SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported): June 25, 2002 (June 25, 2002)
Furniture Brands International, Inc.
------------------------------------
(Exact name of Registrant as specified in charter)
Delaware I-91 43-0337683
- -------------------------- -------------- ---------------------
(State of Incorporation) (Commission (IRS Employer
File Number) Identification Number)
101 South Hanley Road, St. Louis, Missouri 63105
------------------------------------------------
(Address of principal executive offices)
(314) 863-1100
--------------
(Registrant's telephone number)
Item 5. Other Matters
On January 1, 2002 the Company adopted Statement of Financial Accounting
Standards No. 142 (FAS #142), "Goodwill and Other Intangible Assets". FAS #142
required that goodwill and other intangible assets with indefinite lives no
longer be amortized, but instead be tested annually for impairment. The
Company's intangible assets, consisting of trademarks, trade names and goodwill
all have indefinite lives. Note 6 in the attached financial statements presents
net income after adjusting for the amortization of goodwill and other intangible
assets for each of the years in the three-year period ended December 31, 2001.
Item 7. Financial Statements and Exhibits
(a) List of financial statements filed as a part of this report:
Consolidated balance sheets, December 31, 2001 and 2000
Consolidated statements of operations for each of the years in the
three-year period ended December 31, 2001
Consolidated statements of cash flows for each of the years in the
three-year period ended December 31, 2001
Consolidated statements of shareholders' equity for each of the years
in the three-year period ended December 31, 2001
Notes to consolidated financial statements
Independent Auditors' Report
(c) Exhibit 23 Consent of KPMG LLP
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------- -------------------- ---------------------
(Dollars in thousands) December 31, December 31,
2001 2000
- ------------------------------------------------------------------------------------- -------------------- ---------------------
Assets
Current assets:
Cash and cash equivalents $ 15,707 $ 14,606
Receivables, less allowances of $18,841
($23,075 at December 31, 2000) 359,493 351,804
Inventories (Note 5) 369,773 294,454
Deferred income taxes 26,160 23,555
Prepaid expenses and other current assets 7,582 7,162
- --------------------------------------------------------------------------------------------------------------------------------
Total current assets 778,715 691,581
Property, plant and equipment:
Land 18,090 19,206
Buildings and improvements 240,554 226,096
Machinery and equipment 346,460 345,040
- --------------------------------------------------------------------------------------------------------------------------------
605,104 590,342
Less accumulated depreciation 283,464 287,107
- --------------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 321,640 303,235
Goodwill (Note 6) 156,435 166,066
Other Intangible Assets (Note 6) 210,870 123,829
Other assets 35,829 20,127
- --------------------------------------------------------------------------------------------------------------------------------
$1,503,489 $1,304,838
================================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 83,508 $ 65,483
Accrued employee compensation 23,815 24,822
Accrued interest expense 2,805 7,646
Other accrued expenses 65,167 45,167
- --------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 175,295 143,118
Long-term debt (Note 7) 454,400 462,000
Deferred income taxes 69,032 77,533
Other long-term liabilities 45,103 38,282
Shareholders' equity:
Preferred stock, authorized 10,000,000 shares,
No par value - issued, none - -
Common stock, authorized 100,000,000 shares,
$1.00 stated value - issued 56,277,066 shares at December 31, 2001
and 52,277,066 shares at December 31, 2000 (Note 8) 56,277 52,277
Paid-in capital 219,469 118,360
Retained earnings 520,503 462,473
Accumulated other comprehensive income (5,108) -
Treasury stock at cost
(1,664,666 shares at December 31, 2001 and
2,601,759 shares at December 31, 2000) (31,482) (49,205)
- --------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 759,659 583,905
- --------------------------------------------------------------------------------------------------------------------------------
$1,503,489 $1,304,838
================================================================================================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands except per share data)
Year Ended December 31,
--------------------------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales $1,891,313 $2,116,239 $2,088,112
Costs and expenses:
Cost of operations 1,387,632 1,529,874 1,498,622
Selling, general and administrative expenses 330,835 335,596 321,205
Depreciation and amortization 55,767 58,155 56,528
Asset impairment charges 18,000 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings from operations 99,079 192,614 211,757
Interest expense 21,984 36,389 37,577
Other income, net 10,599 9,772 2,584
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings before income tax expense and
extraordinary item 87,694 165,997 176,764
Income tax expense (Note 9) 29,664 57,574 64,854
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings before extraordinary item 58,030 108,423 111,910
Extraordinary item - early extinguishment
of debt, net of income tax benefit (Note 11) - (2,522) -
- -----------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 58,030 $ 105,901 $ 111,910
===================================================================================================================================
Net earnings per common share - basic (Note 8):
Earnings before extraordinary item $ 1.15 $ 2.19 $ 2.20
Extraordinary item - early extinguishment of debt - (0.05) -
- -----------------------------------------------------------------------------------------------------------------------------------
Net earnings per common share - basic $ 1.15 $ 2.14 $ 2.20
===================================================================================================================================
Net earnings per common share - diluted (Note 8):
Earnings before extraordinary item $ 1.13 $ 2.15 $ 2.14
Extraordinary item - early extinguishment of debt - (0.05) -
- -----------------------------------------------------------------------------------------------------------------------------------
Net earnings per common share - diluted $ 1.13 $ 2.10 $ 2.14
===================================================================================================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Year Ended December 31,
---------------------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 58,030 $ 105,901 $ 111,910
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Net loss on early extinguishment of debt - 2,522 -
Depreciation of property, plant and equipment 43,707 46,095 44,468
Amortization of intangible and other assets 12,060 12,060 12,060
Asset impairment charges 18,000 - -
Other, net (includes gains on sale of investments) (11,586) 1,602 2,172
(Increase) decrease in receivables 41,502 (6,419) (21,221)
(Increase) decrease in inventories 33,070 (9,059) 21,987
Increase in prepaid expenses and
intangible and other assets (6,789) (7,737) (2,872)
Increase (decrease) in accounts payable, accrued interest expense
and other accrued expenses 7,224 (9,226) (12,861)
Decrease in net deferred tax liabilities (8,356) (2,788) (5,390)
Decrease in other long-term liabilities (2,156) (807) (1,687)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 184,706 132,144 148,566
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of business, net of cash acquired (176,235) - -
Proceeds from the disposal of assets 18,197 316 451
Additions to property, plant and equipment (22,991) (53,310) (48,951)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (181,029) (52,994) (48,500)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payments for debt issuance costs - (2,090) -
Additions to long-term debt 140,000 486,500 -
Payments of long-term debt (147,600) (559,600) (54,100)
Proceeds from the issuance of treasury stock 5,024 3,237 7,943
Purchase of treasury stock - - (59,720)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (2,576) (71,953) (105,877)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase(decrease) in cash and cash equivalents 1,101 7,197 (5,811)
Cash and cash equivalents at beginning of period 14,606 7,409 13,220
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 15,707 $ 14,606 $ 7,409
===================================================================================================================================
Supplemental Disclosure:
Cash payments for income taxes, net $ 26,083 $ 63,120 $ 68,100
===================================================================================================================================
Cash payments for interest $ 28,940 $ 30,873 $ 40,070
===================================================================================================================================
Issuance of common stock for acquisition $ 110,640 $ - $ -
===================================================================================================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------ -------------------------------------------------------
(Dollars in thousands) Year Ended December 31,
-------------------------------------------------------
2001 2000 1999
- ------------------------------------------------------------------------ ------------------- ---------------- ------------------
Common Stock:
Beginning balance $ 52,277 $ 52,277 $ 52,277
Stock issued for acquisition of business 4,000 - -
- ------------------------------------------------------------------------ ------------------- ---------------- ------------------
Ending balance $ 56,277 $ 52,277 $ 52,277
- ------------------------------------------------------------------------ ------------------- ---------------- ------------------
Paid-In Capital:
Beginning balance $118,360 $120,326 $127,513
Stock plans activity (Note 8) (5,531) (1,966) (7,187)
Stock issued for acquisition of business 106,640 - -
- ------------------------------------------------------------------------ ------------------- ---------------- ------------------
Ending balance $219,469 $118,360 $120,326
- ------------------------------------------------------------------------ ------------------- ---------------- ------------------
Retained Earnings:
Beginning balance $462,473 $356,572 $244,662
Net earnings 58,030 105,901 111,910
- ------------------------------------------------------------------------ ------------------- ---------------- ------------------
Ending balance $520,503 $462,473 $356,572
- ------------------------------------------------------------------------ ------------------- ---------------- ------------------
Accumulated Other Comprehensive Income:
Beginning balance $ - $ - $ -
Cumulative effect of adopting SFAS No. 133 2,960 - -
Effect of financial instruments accounted for as hedges (8,068) - -
- ------------------------------------------------------------------------ ------------------- ---------------- ------------------
Ending balance $ (5,108) $ - $ -
- ------------------------------------------------------------------------ ------------------- ---------------- ------------------
Treasury Stock:
Beginning balance $(49,205) $(54,978) $(10,943)
Stock plans activity (Note 8) 17,723 5,773 15,685
Purchase of treasury shares
(3,123,200 shares) - - (59,720)
- ------------------------------------------------------------------------ ------------------- ---------------- ------------------
Ending balance $(31,482) $(49,205) $(54,978)
- ------------------------------------------------------------------------ ------------------- ---------------- ------------------
Total Shareholders' Equity $759,659 $583,905 $474,197
======================================================================== =================== ================ ==================
Comprehensive Income:
Net earnings $ 58,030 $105,901 $111,910
Cumulative effect of adopting SFAS No. 133 2,960 - -
Effect of financial instruments accounted for as hedges (8,068) - -
- ------------------------------------------------------------------------ ------------------- ---------------- ------------------
$ 52,922 $105,901 $111,910
======================================================================== =================== ================ ==================
See accompanying notes to consolidated financial statements.
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 one of the largest home furniture manufacturers in the United States. During
the year ended December 31, 2001, the Company had three primary operating
subsidiaries: Broyhill Furniture Industries, Inc.; Lane Furniture Industries,
Inc.; and Thomasville Furniture Industries, Inc. On December 28, 2001, the
Company acquired substantially all of the assets and liabilities of Henredon
Furniture Industries, Drexel Heritage Furnishings and Maitland-Smith.
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 sector. 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 accounting
principles generally accepted in the United States of America 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 are likely to differ from
those estimates but management believes such differences are not significant.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all of 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 years 2001, 2000, and 1999 were 52-week 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
Intangible assets consist of goodwill and trademarks and have been
amortized on a straight-line basis over 20 to 40 - year periods. Effective with
the Company's adoption of SFAS No. 142 on January 1, 2002, goodwill and
intangible assets with indefinite lives will no longer be amortized, but instead
tested for impairment. Intangible assets will be reviewed for impairment
annually or 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.
The Company periodically uses interest rate swap agreements (derivative
financial instruments) to hedge risk associated with its floating rate long-term
debt. Effective January 1, 2001 the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which requires that all derivative instruments be recorded on the
balance sheet as an asset or liability with any gain or loss recorded as a
component of accumulated other comprehensive income until recognized in
earnings. The fair value of the swap agreements is based upon quoted market
prices. The net amount to be paid or received under the interest rate swap
agreements is recorded as a component of interest expense.
Revenue Recognition
The Company recognizes revenue when finished goods are shipped, with
appropriate provisions for returns and uncollectible accounts.
Advertising Costs
Advertising costs are expensed when first aired or distributed. Advertising
costs for 2001, 2000 and 1999 were $57,453, $57,111 and $58,039 respectively.
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
basis. 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.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method.
3. Restructuring and Asset Impairment Charges
During 2001, the Company implemented a plan to reduce its domestic case
goods manufacturing capacity. This plan included the closing of 12 manufacturing
facilities and a permanent reduction of approximately 20% of the company's total
employment. Pretax restructuring and impairment charges of $26,352 have been
recorded during 2001 of which $18,000 relates to a fixed asset impairment charge
for properties and machinery and equipment of the closed facilities. The balance
consisting of $5,913 charged to cost of operations and $2,439 charged to
selling, general and administrative expenses relates to employee severance and
benefits costs and plant shutdown costs.
As of December 31, 2001, $1,000 of the restructuring charges were included
as an accrued expense in current liabilities.
4. Acquisition of Business
On December 28, 2001, the Company acquired substantially all of the assets
and liabilities of Henredon Furniture Industries, Drexel Heritage Furnishings
and Maitland-Smith for $287,140. The acquisition establishes the Company as the
furniture industry's only full-line resource in all middle and upper price
categories. The purchase price, including capitalized expenses of approximately
$1,500, consisted of $176,500 paid in cash and four million shares of the
Company's common stock valued at $110,640. The value of the common stock issued
was determined based on the average market price over the two-day period before
and after the terms of the acquisition were agreed to and announced. Since the
acquisition occurred near the last business day of 2001, it is reflected in the
Company's consolidated balance sheet as of December 31, 2001; however, the
Company's consolidated results of operations for 2001 do not include any of the
operations of the acquired companies.
The estimated fair value of the assets acquired and liabilities assumed at
the date of the acquisition are as follows:
Accounts receivable $ 49,191
Inventories 108,389
Other current assets 6,262
Property plant and equipment 68,095
Intangible assets 90,962
Other long-term assets 1,289
-------------------------------------------------------------------------------
Total assets acquired $324,188
-------------------------------------------------------------------------------
Current liabilities $ 30,481
Other long-term liabilities 6,567
-------------------------------------------------------------------------------
Total liabilities assumed 37,048
-------------------------------------------------------------------------------
Net assets acquired $287,140
==============================================================================
The Company is in the process of obtaining third-party valuations of the
assets; thus, the allocation of the purchase price is subject to change.
The following unaudited summary, prepared on a pro forma basis, combines
the consolidated results of operations of the Company for 2001 and 2000 with
those of the acquired companies as if the transaction had occurred at the
beginning of each year presented.
- -------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
2001 2000
- -------------------------------------------------------------------------------------------------------------------------
Net sales $2,311,647 $2,620,151
Earnings before extraordinary item 68,260 127,507
Net earnings $ 68,260 $ 127,507
Net earnings per common share - diluted:
Earnings before extraordinary item $ 1.23 $ 2.34
Net earnings $ 1.23 $ 2.34
- -------------------------------------------------------------------------------------------------------------------------
Such pro forma amounts are not necessarily indicative of what actual
consolidated results of operations might have been if the acquisition had been
effective at the beginning of each year presented.
5. Inventories
Inventories are summarized as follows:
- --------------------------------------------------------------------------------------------------------------------------
December 31, December 31,
2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Finished products $187,523 $125,491
Work-in-process 69,507 61,932
Raw materials 112,743 107,031
- --------------------------------------------------------------------------------------------------------------------------
$369,773 $294,454
==========================================================================================================================
6. Intangible Assets
Intangible assets include the following:
- --------------------------------------------------------------------------------------------------------------------------
December 31, December 31,
2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Goodwill $239,173 $239,173
Less accumulated amortization 82,738 73,107
- --------------------------------------------------------------------------------------------------------------------------
Goodwill $156,435 $166,066
==========================================================================================================================
Trademarks and trade names $156,828 $156,828
Intangible assets from acquisition 90,962 -
- --------------------------------------------------------------------------------------------------------------------------
247,790 156,828
Less accumulated amortization 36,920 32,999
- --------------------------------------------------------------------------------------------------------------------------
Other intangible assets $210,870 $123,829
==========================================================================================================================
The Company is in the process of obtaining third-party valuation of the
acquired assets, including the intangible assets. The allocation of the purchase
price is subject to change.
On January 1, 2002 the Company adopted Statement of Financial Accounting
Standards No. 142 (FAS #142), "Goodwill and Other Intangible Assets". FAS #142
required that goodwill and other intangible assets with indefinite lives no
longer be amortized, but instead be tested annually for impairment. The
Company's intangible assets, consisting of trademarks, trade names and goodwill
all have indefinite lives. The following table presents net income after
adjusting to exclude the amortization of goodwill and other intangible assets:
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
Earnings before extraordinary item -
as reported $58,030 $108,423 $111,910
Exclude amortization of goodwill and
other intangible assets, net of income
tax benefits 11,162 11,162 11,162
- -----------------------------------------------------------------------------------------------------------------------------
Earnings before extraordinary item -
as adjusted 69,192 119,585 123,072
Extraordinary item - early
extinguishment of debt, net of income
tax benefit - (2,522) -
- -----------------------------------------------------------------------------------------------------------------------------
Net earnings - as adjusted $69,192 $117,063 $123,072
=============================================================================================================================
Net earnings per common share - basic:
Earnings before extraordinary item -
as reported $1.15 $2.19 $2.20
Exclude amortization of goodwill and
other intangible assets 0.22 0.22 0.21
Extraordinary item - (0.05) -
- -----------------------------------------------------------------------------------------------------------------------------
Net earnings - as adjusted $1.37 $2.36 $2.41
=============================================================================================================================
Net earnings per common share - diluted:
Earnings before extraordinary item -
as reported 1.13 2.15 2.14
Exclude amortization of goodwill and
Other intangible assets 0.22 0.22 0.21
Extraordinary item - (0.05) -
- -----------------------------------------------------------------------------------------------------------------------------
Net earnings - as adjusted $1.35 $2.32 $2.35
=============================================================================================================================
7. Long-Term Debt
Long-term debt consists of the following:
- --------------------------------------------------------------------------------------------------------------------------
December 31, December 31,
2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Revolving credit facility (unsecured) $ 440,000 $ 446,000
Other 14,400 16,000
- --------------------------------------------------------------------------------------------------------------------------
$ 454,400 $ 462,000
==========================================================================================================================
The following discussion summarizes certain provisions of the long-term
debt.
Revolving Credit Facility
The revolving credit facility is an unsecured, five-year facility with a
commitment of $630,000. The facility allows for issuance of letters of credit
and cash borrowings. Letter of credit outstandings are limited to no more than
$150,000, with cash borrowings limited only by the facility's maximum
availability less letters of credit outstanding.
Currently, for letter of credit issuances, a fee of 0.75% per annum
(subject to increase/decrease based upon the Company achieving certain credit
ratings from Standard & Poor's and Moody's) is assessed for the account of the
lenders ratably. A further fee of 0.125% is assessed on standby 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 adjusted Eurodollar rate is subject to adjustment based upon
achieving certain credit ratings. At December 31, 2001, loans outstanding under
the revolving credit facility consisted of $300,000 based on the adjusted
Eurodollar rate and $140,000 based on the base rate, which in conjunction with
the interest rate swaps have a weighted average interest rate of 4.87%.
At December 31, 2001, there were $440,000 of cash borrowings and $32,464 in
letters of credit outstanding under the revolving credit facility, leaving an
excess of $157,536 available under the facility.
The revolving credit facility has no mandatory principal payments; however,
the commitment matures on June 7, 2005. The facility requires the Company to
meet certain financial covenants including a minimum consolidated net worth and
maximum leverage ratio. In addition, the facility requires repayment upon the
occurrence of a change of control of the Company.
Other
Other long-term debt consists of various industrial revenue bonds with
interest rates ranging from approximately 4.0% to 9.0%.
Interest Rate Swap Agreements
In May 2001, in order to reduce the impact of changes in interest rates on
its floating rate long-term debt, the Company entered into three interest rate
swap agreements each having a notional amount of $100.0 million and a
termination date in May 2004. The Company pays the counterparties a blended
fixed rate of 4.93% per annum and receives payment based upon the floating
three-month LIBOR rate.
Other Information
The Company has no mandatory long-term debt payments until 2005, at which
time $448,000 matures.
8. Common Stock
The Company's restated certificate of incorporation includes authorization
to issue up to 100 million shares of common stock with a $1.00 per share stated
value. As of December 31, 2001, 56,277,066 shares of common stock were issued.
It is not presently anticipated that dividends will be paid on common stock in
the foreseeable future.
The Company has been authorized by its Board of Directors to repurchase its
common stock from time to time in open market or privately negotiated
transactions. Common stock repurchases are recorded as treasury stock and may be
used for general corporate purposes. In 1999, the Company repurchased 3,123,200
shares for $59,720. As of December 31, 2001, the Company has Board of Directors'
authorization for the repurchase of an additional $100,000 of its common stock.
Shares of common stock were reserved for the following purposes at December
31, 2001:
Number of Shares
- ------------------------------------------------------------------------------
Common stock options:
Granted 4,298,916
Available for grant 816,740
- ------------------------------------------------------------------------------
5,115,656
==============================================================================
On April 29, 1999, stockholders approved the 1999 Long-Term Incentive Plan.
The plan provided for a total of 2,250,000 shares plus all remaining shares
available for grant or which become available for grant due to cancellation
under the 1992 Stock Option Plan. The plan is administered by the Executive
Compensation and Stock Option Committee of the Board of Directors and permits
certain key employees to be granted nonqualified options, performance-based
options, restricted stock, or combinations thereof. Options must be issued at
market value on the date of grant and expire in a maximum of ten years.
In 1999, the Company issued 79,000 shares of restricted stock. The
restricted shares vest over various periods from 2 to 5 years. The deferred
compensation expense is amortized to expense over the period of time the
restrictions are in place and the unamortized portion is classified as a
reduction of paid-in-capital in the Company's consolidated balance sheets.
Changes in options granted and outstanding are summarized as follows:
- -------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------------------------
2001 2000 1999
---------------------------- --------------------------- ---------------------------
Average Average Average
Shares Price Shares Price Shares Price
--------------- ------------ --------------- ----------- ------------- -------------
Beginning of period 4,345,634 $13.61 4,027,063 $12.67 4,018,581 $ 9.37
Granted 954,900 24.00 734,600 16.70 772,600 23.49
Exercised (937,093) 5.36 (305,300) 6.83 (662,141) 6.02
Cancelled (64,525) 24.48 (110,729) 18.60 (101,977) 7.91
- ------------------------------------ --------------- ------------ --------------- ----------- ------------- -------------
End of period 4,298,916 $17.55 4,345,634 $13.61 4,027,063 $12.67
==================================== =============== ============ =============== =========== ============= =============
Exercisable at
end of period 2,324,391 2,591,726 2,342,822
==================================== =============== ============ =============== =========== ============= =============
Weighted average fair
value of options granted $12.40 $ 9.52 $13.03
==================================== =============== ============ =============== =========== ============= =============
Had compensation cost for the Company's stock-based compensation plan been
determined consistent with SFAS No. 123, the Company's net earnings and net
earnings per share would have been as follows:
- --------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------------
2001 2000 1999
- ---------------------------------------------------- ----------------------- ---------------------- ----------------------
Net earnings
As reported $58,030 $105,901 $111,910
Pro forma 52,648 101,819 108,600
Net earnings per share - basic
As reported $ 1.15 $ 2.14 $ 2.20
Pro forma 1.05 2.06 2.13
Net earnings per share - diluted
As reported $ 1.13 $ 2.10 $ 2.14
Pro forma 1.04 2.05 2.10
==================================================== ======================= ====================== ======================
The weighted average fair value of options granted is estimated as of the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: risk free interest rate of 4.9%, 5.7%, and 5.0% in
2001, 2000, and 1999, respectively; expected dividend yield of 0% for all years;
expected life of 7 years for all years and expected volatility of 47%, 47%, and
46% for 2001, 2000, and 1999, respectively.
Summarized information regarding stock options outstanding and exercisable
at December 31, 2001 follows:
- -------------------------------------------------------------------------------------------------------------------------
Outstanding Exercisable
--------------------------------------------------------- --------------------------------
Range of Average
Exercise Contractual Average Average
Prices Shares Life Price Shares Price
- -------------------------------------------------------------------------------------------------------------------------
Up to $10 796,441 2.1 $ 6.97 796,441 $ 6.97
$10 - $20 1,512,075 5.5 14.64 972,050 13.64
Over $20 1,990,400 6.9 24.00 555,900 24.04
- -------------------------------------------------------------------------------------------------------------------------
4,298,916 5.5 $17.55 2,324,391 $13.84
=========================================================================================================================
Weighted average shares used in the computation of basic and diluted net
earnings per common share for 2001, 2000, and 1999 are as follows:
- --------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------
2001 2000 1999
----------------------------------------------------------
Weighted average shares used for
basic net earnings per common share 50,356,763 49,531,931 50,967,973
Effect of dilutive securities:
Stock options 968,227 910,805 1,366,611
- --------------------------------------------------------------------------------------------------------------------------
Weighted average shares used for
diluted net earnings per common share 51,324,990 50,442,736 52,334,584
==========================================================================================================================
Excluded from the computation of diluted net earnings per common share were
options to purchase 79,000 and 1,163,700 shares at an average price of $30.84,
and $23.81 per share during 2001 and 2000, respectively. These options have been
excluded from the diluted earnings per share calculation since their impact is
anti-dilutive.
9. Income Taxes
Income tax expense was comprised of the following:
- -------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
Current:
Federal $34,672 $55,191 $62,108
State and local 562 5,171 8,136
- -------------------------------------------------------------------------------------------------------------------------
35,234 60,362 70,244
Deferred (5,570) (2,788) (5,390)
- -------------------------------------------------------------------------------------------------------------------------
$29,664 $57,574 $64,854
=========================================================================================================================
The following table reconciles the differences between the federal
corporate statutory rate and the Company's effective income tax rate:
==========================================================================================================================
Year Ended December 31,
-----------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
Federal corporate statutory rate 35.0% 35.0% 35.0%
State and local income taxes, net of
federal tax benefit 0.4 1.7 2.5
Nondeductible amortization of intangible assets 2.9 1.5 1.5
Dividend exclusion - (1.1) -
Adjustments to income tax reserves (4.3) - 0.3
Other (0.2) (2.4) (2.6)
- --------------------------------------------------------------------------------------------------------------------------
Effective income tax rate 33.8% 34.7% 36.7%
==========================================================================================================================
The sources of the tax effects for temporary differences that give rise to
the deferred tax assets and liabilities were as follows:
- ------------------------------------------------------------------------ ------------------------ -----------------------
December 31, December 31,
2001 2000
- ------------------------------------------------------------------------ ------------------------ -----------------------
Deferred tax assets attributable to:
Expense accruals $ 16,579 $ 15,293
Valuation reserves 16,858 11,811
Asset impairment charges 6,193 -
Employee pension and other benefit plans 1,375 3,605
Fair market value adjustments -
account receivable 1,453 -
Inventory costs capitalized 201 1,560
Other 2,366 2,805
- ------------------------------------------------------------------------ ------------------------ -----------------------
Total deferred tax assets 45,025 35,074
- ------------------------------------------------------------------------ ------------------------ -----------------------
Deferred tax liabilities attributable to:
Fair value adjustments (73,109) (68,744)
Depreciation (7,828) (8,099)
Fair market value adjustments -
accounts receivable - (2,530)
Other (6,960) (9,679)
- ------------------------------------------------------------------------ ------------------------ -----------------------
Total deferred tax liabilities (87,897) (89,052)
- ------------------------------------------------------------------------ ------------------------ -----------------------
Net deferred tax liabilities $(42,872) $(53,978)
======================================================================== ======================== =======================
10.Employee Benefits
The Company sponsors or contributes to retirement plans covering
substantially all employees. The total cost of all plans for 2001, 2000, and
1999 was $1,425, $2,090, and $5,649, 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.
- --------------------------------------------------------------------------------- --------------------- ----------------------
December 31, December 31,
2001 2000
- --------------------------------------------------------------------------------- --------------------- ----------------------
Change in projected benefit obligation:
Projected benefit obligation - beginning of year $323,511 $313,756
Service cost 9,372 8,665
Interest cost 23,315 22,522
Actuarial gain (4,759) (3,298)
Benefits paid (19,258) (18,134)
- --------------------------------------------------------------------------------- --------------------- ----------------------
Projected benefit obligation - end of year $332,181 $323,511
- --------------------------------------------------------------------------------- --------------------- ----------------------
Change in plan assets:
Fair value of plan assets - beginning of year $354,356 $361,890
Actual return on plan assets (16,284) 9,402
Employer contributions 1,319 1,198
Benefits paid (19,258) (18,134)
- --------------------------------------------------------------------------------- --------------------- ----------------------
Fair value of plan assets - end of year $320,133 $354,356
- --------------------------------------------------------------------------------- --------------------- ----------------------
Funded status $(12,048) $ 30,845
Unrecognized net (gain) loss 20,177 (26,807)
Unrecognized prior service cost 824 1,336
- --------------------------------------------------------------------------------- --------------------- ----------------------
Prepaid pension cost $ 8,953 $ 5,374
================================================================================= ===================== ======================
Net periodic pension cost for 2001, 2000, and 1999 included the following
components:
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
Service cost-benefits earned during the period $ 9,372 $ 8,665 $ 8,379
Interest cost on the projected benefit obligation 23,315 22,522 21,905
Expected return on plan assets (32,655) (31,840) (29,193)
Net amortization and deferral (2,291) (2,914) (1,230)
- ----------------------------------------------------------------------------------------------------------------------------
Net periodic pension (income) expense $ (2,259) $ (3,567) $ (139)
============================================================================================================================
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 9.0% in all years
presented. 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.
11.Extraordinary Item - Early Extinguishment of Debt
In conjunction with the June 7, 2000, refinancing of an existing secured
credit agreement, the Company charged to results of operations $2,522, net of
income tax benefit of $1,520, representing the deferred financing fees and
expenses pertaining to the refinanced facility. The charge was recorded as an
extraordinary item.
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 $18,900,
$18,514, and $17,417 for 2001, 2000, and 1999, respectively. Annual minimum
payments under operating leases (including the companies acquired on December
28, 2001) are $19,538, $16,525, $13,609, $8,848, and $6,487 for 2002 through
2006, respectively. Future minimum lease payments under operating leases,
reduced by minimum rentals from subleases of $1,250 at December 31, 2001,
aggregate $94,220.
The Company has provided guarantees related to store leases for certain
independent dealers opening Thomasville Home Furnishings Stores. The total
future lease payments guaranteed at December 31, 2001 were $54,329. The Company
believes the risk of significant loss from these lease guarantees is remote.
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.Other Income, Net
Other income, net for 2001 totaled $10,599 compared to $9,772 for 2000. For
2001, other income consisted of interest on short-term investments of $844,
other miscellaneous income and expense items totaling $1,755 and non-operating
income of $8,000. The non-operating income results from the sale of the
Company's investment in a company which leases exhibition space to furniture and
accessory manufacturers, partially offset by additions to reserves related to
certain discontinued operations.
For 2000, other income consisted of interest on short-term investments of
$538, a cash dividend (nonrecurring) of $7,642 received by the Company relating
to its minority investment in a company which leases exhibition space to
furniture and accessory manufacturers, and other miscellaneous income and
expense items totaling $1,592.
Other income for 1999 consisted of interest on short-term investments of
$388 and other miscellaneous income and expense items totaling $2,196.
14.Quarterly Financial Information (Unaudited)
Following is a summary of unaudited quarterly information:
- --------------------------------------------------------------------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
==========================================================================================================================
Year ended December 31, 2001:
Net sales $476,801 $448,682 $459,648 $506,182
Gross profit 114,417 112,321 114,725 125,331
Net earnings $ 22,831 $ 13,871 $ 1,647 $ 19,681
Net earnings per common share:
Basic $ 0.45 $ 0.27 $ 0.03 $ 0.39
Diluted $ 0.44 $ 0.27 $ 0.03 $ 0.39
Common stock price range:
High $ 32.41 $29.17 $28.00 $ 26.76
Low $ 18.91 $18.25 $ 22.55 $ 20.44
==========================================================================================================================
Year ended December 31, 2000:
Net sales $519,467 $499,746 $533,079 $563,947
Gross profit 130,066 126,812 141,547 148,434
Net earnings:
Earnings before extraordinary item 24,307 23,373 30,143 30,600
Extraordinary item - - (2,522) -
Total $ 24,307 $ 23,373 $ 27,621 $ 30,600
Net earnings per common share - basic:
Earnings before extraordinary item $ 0.49 $ 0.47 $0.61 $ 0.62
Extraordinary item - - (0.05) -
Total $ 0.49 $ 0.47 $ 0.56 $ 0.62
Net earnings per common share- diluted:
Earnings before extraordinary item $ 0.48 $ 0.46 $ 0.60 $ 0.61
Extraordinary item - - (0.05) -
Total $ 0.48 $ 0.46 $ 0.55 $ 0.61
Common stock price range:
High $ 21.69 $ 18.56 $ 21.69 $ 19.69
Low $ 14.94 $ 14.06 $ 14.25 $ 14.56
- ---------------------------------------------------------------------------------------------------------------------------
The Company has not paid cash dividends on its common stock during the
three years ended December 31, 2001. The closing market price of the Company's
common stock on December 31, 2001 was $32.02 per share.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Furniture Brands International, Inc.:
We have audited the accompanying consolidated balance sheets of Furniture
Brands International, Inc. and subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2001. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, 2001 and 2000,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
St. Louis, Missouri
January 24, 2002
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.
By: /s/ Steven W. Alstadt
------------------------------
Steven W. Alstadt
Controller and Chief Accounting Officer
Dated: June 25, 2002
Exhibit 23
Consent of KPMG LLP
The Board of Directors
Furniture Brands International, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-65714, 333-6990, 333-39355, 333-80189) on Form S-8 of Furniture Brands
International, Inc. of our report dated January 24, 2002, relating to the
consolidated balance sheets of Furniture Brands International, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, shareholders' equity, and cash flows and the related
schedule for each of the years in the three-year period ended December 31, 2001,
which report appears in the current report on Form 8-K dated June 25, 2002 of
Furniture Brands International, Inc.
/s/ KPMG LLP
St. Louis, Missouri
June 25, 2002