and 2006, respectively. The increase in the effective tax rate for the three months and six months ended June 30, 2007 was primarily related to the impact of permanent tax differences on lower pretax earnings.
Net earnings per common share were $0.12 and $0.18 for the three months and six months ended June 30, 2007 compared to $0.35 and $0.96 for the same periods last year. Weighted average common shares outstanding used in the calculation of net earnings per common share were 48,444,000 for the three months ended June 30, 2007 and 48,853,000 for the three months ended June 30, 2006 and 48,390,000 for the six months ended June 30, 2007 and 49,186,000 for the six months ended June 30, 2006. The reduction in weighted average shares for the six month period was due to the full year impact of stock repurchases during the first six months of 2006.
Cash and cash equivalents at June 30, 2007 were $92.5 million, compared to $26.6 million at December 31, 2006. For the six months ended June 30, 2007 net cash provided by operating activities totaled $99.8 million compared to net cash used by operating activities of $4.8 million in the six months ended June 30, 2006. In spite of the earnings shortfall, cash flow from operations increased due to reductions in working capital versus the working capital increases in the prior year. Net cash used by investing activities totaled $6.5 million for the six months ended June 30, 2007 compared to $10.0 million for the six months ended June 30, 2006. This decrease is attributed to lower property, plant, and equipment additions. Net cash used by financing activities totaled $27.3 million for the six months ended June 30, 2007 compared to $40.6 million in the prior year period. Financing activities in the current year included debt payments, net of borrowings, of $10.0 million and dividend payments of $15.5 million. Financing activities in the same period of the prior year included stock repurchases of $40.1 million, dividend payments of $15.8 million partially offset by proceeds from the exercise of stock options (including income tax benefits) of $8.6 million and proceeds from the termination of cash flow hedges of $8.6 million.
Working capital was $461.2 million at June 30, 2007, compared to $752.6 million at December 31, 2006. The current ratio was 1.9-to-1 at June 30, 2007, compared to 5.0-to-1 at December 31, 2006. The decrease in working capital is mainly attributable to the classification of the revolving credit facility and the Senior Notes of $300.0 million as current liabilities (see further description under financing arrangements below).
We have maintained a $400.0 million revolving credit facility with a group of financial institutions. The revolving credit facility allowed for the issuance of letters of credit and cash borrowings. Letters of credit outstanding were limited to no more than $100.0 million, with cash borrowings limited only by the facility’s availability, subject to certain financial covenants, less letters of credit outstanding. On June 30, 2007, there were $150.0 million in cash borrowings, $8.6 million in letters of credit outstanding and approximately $131.5 million available under the revolving credit facility, subject to certain restrictions.
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 we executed. The applicable margin over the base rate and Eurodollar rate is subject to adjustment based upon achieving certain credit ratings. At June 30, 2007, loans outstanding under the revolving credit facility consisted of $150.0 million based on the adjusted Eurodollar rate at an interest rate of 6.59%.
The Note Purchase Agreement allowed for the issuance and sale of $150.0 million of 6.83% Senior Notes (7.33% during the amendment period as described below). The Notes originally matured over varying dates ranging from May 17, 2014 through May 17, 2018.
The revolving credit facility originally required us to meet certain financial covenants including: (1) leverage ratio (defined in the credit agreement as Consolidated Debt divided by Consolidated EBITDA from the preceding four quarters) less than 3.25 to 1.0 and (2) coverage ratio (defined in the credit agreement as Consolidated EBITDAR divided by the sum of Consolidated Interest Expense and Consolidated Net Rental Expense in each case from the preceding four quarters) greater than 2.75 to 1.0 (increasing to 3.00 to 1.0 after December 31, 2008). The Note Purchase Agreement contained the same financial covenants as the revolving credit facility except the maximum leverage ratio is 3.50 to 1.0 and the minimum coverage ratio is 2.50 to 1.0 (increasing to 2.75 to 1.0 after December 31, 2008).
On April 16, 2007 we entered into amendments to both the revolving credit facility and the Note Purchase Agreement. These amendments provided temporary relief for the two financial covenants described above. Under the amendments, the leverage ratio must be less than 4.25 to 1.0 and the coverage ratio must be greater than 1.90 to 1.0 with respect to the period from March 31, 2007 through June 29, 2007. In exchange for the covenant relief on both the revolving credit facility and Note Purchase Agreement, we granted certain economic concessions to the lenders, including the payment of an amendment fee and increased interest rates. During the amendment period (March 31, 2007 through June 29, 2007), the interest rates were increased by 0.25% for the revolving credit facility and 0.50% for the Senior Notes. Both agreements are now secured by our personal property (including cash and cash equivalents, accounts receivable, inventory, intangible assets and goodwill).
On June 29, 2007 we entered into additional amendments to both the revolving credit facility and the Note Purchase Agreement. These amendments provided for continued relief for the two financial covenants through August 14, 2007. Under the second amendment to the credit agreement the lenders agreed to waive compliance with the financial covenants for the period from June 30, 2007 through August 14, 2007. Under the second amendment to the Note Purchase Agreement the ratio of Consolidated Debt to Consolidated EBITDA shall not be greater than 4.80 to 1.00 for the period from March 31, 2007 through and including August 14, 2007. Further, under the second amendment to the Note Purchase Agreement the ratio of Consolidated EBITDA to Consolidated Fixed Charges shall not be less than 1.50 to 1.00 at June 30, 2007. In exchange for the covenant relief, in addition to the concessions provided in the first amendments, we agreed to prepay in full the outstanding principal amount of $150.0 million of the Senior Notes together with unpaid interest (estimated at $2.5 million as of August 7, 2007) and the make-whole amount (estimated at $14.2 million, which is net of an interest rate hedge gain of $2.8 million as of August 7, 2007) no later than August 15, 2007. The majority of the expense related to the make-whole payment will be recorded in the third quarter of 2007. In the second of 2007 we discontinued hedge accounting treatment on an interest rate hedge entered into in 2006, in anticipation of this refinancing, and recorded a gain of $4.1 million in other income (expense).
Though the amendments allow us to be in compliance with the financial covenants in the revolving credit facility and Note Purchase Agreement as of June 30, 2007, the present outlook for business conditions indicates we will not be in compliance as of August 15, 2007 upon the expiration of the amendments. As such we reflected this debt of $300.0 million as current in the consolidated balance sheet as of June 30, 2007. We expect to refinance both the credit agreement and the Note Purchase Agreement prior to August 15, 2007 to pay off the senior notes and to provide more permanent refinancing. However, if this refinancing is unsuccessful and we are in default under the credit agreements, the lending groups have certain rights including the termination of commitments and acceleration of principal and interest payments. The successful completion of the refinancing of the credit agreements would be required to meet our future liquidity requirements. See “Item 1A—Risk Factors.”
On August 7, 2007, we notified the holders of our Senior Notes that we will repay the $150.0 million principal amount, together with a make-whole premium of approximately $14.2 million, which is net of an interest rate hedge gain of $2.8 million, and accrued interest of approximately $2.5 million, on August 9, 2007, pursuant to the Note Purchase Agreement, as amended earlier this year. We expect to effect the repayment through borrowings under a new $550.0 million senior revolving credit facility with various financial institutions (the “Proposed Facility”), which we expect to complete on August 9, 2007.
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We agreed to pay certain nonrefundable fees in connection with the Proposed Facility. Interest under the Proposed Facility for the first six months following the effective date would equal (i) the greater of the prime rate and the Federal Funds Effective Rate plus ½% for base rate loans and (ii) 1.25% plus LIBOR for the applicable interest period for Eurodollar loans and after six months would consist of a base rate and a margin which will fluctuate with average availability.
The Company and its principal domestic subsidiaries would be the borrowers under the Proposed Facility. The Proposed Facility would be guaranteed by substantially all of our domestic subsidiaries, which, together with the Company, we refer to collectively as the “Loan Parties,” and would be secured by all of the accounts receivable, inventory, and cash deposit and securities accounts of the Loan Parties. The Proposed Facility would also include prohibitions on the Loan Parties’ and all of our other subsidiaries’ ability to grant security interests to other parties, subject to certain exceptions. The Proposed Facility documentation would include customary representations and warranties of the Loan Parties and their subsidiaries, would impose on the Loan Parties and their subsidiaries certain affirmative and negative covenants, and would include other typical provisions. Availability under the Proposed Facility would fluctuate based on a borrowing base calculation consisting of eligible accounts receivable and inventory. Certain covenants and restrictions, including a fixed charge coverage ratio, would become effective when excess availability under the Proposed Facility falls below certain thresholds.
Completion of the Proposed Facility is subject to certain customary closing conditions, including but not limited to, the following: (a) there not occurring any material adverse condition or adverse change in or affecting the business, operations, property, condition of the Company; (b) the completion of and satisfaction with a due diligence investigation of the Company by the administrative agent and arranger of the Proposed Facility (collectively, the “Agent”); (c) the Agent not becoming aware of any new information that is materially and adversely different than information that was previously provided to the Agent; (d) there having not occurred a material disruption in the marketplace that, in the judgment of the Agent, could materially impair the syndication of the Proposed Facility; and (e) the Company having a minimum excess Availability (as defined) and cash on hand at closing of $150.0 million.
The proceeds of the Proposed Facility would be used to refinance the Company’s existing revolving credit facility, to repay the Senior Notes and for general corporate purposes. See “Item 1A—Risk Factors.”
Contractual Obligations and Other Commitments
Off-Balance Sheet Arrangement - We have provided guarantees related to store leases for certain independent dealers opening Company-branded stores. The guarantees range from one to fifteen years and generally require us to make lease payments in the event of default by the dealer. In the event of default, we have the right to assign or assume the lease. The total future lease payments guaranteed at June 30, 2007 were $78,502. We consider the estimated loss on these guarantees to be insignificant; therefore, as of June 30, 2007 we have not recorded any contingent liability for lease guarantees.
Recently Issued Accounting Pronouncement
In February 2007, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.” This statement permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. If elected, SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently assessing whether fair value accounting is appropriate for any of our eligible items and have not yet determined the impact, if any, on our consolidated financial statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes in the quantitative and qualitative information about market risk since the end of the most recent fiscal year. For more information, see Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2006.
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Item 4. CONTROLS AND PROCEDURES
| (a) | The Company’s management, with the participation of the Company’s Chief Executive Officer and the Company’s Controller and Chief Accounting Officer, in his capacity as principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2007. The term “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of June 30, 2007, the Company’s Chief Executive Officer and Controller and Chief Accounting Officer, in his capacity as principal financial officer, concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level. |
During the three months ended March 31, 2007, we acquired 18 retail stores from three of our dealers for $4.2 million. We will exclude these businesses from management’s report on internal controls over financial reporting, as permitted by SEC guidance, to be included in our Form 10-K for the year ended December 31, 2007.
| (b) | No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. |
PART II - OTHER INFORMATION
Item 1A. RISK FACTORS
Our Annual Report on Form 10-K for the year ended December 31, 2006 includes a detailed discussion of certain risk factors in Part I, Item 1A. The information presented below updates and should be read in conjunction with the risk factors and information disclosed in that Form 10-K. These are not the only risks and uncertainties that we face. Additional risks and uncertainties that we do not currently know about or that we currently believe are immaterial, or that we have not predicted, may also harm our business operations or adversely affect us. If any of these risks or uncertainties actually occurs, our business, financial condition, operating results or liquidity could be materially and adversely affected.
If we are unable to complete the refinancing of our debt obligations on August 9, 2007, we will be unable to satisfy our repayment obligations under the Senior Notes and will be in default and subject to termination of commitments and acceleration of principal and interest payments under our existing credit facility.
On August 7, 2007, we notified the holders of our Senior Notes that we will repay the $150 million principal amount, together with a make-whole premium and accrued interest, on August 9, 2007, pursuant to the Note Purchase Agreement, as amended earlier this year. If we are unable to complete the refinancing of our credit facilities by that date, we would be unable to satisfy our repayment obligations and thereby default under the Senior Notes. In addition we would be in default under our existing credit facility and the lending group would have certain rights including the termination of commitments and acceleration of principal and interest payments, which could have a material adverse effect on our results of operation and financial condition.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 3, 2007. The directors listed in the Notice of Annual Meeting of Stockholders dated March 27, 2007 were elected for terms of one year ending in 2008 with voting for each as follows:
Director | For | | Withheld |
| | | |
K. B. Bell | 23,586,902 | | 21,022,053 |
J. T. Foy | 44,041,083 | | 567,872 |
W. G. Holliman | 44,039,314 | | 569,641 |
J. R. Jordan, Jr. | 44,395,199 | | 213,756 |
L. M. Liberman | 43,944,920 | | 664,035 |
R. B. Loynd | 44,034,908 | | 574,047 |
B. L. Martin | 44,240,948 | | 368,007 |
A. B. Patterson | 40,728,761 | | 3,880,194 |
M. E. Rubel | 44,394,844 | | 214,111 |
A. E. Suter | 44,363,856 | | 245,099 |
To vote to ratify the selection of independent auditors:
Affirmative votes | | | 44,562,821 | |
Negative votes | | | 34,881 | |
Abstentions | | | 11,199 | |
Broker non-votes | | | 0 | |
Item 6. EXHIBITS
| 3.1 | | 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 June 30, 2002) |
| | | |
| 3.2 | | By-Laws of the Company revised and amended to May 6, 1998. (Incorporated by reference to Exhibit 3(a) to Furniture Brands International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998) |
| | | |
| 10.1 | | Waiver and Amendment dated June 29, 2007 to the Credit Agreement dated April 21, 2006, by and among the Company, Broyhill Furniture Industries, Inc., HDM Furniture Industries, Inc., Lane Furniture Industries, Inc., and Thomasville Furniture Industries, Inc. and various lenders, The Bank of Tokyo-Mitsubishi UFJ, LTD., PNC Bank, National Association, Wachovia Bank, National Association, as Co-Syndication Agents and JPMorgan Chase Bank, N.A., as Administrative Agent (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated on June 29, 2007 and filed on July 3, 2007) |
| | | |
| 10.2 | | Second Amendment dated June 29, 2007 to Note Purchase Agreement dated May 17, 2006, by and among Furniture Brands International, Inc., Broyhill Furniture Industries, Inc., HDM Furniture Industries, Inc., Lane Furniture Industries, Inc., and Thomasville Furniture Industries, Inc., and various institutional investors. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated on June 29, 2007 and filed on July 3, 2007) |
| | | |
| 10.3 | | Employment Agreement dated June 14, 2007 between Ralph Scozzafava and the Company (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated on June 14, 2007 and filed on June 18, 2007) |
| | | |
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| 10.4 | | Change of Control Agreement between the Company and Nancy W. Webster and Lynn Chipperfield (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated on June 19, 2007 and filed on June 26, 2007) |
| | | |
| 10.5 | | Executive Severance Plan of the Company (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated on June 19, 2007 and filed on June 27, 2007) |
| | | |
| 31.1 | | Certification of W. G. Holliman, Chief Executive Officer of the Company, pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 31.2 | | Certification of Richard R. Isaak, Controller and Chief Accounting Officer of the Company, as principal financial officer, pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 32.1 | | Certification of W. G. Holliman, Chief Executive Officer of the Company, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 32.2 | | Certification of Richard R. Isaak, Controller and Chief Accounting Officer of the Company, as principal financial officer, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Furniture Brands International, Inc. |
| (Registrant) |
| | |
| By: | /s/ Richard R. Isaak |
| | Richard R. Isaak |
| | Controller and Chief Accounting Officer |
| | (on behalf of registrant and as principal financial officer and as principal accounting officer) |
| Date: August 8, 2007 |
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EXHIBIT INDEX
| 3.1 | | 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 June 30, 2002) |
| | | |
| 3.2 | | By-Laws of the Company revised and amended to May 6, 1998. (Incorporated by reference to Exhibit 3(a) to Furniture Brands International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998) |
| | | |
| 10.1 | | Waiver and Amendment dated June 29, 2007 to the Credit Agreement dated April 21, 2006, by and among the Company, Broyhill Furniture Industries, Inc., HDM Furniture Industries, Inc., Lane Furniture Industries, Inc., and Thomasville Furniture Industries, Inc. and various lenders, The Bank of Tokyo-Mitsubishi UFJ, LTD., PNC Bank, National Association, Wachovia Bank, National Association, as Co-Syndication Agents and JPMorgan Chase Bank, N.A., as Administrative Agent (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated on June 29, 2007 and filed on July 3, 2007) |
| | | |
| 10.2 | | Second Amendment dated June 29, 2007 to Note Purchase Agreement dated May 17, 2006, by and among Furniture Brands International, Inc., Broyhill Furniture Industries, Inc., HDM Furniture Industries, Inc., Lane Furniture Industries, Inc., and Thomasville Furniture Industries, Inc., and various institutional investors. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated on June 29, 2007 and filed on July 3, 2007) |
| | | |
| 10.3 | | Employment Agreement dated June 14, 2007 between Ralph Scozzafava and the Company (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated on June 14, 2007 and filed on June 18, 2007) |
| | | |
| 10.4 | | Change of Control Agreement between the Company and Nancy W. Webster and Lynn Chipperfield (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated on June 19, 2007 and filed on June 26, 2007) |
| | | |
| 10.5 | | Executive Severance Plan of the Company (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated on June 19, 2007 and filed on June 27, 2007) |
| | | |
| 31.1 | | Certification of W. G. Holliman, Chief Executive Officer of the Company, pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 31.2 | | Certification of Richard R. Isaak, Controller and Chief Accounting Officer of the Company, as principal financial officer, pursuant to Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 32.1 | | Certification of W. G. Holliman, Chief Executive Officer of the Company, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 32.2 | | Certification of Richard R. Isaak, Controller and Chief Accounting Officer of the Company, as principal financial officer, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | |
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