1994 ANNUAL REPORT
(Five photos of various furniture groupings appear here.)
LADD FURNITURE, INC.
ONE FOCUS. A BROADER VISION
(Four photos of various furniture groupings and a photo of a map appear here .)
LADD's ten U.S.-based furniture companies manufacture and market a broad
assortment of residential furniture for every room of every home. During 1994,
these products were shipped to customers located throughout the United States
and, through LADD International, in 53 foreign countries (map at left).
LADD is one of North America's largest residential furniture manufacturers,
with 1994 net sales of $592 million, 26 manufacturing facilities in ten states
and Mexico, and approximately 7,900 employees. LADD markets its broad line of
residential and contract furniture under the major brand names American
Drew, American of Martinsville, Barclay, Brown Jordan, Clayton Marcus, Daystrom,
Design Horizons, Fournier, LADD Home Theatre, Lea, Pennsylvania House and
Pilliod; and distributes these products both domestically and, through LADD
International, worldwide. LADD also owns and operates two support companies, Lea
Lumber & Plywood and LADD Transportation. The company's common stock trades on
the Nasdaq Stock Market under the symbol: LADF.
Financial Highlights
Dollar amounts in thousands, except per share data
PERCENT
1994* 1993 CHANGE
INCOME STATEMENT
Net sales $ 591,575 521,200 +13.5%
Gross profit 109,581 94,279 16.2
Operating income 15,670 12,326 27.1
Net earnings 4,308 3,846 12.0
Weighted average shares outstanding 23,086 23,054 0.1
PER SHARE
Net sales $ 25.62 22.61 +13.3%
Net earnings 0.19 0.17 11.8
Cash dividends 0.12 0.12 0.0
Year-end book value 6.58 6.51 1.1
BALANCE SHEET
Net working capital $ 123,685 123,004 + 0.6%
Total assets 378,816 335,737 12.8
Long-term debt** 143,584 105,257 36.4
Shareholders' equity 151,906 150,103 1.2
RATIOS
Gross margin 18.5% 18.1
Operating profit margin 2.6 2.4
Return on sales 0.7 0.7
Return on beginning equity 2.9 2.6
Long-term debt** to capitalization 45.3 37.9
Current ratio 3.0X 3.1
OTHER
Capital spending $ 31,825 24,666 +29.0%
Depreciation and amortization 17,812 13,062 36.4
Year-end employees 7,860 6,670 17.8
Year-end shareholders 5,500 4,500 22.2
*1994 data reflect the acquisition of Pilliod Furniture as of January 31, 1994.
**Excluding current installments.
1
Dear Shareholder
LADD achieved record sales in 1994, with total volume increasing 13%
to $592 million. Operating profit for the year increased 27% and net earnings
rose 12% to $4.3 million or $.19 per share. During the year, we continued to
take strategic actions designed to improve LADD's profitability and
return on investment.
In January 1994, we successfully completed the $54 million acquisition of
Pilliod Furniture. This acquisition increased LADD's position in the fast
growing promotional casegoods segment of the industry. With
annualized sales in excess of $90 million, Pilliod was a significant
contributor to our earnings in its first year as a LADD company.
During 1994, LADD's operating companies significantly increased their new
product development and marketing efforts. Our casegoods and upholstery
companies successfully introduced a variety of new product groups, several of
which are pictured in this annual report. We believe successful new
introductions, coupled with innovative marketing programs, are critical
elements for LADD's growth and profitability in the future.
Investment in technology continues to be a key LADD strategy. Capital
spending in 1994 was a record $32 million. Over the last two years, over $56
million has been invested in our operating companies. While this
aggressive capital spending program has disrupted earnings in the short-term,
these investments will lead to improved product quality, more favorable raw
material yields, and higher productivity levels.
We also continued our strategic efforts to develop and expand our
international business during 1994. Although international sales declined in
1994 due to lower sales in Canada and the Mid-East, we increased to 53
the number of countries to which we sell and expanded our sales representation
in a number of key international markets. Recent currency
(Logos of American Drew, American of Martinsville, Barclay, Brown Jordan,
Clayton Marcus, Daystrom, Fournier, LADD Home Theatre and Home Design Horizons
appear in a reversed strip around this page)
2
exchange rate fluctuations will most likely reduce our exports to Canada and
Mexico this year, but we continue to believe our international focus provides a
significant growth opportunity for LADD.
While 1994 was a year of overall growth and improved earnings for LADD,
bottom line results were below our expectations. We are satisfied with the
recent sales growth and earnings performance of half our operating companies.
The balance are receiving intense management attention aimed at improving their
operating results.
With this in mind, LADD's corporate management team was realigned in January
1995 with the promotion of Fred Schuermann to the position of president and
chief operating officer. With over 18 years of industry experience, a successful
managerial track record, and newly-broadened management responsibilities, we are
confident that Fred's leadership skills and experience will positively impact
our future operating results.
LADD continues to maintain a strong financial position. During 1994, we
refinanced our short and long-term bank debt with a new $190 million credit
facility which reduced LADD's interest rate, extended long-term debt maturities,
and increased financial flexibility. At year-end, the company's long-term debt
ratio of 45% was consistent with our long-term financial objectives.
We believe 1995 will be another year of improvement for LADD, even if the
industry's growth rate slows from its 1994 level, as most forecasters are
currently predicting. Our extensive new product introductions, increased
marketing emphasis, and substantial capital investment during the past two
years should generate additional returns during 1995. On behalf of LADD's
7,900 employees, I want to thank you, our shareholders, along with our
customers and suppliers, for your continuing support.
(Signature of Richard R. Allen appears here)
Richard R. Allen,
Chairman and Chief Executive Officer
...NEW PRODUCT
INTRODUCTIONS,
INCREASED MARKETING
EMPHASIS, AND
SUBSTANTIAL CAPITAL
INVESTMENT...SHOULD
GENERATE ADDITIONAL
RETURNS DURING 1995.
3
(Logos of American Drew, American of Martinsville, Barclay, Brown Jordan,
Clayton Marcus, Daystrom, Fournier, LADD Home Theatre and Home Design Horizons
appear in a reversed strip around this page)
Marketing Focus...
LADD's corporate and operating company managers continue to focus on the
company's overall marketing process; from initial product conception through
manufacturing, distribution, delivery and follow-up. These efforts are targeted
at enhancing the design, quality, utility and value of LADD's products, and
delivering them to customers more quickly and efficiently. We remain strongly
committed to improving LADD's sales and market share by providing appealing,
high value products and services to our customers.
The LADD operating companies rely on focus group interviews with consumers
and retailers to help design and develop successful new products. This
market-derived information is equally helpful in refining and improving
existing products and services. For example, Lea Industries is innovatively
using groups of elementary school children to suggest improvements
in the design and functionality of the company's existing lines of youth
bedroom furniture. Customer tests and retailer feedback have also been major
contributors to the development of American Drew's new American
Traveler series, which features product groups with styling traceable to
various geographic regions of America. The well-received Magnolia's Secret
group, with its French New Orleans look, owes much of its success to such market
research.
Computer technology also plays an important role in LADD's marketing
efforts. Clayton Marcus, winner of the LADD Chairman's Award in both 1993 and
1994, utilizes an in-store computer system which allows participating furniture
retailers in the U.S., Mexico and Canada to visually show consumers exactly how
any of the more than 900 Clayton Marcus fabric alternatives will look on any of
the company's custom-made upholstery frames. Clayton Marcus is also one of
several LADD companies employing around-the-clock computerized voice response
systems to assist its retailers in checking product availability and order
status.
WE REMAIN STRONGLY
COMMITTED TO
GROWING LADD'S
SALES AND MARKET
SHARE BY PROVIDING
APPEALING, HIGH
VALUE PRODUCTS...
(Logos of American Drew, American of Martinsville, Barclay, Brown Jordan,
Clayton Marcus, Daystrom, Fournier, LADD Home Theatre and Home Design Horizons
appear in a reversed strip around this page)
4
(Four photos of various furniture groupings appear here.)
LADD's broad assortment of wood, upholstered, and metal furniture, with a
wide range of price points, is marketed to consumers throughout the United
States and abroad, as well as to leading hotels and motels around the world.
(Logos of American Drew, American of Martinsville, Barclay, Brown Jordan,
Clayton Marcus, Daystrom, Fournier, LADD Home Theatre and Home Design Horizons
appear in a reversed strip around this page)
5
Brown Jordan, known principally as an award-winning designer and premier
supplier of outdoor pool and patio furniture, introduced an "in-home collection"
during 1994 designed to meet increasing consumer demand for high fashion indoor
metal furniture. Brown Jordan's furniture was recently featured on the cover of
Home Magazine as part of national publicity received for a home decorated
entirely with LADD company products and accessories.
LADD International's team of professionals continues to increase the
worldwide awareness of our broad product line. During 1994, LADD shipped $34
million of its products to a record 53 foreign countries. Retail distribution
breakthroughs were achieved in several countries, including Turkey, Ecuador,
Guatemala, Panama, and Peru. Pennsylvania House recently established its first
dealer in Saudi Arabia. In addition, significant marketing activities were
initiated in Europe, the Middle East and the Far East. We remain convinced that
LADD's overall international sales base will represent an important complement
to our domestic business in the years ahead.
The number of furniture distribution channels continues to increase, and
LADD's broad product line uniquely positions us to capitalize on this trend.
Last year, consumers purchased LADD products from such diverse places as home
shopping networks, mail order catalogs, mass merchandisers, and consumer
electronics stores.
Furniture for home theatre is one of the rapidly growing new market niches
LADD has identified and targeted for future growth. LADD is one of only a few
manufacturers who can offer a broad assortment of home theatre furniture styles
at a wide range of price points. We have begun to enjoy considerable success
with major home theatre retailers, who are attracted to the LADD home theatre
program by our ability to offer a "good, better, best" product assortment
through our Fournier, Pilliod, Lea and American Drew brand names.
Each of these examples illustrates how LADD innovatively creates and
markets its broad range of products. An
intensified focus on marketing will continue throughout 1995.
...INTERNATIONAL
SALES, WILL
REPRESENT AN
IMPORTANT
COMPLEMENT TO
OUR DOMESTIC
BUSINESS...
(Logos of American Drew, American of Martinsville, Barclay, Brown Jordan,
Clayton Marcus, Daystrom, Fournier, LADD Home Theatre and Home Design Horizons
appear in a reversed strip around this page)
6
LADD's product offerings--ranging from inexpensive RTA occasional pieces
through high fashion metal furniture, stylish upholstery and richly-
finished wood casegoods--can be used in every room of every home and
appealingly combined within the same room.
(Logos of American Drew, American of Martinsville, Barclay, Brown Jordan,
Clayton Marcus, Daystrom, Fournier, LADD Home Theatre and Home Design Horizons
appear in a reversed strip around this page)
7
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
The management of LADD Furniture, Inc. is responsible for the integrity of
the financial statements of the Company and for ascertaining that the financial
statements accurately reflect the financial position and results of operations
of the Company. The financial statements were prepared in conformity with
generally accepted accounting principles, applying estimates and management's
best judgment, as required. Information presented elsewhere in this Annual
Report is consistent with the financial statements.
LADD has established and maintains a system of internal controls designed to
provide reasonable assurance, at an appropriate cost, that the Company's assets
are adequately safeguarded and that the accounting records reflect the
transactions of the Company accurately, fairly and in reasonable detail. The
internal control system provides for careful selection and training of
personnel, the delegation of management authority and responsibility, the
dissemination of management control policies and procedures and an internal
audit program.
The board of directors, through its Audit Committee consisting of two
directors who are not officers or employees of the Company, is responsible for
reviewing and monitoring the financial statements and accounting practices of
the Company. The Audit Committee meets periodically, either separately or
jointly, with the independent auditors, representatives of management and the
Company's internal auditors to discuss auditing, accounting and financial
statement matters. To ensure complete independence, representatives of KPMG Peat
Marwick LLP, certified public accountants retained by the Company to audit the
financial statements, have full and free access to meet with the Audit Committee
with or without the presence of management representatives.
(Signature of Richard A. Allen) (Signature of William S. Creekmuir)
Richard R. Allen William S. Creekmuir
Chairman & Chief Executive Officer Senior Vice President & Chief Financial Officer
February 16, 1995 February 16, 1995
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
LADD Furniture, Inc.:
We have audited the accompanying consolidated balance sheets of LADD
Furniture, Inc. and subsidiaries as of December 31, 1994 and January 1, 1994,
and the related consolidated statements of earnings, shareholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1994. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of LADD
Furniture, Inc. and subsidiaries as of December 31, 1994 and January 1, 1994,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1994 in conformity with generally
accepted accounting principles.
As discussed in notes 1 and 11 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," in 1993.
(Signature of KPMG Peat Marwick LLP)
Greensboro, North Carolina
February 16, 1995
8
LADD Furniture, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended December 31, 1994, January 1, 1994 and January 2, 1993
Dollar amounts in thousands, except share data
1994 1993 1992
Net sales $ 591,575 521,200 496,679
Cost of sales 481,994 426,921 401,250
Gross profit 109,581 94,279 95,429
Selling, general and administrative expenses 93,911 81,953 78,493
Operating income 15,670 12,326 16,936
Other deductions:
Interest expense - Note 8 8,939 5,542 7,502
Other, net - Note 8 1,714 377 1,164
10,653 5,919 8,666
Earnings before income taxes 5,017 6,407 8,270
Income tax expense - Note 12 709 2,561 3,725
Net earnings $ 4,308 3,846 4,545
Net earnings per common share $ 0.19 0.17 0.21
Cash dividends per common share $ 0.12 0.12 --
Weighted average number of common
shares outstanding 23,086,467 23,053,654 21,441,616
See accompanying notes to consolidated financial statements.
9
LADD Furniture, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
Dollar amounts in thousands, except share data
DECEMBER 31, January 1,
1994 1994
ASSETS
Current assets:
Cash $ 576 1,350
Trade accounts receivable, less allowances for
doubtful
receivables, discounts, returns and allowances
of
$4,294 and $4,178, respectively - Notes 3 and 14 52,735 72,975
Inventories - Note 4 122,083 100,639
Prepaid expenses and other current assets - Note 10 10,053 6,110
Total current assets 185,447 181,074
Property, plant and equipment, net - Notes 5 and 13 109,522 97,497
Intangible and other assets, net - Note 6 83,847 57,166
$ 378,816 335,737
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt - Note 8 $ 687 5,815
Short-term bank borrowings - Note 8 5,000 --
Trade accounts payable 28,360 23,414
Accrued expenses and other current
liabilities - Notes 7 and 12 27,715 28,841
Total current liabilities 61,762 58,070
Long-term debt, excluding current installments - Note 8 143,584 105,257
Deferred compensation and other liabilities - Notes 10, 11
and 13 6,316 3,405
Deferred income taxes - Note 12 15,248 18,902
Total liabilities 226,910 185,634
Shareholders' equity - Notes 9 and 15:
Preferred stock of $100 par value. Authorized
500,000 shares; no shares issued -- --
Common stock of $.10 par value. Authorized
50,000,000 shares; issued 23,096,557 shares and
23,062,262 shares, respectively 2,310 2,306
Additional paid-in capital 49,516 49,186
Currency translation adjustment (208) (170)
Retained earnings 101,105 99,568
152,723 150,890
Less unamortized value of restricted stock (817) (787)
Total shareholders' equity 151,906 150,103
Commitments and contingencies - Notes 13 and 14
$ 378,816 335,737
See accompanying notes to consolidated financial statements.
10
LADD Furniture, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1994, January 1, 1994 and January 2, 1993
Dollar amounts in thousands, except share data
1994 1993 1992
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 4,308 3,846 4,545
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation of property, plant and equipment 14,143 10,508 9,151
Amortization 3,669 2,554 2,848
Provision for losses on trade accounts receivable 1,521 2,056 3,126
Gain on sales of property, plant and equipment (89) (155) (127)
Provision for deferred income taxes (1,204) 214 802
Increase (decrease) in deferred compensation
and other liabilities 1,388 1,840 (144)
Change in assets and liabilities, net of effects
from the acquisition of businesses:
Increase in trade accounts receivable (2,517) (5,188) (6,407)
Increase in inventories (10,709) (5,063) (5,633)
Decrease in refundable income taxes -- -- 7,264
(Increase) decrease in prepaid expenses
and other current assets (1,886) 61 2,132
Increase (decrease) in trade accounts payable (2,496) 310 3,031
Increase (decrease) in accrued expenses
and other current liabilities (3,313) (2,239) 5,750
Total adjustments (1,493) 4,898 21,793
Net cash provided by operating activities 2,815 8,744 26,338
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash
acquired - Note 2 (23,847) -- (4,720)
Additions to property, plant and equipment (31,825) (24,666) (8,988)
Proceeds from sales of property, plant
and equipment 962 425 1,161
Additions to intangible and other assets (1,150) (724) (420)
Net cash used in investing activities (55,860) (24,965) (12,967)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 136,666 19,654 --
Proceeds from short-term bank borrowings 5,000 -- --
Proceeds from sales of trade accounts receivable 32,485 -- --
Proceeds from sale leaseback of equipment 14,566 -- --
Proceeds from sale leaseback of other assets 1,360 -- --
Principal payments of long-term debt (135,020) (1,155) (49,010)
Proceeds from common stock issued 23 94 34,049
Dividends paid (2,771) (2,767) --
Net cash provided by (used in)
financing activities 52,309 15,826 (14,961)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (38) (81) (89)
Net decrease in cash (774) (476) (1,679)
Cash at beginning of year 1,350 1,826 3,505
Cash at end of year $ 576 1,350 1,826
See accompanying notes to consolidated financial statements.
11
LADD Furniture, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1994, January 1, 1994 and January 2, 1993
Dollar amounts in thousands, except share data
UNAMORTIZED TOTAL
NUMBER ADDITIONAL CURRENCY VALUE OF SHAREHOLDERS'
OF SHARES COMMON PAID-IN TRANSLATION RETAINED RESTRICTED EQUITY
ISSUED STOCK CAPITAL ADJUSTMENT EARNINGS STOCK (NOTES 9 AND 15)
Balance at December 28, 1991 18,984,452 $ 1,898 15,036 -- 93,944 (877) 110,001
Shares issued in connection
with incentive stock
option plan 10,179 1 29 -- -- -- 30
Proceeds from public offering
of 4,025,000 shares 4,025,000 403 33,616 -- -- -- 34,019
Currency translation
adjustment -- -- -- (89) -- -- (89)
Amortization of employee
restricted stock awards -- -- -- -- -- 218 218
Net earnings -- -- -- -- 4,545 -- 4,545
Balance at January 2, 1993 23,019,631 2,302 48,681 (89) 98,489 (659) 148,724
Shares issued in connection
with incentive stock
option plan 11,668 1 90 -- -- -- 91
Shares issued in connection
with and amortization
of employee restricted
stock awards 30,963 3 415 -- -- (128) 290
Currency translation
adjustment -- -- -- (81) -- -- (81)
Net earnings -- -- -- -- 3,846 -- 3,846
Dividends paid -- -- -- -- (2,767) -- (2,767)
Balance at January 1, 1994 23,062,262 2,306 49,186 (170) 99,568 (787) 150,103
Shares issued in connection
with incentive stock
option plan 2,344 -- 19 -- -- -- 19
Repurchase of restricted
stock (18,424) (1) (170) -- -- 170 (1)
Shares issued in connection
with and amortization
of employee restricted
stock awards 50,375 5 481 -- -- (200) 286
Currency translation
adjustment -- -- -- (38) -- -- (38)
Net earnings -- -- -- -- 4,308 -- 4,308
Dividends paid -- -- -- -- (2,771) -- (2,771)
BALANCE AT DECEMBER 31, 1994 23,096,557 $ 2,310 49,516 (208) 101,105 (817) 151,906
See accompanying notes to consolidated financial statements.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include
the accounts of LADD Furniture, Inc. and its subsidiaries, all of which are
wholly-owned. All significant intercompany balances and transactions have been
eliminated in consolidation.
FISCAL YEAR The Company's fiscal year ends on the Saturday nearest the end
of December. Fiscal year 1994 ended December 31, 1994; fiscal year 1993 ended
January 1, 1994; and fiscal year 1992 ended January 2, 1993. Fiscal years 1994
and 1993 comprised 52 weeks; fiscal year 1992 comprised 53 weeks.
INVENTORIES Approximately 66% in 1994 and 64% in 1993 of the Company's
inventories are valued using the last-in, first-out (LIFO) cost method, which is
not in excess of market. All other inventories in 1994 and 1993 are valued at
the lower of first-in, first-out (FIFO) cost or market (net realizable value).
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at
cost. Depreciation of plant and equipment is provided over the estimated useful
lives of the respective assets on the straight-line method. Estimated useful
lives are 10 to 35 years for buildings and improvements and 3 to 13 years for
machinery and equipment.
REVENUE RECOGNITION The Company's only line of business is the manufacture
and sale of furniture, related components and accessories. Sales are recognized
when products are shipped and invoiced to customers. Monthly provision is made
for doubtful receivables, discounts, returns and allowances.
Substantially all of the Company's accounts receivable are due from
retailers of residential furniture. Management periodically performs credit
evaluations of its customers and generally does not require collateral. The
Company has no concentrated credit risk with any individual customer.
FOREIGN CURRENCY TRANSLATION Assets and liabilities of a foreign subsidiary
are translated at year-end rates of exchange, and revenues and expenses are
translated at the average rates of exchange for the year. Gains and losses
resulting from translation are accumulated in a separate component of
shareholders' equity. Gains and losses resulting from foreign currency
transactions are included in net earnings.
INCOME TAXES Deferred tax assets and liabilities are recognized for the
temporary differences between the financial statement carrying amounts and the
tax bases of the Company's assets, liabilities, and loss and tax credit
carryforwards at income tax rates expected to be in effect when such amounts are
realized or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in earnings in the period that includes the
enactment date.
EARNINGS PER SHARE Earnings per share are calculated based upon the
weighted average number of common shares outstanding during each fiscal year.
The effect of dilutive stock options on the calculation is insignificant in each
of the fiscal years presented.
INTANGIBLE ASSETS Intangible assets consist principally of values assigned
to patents, furniture designs, trade names and the excess of cost over the
assigned value of net assets acquired. These assets are being amortized using
the straight-line method over periods of 15 to 40 years. The Company assesses
the recoverability of the excess of cost over the assigned value of net assets
acquired by determining whether the amortization of the balance over its
remaining life can be recovered through undiscounted future operating cash flows
of the acquired operations.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
POSTRETIREMENT BENEFITS In addition to providing pension benefits, the
Company provides certain health care benefits for eligible retired employees.
Effective January 3, 1993, the Company adopted Statement of Financial Accounting
Standards No. 106, Employers' Accounting for Postretirement Benefits Other than
Pensions. The provisions of this statement require the Company to accrue for the
expected costs of retiree health care benefits, for which substantially all
employees are eligible if they reach normal retirement, during the active period
when such benefits are earned. Additionally, the standard requires the
recognition of a transition obligation which represents that portion of future
retiree benefit costs related to the service already rendered by both active and
retired employees up to the date of adoption. The Company has elected to
amortize the transition obligation of $20,618,000 at January 3, 1993 over a
period of 20 years. Prior to 1993, the Company's policy had been to expense
retiree health costs as they were incurred (i.e., the "pay as you go" method).
In 1992, the Company paid approximately $791,000, before the effect of income
taxes, for retiree health care benefits which were charged to earnings under the
"pay as you go" method.
RECLASSIFICATION Certain items in the 1993 and 1992 consolidated financial
statements have been reclassified to conform with the presentation adopted in
the current year. The reclassifications did not impact the results from
operations as previously reported.
NOTE 2: ACQUISITIONS
On January 31, 1994, the Company acquired The Pilliod Cabinet Company, a
manufacturer of promotional priced casegoods furniture, by purchasing all of the
common stock of its parent company, Pilliod Holding Company (Pilliod), for
$24,259,000 cash (including acquisition expenses), the repayment of Pilliod debt
of $29,893,000, and the assumption of other long-term debt of $247,000. The
excess of cost over the assigned value of net assets acquired was approximately
$32,826,000 and is being amortized on the straight-line method over 40 years.
The acquisition was accounted for as a purchase and accordingly, the net assets
and operations of Pilliod have been included in the Company's consolidated
financial statements beginning on the acquisition date.
The following unaudited pro forma data presents the combined 1994 and 1993
results of operations of the Company and Pilliod as though the acquisition had
occurred on January 3, 1993, giving effect to depreciation and amortization of
assets on the accounting basis recognized in recording the purchase, the
interest on the funds used to effect the purchase, and excluding certain non-
recurring expenses of Pilliod during 1993.
In thousands, except per share data 1994 1993
Net sales $599,235 607,845
Net earnings 4,550 6,560
Net earnings per common share $ 0.20 0.28
On July 2, 1992, the Company acquired substantially all of the assets and
assumed certain liabilities of Fournier Furniture Corporation and subsidiary for
an aggregate purchase price of approximately $11,000,000, including acquisition
accounting adjustments. The purchase price consisted of approximately $4,720,000
in cash and the assumption of a $3,500,000 Industrial Development Authority
obligation and certain other liabilities. The acquisition was accounted for as a
purchase, and the net assets and results of operations of Fournier are included
in the Company's consolidated financial statements from the acquisition date.
14
NOTE 3: ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM
On January 31, 1994, the Company sold ownership interest in a defined pool
of trade accounts receivable for $20,000,000, the proceeds of which were used to
partially finance the Pilliod acquisition - see Note 2. Under the agreement, as
revised in March 1995 and which expires in March 1996, the maximum amount of the
purchaser's investment can be $40,000,000 and is subject to change based on the
level of eligible receivables and concentrations of receivables. At December 31,
1994, the defined pool of trade accounts receivable totaled approximately
$42,848,000 and the purchaser's investment totaled $32,485,000. The purchaser's
investment is reflected as a reduction of trade accounts receivables in the
accompanying December 31, 1994 consolidated balance sheet. At December 31, 1994,
the Company retained an ownership interest in the receivables pool of
approximately $10,363,000, of which approximately $8,090,000 was subordinate
to that of the purchaser. The Company maintains reserves which approximate the
risk of loss relating to its interest in the receivables. The Company's ongoing
obligations with respect to the receivables pool are limited to the subordinated
portion of its ownership interest. A portion of the cost of the accounts
receivable securitization program is based on the purchaser's level of
investment and borrowing costs. The total cost of the program, which aggregated
$1,458,000 in 1994, is included in selling, general and administrative expenses
in the accompanying 1994 consolidated statement of earnings.
NOTE 4: INVENTORIES
A summary of inventories follows:
DECEMBER 31, January 1,
In thousands 1994 1994
Inventories on the FIFO cost method:
Finished goods $ 65,046 55,881
Work in process 23,084 21,513
Raw materials and supplies 47,997 34,947
Total inventories on FIFO cost method 136,127 112,341
Less adjustments of certain inventories
to the LIFO cost method (14,044) (11,702)
$122,083 100,639
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
DECEMBER 31, January 1,
In thousands 1994 1994
Land and improvements $ 6,592 5,892
Buildings and improvements 78,381 65,850
Machinery and equipment 87,480 72,997
Construction in progress 8,343 12,266
180,796 157,005
Less accumulated depreciation (71,274) (59,508)
$109,522 97,497
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: INTANGIBLE AND OTHER ASSETS
A summary of intangible and other assets follows:
DECEMBER 31, January 1,
In thousands 1994 1994
Excess of cost over the assigned value of net assets
acquired $ 57,038 27,289
Trade names 26,031 26,031
Furniture designs and patents 9,750 10,570
Other 3,041 3,095
95,860 66,985
Less accumulated amortization (12,013) (9,819)
$ 83,847 57,166
NOTE 7: ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
A summary of accrued expenses and other current liabilities follows:
DECEMBER 31, January 1,
In thousands 1994 1994
Payrolls, commissions and employee benefits $ 15,291 13,637
Other 12,424 15,204
$ 27,715 28,841
NOTE 8: SHORT-TERM BANK BORROWINGS AND LONG-TERM DEBT
Short-term bank borrowings under a revolving credit facility with a bank
totaled $5,000,000 at December 31, 1994. Borrowings under the facility bear
interest at a rate based on the availability of bank funds.
Long-term debt consists of the following:
DECEMBER 31, January 1,
In thousands 1994 1994
Term loan due at various dates through October 19, 1999 $ 75,000 --
Revolving credit loan, due October 19, 1999 61,100 --
Term loan, repaid October 24, 1994 -- 45,000
Revolving credit loan, repaid October 24, 1994 -- 58,000
Other indebtedness, primarily fixed-rate
industrial revenue bonds, due through 2009 8,171 8,072
Total long-term debt 144,271 111,072
Less current installments of long-term debt 687 5,815
Long-term debt, excluding current installments $ 143,584 105,257
At January 1, 1994, the Company had outstanding under a term and revolving
credit loan agreement (the Facility) provided by a syndicate of banks a term
loan of $45,000,000 and borrowings of $58,000,000 under an $85,000,000 revolving
credit loan. Borrowings under the Facility were unsecured. Interest under the
Facility during 1994 accrued at rates selected by the Company of LIBOR plus 1
1/8% to 1 3/8% or prime.
16
NOTE 8: SHORT-TERM BANK BORROWINGS AND LONG-TERM DEBT (continued)
On October 19, 1994, the Company entered into an amended and restated credit
agreement (the New Facility) with a syndicate of banks which provides a
$75,000,000 five-year term loan and an $115,000,000 five-year revolving credit
loan. At December 31, 1994, the Company had $75,000,000 outstanding under the
term loan and $61,100,000 outstanding under the revolving credit loan.
Borrowings under the New Facility are unsecured. The term loan is payable in
quarterly installments commencing March 1997 of $3,750,000 each with a final
payment of the outstanding balance on October 19, 1999. Borrowings under the New
Facility bear interest at rates selected periodically by the Company of LIBOR
(6.50% at December 31, 1994) plus 7/8%, prime (8.50% at December 31, 1994) or at
a lesser rate based on the availability of bank funds. Under the New Facility,
the Company pays a commitment fee of 1/4% per annum on the unused portion of the
revolving credit loan. In connection with obtaining the New Facility, the
Company in 1994 charged to earnings approximately $304,000 in unamortized
financing fees under the Facility.
The New Facility, as amended February 16, 1995, requires the maintenance of
certain ratios pertaining to shareholders' equity and operating earnings and
contains covenants which relate to future borrowings, liens on assets, specified
amounts of consolidated net worth, and the operations of the Company. At
December 31, 1994, the Company was in compliance with all such covenants under
the New Facility, as amended.
The industrial revenue bonds are secured by property, plant and equipment
with a depreciated cost of approximately $5,532,000 at December 31, 1994.
The aggregate annual maturities of long-term debt during each of the five
fiscal years subsequent to December 31, 1994 are approximately as follows:
$687,000 in 1995; $765,000 in 1996; $15,477,000 in 1997; $15,245,000 in 1998;
and $106,325,000 in 1999.
Interest paid by the Company in 1994, 1993 and 1992 amounted to
approximately $8,014,000, $4,995,000 and $7,338,000, respectively.
NOTE 9: EMPLOYEE STOCK PLANS
STOCK OPTION PLAN Under an Incentive Stock Option Plan which expired in June
1993, the Company granted nontransferable stock options to officers, key
management employees and nonemployee directors. In April 1994, shareholders
approved a 1994 Incentive Stock Option Plan substantially similar in nature to
the prior plan. Although options are generally granted at fair market value on
the dates of grant, nonqualified options can be granted at less than
fair market value at the discretion of the Plan's Administrative Committee.
Incentive stock options and director options are granted at not less than
fair market value on the date of grant. All optionees were employees or
directors of the Company on the date of grant and throughout the term of the
option except in the case of death, retirement, or disability.
A total of 1,166,666 shares were reserved for option under the Plan that
expired in June 1993. Under the option 1994 Plan, a total of 1,200,000 shares
are reserved for option. Options granted prior to 1991 are generally
exercisable at the cumulative rate of 20% per year after one year from the
date of grant. Options granted subsequent to 1990 are exercisable at the
cumulative rate of 25% per year after one year from the date of
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: EMPLOYEE STOCK PLANS (continued)
grant. Options expire over a period not to exceed ten years from the date of
grant. Stock option activity during 1994, 1993 and 1992 follows:
Number of Option price
shares per share
Outstanding at December 28, 1991 674,625 $ 6.00 -$22.76
Granted in 1992 16,000 $ 8.25
Exercised in 1992 (10,179) $ 6.00 -$9.75
Cancelled in 1992 (131,295) $ 6.00 -$20.69
Outstanding at January 2, 1993 549,151 $ 6.00 -$22.76
Granted in 1993 136,101 $11.50 -$14.85
Exercised in 1993 (11,668) $ 6.00 -$11.63
Cancelled in 1993 (81,700) $ 6.00 -$22.76
Outstanding at January 1, 1994 591,884 $ 7.25 -$16.13
Granted in 1994 565,933 $ 5.75 -$11.00
Exercised in 1994 (2,344) $ 8.00
Cancelled in 1994 (140,011) $ 5.75 -$14.38
Outstanding at December 31, 1994 1,015,462 $ 5.75 -$16.13
Exercisable at December 31, 1994 333,753 $ 6.29 -$16.13
RESTRICTED STOCK AWARDS The board of directors periodically awards
restricted common stock to key management employees. Vesting of such awards is
subject to future service requirements of five years from the date of each
award. The difference between cash paid by the employee for the awarded shares,
generally par value, and the market value of the shares as of the award date is
amortized over the five-year service requirement periods. During 1994 and 1993,
the board of directors awarded and issued 50,375 and 30,963 shares,
respectively. During 1992, there were no shares awarded or issued.
NOTE 10: EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PENSION PLANS The Company and several of its subsidiaries
have noncontributory defined benefit pension plans covering qualified salaried
and hourly employees. The plans covering qualified salaried employees provide
pension benefits based on the participant's final average salary before
retirement. The plans covering qualified hourly employees provide pension
benefits based on years of service. The Company's policy is to fund normal costs
and amortization of prior service costs.
In addition to the qualified plans, the Company has a nonqualified
retirement plan covering certain salaried employees. At December 31, 1994 and
January 1, 1994, the Company had approximately $450,000 and $471,000,
respectively, of assets available to fund future obligations of the nonqualified
plan. These assets are included in intangible and other assets, and the related
liability is included in deferred compensation and other liabilities in the
accompanying consolidated balance sheets. The liability for the nonqualified
retirement plan is reflected in the reconciliation of the funded status of the
plans on the following page.
18
NOTE 10: EMPLOYEE BENEFIT PLANS (continued)
The following sets forth the funded status of the plans:
In thousands December 31, 1994 January 1, 1994
Assets exceed Accumulated Assets exceed Accumulated
accumulated benefits accumulated benefits
benefits exceed assets benefits exceed assets
Actuarial present value of
benefit obligations:
Vested benefit obligation $ (30,247) (973) (32,113) (875)
Accumulated benefit
obligation (30,819) (1,442) (32,781) (1,042)
Projected benefit obligation
for service rendered to date (36,968) (2,384) (40,778) (1,370)
Less plan assets at fair value,
primarily equity and fixed
income investment funds 35,798 -- 36,445 --
Projected benefit obligation
in excess of plan assets (1,170) (2,384) (4,333) (1,370)
Unrecognized net asset at
transition being amortized
over 15 years (572) -- (651) --
Unrecognized net (gain) loss (1,023) 589 3,124 227
Unrecognized prior service cost 1,933 534 2,375 270
Adjustment required to
recognize minimum liability -- (181) -- (169)
Pension asset (liability)
recognized in the consolidated
balance sheets $ (832) (1,442) 515 (1,042)
Net pension expense for the plans for 1994, 1993 and 1992 included the
following components:
In thousands 1994 1993 1992
Service costs-benefits earned during the period $ 2,374 1,915 1,698
Interest cost on projected obligation 3,101 2,644 2,517
Return on assets (121) (4,737) (1,358)
Amortization of unrecognized net obligation
(asset) at transition and net deferrals (2,522) 2,166 (872)
Net pension expense $ 2,832 1,988 1,985
The projected benefit obligation at December 31, 1994 and January 1, 1994
was determined using an assumed discount rate of 8.50% and 7.25%, respectively.
The salary plans assume a long-term rate of increase in compensation of 5% to
age 60, and 3% thereafter. The assumed long-term rate of return on plan assets
is 8.5%.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: EMPLOYEE BENEFIT PLANS (continued)
DEFINED CONTRIBUTION PLANS The Company has savings plans for certain
employees which qualify under Section 401(k) of the Internal Revenue Code. The
plans allow eligible employees to contribute up to a fixed percentage of their
compensation, with the Company matching a portion of each employee's
contributions. Company contributions under the plans aggregated approximately
$635,000 in 1994, $687,000 in 1993 and $422,000 in 1992.
NOTE 11: POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company has plans which provide for postretirement health care benefits
for certain employees. These benefits include major medical insurance with
deductible and coinsurance provisions. The Company pays all benefits on a
current basis and the plans are not funded.
The components of the net postretirement benefit cost for the years ended
December 31, 1994 and January 1, 1994 are as follows:
In thousands 1994 1993
Service costs $ 286 439
Interest costs of benefit obligation 1,132 1,611
Amortization of transition obligation 759 1,031
$ 2,177 3,081
The plans' funded status as of December 31, 1994 and 1993 was as follows:
In thousands 1994 1993
Accumulated postretirement benefit obligation:
Retirees $ (9,758) (11,985)
Active participants eligible to retire (3,739) (6,285)
Other active participants (1,921) (4,472)
(15,418) (22,742)
Unrecognized net (gain) or loss (1,078) 1,104
Unrecognized transition obligation 13,665 19,587
Accrued postretirement benefit cost $ (2,831) (2,051)
During 1994, the Company amended its retiree health care plan to limit the
Company's contributions and to eliminate benefits for certain employees of its
divisions. The effect of these amendments was to reduce the December 31, 1994
accumulated postretirement benefit obligation and the unrecognized transition
obligation by approximately $5,163,000. Additionally, the effect of the change
was to reduce the net postretirement cost by approximately $801,000 in 1994.
The postretirement benefit obligation was determined by application of the
terms of the various plans using relevant actuarial assumptions. Health care
costs are projected to increase at annual rates ranging from 9.25% in 1993 down
to 5.25% in 1997 and thereafter. A one percent annual increase in these assumed
cost trend rates would increase the accumulated postretirement benefit
obligation at December 31, 1994 by approximately $716,000 and the service and
interest cost components of the net postretirement benefit cost for 1994 would
be approximately the same. The assumed discount rate used in determining the
accumulated postretirement benefit obligation at December 31, 1994 and January
1, 1994 was 8.50% and 7.25%, respectively.
20
NOTE 12: INCOME TAXES
Components of income tax expense are as follows:
In thousands 1994 1993 1992
Current:
Federal $ 1,769 1,855 2,394
State 144 492 529
1,913 2,347 2,923
Deferred:
Federal (1,034) 199 657
State (170) 15 145
(1,204) 214 802
$ 709 2,561 3,725
The effective income tax rate on earnings before income taxes for the years
ended December 31, 1994, January 1, 1994 and January 2, 1993 was 14.1%, 40.0%
and 45.0%, respectively. The actual income tax expense differs from the
"expected" income tax expense computed by applying the applicable Federal
income tax rate (34% for each year) to earnings before income taxes
for the years ended December 31, 1994, January 1, 1994 and January 2, 1993 as
follows:
In thousands 1994 1993 1992
Computed "expected" Federal
income tax expense $ 1,706 2,178 2,812
Increases (reductions) due to:
State income taxes, net of
Federal income tax benefit 28 335 445
Amortization of the excess of
cost over the assigned value
of net assets acquired 463 250 250
Expenses subject to percentage
limitations 130 45 47
Change in valuation allowance for
deferred tax assets allocated to
income tax expense (913) -- --
Jobs, fuels and other credits, net (230) (92) (32)
Donation of appreciated property (170) -- --
Foreign trade income exemptions (154) (99) (81)
Other (151) (56) 284
Actual income tax expense $ 709 2,561 3,725
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12: INCOME TAXES (continued)
During 1993, the effect of enacted changes in tax rates was to increase
deferred tax expense by approximately $469,000.
During the years ended December 31, 1994 and January 1, 1994, the Company
paid income taxes (net of refunds received) amounting to approximately
$2,030,000 and $1,863,000, respectively. During the year ended January 2, 1993,
the Company received net refunds of income taxes amounting to approximately
$5,991,000.
The tax effects of temporary differences and carryforwards that give rise to
significant portions of deferred tax assets and liabilities consist of the
following:
DECEMBER 31, January 1,
In thousands 1994 1994
Deferred tax liabilities:
Inventories $ (7,226) (6,226)
Property, plant and equipment (8,315) (7,975)
Intangible and other assets (8,420) (10,938)
Other (2,428) (2,174)
Total deferred tax liabilities (26,389) (27,313)
Deferred tax assets:
Accounts receivable 1,727 1,655
Inventories 668 --
Liabilities and reserves 7,212 3,730
Capital loss carryforwards 1,674 2,614
Net operating loss carryforwards 1,885 --
Other 435 728
Gross deferred tax assets 13,601 8,727
Valuation allowances (3,540) (2,600)
Total deferred tax assets 10,061 6,127
Net deferred tax liability $ (16,328) (21,186)
Deferred taxes are classified in the accompanying consolidated balance sheet
as follows:
DECEMBER 31, January 1,
In thousands 1994 1994
Accrued expenses and other current liabilities $ 1,080 2,284
Deferred income taxes 15,248 18,902
$ 16,328 21,186
22
NOTE 12: INCOME TAXES (continued)
A valuation allowance has been fully provided for the deferred tax assets
related to capital loss carryforwards. As of January 1, 1994, the Company had
approximately $6,600,000 of capital loss carryforwards available to offset
future capital gains, for which there was a $2,600,000 valuation allowance.
Capital losses of $2,305,000 were utilized in 1994 to offset a like amount of
capital gains, and the valuation allowance was reduced accordingly by
approximately $945,000. The remaining capital loss carryforward of $4,225,000
will expire in 1995 if not utilized. A valuation allowance of approximately
$1,655,000 remains in deferred taxes for the unexpired capital losses.
A valuation allowance has also been fully provided for the deferred tax
assets related to net operating loss (NOL) carryforwards. With the purchase of
the Pilliod stock in January 1994, the Company recorded a deferred tax asset of
approximately $2,339,000 for Pilliod's NOL carryforwards along with a valuation
allowance of a like amount. NOL carryforwards of approximately $1,150,000 were
utilized later in 1994, and the valuation allowance was reduced accordingly. The
excess of cost over the assigned value of net assets acquired decreased
approximately $453,000 in recognition of the tax benefits resulting from the
utilization of the NOL carryforwards. The remaining NOL's of approximately
$4,761,000 may be carried forward up to 14 more years to offset future earnings,
subject to normal annual limitations prescribed by tax law. A valuation
allowance of $1,885,000 remains in deferred taxes for these unexpired NOL
carryforwards.
Tax benefits recognized subsequent to 1994 relating to the valuation
allowances for deferred tax assets at December 31, 1994 will be reflected as
follows:
In thousands
Reported in the consolidated statement of earnings $ 1,655
Reduce the excess of cost over the assigned value of
net assets acquired 1,885
$ 3,540
The Company believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize the
remaining deferred tax assets.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: LEASES
The Company leases manufacturing facilities, various warehouses, sales
offices and showrooms, as well as manufacturing, transportation, data processing
equipment and certain patents under operating leases which expire at various
dates through 2026. Future minimum lease payments under noncancelable operating
leases as of December 31, 1994 are:
In thousands
Fiscal year:
1995 $11,075
1996 10,301
1997 8,277
1998 5,377
1999 4,644
Thereafter 5,566
Total $45,240
In December 1994, the Company entered into a sale leaseback agreement for
certain manufacturing equipment located at several of its manufacturing
facilities. The transaction has been recorded as a sale. The cash proceeds from
the sale of approximately $14,566,000 were used to repay long-term debt. The
gain from the sale of approximately $683,000 has been recorded in the
accompanying 1994 consolidated balance sheet as deferred income and will be
amortized into earnings over the term of the lease. Under the agreement, the
Company has agreed to lease the equipment over 69 months. The Company has the
option to purchase the equipment at the end of the lease term.
Rental expense for cancelable and noncancelable operating leases charged to
operations was as follows:
In thousands
Fiscal year:
1994 $11,459
1993 10,275
1992 9,337
Rental expense includes contingent rentals based upon usage of
transportation equipment under cancelable and noncancelable operating leases
which totaled approximately $762,000 in 1994, $650,000 in 1993 and $786,000 in
1992.
24
NOTE 14: DEALER FINANCING ARRANGEMENT
The Company has a cancelable financing arrangement whereby certain notes
receivable from furniture dealers are assigned with recourse to a bank. The
terms of the notes receivable, which are collateralized by inventories held by
the furniture dealers, range from 12 to 48 months with interest rates ranging
from 6% to prime plus 1 1/4%. Upon cancelation of the financing arrangement,
the bank retains the previously assigned notes receivable and, as such, the
notes receivable and related obligations under the dealer financing arrangement
are not recorded in the December 31, 1994 and January 1, 1994 consolidated
balance sheets. Total notes receivable assigned during fiscal 1994, 1993 and
1992 were approximately $4,286,000, $7,503,000 and $5,304,000, respectively.
At December 31, 1994, the Company was contingently liable for approximately
$6,224,000 of receivables transferred with recourse to the bank under the dealer
financing arrangement for which the Company maintains a $3,200,000 letter of
credit agreement to fund any liabilities which might arise under the program. In
the opinion of management, adequate provision for potential losses under the
dealer financing arrangement has been included in the allowances for doubtful
receivables, discounts, returns and allowances in the accompanying consolidated
balance sheets.
NOTE 15: STOCK OFFERING
In May 1992, the Company sold 4,025,000 shares of common stock realizing net
proceeds of $34,019,000. The net proceeds from the offering were used to reduce
outstanding borrowings under the Company's revolving credit loan.
NOTE 16: SUBSEQUENT EVENT
On March 2, 1995, the Board of Directors authorized, subject to shareholder
approval, a one-for-three reverse split of the Company's common stock. If this
proposed split is approved by the shareholders on May 12, 1995, the par value of
the common stock will increase to $0.30 per share. Additionally, the number of
common shares outstanding will decrease by two-thirds and per share data for all
periods presented will increase accordingly.
25
LADD Furniture, Inc. and Subsidiaries
SELECTED ANNUAL DATA
Dollar and share data in thousands, except per share amounts
FIVE-YEAR ONE-YEAR
FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL COMPOUND CHANGES
1994 1993 1992 1991 1990 1989 GROWTH RATES (1994 VS. 1993)
OPERATING STATEMENT DATA
Net sales $591,575 521,200 496,679 429,110 511,911 453,002 + 5.5% + 13.5%
Cost of sales 481,994 426,921 401,250 356,025 406,039 352,660 6.4 12.9
Gross profit 109,581 94,279 95,429 73,085 105,872 100,342 1.8 16.2
Selling, general and
administrative expenses 93,911 81,953 78,493 79,322 80,617 64,639 7.8 14.6
Manufacturing restructuring
charge -- -- -- -- 8,268 -- -- --
Operating income (loss) 15,670 12,326 16,936 (6,237) 16,987 35,703 (15.2) 27.1
Other deductions:
Interest expense 8,939 5,542 7,502 10,413 14,799 8,860 0.2 61.3
Other (net) 1,714 377 1,164 2,594 1,584 1,038 10.6 N/M
Earnings (loss) before income 5,017 6,407 8,270 (19,244) 604 25,805 (27.9) (21.7)
Income tax expense (benefit) 709 2,561 3,725 (6,041) (426) 9,383 (40.9) (72.3)
Net earnings (loss) $ 4,308 3,846 4,545 (13,203) 1,030 16,422 (23.5) 12.0
Depreciation $ 14,143 10,508 9,151 8,783 9,138 8,018 + 12.0% + 34.6%
Amortization 3,669 2,554 2,848 5,081 2,952 1,244 24.1 43.7
Cash dividends paid 2,771 2,767 -- 4,545 5,274 5,814 (13.8) 0.0
Weighted average shares
outstanding 23,086 23,054 21,442 18,946 18,833 18,759 4.2 0.1
PER SHARE DATA
Net sales $ 25.62 22.61 23.16 22.65 27.18 24.15 + 1.2% 13.3%
Net earnings (loss) 0.19 0.17 0.21 (0.70) 0.05 0.88 (26.4) 11.8
Cash dividends 0.12 0.12 -- 0.24 0.28 0.31 (17.3) 0.0
Year-end book value 6.58 6.51 6.46 5.79 6.76 6.99 (1.2) 1.1
BALANCE SHEET DATA
Net working capital $123,685 123,004 117,693 111,583 115,960 123,968 + 0.0% + 0.6%
Net property, plant and
equipment 109,522 97,497 83,609 81,660 82,758 106,838 0.5 12.3
Total assets 378,816 335,737 315,649 308,980 320,539 407,136 (1.4) 12.8%
Long-term debt 143,584 105,257 91,503 125,304 124,462 145,997 (0.3) 36.4
Shareholders' equity 151,906 150,103 148,724 110,001 127,331 131,399 2.9 1.2
RATIOS, OTHER
Gross profit margin 18.5% 18.1 19.2 17.0 20.7 22.2
Operating profit (loss)
margin 2.6 2.4 3.4 (1.5) 3.3 7.9
Return (loss) on sales 0.7 0.7 0.9 (3.1) 0.2 3.6
Effective income tax rate 14.1 40.0 45.0 31.4 N/M 36.4
Dividend payout ratio 64.3 71.9 -- N/M N/M 35.4
Return (loss) on beginning
assets 1.3 1.2 1.5 (4.1) 0.3 9.5
Return (loss) on beginning
equity 2.9 2.6 4.1 (10.4) 0.8 13.7
Current ratio 3.0X 3.1 3.1 3.1 3.2 2.1
Inventory turnover 4.3 4.4 4.4 4.0 4.2 4.6
Asset turnover 1.7 1.6 1.6 1.4 1.4 1.6
Long-term debt to
capitalization 45.3% 37.9 35.2 49.1 46.3 49.0
Year-end employees 7,860 6,670 6,940 6,340 6,880 8,020
Sales per employee (000's) $ 77.9 77.0 75.4 66.1 67.7 62.1
STOCK DATA
High $ 11.75 14.75 12.00 12.75 13.00 17.75
Low 4.88 7.50 6.25 5.75 4.25 11.00
Close 6.50 10.00 10.50 7.50 6.25 11.38
P/E ratios:
High 61.8 86.8 57.1 N/M N/M 20.2
Low 25.7 44.1 29.8 N/M N/M 12.5
Trading volume (shares) 19,419 24,781 19,758 11,619 12,240 11,834
NOTES: Long-term debt excludes current installments. Capitalization defined
as net working capital plus noncurrent assets. Fiscal year 1992 comprised 53
weeks; all other years comprised 52 weeks. P/E ratios based on yearly net
earnings per share. Stock price data for calendar years. N/M = Not meaningful.
Sales per employee based on monthly employee averages.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto.
RESULTS OF OPERATIONS
The table below sets forth the percentage relationship of net sales to
certain items included in the consolidated statements of earnings in each of the
last three fiscal years.
1994 1993 1992
Net sales 100.0% 100.0% 100.0%
Cost of sales 81.5 81.9 80.8
Gross profit 18.5 18.1 19.2
Selling, general and administrative expenses 15.9 15.7 15.8
Operating income 2.6 2.4 3.4
Other deductions, net 1.8 1.2 1.7
Earnings before income taxes 0.8 1.2 1.7
Income tax expense 0.1 0.5 0.8
Net earnings 0.7% 0.7% 0.9%
The following paragraphs provide an analysis of the changes in net sales,
selected cost and expense items, and net earnings over the three-year period
ended December 31, 1994.
FISCAL 1994 COMPARED TO 1993
Net sales increased $70.4 million, or 13.5%, to a record $591.6 million in
1994, compared to $521.2 million in 1993, largely as a result of the January 31,
1994 acquisition of Pilliod Furniture. On a pro forma basis, assuming the
acquisition of Pilliod Furniture had occurred at the beginning of fiscal year
1993, 1994 net sales decreased from prior year levels by 1.4%. The decrease in
the pro forma 1994 net sales was primarily due to the discontinuance of certain
American of Martinsville residential casegoods product lines, a reduction in
export shipments, and a decline in sales of lower-priced upholstery and higher-
priced casegoods products compared to 1993.
Cost of sales as a percentage of net sales decreased to 81.5% in 1994, from
81.9% in 1993, resulting in an increase in the 1994 gross profit margin to 18.5%
from 18.1% in 1993. The 1994 gross margin was positively impacted by Pilliod
Furniture's gross margin and operating efficiencies generated by the Company's
capital investment program, and negatively affected by higher raw material
costs, including particleboard, medium-density fiberboard, cartons and aluminum.
Additionally, 1994's gross margin was reduced by manufacturing disruptions
associated with the Company's Virginia manufacturing realignment started in
1993's second half and plant disruptions resulting from other capital projects
initiated during 1994. Further, selected plant downtime taken in the fourth
quarter to control inventory levels increased 1994's fourth quarter cost of
sales, negatively impacting gross margins. Although 1995's cost of sales will
likely continue to reflect high material costs, the Company has initiated
selective price increases and material substitutions aimed at offsetting
these cost increases and improving gross margins.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS
Selling, general and administrative (SG&A) expenses were 15.9% of net sales
in 1994, compared to 15.7% in 1993. The increase was due to the costs
associated with the Company's accounts receivable securitization program which
was initiated in February 1994.
Other deductions totaled 1.8% of net sales in 1994, compared with 1.2% in
1993. The increase was primarily attributable to higher interest expense
reflecting the use of long-term debt to partially fund the Company's $31.8
million capital spending program and its $54.4 million Pilliod Furniture
acquisition (see note 2) coupled with rising interest rates. Additionally,
amortization expense increased in 1994 as a result of the Pilliod Furniture
acquisition.
The decrease in the Company's effective income tax rate from 40.0% in 1993
to 14.1% in 1994 resulted principally from reductions in income taxes derived
from state tax planning strategies and the utilization of capital loss
carryforwards (see note 12). The effective income tax rate for 1995 should
approximate the Federal tax rate of 34.0% unless the Company is able to further
utilize its capital loss carryforwards.
FOURTH QUARTER 1994 RESULTS
The 1994 fourth quarter loss was largely attributable to manufacturing
downtime taken in the fourth quarter to control finished goods inventories,
increased raw material costs, customer deferrals of planned fourth quarter
shipments, and a write-off of unamortized bank fees in connection with the
refinancing of the Company's bank debt. The low fourth quarter income tax rate
resulted from the utilization of capital loss carryforwards during the quarter.
FISCAL 1993 COMPARED TO 1992
Net sales increased $24.5 million, or 4.9%, to $521.2 million in 1993's 52-
week fiscal year, compared to $496.7 million in 1992's 53-week year. Sales
growth in 1993 occurred within a competitive selling environment which limited
the Company's ability to increase product prices. The increase in net sales was
primarily attributable to growth in shipments of medium and lower-priced
casegoods products, upholstery products and the Company's contract business.
Additionally, sales of Fournier Furniture were $15.0 million higher for the full
year 1993 than for the six-month period following Fournier's acquisition by the
Company in July 1992. Net sales for 1993 were negatively impacted by $11.9
million due to the non-renewal of a government contract which expired during
1992 and a decrease in sales of higher-priced casegoods products. Additionally,
selling prices were impacted by discounting due to the highly competitive
industry conditions and the liquidation of certain American of Martinsville
Residential Casegoods (AOM Casegoods) products. Further, as a result of a
decision in the third quarter of 1993 to discontinue certain unprofitable
product lines of AOM Casegoods and merge profitable products with American
Drew's product lines, 1993 sales were reduced by $2.7 million compared to 1992.
Cost of sales as a percentage of net sales rose to 81.9% in 1993, from
80.8% in 1992, resulting in a decrease in the gross profit margin
to 18.1% in 1993 from 19.2% in 1992. The increase in the cost of sales was
largely due to increased raw material costs, principally lumber, as well as
retiree health care costs resulting from the implementation of Statement of
Financial Accounting Standards No. 106. Additionally, as a result of the
decision to discontinue certain products of AOM Casegoods, manufacturing
capacity became available for redeployment to other operating companies.
The Virginia manufacturing plants of AOM Casegoods, American of
Martinsville Contract (AOM Contract) and Lea Industries were realigned.
Initial inefficiencies
28
associated with these significant manufacturing changes increased 1993
cost of sales, particularly during the fourth quarter. In addition,
manufacturing disruptions associated with the implementation of certain capital
projects increased 1993 cost of sales.
Selling, general and administrative (SG&A) expenses were 15.7% of net sales
in 1993, which was comparable to 15.8% in 1992.
Net other deductions declined to 1.2% of net sales in 1993 from 1.7% in
1992. The decrease was largely attributable to a $2.0 million decline in
interest expense in 1993 resulting from reduced borrowing levels and lower
interest rates.
The difference between the Company's actual effective income tax rate for
1993 of 40.0% compared to the expected Federal income tax rate of 34.0% was
largely due to state income taxes and the non-deductibility of the amortization
of intangible assets. Further, the Company's earnings were negatively impacted
by new tax legislation enacted by Congress during the year which increased the
top Federal income tax rate retroactive to January 1, 1993. The adjustment of
the Company's net deferred tax liability to reflect the revised Federal income
tax rate lowered net earnings by approximately $469,000, or $.02 per share,
during 1993.
LIQUIDITY AND CAPITAL RESOURCES
On October 19, 1994, the Company entered into an amended and restated credit
facility with a syndicate of banks (the New Facility - see note 8). On December
31, 1994, the Company had $136.1 million outstanding under the New Facility,
comprised of a $75.0 million term loan and borrowings of $61.1 million under a
$115.0 million revolving credit line. Additionally, the Company had other long-
term indebtedness outstanding at the same date, primarily fixed-rate industrial
revenue bonds, aggregating $8.2 million, and short-term bank borrowings of $5.0
million. Excluding current installments, total long-term debt represented 45.3%
of the Company's total capitalization at the end of 1994. On December 31, 1994,
net working capital totaled $123.7 million and the current ratio was 3.0:1, both
of which were comparable to year-earlier levels.
The New Facility extended maturities of short and long-term debt and
provides the Company with increased financial flexibility. Additionally, the New
Facility provides a lower rate of interest, which based on current borrowing
levels, reduces annual interest cost by approximately $750,000. In connection
with the refinancing, the Company expensed approximately $304,000 of unamortized
fees from its prior bank facility.
During 1994, the Company generated cash from operating activities of $2.8
million, a decrease of $5.9 million from 1993. Cash flows from net earnings plus
depreciation and amortization increased $5.2 million to $22.1 million in 1994.
However, increased working capital requirements used $20.9 million of cash in
the aggregate. The working capital increase resulted principally from higher
inventories, largely raw materials, and a decrease in current liabilities.
During 1994, capital spending totaled $31.8 million compared to $24.7
million in the prior year. Capital expenditures were principally directed to new
manufacturing equipment designed to automate production, reduce manufacturing
costs and improve product quality. Capital expenditures during 1994 and 1993
were funded largely from the operations of the Company and borrowings under the
Company's existing long-term credit facility. Further, in December 1994, the
Company generated $14.6 million from a sale/leaseback of selected new machinery
and equipment. The Company anticipates spending in excess
29
MANAGEMENT'S DISCUSSION AND ANALYSIS
of $15.0 million for capital improvements during 1995, and believes that the
unused long-term credit lines available under its banking arrangements, as well
as cash generated from operations, will be adequate to fund these planned
investments.
As more fully discussed in note 2 to the consolidated financial statements,
the Company acquired Pilliod Furniture on January 31, 1994 for $54.4 million by
retiring $29.9 million of Pilliod's debt, assuming $0.2 million of debt, and
paying $23.9 million to Pilliod's shareholders. The purchase was financed from
available long-term and short-term revolving bank credit lines and funds
generated from the sale of trade accounts receivable. At December 31, 1994,
$32.5 million of cash had been generated from the $40.0 million trade accounts
receivable securitization program (see note 3).
IMPACT OF INFLATION
Although the effects of inflation on the Company cannot be accurately
determined, in 1994 the impact of inflation affected the Company's manufacturing
costs in the areas of manufacturing overhead and raw materials other than
lumber. The price of lumber, like the prices of other commodities, is affected
more by the interaction of supply and demand than by inflation. Although 1994
margin was impacted by inflation, the Company's gross profit margins during the
past several years have, in general, been impacted more by promotional selling
discounts and plant downtime taken to curtail production than by inflation. The
Company believes it will be able to largely offset the effects of inflation by
improving its manufacturing efficiency, increasing employee productivity,
substituting raw materials, and increasing the selling prices of its products.
30
LADD Furniture, Inc. and Subsidiaries
SELECTED QUARTERLY DATA
Dollar and share data in thousands, except per share amounts
FISCAL 1994 FISCAL 1993
4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
OPERATING STATEMENT DATA
Net sales $ 146,172 153,182 153,182 139,039 123,935 127,297 133,840 136,128
Cost of sales 122,242 123,640 122,657 113,455 103,444 104,905 107,328 111,244
Gross profit 23,930 29,542 30,525 25,584 20,491 22,392 26,512 24,884
Selling, general and
administrative expenses 24,784 23,562 23,996 21,569 20,188 19,907 21,252 20,606
Operating income (loss) (854) 5,980 6,529 4,015 303 2,485 5,260 4,278
Other deductions (income):
Interest expense 2,771 2,328 2,206 1,634 1,398 1,379 1,374 1,391
Other (net) 793 445 524 (48) 562 (34) (79) (72)
Earnings (loss) before income
taxes (4,418) 3,207 3,799 2,429 (1,657) 1,140 3,965 2,959
Income tax expense (benefit) (2,121) 962 1,094 774 (972) 709 1,615 1,209
Net earnings (loss) $ (2,297) 2,245 2,705 1,655 (685) 431 2,350 1,750
Depreciation $ 3,896 3,626 3,476 3,145 2,905 2,722 2,474 2,407
Amortization 1,205 864 893 707 655 636 638 625
Cash dividends paid 693 693 692 693 692 692 691 692
Weighted average
shares outstanding 23,097 23,096 23,087 23,066 23,061 23,060 23,060 23,034
PER SHARE DATA
Net sales $ 6.33 6.63 6.63 6.03 5.37 5.52 5.80 5.91
Net earnings (loss) (0.10) 0.10 0.12 0.07 (0.03) 0.02 0.10 0.08
Cash dividends 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03
Quarter-end book value 6.58 6.70 6.63 6.54 6.51 6.57 6.58 6.50
BALANCE SHEET DATA
Net working capital $ 123,685 92,421 96,349 104,454 123,004 129,995 135,277 135,903
Net property, plant and equipment 109,522 121,364 117,780 113,580 97,497 92,435 90,020 85,525
Total assets 378,816 402,213 394,373 390,716 335,737 334,541 337,546 335,317
Long-term debt 143,584 125,782 126,967 130,635 105,257 107,453 111,009 109,916
Shareholders' equity 151,906 154,821 153,138 151,104 150,103 151,416 151,671 149,942
RATIOS
Gross profit margin 16.4% 19.3 19.9 18.4 16.5 17.6 19.8 18.3
Operating profit (loss) margin (0.6) 3.9 4.3 2.9 0.2 2.0 3.9 3.1
Return (loss) on sales (1.6) 1.5 1.8 1.2 (0.6) 0.3 1.8 1.3
Effective income tax rate 48.0 30.0 28.8 31.9 58.7 62.2 40.7 40.9
Long-term debt to capitalization 45.3 42.1 42.5 43.4 37.9 38.3 39.2 39.3
STOCK DATA
High $ 6.50 8.00 9.25 11.75 11.00 11.25 12.00 14.75
Low 4.88 5.88 6.00 8.25 7.50 8.00 8.75 11.25
Close 6.50 6.00 7.00 8.75 10.00 8.38 9.00 11.75
Trading volume (shares) 8,578 4,839 2,334 3,668 3,980 4,955 4,925 10,921
NOTES: Long-term debt excludes current installments. Pilliod Furniture included
in consolidated results from its January 31, 1994 acquisition by LADD. Stock
price and volume data for calendar quarters.
31
OFFICERS, DIRECTORS, CORPORATE DATA
BOARD OF DIRECTORS
Richard R. Allen
Chairman and Chief Executive Officer
William B. Cash 2
Former Chairman, Turnpike Properties, Inc.
James H. Corrigan, Jr. 1
Chairman and Chief Executive Officer,
Mebane Packaging Corporation
O. William Fenn, Jr. 1
Retired Vice Chairman, LADD
Don A. Hunziker 2
Retired Chairman, LADD
Thomas F. Keller, Ph.D. 2
Dean and R.J. Reynolds Industries Professor
Fuqua School of Business, Duke University
Fred L. Schuermann, Jr.
President and Chief Operating Officer
1 Audit Committee. 2 Compensation Committee.
CORPORATE OFFICERS, OPERATING
COMPANY EXECUTIVES
Daryl B. Adams
Vice President, Corporate Controller and
Chief Accounting Officer, LADD
Richard R. Allen
Chairman and Chief Executive Officer, LADD
William S. Creekmuir
Senior Vice President, Chief Financial Officer,
Secretary and Treasurer, LADD
Kenneth E. Church
Vice President, LADD; President, Clayton Marcus
Beverly C. Davis
President, LADD Transportation
William M. Duncan, Jr.
President, Pilliod Furniture
Victor D. Dyer
Vice President, Human Resources, LADD
John N. Foster, Jr.
Vice President, LADD; President, Lea Industries
Gerald R. Grubbs
President, Daystrom Furniture
Michael P. Haley
President, American of Martinsville
Lee H. Houston, Jr.
Vice President, Manufacturing Services, LADD
Robert J. Maricich
Vice President, LADD; President, American Drew
D. Fredric Myers
President, Fournier Furniture
James Mueller
President, Brown Jordan
David C. Ogren
Vice President, Market Development, LADD
William B. Pirtle
President, Barclay Furniture
Craig M. Shoemaker
President, Pennsylvania House
Fred L. Schuermann, Jr.
President and Chief Operating Officer, LADD
Bradly A. Upfield
President, Lea Lumber & Plywood
CORPORATE HEADQUARTERS
One Plaza Center, Box HP-3
High Point, NC 27261-1500
Phone: (910) 889-0333
U.S. FAX: (910) 888-6446 International FAX: (910) 888-6445
TRANSFER AGENT
Wachovia Bank & Trust Company, N.A.
Winston-Salem, NC
LEGAL COUNSEL
Petree Stockton, L.L.P.
Winston-Salem, NC
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
Greensboro, NC
FORM 10-K, OTHER INFORMATION
For a copy of LADD's Form 10-K (annual report filed with the Securities and
Exchange Commission) or other information on LADD, please contact:
John J. Ong, CFA
Director, Corporate Communications
STOCK LISTING
LADD's common stock is traded on the Nasdaq Stock Market under the Nasdaq
symbol: LADF. At year-end 1994, LADD had 890 shareholders of record,
representing an estimated 5,500 beneficial owners.
MARKET MAKERS
Davenport & Co. of Virginia MLPF&S
Dean Witter Reynolds, Inc. Morgan, Keegan & Co.
Dillon, Read & Co., Inc. Nash Weiss
Ferris Baker Watts Inc. Raymond, James & Associates
Herzog, Heine, Geduld, Inc. Robinson Humphrey Company, Inc.
Huntleigh Securities Corp. Sherwood Securities Corp.
Interstate/Johnson Lane Scott & Stringfellow
Jefferies & Company, Inc. Southeast Research Partners
C.L. King & Associates Southwest Securities Inc.
Kirkpatrick, Pettis, Smith Troster Singer Corp.
Legg Mason Wood Walker Inc. Wheat First Butcher Singer
Mayer & Schweitzer, Inc.
ANNUAL MEETING
Stockholders are cordially invited to attend LADD's 1995 Annual Meeting, to be
held Friday, May 12th, at 10:00 a.m. at the Radisson Hotel in High Point, NC.
32
We at LADD are proud of the fine residential furniture manufactured
by our family of companies and we invite you to see them at your nearest dealer.
Ask for them by name: American Drew, American of Martinsville, Barclay, Brown
Jordan, Clayton Marcus, Daystrom, Design Horizons, Fournier, LADD Home Theatre,
Lea, Pennsylvania House and Pilliod.
(Photo of a map appears here)
LADD MANUFACTURING FACILITIES
NORTH CAROLINA
Hickory (3)
Monroe (1)
North Wilkesboro (3)
Waynesville (1)
Windsor (1)
VIRGINIA
Chilhowie (1)
Marion (1)
Martinsville (1)
South Boston (1)
St. Paul (1)
TENNESSEE
Morristown (2)
SOUTH CAROLINA
Nichols (1)
MISSISSIPPI
Myrtle (1)
Sherman (1)
PENNSYLVANIA
Lewisburg (1)
White Deer (1)
ALABAMA
Selma (1)
ARKANSAS
Newport (1)
CALIFORNIA
El Monte (1)
MEXICO
Juarez (1)
OHIO
Swanton (1)
DESIGN
Trone Advertising, Greensboro, NC
PHOTOGRAPHY
Marshall Marvelli; Jeff McNamara
and the LADD Furniture companies;
PRINTING
Washburn Graphics, Inc., Charlotte, NC
TYPOGRAPHY
LADD Graphic Services, High Point, NC
(LADD FURNITURE, INC. LOGO APPEARS HERE)
LADD Furniture, Inc.
One Plaza Center--Box HP3
High Point, NC 27261-1500
U.S. Fax (910) 888-6446
International Fax (910) 888-6445