SHELBY WILLIAMS INDUSTRIES, INC.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
DECEMBER 31 AND YEAR THEN ENDED
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
($000'S OMITTED EXCEPT FOR PER SHARE DATA)
OPERATING RESULTS
Net sales............................................ $ 172,431 $ 166,776 $ 159,072 $ 153,527 $ 140,262
Cost of sales........................................ 133,231 130,189 126,401 121,872 109,330
Restructuring charge................................. -- -- 5,575 -- --
Selling and administrative expenses.................. 25,765 25,974 25,402 24,770 24,342
Interest expense..................................... 969 1,257 1,207 1,060 1,622
Interest income...................................... (18) (9) -- (8) (130)
Miscellaneous expense (income)....................... (44) (65) 106 (26) (44)
Income before income taxes........................... 12,528 9,430 381 5,859 5,142
Income taxes......................................... 4,111 2,650 16 1,709 1,548
Net income........................................... 8,417 6,780 365 4,150 3,594
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
PER SHARE DATA
Net sales per common share........................... $ 19.58 $ 18.62 $ 17.58 $ 16.88 $ 15.41
Net income per common share.......................... 0.96 0.76 0.04 0.46 0.39
Cash dividends declared per common share............. 0.30 0.28 0.28 0.28 0.24
Equity per common share.............................. 6.38 5.81 5.41 5.64 5.62
Weighted average number of common shares
outstanding........................................ 8,805 8,955 9,049 9,097 9,105
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
CHANGES IN FINANCIAL POSITION
Cash provided by operating activities................ $ 8,069 $ 9,201 $ 4,998 $ 1,778 $ 7,394
Capital expenditures................................. 1,189 2,252 2,228 1,720 1,831
Depreciation and amortization........................ 2,656 2,833 2,707 2,673 2,706
Cash dividends....................................... 2,643 2,511 2,533 2,547 2,186
FINANCIAL POSITION
Stockholders' equity................................. $ 55,970 $ 51,724 $ 48,658 $ 51,316 $ 51,156
Long-term debt (including current portion)........... 8,000 8,895 8,944 8,987 9,025
Total assets......................................... 84,678 89,907 88,520 90,804 86,775
Working capital...................................... 37,606 32,016 28,092 28,809 28,680
Current assets....................................... 57,177 59,256 57,079 57,151 52,237
Net investment in plant and equipment................ 25,961 29,231 29,874 31,630 32,558
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
FINANCIAL RATIOS
Return on average common shareholders' equity........ 16% 14% 1% 8% 7%
Return on average total assets....................... 9.6% 7.6% .4% 4.7% 4.1%
Pre-tax return on net sales.......................... 7.2% 5.7% .2% 3.8% 3.7%
Effective income tax rate............................ 32.8% 28.1% 4.2% 29.2% 30.1%
After-tax return on net sales........................ 4.9% 4.1% .2% 2.7% 2.6%
Current ratio........................................ 2.9 2.2 2.0 2.0 2.2
Debt as percent of total invested capital............ 13% 15% 16% 15% 15%
Current assets as percent of total assets............ 68% 66% 64% 63% 60%
Dividend payout ratio................................ 31% 37% -- 61% 61%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
PRODUCTIVITY STATISTICS
Average inventory turnover........................... 4.8X 4.6X 4.6X 4.3X 4.0X
Average receivable turnover.......................... 6.8X 6.8X 6.5X 7.1X 7.4X
3
SHELBY WILLIAMS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
-------------- -------------- --------------
NET SALES....................................................... $ 172,431,000 $ 166,776,000 $ 159,072,000
Cost of goods sold.............................................. 133,231,000 130,189,000 126,401,000
Restructuring charge............................................ -- -- 5,575,000
Selling, general and administrative expenses.................... 25,765,000 25,974,000 25,402,000
13,435,000 10,613,000 1,694,000
OTHER DEDUCTIONS (INCOME):
Interest expense................................................ 969,000 1,257,000 1,207,000
Interest income................................................. (18,000) (9,000) --
Miscellaneous expense (income).................................. (44,000) (65,000) 106,000
907,000 1,183,000 1,313,000
INCOME BEFORE INCOME TAXES...................................... 12,528,000 9,430,000 381,000
INCOME TAXES:
Current......................................................... 3,638,000 2,452,000 429,000
Deferred........................................................ 473,000 198,000 (413,000)
4,111,000 2,650,000 16,000
NET INCOME...................................................... $ 8,417,000 $ 6,780,000 $ 365,000
NET INCOME PER SHARE............................................ $ 0.96 $ 0.76 $ 0.04
Weighted average number of common shares outstanding............ 8,805,000 8,955,000 9,049,000
See accompanying notes.
13
SHELBY WILLIAMS INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 1,039,000 $ 2,376,000
Accounts receivable, less allowance for doubtful accounts of $402,000 in 1996 and
$423,000 in 1995............................................................... 25,224,000 25,198,000
Inventories:
Raw materials.................................................................. 11,615,000 12,349,000
Work in process................................................................ 4,414,000 4,598,000
Finished goods................................................................. 11,194,000 11,488,000
27,223,000 28,435,000
Prepaid expenses................................................................. 3,691,000 3,247,000
Total current assets............................................................... 57,177,000 59,256,000
Excess of cost over net assets of acquired companies............................... 169,000 178,000
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land and land improvements 2,930,000 2,876,000
Buildings and leasehold improvements............................................. 22,969,000 25,408,000
Machinery and equipment.......................................................... 24,207,000 25,029,000
50,106,000 53,313,000
Less accumulated depreciation and amortization................................... 24,145,000 24,082,000
25,961,000 29,231,000
OTHER ASSETS....................................................................... 1,371,000 1,242,000
$ 84,678,000 $ 89,907,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings............................................................ $ -- $ 5,900,000
Accounts payable................................................................. 9,002,000 10,425,000
Customer deposits on orders in process........................................... 3,690,000 3,245,000
Accrued liabilities.............................................................. 4,172,000 6,787,000
Income taxes..................................................................... 1,707,000 828,000
Current portion of long-term debt................................................ 1,000,000 55,000
Total current liabilities.......................................................... 19,571,000 27,240,000
Long-term debt..................................................................... 7,000,000 8,840,000
Deferred income taxes.............................................................. 2,137,000 2,103,000
Commitments (see notes)
STOCKHOLDERS' EQUITY:
Common stock, $.05 par value; authorized 30,000,000 shares; issued 11,814,000
shares (1995--11,779,000)...................................................... 591,000 589,000
Capital in excess of par value................................................... 8,143,000 7,855,000
Retained earnings................................................................ 69,172,000 63,398,000
Pension liability adjustment..................................................... (789,000) (908,000)
77,117,000 70,934,000
Less common stock held in treasury; 3,047,000 shares at cost (1995--
2,879,000)..................................................................... 21,147,000 19,210,000
Total stockholders' equity......................................................... 55,970,000 51,724,000
$ 84,678,000 $ 89,907,000
See accompanying notes.
14
SHELBY WILLIAMS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
-------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 8,417,000 $ 6,780,000 $ 365,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................... 2,656,000 2,833,000 2,707,000
Assets abandoned and impaired in restructuring.................. -- -- 1,799,000
Provision for losses on accounts receivable..................... 139,000 323,000 308,000
Equity change in affiliate...................................... -- 50,000 (303,000)
Changes in assets and liabilities net of effects from sale of
facility:
Accounts receivable........................................... (165,000) (1,397,000) 234,000
Inventories................................................... (389,000) 27,000 (10,000)
Prepaid expenses.............................................. (580,000) (387,000) 155,000
Accounts payable and accrued liabilities...................... (3,493,000) 356,000 660,000
Income taxes payable.......................................... 879,000 441,000 (1,471,000)
Increase in deferred taxes...................................... 34,000 123,000 81,000
Pension liability adjustment.................................... 119,000 (37,000) 540,000
Other........................................................... 452,000 89,000 (67,000)
NET CASH PROVIDED BY OPERATING ACTIVITIES........................... 8,069,000 9,201,000 4,998,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of facility...................................... 2,000,000 -- --
Proceeds from disposal of property, plant and equipment............. 5,000 70,000 1,000
Capital expenditures................................................ (1,189,000) (2,252,000) (2,228,000)
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES.................... 816,000 (2,182,000) (2,227,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayment) of short-term borrowings................. (5,900,000) (2,550,000) 1,450,000
Principal payments of long-term debt................................ (32,000) (49,000) (43,000)
Sale of common stock under stock option plan........................ 290,000 169,000 19,000
Purchase of common stock for the treasury........................... (1,937,000) (1,335,000) (1,049,000)
Dividends declared and paid......................................... (2,643,000) (2,511,000) (2,533,000)
NET CASH USED BY FINANCING ACTIVITIES............................... (10,222,000) (6,276,000) (2,156,000)
Net increase (decrease) in cash and cash equivalents................ (1,337,000) 743,000 615,000
Cash and cash equivalents at beginning of year...................... 2,376,000 1,633,000 1,018,000
CASH AND CASH EQUIVALENTS AT END OF YEAR............................ $ 1,039,000 $ 2,376,000 $ 1,633,000
Supplemental cash flow information:
Cash paid during the year for:
Interest........................................................ $ 969,000 $ 1,263,000 $ 1,207,000
Income taxes.................................................... 3,277,000 2,061,000 1,766,000
$ 4,246,000 $ 3,324,000 $ 2,973,000
See accompanying notes.
15
SHELBY WILLIAMS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
--------------------------------------------------------------------------------
COMMON STOCK CAPITAL
-------------------- IN EXCESS PENSION TREASURY
SHARES OF PAR RETAINED LIABILITY STOCK, AT
ISSUED AMOUNT VALUE EARNINGS ADJUSTMENT COST TOTAL
--------- --------- --------- ---------- ---------- ----------- ----------
BALANCE AT DECEMBER 31,
1993 11,756,000 $ 588,000 $7,668,000 $61,297,000 $(1,411,000) $(16,826,000) $51,316,000
Net income................. -- -- -- 365,000 -- -- 365,000
Pension liability
adjustment............... -- -- -- -- 540,000 -- 540,000
Sale of common stock under
stock option plan........ 2,000 -- 19,000 -- -- -- 19,000
Common stock purchased for
treasury (105,000
shares).................. -- -- -- -- -- (1,049,000) (1,049,000)
Cash dividends--$.28 per
share.................... -- -- -- (2,533,000) -- -- (2,533,000)
BALANCE AT DECEMBER 31,
1994..................... 11,758,000 588,000 7,687,000 59,129,000 (871,000) (17,875,000) 48,658,000
Net income................. -- -- -- 6,780,000 -- -- 6,780,000
Pension liability
adjustment............... -- -- -- -- (37,000) -- (37,000)
Sale of common stock under
stock option plan........ 21,000 1,000 168,000 -- -- -- 169,000
Common stock purchased for
treasury (120,000
shares).................. -- -- -- -- -- (1,335,000) (1,335,000)
Cash dividends--$.28 per
share.................... -- -- -- (2,511,000) -- -- (2,511,000)
BALANCE AT DECEMBER 31,
1995..................... 11,779,000 589,000 7,855,000 63,398,000 (908,000) (19,210,000) 51,724,000
Net income................. -- -- -- 8,417,000 -- -- 8,417,000
Pension liability
adjustment............... -- -- -- -- 119,000 -- 119,000
Sale of common stock under
stock option plan........ 35,000 2,000 288,000 -- -- -- 290,000
Common stock purchased for
treasury (168,000
shares).................. -- -- -- -- -- (1,937,000) (1,937,000)
Cash dividends--$.30 per
share.................... -- -- -- (2,643,000) -- -- (2,643,000)
BALANCE AT DECEMBER 31,
1996..................... 11,814,000 $ 591,000 $8,143,000 $69,172,000 $ (789,000) $(21,147,000) $55,970,000
See accompanying notes.
16
SHELBY WILLIAMS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Shelby Williams designs, manufactures and distributes products for the
contract furniture market. The Company has a significant position in the
hospitality and food service markets through its "Shelby Williams" seating line,
"King Arthur" line of function room furniture and "Sterno" accessories. It
serves the health care, university, office furniture and other institutional
markets through its "Thonet" division with health care and dormitory furniture,
including chairs and tables, and ergonomically designed office seating products,
desks and credenzas. The Company also distributes vinyl wallcoverings for
residential, hotel and office use under the name "Sellers &Josephson," and
markets other textile products to the architectural and design community through
"SW Textiles." The Company distributes floor coverings and other textile
products, as well as Shelby Williams products, in Hawaii and the entire Pacific
Basin, through "PHF."
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
items and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Sales are recognized when the products are shipped and include export sales
of $ 14,719,000 for 1996, $15,538,000 for 1995, and $16,279,000 for 1994.
INCOME TAXES
Income tax expense includes Federal and state income taxes currently payable
and deferred taxes arising from temporary differences between the tax bases of
assets or liabilities and their reported amounts in the financial statements.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments, with original maturities
of three months or less, that are readily convertible to known amounts of cash.
INVENTORIES
Inventories are carried at the lower of cost or market, determined by the
last-in, first-out (LIFO) method. The current replacement cost of inventories
exceeded carrying value by approximately $10,123,000 at December 31, 1996 and $
10,019,000 at December 31, 1995.
As a result of the difference between the method of allocating the cost of
acquisitions in 1976, 1987 and 1988 for financial reporting purposes, and the
method used for income tax purposes, the Company's tax basis in the inventories
is approximately $24,266,000 at December 31, 1996 and $25,478,000 at December
31, 1995.
17
SHELBY WILLIAMS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Depreciation and amortization of property, plant and equipment is provided
using the straight-line method over the estimated useful lives of the respective
assets.
POSTEMPLOYMENT BENEFITS
The Company provides certain postemployment benefits. Payments of these
benefits in the past have been infrequent and are not estimable, thus the
Company records these benefits on an event basis.
OTHER SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. As a result of significant deductibles in its insurance
coverage for liability and worker's compensation claims, the Company provides
amounts which management believes are sufficient to cover the associated
liabilities.
SHORT-TERM BORROWINGS
The Company has unsecured lines of credit amounting to $20,000,000 at
interest rates of prime or less. At December 31, 1996, all of these lines were
unused. The weighted average interest rate on short-term borrowings outstanding
on December 31, 1995 was 6.7%.
COMMITMENTS
LEASES
The Company leases certain manufacturing facilities under operating leases
which expire over the next nine years. The Company also leases showroom space
under operating leases expiring over the next five years.
Future minimum rental payments required under operating leases that have
initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 1996 are:
YEAR ENDING
DECEMBER 31,
------------
1997............................................................................ $1,662,000
1998............................................................................ 1,640,000
1999............................................................................ 1,251,000
2000............................................................................ 1,162,000
2001............................................................................ 729,000
Subsequent to 2001.............................................................. 1,201,000
------------
Total minimum lease payments.................................................... $7,645,000
------------
------------
Total rental expense for all operating leases aggregated $1,912,000 in 1996,
$ 2,008,000 in 1995, and $1,998,000 in 1994.
18
SHELBY WILLIAMS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
COMMON STOCK INFORMATION (UNAUDITED)
The following table sets forth the high and low sales prices of the
Company's common stock as reported by the New York Stock Exchange.
SALES
PRICES HIGH LOW
--------- --------- ---------
1995
1st Quarter.................................................... 10 1/4 7 1/2
2nd Quarter.................................................... 11 3/4 9
3rd Quarter.................................................... 13 3/4 11 3/4
4th Quarter.................................................... 13 1/2 11 3/8
1996
1st Quarter.................................................... 12 7/8 10 5/8
2nd Quarter.................................................... 12 1/2 10 1/8
3rd Quarter.................................................... 13 1/2 10 5/8
4th Quarter.................................................... 14 3/4 12 1/4
At December 31, 1996, there were approximately 3,000 holders of record of
the Company's common stock, including individual participants in security
position listings.
The Company declared and paid cash dividends on its common stock during the
last two fiscal years as follows:
CASH DIVIDEND PER
COMMON SHARE
PERIOD 1996 1995
- ---------------------------------------------------------------------------------------------- --------- ---------
1st Quarter................................................................................... $ .07 $ .07
2nd Quarter................................................................................... .07 .07
3rd Quarter................................................................................... .08 .07
4th Quarter................................................................................... .08 .07
--- ---
$ .30 $ .28
--- ---
--- ---
19
SHELBY WILLIAMS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly results for the years ended December 31, 1996, 1995 and
1994 are as follows:
NET INCOME
1996 NET SALES GROSS PROFIT NET INCOME PER SHARE
- ------------------------------------------------------ -------------- ------------- -------------- -----------
First................................................. $ 40,734,000 $ 9,091,000 $ 1,745,000 $ .20
Second................................................ 43,548,000 9,894,000 2,032,000 .23
Third................................................. 43,250,000 9,905,000 2,200,000 .25
Fourth................................................ 44,899,000 10,310,000 2,440,000 .28
-------------- ------------- -------------- -----
Total................................................. $ 172,431,000 $ 39,200,000 $ 8,417,000 $ .96
-------------- ------------- -------------- -----
-------------- ------------- -------------- -----
NET INCOME
1995 NET SALES GROSS PROFIT NET INCOME PER SHARE
- ------------------------------------------------------ -------------- ------------- -------------- -----------
First................................................. $ 39,301,000 $ 8,400,000 $ 1,325,000 $ .15
Second................................................ 42,352,000 9,277,000 1,702,000 .19
Third................................................. 42,518,000 9,379,000 1,874,000 .21
Fourth................................................ 42,605,000 9,531,000 1,879,000 .21
-------------- ------------- -------------- -----
Total................................................. $ 166,776,000 $ 36,587,000 $ 6,780,000 $ .76
-------------- ------------- -------------- -----
-------------- ------------- -------------- -----
NET INCOME
NET INCOME (LOSS) PER
1994 NET SALES GROSS PROFIT (LOSS) SHARE
- ------------------------------------------------------ -------------- ------------- -------------- -----------
First................................................. $ 38,122,000 $ 7,723,000 $ 785,000 $ .09
Second................................................ 40,208,000 8,340,000 1,104,000 .12
Third................................................. 38,859,000 7,858,000 876,000 .10
Fourth................................................ 41,883,000 3,175,000 (2,400,000)* (.27)*
-------------- ------------- -------------- -----
Total................................................. $ 159,072,000 $ 27,096,000 $ 365,000* $ .04*
-------------- ------------- -------------- -----
-------------- ------------- -------------- -----
- ------------------------
* See "Restructuring Charge" below for a description of the charge recorded in
the fourth quarter of 1994 and its effect on operations.
STOCK OPTION PLANS
Under the Company's incentive stock option plan and directors' stock option
plan, options are granted to key employees and directors to purchase the
Company's common stock at not less than fair market value at date of grant. At
December 31, 1996 and 1995, there were 350,000 and 385,000 shares, respectively,
reserved for issuance under the plans. Of options granted, 16,000 in both 1996
and 1995 have five year terms and vest and become fully exercisable at the end
of six months service. The remaining options granted in 1996 and 1995 have five
year terms and vest and become exercisable in 1/3 increments after 15 months, 30
months, and 45 months, respectively, of continued employment.
The intrinsic value method is used in accounting for stock-based awards
under the Company's stock option plans. Because the exercise price of the
Company's stock options at least equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
20
SHELBY WILLIAMS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
STOCK OPTION PLANS (CONTINUED)
A summary of the Company's stock option activity, and related information
for years ended December 31 follows:
1994 1995 1996
------------------------------ ------------------------------ ------------------------------
OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
----------- ----------------- ----------- ----------------- ----------- -----------------
Outstanding beginning of
year......................... 107 $ 8.69 95 $ 8.46 119 $ 8.30
Granted....................... -- -- 48 8.01 63 12.25
Exercised..................... (2) 8.38 (20) 8.38 (35) 8.38
Forfeited..................... (10) 10.86 (4) 8.38 -- --
Outstanding end of year....... 95 8.46 119 8.30 147 $ 9.97
Exercisable at end of year.... 62 8.47 87 8.39 79 $ 9.14
Weighted average fair value of
options granted during the
year......................... $ 2.44 $ 3.68
Exercise prices for options outstanding as of December 31, 1996 ranged from
$ 7.94 to $12.25. The weighted-average remaining contractual life of those
options is 2.7 years.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996, respectively: risk-free interest rates of 6.5%;
dividend yields of 2.7%; volatility factors of the expected market price of the
Company's common stock of .33 and .32; and a weighted-average expected life of
the option of five years.
The effect of applying the fair value method to the Company's stock-based
awards results in net income and earnings per share that are not materially
different from amounts reported.
LONG-TERM DEBT
1996 1995
------------ ------------
Long-term debt at December 31, 1996, and 1995 consisted of the following:
7.8% senior notes due in quarterly installments of $1,000,000 in October 1997
through July 1999................................................................. $ 8,000,000 $ 8,000,000
13% capitalized lease obligation, due in monthly installments of $14,000 (including
interest); final $863,000 discharged by assignment with sale of related facility
in August 1996.................................................................... 0 895,000
------------ ------------
8,000,000 8,895,000
------------ ------------
Less amounts due within one year...................................................... 1,000,000 55,000
------------ ------------
$ 7,000,000 $ 8,840,000
------------ ------------
------------ ------------
The terms of the senior note agreement restrict the payment of dividends and
the acquisition of stock for the treasury until the indebtedness is paid in
full. At December 31, 1996 there was $6,939,000 available for payment of
dividends and the acquisition of stock for the treasury. In addition, the
Company is
21
SHELBY WILLIAMS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
LONG-TERM DEBT (CONTINUED)
restricted as to the incurrence of additional indebtedness and the amount of
leases which may be entered into. The Company is in compliance with all such
restrictions.
RESTRUCTURING CHARGE
Due to increases in lumber prices and increased competition primarily from
imported products, the Company made changes in its product and manufacturing
strategies during December 1994, designed to make the Company more competitive
in the industry. The plan was to exit certain portions of the Company's
enterprise by selling an upholstery business with a related manufacturing
facility and discontinuing a part of the product lines in the health care,
university and office markets, resulting in closure of another plant. The
Company anticipated completing the restructuring by December 31, 1995; however,
the sale of the upholstery business was not completed until August 1996. The
planned discontinuance of a part of the product lines in the health care,
university and office markets was completed in 1995 resulting in the reduction
of operations of that plant by approximately 75 percent. The Company planned to
move the remaining production to other facilities and close the plant by
September 30, 1996, but changing economic conditions, particularly labor
shortages at those other facilities, necessitated changing the plan to continue
the reduced level of production, which is mainly in a portion of the plant owned
by the Company. This minor change does not affect the original restructuring
provision.
At December 31, 1995, accrued liabilities include $439,000 related to the
above, primarily to return the leased portion of the plant being closed to
original condition. These costs were paid and charged against the liability in
1996, completing the plan.
Components of the 1994 charge were as follows:
Write downs resulting from discontinuance of product lines:
Inventory, to net realizable value............................................ $2,565,000
Catalogs and other sales materials............................................ 416,000
Cost related to plants:
Abandonment of leasehold improvements and other fixed assets.................. 1,301,000
Cost to return leased plant to original condition............................. 471,000
Other cost, principally severance............................................. 324,000
Other assets impaired:
Write-off of goodwill of upholstery business which will not be recovered upon
its sale....................................................................... 498,000
---------
$5,575,000
---------
---------
The revenues and net operating income for the upholstery business that was
sold are as follows:
1996 1995 1994
------------ ------------ ------------
Revenues................................................................ $ 5,858,000 $ 8,963,000 $ 7,925,000
Net operating income.................................................... 182,000 325,000 188,000
The charge was recorded in the fourth quarter of 1994 and reduced the net
income of the year by $3,850,000 or $.43 per share. Excluding the restructuring
charge, 1994 net income was $4,215,000, or $.47 per share.
22
SHELBY WILLIAMS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
RETIREMENT PLANS
The Company has several defined benefit pension plans covering essentially
all of its employees in the United States. The benefits are based on years of
service, and for salaried employees, average annual compensation. The Company's
practice is to fund amounts which are required by statute and applicable
regulations and which are tax deductible.
Assumptions used in the accounting were:
AS OF DECEMBER 31,
------------------------
1996 1995
----- -----
Discounts rates................................................................................. 8.5% 8.0%
Rates of increase in compensation levels........................................................ 3.5% 3.5%
Expected long-term rate of return on assets..................................................... 8.5% 8.5%
Net defined benefit pension cost for 1996, 1995, and 1994 included the
following components:
1996 1995 1994
------------ ------------- ------------
Service cost-benefits earned during period............................. $ 966,000 $ 1,062,000 $ 1,114,000
Interest cost on projected benefit obligations......................... 1,151,000 1,088,000 892,000
Net amortization and deferral.......................................... 62,000 1,504,000 (524,000)
Actual return on plan assets........................................... (1,128,000) (2,128,000) 16,000
Total pension plan expense............................................. $ 1,051,000 $ 1,526,000 $ 1,498,000
The following table sets forth the funded status of the Company's defined
benefit pension plans and amounts recognized in the accompanying consolidated
balance sheets as of December 31, 1996 and 1995.
1996 1995
------------- -------------
Actuarial present value of vested benefit obligations.............................. $ 14,696,000 $ 13,281,000
Actuarial present value of accumulated benefit obligations......................... $ 15,235,000 $ 13,842,000
Actuarial present value of projected benefit obligations for service rendered to
date.............................................................................. $ 15,983,000 $ 15,495,000
Plan assets at fair value, primarily cash equivalents and publicly traded stocks
and bonds, including 46,000 shares of Shelby Williams Industries, Inc. common
stock (1995--22,000 shares)....................................................... 15,142,000 12,084,000
Projected benefit obligations in excess of plan assets............................. 841,000 3,411,000
Unrecognized net assets being recognized over remaining service period............. 188,000 213,000
Unrecognized net loss.............................................................. (2,669,000) (3,379,000)
Unrecognized prior service credit (cost)........................................... 231,000 (589,000)
Adjustment required to recognize minimum liability................................. 1,502,000 2,102,000
Pension related liability included in accrued liabilities.......................... $ 93,000 $ 1,758,000
The Company has an employee stock ownership plan covering essentially all
salaried employees. Contributions are determined annually at the discretion of
the Company but not to exceed the amount allowable as a deduction for federal
income tax purposes. The contributions were $63,000 for 1996, $70,000 for 1995,
and $72,000 for 1994. The plan held 40,000 shares of the Company's common stock
at December 31, 1996 and 35,000 shares at December 31, 1995.
23
SHELBY WILLIAMS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
RETIREMENT PLANS (CONTINUED)
Retirement plan expense was $1,114,000, $1,596,000, and $1,570,000 for 1996,
1995, and 1994 respectively.
INCOME TAXES
Deferred income tax liabilities (assets) for differences in tax bases and
amounts in the financial statements were as follows:
AS OF DECEMBER 31,
--------------------------
1996 1995
------------ ------------
Current:
Allocated costs of acquisition inventories..................................... $ 1,005,000 $ 1,005,000
Pension liability.............................................................. (13,000) (411,000)
Restructuring related liabilities.............................................. -- (149,000)
Other--net..................................................................... (364,000) (335,000)
Total included in current income taxes........................................... 628,000 110,000
Noncurrent:
Property, plant and equipment.................................................. 2,062,000 1,868,000
Other.......................................................................... 75,000 235,000
Total noncurrent deferred income taxes........................................... 2,137,000 2,103,000
Net deferred tax liabilities..................................................... $ 2,765,000 $ 2,213,000
The components of income tax expense are as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
Current:
Federal............................................................... $ 3,026,000 $ 2,350,000 $ 415,000
State................................................................. 612,000 102,000 14,000
3,638,000 2,452,000 429,000
Deferred:
Federal............................................................... 473,000 198,000 (413,000)
$ 4,111,000 $ 2,650,000 $ 16,000
Income tax expense differs from amounts computed by applying the Federal
statutory tax rate to income before income taxes as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
Statutory rate......................................................... $ 4,260,000 $ 3,206,000 $ 129,000
State income taxes, net of Federal tax benefit........................ 404,000 67,000 9,000
Other................................................................. (553,000) (623,000) (122,000)
$ 4,111,000 $ 2,650,000 $ 16,000
Effective rate........................................................ 32.8% 28.1% 4.2%
24
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Shelby Williams Industries, Inc.
We have audited the accompanying consolidated balance sheets of Shelby
Williams Industries, Inc., as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Shelby Williams
Industries, Inc., as of December 31, 1996 and 1995, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ERNST & YOUNG LLP
January 30, 1997
Atlanta, Georgia
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds have been, and are expected to
continue to be, cash flows from operations and borrowings under credit lines
provided by banks. At December 31, 1996, the Company had cash and cash
equivalents of $1.0 million compared with $2.4 million at December 31, 1995.
The Company has additional sources of liquidity available in the form of
committed lines of credit maintained with banks. Unused short-term bank credit
lines totaled $20.0 million at December 31, 1996. Long-term debt at year-end,
including current portions of $1.0 million, amounted to $8.0 million. Total debt
as a percentage of total capitalization was 12.5% at December 31, 1996.
The Company's outstanding indebtedness consists of a note payable to an
institutional investor which bears interest at an annual rate of 7.8%.
Amortization of $1.0 million per quarter begins in October 1997 and continues
through July 1999. Pursuant to the terms of the note, a prepayment option is
available only at a substantial penalty.
Net cash provided by operating activities was $8.1 million in 1996.
Net cash provided by investing activities was $816,000 in 1996, which
principally reflects $2.0 million from the sale of the Preview facility
described below, partially offset by capital expenditures of $1.2 million.
Capital expenditures in 1996 were primarily used to upgrade manufacturing
equipment. In 1997, the Company expects capital expenditures of approximately
$6.0 million which will consist of $3.0 million for a new regional
manufacturing facility, $2.0 million for a powder coating system and $1.0
million for automated machinery.
Cash used by financing activities in 1996 was $10.2 million which
principally reflects the repayment of $5.9 million of total indebtedness, the
payment of $2.6 million in dividends and the repurchase of $1.9 million of
treasury stock.
The Company's stockholders' equity at December 31, 1996, was $56.0 million.
The Company purchased 168,000 shares of its common stock in 1996 for $1.9
million at an average repurchase price of $11.52 per share. These repurchases
were made to provide shares upon the exercise of options granted and to be
granted under the Company's stock option plans. In January 1997, the Company's
Board of Directors authorized the repurchase of an additional 467,000 shares of
Common Stock. The Company may purchase these shares from time to time, depending
on market conditions, in the open market or privately negotiated transactions.
The Company operates a frame and component manufacturing plant in Mexico.
The year-end carrying value of property, plant and equipment at this facility
was $3.5 million for 1996, $3.8 million for 1995, and $4.1 million for 1994. All
items produced at the plant are shipped to facilities of the Company in the
United States for further processing. The value of these transfers amounted to
$2.1 million in 1996, $1.9 million in 1995, and $1.8 million in 1994.
The Company believes that cash on hand, internally generated cash flows,
the net proceeds of a planned offering of Company stock, and available credit
lines will be adequate to support currently planned business operations both
on a near-term and long-term basis.
26
1996 COMPARED TO 1995
Net sales increased 3.4% to $172.4 million in 1996 from $166.8 million in
1995. This increase was due almost entirely to volume increases. Volume growth
was primarily attributable to the continued robust levels of refurbishment
activity in the hospitality and food service markets. The Company's sales growth
also reflects higher levels of new construction, particularly in the budget
sector of the hospitality market and in the food service and gaming markets.
Excluding Preview, net sales increased by 5.6% to $166.6 million in 1996 from
$157.8 million in 1995. At December 31, 1996, the backlog of orders, which
achieved record levels, was approximately $32.0 million, compared to $28.0
million, excluding Preview, at December 31, 1995.
Gross profit increased 7.1% to $39.2 million in 1996 from $36.6 million in
1995. The gross profit margin increased to 22.7% in 1996 compared to 21.9% in
1995, reflecting higher factory utilization rates and favorable product mix.
Excluding Preview, gross profit margins in 1996 and 1995 were 22.6% and 21.6%,
respectively.
Selling, general and administrative expenses decreased 0.8% to $25.8 million
in 1996 from $26.0 million in 1995. As a percentage of net sales, selling,
general and administrative expenses decreased to 14.9% in 1996 from 15.6% in
1995. This decrease reflects the success of management's cost containment
programs. Excluding Preview, selling, general and administrative expenses
increased 2.3% to $24.3 million in 1996 from $23.8 million in 1995, and as a
percentage of sales were 14.6% and 15.1% in 1996 and 1995, respectively.
As a result of the factors described above, operating profit increased 26.4%
to $13.4 million in 1996 from $10.6 million in 1995. The operating margin
improved to 7.8% in 1996 compared to 6.4% in 1995. Excluding Preview, operating
profits in 1996 and 1995 were $13.3 million and $10.3 million, respectively, and
as a percentage of sales, were 8.0% and 6.5%, respectively. Excluding Preview,
operating profit grew 28.8% in 1996, reflecting the high selling, general and
administrative expenses of Preview.
Net interest expense fell 23.8% to $951,000 in 1996 from $1.2 million in
1995. The decrease reflects the reduction in outstanding indebtedness to $8.0
million at December 31, 1996 from $14.8 million at December 31, 1995.
The effective tax rate increased to 32.8% in 1996 from 28.1% in 1995 due to
the absence of tax credits which were no longer available and the effect of
reduced export sales.
As a result of the foregoing, net income increased 24.1% to $8.4 million in
1996, or $0.96 per share, compared to $6.8 million, or $0.76 per share in 1995.
Excluding Preview, net income per share in 1996 and 1995 was $0.95 and $0.74,
respectively, representing an annual increase of 28.4%
27
1995 COMPARED TO 1994
Net sales increased 4.8% to $166.8 million in 1995 from $159.1 million in
1994. Of such increase, approximately 2% was due to volume increases with the
remainder being due to a combination of increased pricing and favorable product
mix. The volume growth was primarily attributable to pent-up demand in the
refurbishment sector. Excluding Preview, total net sales increased by 4.4% to
$157.8 million in 1995 from $151.1 million in 1994. Excluding Preview, the
backlog of orders at December 31, 1995 was $28.0 million, compared to $26.5
million at December 31, 1994.
In December 1994, the Company made changes to its product and
manufacturing strategies designed to increase the Company's competitiveness.
These changes included (i) a plan to divest its contemporary upholstered
seating product line, Preview, and a related manufacturing facility and (ii)
discontinuance of a part of its product lines in the healthcare, university
and office markets and the closure of a related manufacturing facility. The
Company took a $5.6 million restructuring charge in the fourth quarter of
1994 as a result of the aforementioned restructuring. See Note to
Consolidated Financial Statements captioned "Restructuring Charge."
Gross profit excluding the restructuring charge increased 12.0% to $36.6
million in 1995 from $32.7 million in 1994. The gross profit margin excluding
the restructuring charge increased to 21.9% in 1995 compared to 20.5% in 1994,
resulting mainly from greater operating efficiencies and lower expense levels
achieved by the restructuring. Excluding Preview, gross profit margins in 1995
and 1994 were 21.6% and 20.1%, respectively.
Selling, general and administrative expenses increased 2.3% to $26.0 million
in 1995 from $25.4 million in 1994. As a percentage of net sales, selling,
general and administrative expenses decreased to 15.6% in 1995 from 16.0% in
1994. This decrease as a percentage of net sales was a function of volume.
Weakness in the Mexican economy led to the liquidation in 1995 of Shelby
Williams de Mexico, S.A. de C.V., in which the Company owned 25% of the issued
and outstanding shares. The write-off of the investment in and receivables from
this affiliate amounted to $200,000. The Company's frame and component
manufacturing plant in Mexico was unaffected. Excluding Preview, selling,
general and administrative expenses increased 2.2% to $23.8 million in 1995 from
$23.3 million in 1994, and as a percentage of sales were 15.1% and 15.4% in 1995
and 1994, respectively.
As a result of the factors described above, operating profit, excluding the
restructuring charge, increased 46.0% to $10.6 million in 1995 from $7.3 million
in 1994 and the operating margin improved to 6.4% in 1995 compared to 4.6% in
1994. Excluding Preview and the restructuring charge, operating profits in 1995
and 1994 were $10.3 million and $7.1 million, respectively, and as a percentage
of sales, were 6.5% and 4.7%, respectively.
Net interest expense was relatively unchanged from 1994 to 1995.
The effective tax rate increased to 28.1% in 1995 from 4.2% in 1994.
As a result of the foregoing, net income excluding the restructuring charge
increased 60.9% to $6.8 million in 1995, or $0.76 per share, compared to $4.2
million, or $0.47 per share in 1994. Excluding Preview and the restructuring
charge, net income per share in 1995 and 1994 would have been $0.74 and $0.45,
respectively, representing an annual increase of 63.2%.
28