FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002 or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period
from to
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Commission file number I-91
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Furniture Brands International, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 43-0337683
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 South Hanley Road, St. Louis, Missouri 63105
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (314) 863-1100
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
56,277,066 shares as of July 31, 2002
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Financial Statements for the quarter ended June 30, 2002.
Consolidated Balance Sheets
Consolidated Statements of Operations:
Three Months Ended June 30, 2002
Three Months Ended June 30, 2001
Six Months Ended June 30, 2002
Six Months Ended June 30, 2001
Consolidated Statements of Cash Flows:
Six Months Ended June 30, 2002
Six Months Ended June 30, 2001
Notes to Consolidated Financial Statements
The financial statements are unaudited, but include all adjustments (consisting
of normal recurring adjustments) which the management of the Company considers
necessary for a fair presentation of the results of the period. The results for
the three months and six months ended June 30, 2002 are not necessarily
indicative of the results to be expected for the full year.
FURNITURE BRANDS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
June 30, December 31,
2002 2001
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents....................... $ 14,606 $ 15,707
Receivables, less allowances of $21,556
($18,841 at December 31, 2001)................ 394,804 359,493
Inventories...(Note 1).......................... 393,295 369,773
Deferred income taxes........................... 23,826 26,160
Prepaid expenses and other current assets....... 7,466 7,582
---------- -----------
Total current assets.......................... 833,997 778,715
---------- -----------
Property, plant and equipment..................... 640,402 605,104
Less accumulated depreciation................... 307,320 283,464
---------- -----------
Net property, plant and equipment............. 333,082 321,640
---------- -----------
Goodwill...(Note 6)............................... 188,035 156,435
Other intangible assets...(Note 6)................ 171,008 210,870
Other assets...................................... 40,195 35,829
---------- -----------
$1,566,317 $ 1,503,489
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued interest expense........................ $ 3,216 $ 2,805
Accounts payable and other accrued expenses..... 194,595 172,490
---------- -----------
Total current liabilities..................... 197,811 175,295
----------- -----------
Long-term debt.................................... 405,400 454,400
Deferred income taxes............................. 70,163 69,032
Other long-term liabilities....................... 48,343 45,103
Shareholders' equity:
Preferred stock, authorized 10,000,000
shares, no par value - issued, none........... - -
Common stock, authorized 200,000,000 shares,
$1.00 stated value - issued 56,277,066
shares at June 30, 2002 and
December 31, 2001............................. 56,277 56,277
Paid-in capital................................. 221,466 219,469
Retained earnings............................... 585,359 520,503
Accumulated other comprehensive income (Note 3). (6,143) (5,108)
Treasury stock at cost (653,459 shares at
June 30, 2002 and 1,664,666 shares at
December 31, 2001)............................ (12,359) (31,482)
---------- -----------
Total shareholders' equity.................... 844,600 759,659
---------- -----------
$1,566,317 $ 1,503,489
========== ===========
See accompanying notes to consolidated financial statements.
FURNITURE BRANDS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
(Unaudited)
Three Months Three Months
Ended Ended
June 30, June 30,
2002 2001
------------ ------------
Net sales...................................... $ 604,511 $ 459,648
Costs and expenses:
Cost of operations........................... 429,577 335,034
Selling, general and administrative expenses. 108,470 84,866
Depreciation and amortization................ 12,266 14,765
Asset impairment charges..................... - 18,000
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Earnings from operations....................... 54,198 6,983
Interest expense............................... 5,492 5,539
Other income, net.............................. 996 610
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Earnings before income tax expense............. 49,702 2,054
Income tax expense............................. 17,617 407
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Net earnings................................... $ 32,085 $ 1,647
=========== ============
Net earnings per common share:
Basic........................................ $ 0.58 $ 0.03
====== ======
Diluted...................................... $ 0.57 $ 0.03
====== ======
Weighted average common shares outstanding:
Basic........................................ 55,553,253 50,295,895
========== ==========
Diluted...................................... 56,698,417 51,214,184
========== ==========
See accompanying notes to consolidated financial statements.
FURNITURE BRANDS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
(Unaudited)
Six Months Six Months
Ended Ended
June 30, June 30,
2002 2001
---------- ----------
Net sales...................................... $1,238,972 $ 965,830
Costs and expenses:
Cost of operations........................... 885,828 705,450
Selling, general and administrative expenses. 218,768 169,277
Depreciation and amortization................ 24,822 30,023
Asset impairment charges..................... - 18,000
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Earnings from operations....................... 109,554 43,080
Interest expense............................... 11,094 12,308
Other income, net.............................. 2,070 1,419
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Earnings before income tax expense............. 100,530 32,191
Income tax expense............................. 35,674 10,863
---------- ----------
Net earnings................................... $ 64,856 $ 21,328
========== ==========
Net earnings per common share:
Basic........................................ $ 1.17 $ 0.43
====== ======
Diluted...................................... $ 1.15 $ 0.42
====== ======
Weighted average common shares outstanding:
Basic........................................ 55,375,196 50,159,494
========== ==========
Diluted...................................... 56,570,135 51,148,911
========== ==========
See accompanying notes to consolidated financial statements.
FURNITURE BRANDS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Six Months
Ended Ended
June 30, June 30,
2002 2001
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Cash flows from operating activities:
Net earnings............................................. $ 64,856 $ 21,328
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization........................ 24,822 30,023
Asset impairment charges............................. - 18,000
Other noncash items, net............................. 5 707
(Increase) decrease in receivables................... (35,311) 31,354
(Increase) decrease in inventories................... (23,522) 5,767
Increase in prepaid expenses and other assets........ (3,854) (1,799)
Increase (decrease) in accounts payable, accrued
interest expense and other accrued expenses........ 30,040 (7,193)
Increase (decrease)in net deferred tax
liabilities........................................ 4,319 (8,622)
Increase in other long-term liabilities.............. 801 395
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Net cash provided by operating activities................ 62,156 89,960
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Cash flows from investing activities:
Proceeds from the disposal of assets..................... 1,193 65
Additions to property, plant and equipment............... (28,564) (11,386)
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Net cash used by investing activities.................... (27,371) (11,321)
---------- ----------
Cash flows from financing activities:
Payments of long-term debt............................... (49,000) (88,000)
Proceeds from the issuance of treasury stock............. 13,114 3,492
----------- ----------
Net cash used by financing activities.................... (35,886) (84,508)
---------- ----------
Net decrease in cash and cash equivalents.................. (1,101) (5,869)
Cash and cash equivalents at beginning of period........... 15,707 14,606
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Cash and cash equivalents at end of period................. $ 14,606 $ 8,737
========== ==========
Supplemental Disclosure:
Cash payments for income taxes, net...................... $ 24,473 $ 12,067
========== ==========
Cash payments for interest............................... $ 10,260 $ 17,239
========== ==========
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
(1) Inventories are summarized as follows:
June 30, December 31,
2002 2001
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Finished products $ 208,980 $ 187,523
Work-in-process 67,078 69,507
Raw materials 117,237 112,743
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$ 393,295 $ 369,773
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(2) Weighted average shares used in the computation of basic and diluted net earnings per
common share are as follows:
Three Months Ended Six Months Ended
--------------------------- ----------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Weighted average shares used
for basic net earnings per
common share 55,553,253 50,295,895 55,375,196 50,159,494
Effect of dilutive securities:
Stock options 1,145,164 918,289 1,194,939 989,417
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Weighted average shares used
for diluted net earnings
per common share 56,698,417 51,214,184 56,570,135 51,148,911
========== ========== ========== ==========
(3) Comprehensive income is as follows:
Six Months Six Months
Ended Ended
June 30, June 30,
2002 2001
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Net earnings $ 64,856 $ 21,328
Cumulative effect of adopting
SFAS No. 133 - 2,960
Effect of financial instruments
accounted for as hedges (1,585) 143
Effect of foreign currency
translation 550 -
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$ 63,821 $ 24,431
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(4) On January 1, 2002 the Company adopted Statement of Financial Accounting
Standards No. 142 (FAS 142), "Goodwill and Other Intangible Assets." FAS
142 requires 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 earnings on a comparative basis, after adjusting to exclude
the amortization of goodwill and other intangible assets:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2002 2001 2002 2001
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Net earnings:
As reported $32,085 $ 1,647 $64,856 $21,328
Exclude amortization of goodwill and
other intangible assets (net of income tax
benefit) - 2,790 - 5,580
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$32,085 $ 4,437 $64,856 $26,908
======= ======= ======= =======
Basic earnings per share:
As reported $0.58 $0.03 $1.17 $0.43
As adjusted $0.58 $0.09 $1.17 $0.54
Diluted earnings per share:
As reported $0.57 $0.03 $1.15 $0.42
As adjusted $0.57 $0.09 $1.15 $0.53
(5) In 2001, the Company implemented a restructuring plan which included the
closing of 12 manufacturing facilities. As of June 30, 2002, real estate
with a carrying value of $7,421 was included in other assets. No events
occurred during the six months ended June 30, 2002 that would indicate the
need for a change in the carrying value of these assets.
(6) The purchase price allocation for the December 28, 2001 acquisition of
Henredon, Drexel Heritage and Maitland-Smith was finalized during the
second quarter of 2002. The allocation resulted in the reclassification of
$39,862 from Other Intangible Assets to Goodwill and Property, Plant and
Equipment.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
Furniture Brands International, Inc. (referred to herein as the "Company") is
the largest manufacturer of residential furniture in the United States. The
Company has four primary operating subsidiaries: Broyhill Furniture Industries,
Inc.; Lane Furniture Industries, Inc.; Thomasville Furniture Industries, Inc.,
and HDM Furniture Industries, Inc. (which includes the operations of Henredon,
Drexel Heritage and Maitland-Smith).
Comparison of Three Months and Six Months Ended June 30, 2002 and 2001
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Selected financial information for the three months and six months ended June
30, 2002 and June 30, 2001 is presented below:
(Dollars in millions except per share data)
Three Months Ended
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June 30, 2002 June 30, 2001
------------------- ----------------
% of % of
Dollars Net Sales Dollars Net Sales
Net sales $ 604.5 100.0% $459.6 100.0%
Earnings from operations 54.2 9.0% 7.0 1.5%
Interest expense 5.5 0.9% 5.5 1.2%
Income tax expense 17.6 2.9% 0.5 0.1%
Net earnings 32.1 5.3% 1.6 0.4%
Net earnings per common share-diluted 0.57 - 0.03 -
Gross profit (1) $ 164.4 27.2% $114.8 25.0%
Six Months Ended
------------------------------------
June 30, 2002 June 30, 2001
------------------- ----------------
% of % of
Dollars Net Sales Dollars Net Sales
Net sales $1,239.0 100.0% $965.8 100.0%
Earnings from operations 109.6 8.8% 43.1 4.5%
Interest expense 11.1 0.9% 12.3 1.3%
Income tax expense 35.6 2.9% 10.9 1.1%
Net earnings 64.9 5.2% 21.3 2.2%
Net earnings per common share-diluted 1.15 - 0.42 -
Gross profit (1) $ 331.5 26.8% $240.1 24.9%
(1) The Company believes that gross profit provides useful information
regarding a company's financial performance. Gross profit has been
calculated by subtracting cost of operations and the portion of
depreciation associated with cost of goods sold from net sales.
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------
2002 2001 2002 2001
-------- -------- -------- ------
Net sales $604.5 $459.6 $1,239.0 $965.8
Cost of operations 429.5 335.0 885.8 705.4
Depreciation (associated with
cost of goods sold) 10.6 9.8 21.7 20.3
------ ------ -------- ------
Gross profit $164.4 $114.8 $ 331.5 $240.1
====== ====== ======== ======
Net sales for the three months ended June 30, 2002 were $604.5 million, compared
to $459.6 million in the three months ended June 30, 2001, an increase of $144.9
million or 31.5%. For the six months ended June 30, 2002, net sales increased
$273.2 million or 28.3% to $1,239.0 million from $965.8 million for the six
months ended June 30, 2001. Excluding the impact of Henredon, Drexel Heritage
and Maitland-Smith, which the Company acquired as of the close of business on
December 28, 2001, the Company's sales showed year-over-year growth of 10.6% in
the quarter and 7.7% in the first half, reflecting improved business conditions,
particularly in middle-price point upholstery products.
Earnings from operations for the three months ended June 30, 2002 and June 30,
2001 were $54.2 million and $7.0 million, respectively. As a percentage of net
sales, earnings from operations for the three months ended June 30, 2002 and
June 30, 2001 were 9.0% and 1.5%, respectively. For the six months ended June
30, 2002 and June 30, 2001, earnings from operations were $109.6 million and
$43.1 million, respectively. Earnings from operations for the six months ended
June 30, 2002 and June 30, 2001 were 8.8% and 4.5% of net sales, respectively.
The improved operating profitability was due to the higher sales volume,
increased plant utilization, added focus on imported products and past cost
reduction efforts. Operating profits also improved due to the adoption of
Statement of Financial Accounting Standards No. 142 (FAS 142) which eliminated
the amortization of goodwill and other intangible assets. Such amortization for
the comparable periods of 2001 totaled $3.4 million in the quarter and $6.8
million in the first half.
Interest expense totaled $5.5 million and $11.1 million for the three months and
six months ended June 30, 2002, respectively, compared to $5.5 million and $12.3
million for the prior year comparable periods. The decrease in interest expense
during the periods resulted from lower interest rates, offset by the increase in
long-term debt used to fund the acquisition.
The effective income tax rates were 35.4% and 19.8% for the three months ended
June 30, 2002 and June 30, 2001, respectively, and 35.5% and 33.7% for the six
months ended June 30, 2002 and June 30, 2001, respectively. The effective tax
rate for the three months and six months ended June 30, 2002 was less favorably
impacted than the comparable prior year periods due in part to a reduction in
nontaxable income and income tax credits.
Net earnings per common share for basic and diluted were $0.58 and $0.57 for the
three months ended June 30, 2002, respectively, compared with $0.03 and $0.03
for the same period last year, respectively. For the six months ended June 30,
2002 and June 30, 2001, net earnings per common share for basic and diluted were
$1.17 and $1.15, respectively, and $0.43 and $0.42, respectively. Average common
and common equivalent shares outstanding used in the calculation of net earnings
per common share on a basic and diluted basis were 55,553,000 and 56,698,000,
respectively, for the three months ended June 30, 2002, and 50,296,000 and
51,214,000, respectively, for the three months ended June 30, 2001. For the six
months ended June 30, 2002 and June 30, 2001, average common and common
equivalent shares outstanding used in the calculation of net earnings per common
share on a basic and diluted basis were 55,375,000 and 56,570,000, respectively,
and 50,159,000 and 51,149,000, respectively.
FINANCIAL CONDITION
Working Capital
Cash and cash equivalents at June 30, 2002 amounted to $14.6 million, compared
with $15.7 million at December 31, 2001. During the six months ended June 30,
2002, net cash provided by operating activities totaled $62.2 million, net cash
used by investing activities totaled $27.4 million and net cash used by
financing activities totaled $35.9 million.
Working capital was $636.2 million at June 30, 2002, compared with $603.4
million at December 31, 2001. The current ratio was 4.2-to-1 at June 30, 2002,
compared to 4.4-to-1 at December 31, 2001.
Financing Arrangements
As of June 30, 2002, long-term debt consisted of the following, in millions:
Revolving credit facility (unsecured) $392.6
Other 12.8
------
$405.4
======
To meet short-term capital and other financial requirements, the Company
maintains a $630.0 million revolving credit facility with a group of financial
institutions. The revolving credit facility allows for the issuance of letters
of credit and cash borrowings. Letter of credit outstandings are limited to no
more than $150.0 million, with cash borrowings limited only by the facility's
maximum availability less letters of credit outstanding. On June 30, 2002 there
were $392.6 million in cash borrowings and $40.5 million in letters of credit
outstanding.
The facility requires the Company to meet certain financial covenants including
a minimum consolidated net worth and maximum leverage ratio. As of June 30,
2002, the Company was in compliance with all financial covenants.
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 Eurodollar rate is subject to adjustment based upon achieving
certain credit ratings. At June 30, 2002, loans outstanding under the revolving
credit facility consisted of $385.0 million based on the adjusted Eurodollar
rate and $7.6 million based upon the base rate, which in conjunction with the
interest rate swaps (used to hedge $300.0 million of the floating rate debt),
have a weighted average interest rate of 5.04%.
The Company believes that cash generated from operations, together with its
revolving credit facility, will be adequate to meet liquidity requirements for
the foreseeable future.
Recently Issued Statements of Financial Accounting Standards
On January 1, 2002 the Company adopted Statement of Financial Accounting
Standards No. 142 (FAS 142), "Goodwill and Other Intangible Assets." FAS 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually.
Intangible assets with definite useful lives will continue to be amortized over
their respective estimated useful lives. The Company estimates the impact of
discontinuing the amortization of intangible assets will be to increase annual
earnings by approximately $0.20 per share.
OUTLOOK
While the Company continues to see weak consumer spending in its sector, it is
beginning to see signs the economy is firming up. Orders in the middle-price
points, particularly in upholstered products continue to show good year over
year comparisons. While the Company has yet to see such a turnaround at the
upper end, the cost savings initiatives undertaken during the year should
position it for strong operating profit margin improvement as that price
category begins to turn as well. The Company believes revenues for the third
quarter should be up 25% (4% to 6% excluding the acquisitions) from the third
quarter of 2001. The Company is currently projecting earnings per share of $0.48
to $0.52 for the third quarter and $2.25-$2.32 for the full year.
Capital expenditures are forecasted at $45.0 - $48.0 million for 2002, with
depreciation expense anticipated to be approximately $50.0 million. Selling,
general and administrative expenses for the year are expected to be 17.00% -
17.25% of net sales. Based upon current interest rates and budgeted debt
reduction, interest expense is expected to be approximately $22.0 million for
2002. The Company expects to generate in excess of $100.0 million in cash flow
from operations, the majority of which will be used to reduce long-term debt.
FORWARD-LOOKING STATEMENTS
The Company herein has made forward-looking statements within the meaning of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements include the Company's expected sales,
earnings per share, profit margins, and cash flows, the effects of certain
manufacturing realignments and other business strategies, the prospects for the
overall business environment, and other statements containing the words
"expects," "anticipates," "estimates," "believes," and words of similar import.
The Company cautions investors that any such forward-looking statements are not
guarantees of future performance and that certain factors may cause actual
results to differ materially from those in the forward-looking statements. Such
factors include:
An economic downturn could result in a decrease in our sales and earnings.
The furniture industry has historically been subject to cyclical variations in
the general economy and to uncertainty regarding future economic prospects.
Economic downturns could affect consumer spending habits by decreasing the
overall demand for home furnishings. Such events would also impact retailers,
our primary customers, resulting in a decrease in our sales and earnings. For
example, the general economic slowdown during 2001 was in part responsible for
the 10.6% decrease in our sales in 2001.
Loss of market share due to competition would result in a decrease in future
sales and earnings.
The residential furniture manufacturing business is highly competitive and
fragmented. We compete with many other manufacturers some of which offer widely
advertised, well known, branded products. The highly competitive nature of the
industry means we are constantly subject to the risk of losing market share to
those privately held competitors who have lower sales and profitability targets.
As a result, we may not be able to maintain or to raise the prices of our
products in response to such inflationary pressures as increasing costs. Also
due to the large number of competitors and their wide range of product
offerings, we may not be able to differentiate our products (through styling,
finish and other construction techniques) from those of our competitors.
Failure to anticipate or respond to changes in consumer tastes and fashion
trends in a timely manner could result in a decrease in future sales and
earnings.
Residential furniture is a highly styled product subject to fashion trends and
geographic consumer tastes. Consumer tastes and fashion trends can change
rapidly. If we are unable to anticipate or respond to changes in consumer tastes
and fashion trends in a timely manner we may lose sales and be faced with excess
inventory (both raw materials and finished goods). Disposal of excess inventory
may result in a decrease in our sales and earnings.
<page>
Failure to achieve our projected mix of product sales could result in a decrease
in our future sales and earnings.
Some of our products are sold for a higher profit than other of our products. An
increase in the sales of lower profit products at the expense of the sales of
higher profit products could result in a decrease in our earnings.
Business failures of large customers could result in a decrease in our future
sales and earnings.
Although we have no customers who individually represent 10% or more of our
total annual sales the possibility of business failures of large customers could
result in a decrease in our future sales and earnings in that these sales are
difficult to replace. For example, in 2001 the failures of Homelife, Wards and
Heilig-Meyers were in part responsible for the 10.6% decrease in our sales.
Distribution realignments and cost savings programs can result in a decrease in
our near-term sales and earnings.
At times it is necessary for us to discontinue certain relationships with
customers (retailers) who do not meet our growth and profitability standards.
Until a realignment is established, there can be a decrease in our near-term
sales and earnings. The continuation in 2001 of such a realignment program was
in part responsible for the 10.6% decrease in our sales in 2001. We continually
review our relationships with our customers (retailers) and future realignments
are possible based upon such ongoing reviews.
Manufacturing realignments could result in a decrease in our near-term earnings
We continually review our domestic manufacturing operations and offshore
(import) sourcing capabilities. Effects of periodic manufacturing realignments
and cost savings programs, such as our efforts to reduce domestic case goods
manufacturing capacity in 2001, could result in a decrease in our near-term
earnings until the expected cost reductions are achieved. Such programs can
include the consolidation and integration of facilities, functions, systems and
procedures. Certain products may also be shifted from domestic manufacturing to
offshore sourcing. Such actions may not be accomplished as quickly as
anticipated and the expected cost reductions may not be achieved in full.
Increased reliance on offshore (import) sourcing of various products could
adversely affect our ability to service customers which could result in a
decrease in our sales.
During the last several years, we have been increasing our offshore (import)
capabilities to provide flexibility in product programs and pricing to meet
competitive pressures. The mix of our various product lines has been moving from
domestically manufactured to offshore sourced and was the primary reason for our
efforts to reduce domestic case goods manufacturing capacity in 2001. Offshore
(import) sourcing is subject to political instability in countries where
contractors and suppliers are located and possible delay due to managing at a
distance. Either could make it more difficult for us to service our customers.
Other risks include the imposition of regulations and quotas relating to
imports; duties, taxes and other charges on imports; and, significant
fluctuation of the value of the U.S. dollar against foreign currencies, all of
which could increase costs and decrease earnings.
Fluctuations in the price, availability and quality of raw materials could cause
delay which could result in a decrease in our sales and increase costs which
would result in a decrease in our earnings.
Fluctuations in the price, availability and quality of the raw materials that we
use in manufacturing residential furniture could have a negative effect on our
cost of sales and our ability to meet the demands of our customers (retailers).
Inability to meet the demands of our customers could result in the loss of
future sales. We use various types of wood, fabrics, leathers, glass,
upholstered filling material and other raw materials in manufacturing our
furniture. The costs to manufacture our furniture depend in part on the market
prices of the raw materials used to produce the furniture. We may not be able to
pass along to our customers all or a portion of the costs of higher raw
materials due to competitive and marketing pressures.
A successful product liability claim brought against us in excess of available
insurance coverage would result in a decrease in earnings and any claim or
product recall that results in significant adverse publicity against us may
result in a decrease in our sales and earnings.
We face the business risk of exposure to product liability claims in the event
that the use of any of our products results in personal injury or property
damage. In the event that any of our products prove to be defective, we may be
required to recall or redesign such products. We maintain insurance against
product liability claims, but there can be no assurance that such coverage will
continue to be available on terms acceptable to us or that such coverage will be
adequate for liabilities actually incurred
Future acquisitions and investments could result in dilution to earnings per
share and a decrease in the valuation of our common stock.
As part of our business strategy, we have made and expect to continue to make
acquisitions and investments in businesses that offer complementary products.
Risks commonly encountered in our acquisitions include the possibility that we
pay more than the acquired company or assets are worth, the difficulty of
assimilating the operations and personnel of the acquired business, the
potential disruption of our ongoing business and the distraction of management
from our ongoing business. Consideration paid for future acquisitions could be
in the form of cash or stock or a combination thereof. Dilution to existing
stockholders and to earnings per share may result in connection with any such
future acquisition.
Impairment of goodwill and other intangible assets would result in a decrease in
our earnings.
Current accounting rules require that goodwill and other intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually. The Company has substantial goodwill and other
intangible assets which based upon the outcome of the annual test could result
in the write-down of all or a portion of these assets and a corresponding
reduction in earnings and net worth.
Our current policy of not paying cash dividends means the only way to realize a
return on your investment in our common stock is to sell it at a profit.
We do not anticipate paying cash dividends in the foreseeable future. Currently
the only way you will realize a return on your investment in our common stock is
to sell your stock at a profit.
Certain anti-takeover provisions and preferred stock could result in a decrease
in a potential acquirer's valuation of our common stock.
Certain provisions of our Certificate of Incorporation could make it more
difficult for a third party to acquire control of our company, even if such
change in control would be beneficial to stockholders. Also, the Certificate of
Incorporation allows us to issue preferred stock without stockholder approval.
Such issuances could also make it more difficult for a third party to acquire
the Company.
Other risk factors may be listed from time to time in the Company's future
public release and SEC reports.
Item 3. Quantitative and Qualitative Disclosures about Market
The Company is exposed to market risk from changes in interest rates. The
company's exposure to interest rate risk consists of its floating rate Secured
Credit agreement. This risk is managed using interest rate swaps to fix a
portion of the Company's floating rate long-term debt. Based upon a hypothetical
ten percent increase in interest rates the potential impact to the Company's net
earnings would be $0.2 million.
<page>
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on April 25, 2002. The
directors listed in the Notice of Annual Meeting of Stockholders dated
March 15, 2002 were elected for terms of one year ending 2003 with
voting for each as follows:
Director For Withheld
-------- --- --------
K. B. Bell 49,502,857 903,465
W. B. Holliman 42,419,410 7,986,912
B. A. Karsh 46,897,524 3,508,798
D. E. Lasater 50,044,113 362,209
L. M. Liberman 49,494,696 911,965
R. B. Loynd 50,044,357 361,965
A. E. Suter 50,048,739 357,583
To vote to further amend the Restated Certificate of Incorporation, to
increase the number of authorized shares of common stock to two
hundred million from one hundred million:
Affirmative votes 46,045,660
Negative votes 4,328,138
Abstentions 35,524
Broker non-votes 0
To vote to further amend the Furniture Brands International, Inc. 1999
Long-Term Incentive Plan to increase the number of shares reserved for
issuance:
Affirmative votes 39,162,435
Negative votes 9,745,524
Abstentions 1,498,363
Broker non-votes 0
Item 5. Other information
On April 8, 2002 Jeff Young was appointed President and Chief
Executive Officer of Drexel Heritage Furniture Industries, Inc., a
subsidiary of the Company.
Item 6. Exhibits and Reports on Form 8 -K
(a) 99.1 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.
99.2 Certification of David P. Howard, Chief Financial 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.
(b) A Form 8-K was filed on April 26, 2002 announcing first quarter
operating results and projections of second quarter and full year
sales and earnings. A Form 8-K was filed on June 10, 2002 announcing
projections of second quarter and full year sales and earnings. A Form
8-K was filed on June 26, 2002 amending Note 6 to the financial
statements for each of the years in the three-year period ended
December 31, 2001 to present net income after adjusting for the
amortization of goodwill and other intangible assets. Form 8-K, dated
January 11, 2002, as amended on March 14, 2002, announcing the
acquisition of substantially all the assets of Henredon Furniture
Industries, Inc., Drexel Heritage Furnishings, Inc. and
Maitland-Smith, Inc. was further amended on June 26, 2002. A Form 8-K
was filed on July 26, 2002 announcing second quarter and first half of
2002 operating results and projections for third quarter and full year
sales and earnings.
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/ Steven W. Alstadt
------------------------------
Steven W. Alstadt
Controller and
Chief Accounting Officer
Date: August 9, 2002
<page>
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Furniture Brands International,
Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, W. G. Holliman, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company. of the Company.
/s/ W.G. Holliman
-----------------
W. G. Holliman
Title: Chief Executive Officer
Furniture Brands International, Inc.
August 12, 2002
<page>
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Furniture Brands International,
Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, David P. Howard, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company. of the Company.
/s/ David P. Howard
--------------------
David P. Howard
Title: Chief Financial Officer
Furniture Brands International, Inc.
August 12, 2002