ITEM 1. BUSINESS - ------ ---------
(a) GENERAL DEVELOPMENT OF BUSINESS -------------------------------
Bush Industries, Inc. (the "Company" or the "Registrant"), was incorporated under the laws of the State of Delaware on February 5, 1985. The Company was a successor to a corporation of the same name incorporated under the laws of the State of New York in 1959. The Company's principal place of business is located at One Mason Drive, Jamestown, New York 14702.
On June 30, 1997, the Company acquired a 51% interest in the Rohr Gruppe, a German furniture manufacturer, which name was subsequently changed to Rohr-Bush GmbH & Co. ("Rohr-Bush"). On February 29, 2000, the Company executed a definitive agreement with certain members of the Rohr family to acquire the family's approximately 49% remaining interest in Rohr-Bush. The transaction closed in October 2000. The Bush Furniture Europe segment is comprised of Rohr-Bush.
The Company organizes its operations into four operating segments based principally on the natural alignment of its customers, markets and products. The four operating segments, which are discussed in more detail below, are as follows: Bush Business Furniture, Bush Furniture, Bush Furniture Europe, and Bush Technologies.
On February 27, 2003, the Company approved plans to restructure certain of its operations. In conjunction with such plans the Company will close its St. Paul, Virginia manufacturing facility and relocate certain operations to other plants, close three of its retail outlet stores and utilize third party liquidators to expedite the sale of excess inventory (which will create space in the Company's Erie, Pennsylvania facility to launch new production strategies), and terminate production and management level employees in various locations. The Company expects to incur losses in the range of approximately $16 to $18 million associated with implementing these plans during 2003. See "Management's Discussion and Analysis of Financial Condition and Results of Operation."
The Company's website is http://www.bushfurniture.com. The Company makes available on this website, free of charge, access to its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statement on Schedule 14A and amendments to those materials filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Company electronically submits such material to the Securities and Exchange Commission (the "Commission"). In addition, the Commission's website is http://www.sec.gov. The Commission makes available on this website, free of charge, reports, proxy and information statements, and other information regarding issuers, such as the Company, that file electronically with the Commission. Information on the Company's website or the Commission's website is not part of this document.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS ---------------------------------------------
The Company operates its business in four reportable segments: (1) Bush Business Furniture, which concentrates on the business office and the home office markets with sales to the office superstore and dealer channels; (2) Bush Furniture, which focuses on home entertainment, home office and other home furnishings products; (3) Bush Furniture Europe, which sells commercial, home office and other furnishings in the European market; and (4) Bush Technologies, which is focused on the cell phone accessories after-market, as well as the utilization of surface technologies in automotive interiors, cosmetics, sporting goods and consumer electronics. The Company operates several manufacturing and warehouse facilities throughout North America and in Germany. See Note 11 to the Consolidated Financial Statements.
(c) NARRATIVE DESCRIPTION OF BUSINESS ---------------------------------
The Company's furniture segments are engaged primarily in the design, manufacture and sale of ready-to-assemble ("RTA") and assembled furniture products in various price ranges for both business and consumer use. The Company's furniture product line includes audio/video home entertainment centers, audio cabinets, television/VCR carts, wall units, bookcases, bedroom furniture, computer desks and workstations, desks, hutches, armoires and file cabinets.
The Company's diverse RTA furniture product line is sold by all three furniture segments. RTA product is designed for ease of assembly, to ensure that such products can be readily assembled by following simple, easy to read diagramed instructions, contained with each RTA product sold. To enhance customer service, the Company maintains a toll-free number in the United States to assist consumers with any questions with respect to the assembly of the Company's products. Assembled furniture sold by Bush Furniture Europe is designed to be a high quality product that appeals to popular price points. Assembled commercial office furniture sold by Bush Business Furniture is designed to meet industry (ANSI/BIFMA) standards.
The Company's surface technologies segment is engaged in the finishing and decoration of various substrate materials through painting, the application of the HydroGraFix process, and the use of surface technologies. The Company, through its wholly owned subsidiary, The ColorWorks, Inc., holds the master license to the HydroGraFix film processing technology in the Western Hemisphere, portions of Central Europe and South Africa. Although the master license expires in 2006, the Company believes that it will still be able to continue to use the process in its North Carolina facilities. The Company is exploring the ability to extend the term of the master license, the success of which no assurance can be given. The HydroGraFix process permits the decoration of a variety of geometric shapes, including complex three-dimensional parts. Cell phones, laptop computers, sporting goods such as firearms and archery equipment, cosmetics and automotive interior components are examples of major product lines decorated by Bush Technologies.
Marketing and Distribution
The Company's furniture products are marketed to a variety of retailers for sale to both business and consumer end-users. Bush Business Furniture's customers include office superstores, office
furniture retailers, wholesalers, contract stationers and dealers. Bush Furniture's customers include national chains, electronic and computer superstores, discount mass merchants, home furnishings retailers, department stores, home improvement centers and independent wholesale distributors. Bush Furniture Europe's customers include buying groups, office furniture retailers, office supply superstores and home furnishings retailers. The Company's furniture products are sold both through independent manufacturers' representatives and directly by the Company's sales personnel. The Company's furniture products are currently sold to approximately 2,100 customers, and the Company estimates that its products are carried in approximately 10,000 retail outlets.
Bush Technologies offers finishing and decorating processing services to manufacturers and end-users of various products. Bush Technologies generally provides such services directly and also sublicenses the HydroGraFix film processing technology to third parties in varying fields of application and/or geographic areas. Decorated faceplates from multiple manufactures are sold to distributors and major retailers.
Sources and Availability of Raw Materials
The Company purchases the raw materials used in the production of its furniture at each manufacturing location from a variety of sources on a global basis. The Company believes that none of the materials required for its furniture manufacturing operations are proprietary in nature and that an adequate supply of raw materials is available from multiple sources.
Bush Technologies acquires various plastic housings for cell phones that Bush Technologies decorates directly from the OEM manufacturers and their source suppliers. In many instances Bush Technologies is contractually or otherwise required to obtain these plastic substrates directly from these manufacturers and their source suppliers. During fiscal 2002, Bush Technologies had difficulty in obtaining an adequate substrate supply with respect to certain cell phone platforms from these manufacturers and to the extent of such shortfall, Bush Technologies' business was adversely impacted. Bush Technologies is currently addressing this issue with these manufacturers to ensure that an adequate supply of raw materials will be available, although no assurance can be given that there will be ample supply in the future. In addition, in connection with the HydroGraFix process, Bush Technologies obtains the film and chemicals used in the process from the company from which the master license to the HydroGraFix process was obtained, and to date, has not had any difficulty in obtaining an adequate supply of these raw materials. Except as described above, Bush Technologies believes that an adequate supply of raw materials used in its business is available from multiple sources.
Trademarks and Design Patents
The Company either owns or has applied for various trade names and trademarks in the United States and abroad, for use with its furniture product lines. The Company believes that its trade names and trademarks are well recognized within the furniture industry. The Company also believes that the loss of any trade name and/or trademark would not have a material adverse effect on its business operations.
In addition, the Company owns a variety of patents with respect to surface technologies and the design and manufacture of certain furniture products. The Company believes that the loss of any of its patents would not have a material adverse effect on its business. The Company also relies on trade secrets and confidentiality to protect the proprietary nature of its technology.
Seasonality
The nature of the business in which the Company is engaged is not seasonal.
Customers
For the fiscal year ended December 28, 2002, the Company had four customers which accounted for approximately 17%, 14%, 13% and 12% of the Company's total gross sales. No other single customer accounted for more than 10% of the Company's total gross sales for the fiscal year ended December 28, 2002. The loss of any substantial customer could have a material impact on the Company's results of operations.
Backlog
The Company believes that order backlog at any particular point in time is not predictive of future sales performance. As is standard in the furniture industry, a customer may cancel a product order prior to shipment without penalty. In addition, Bush Technologies customers may generally cancel orders prior to shipment without penalty. The Company has historically filled orders within approximately one to six weeks of the receipt of a purchase order. With respect to Bush Technologies, the timing between receipt of purchase orders and filling those orders is specific to the customer and product-type.
Government Contracts
No material portion of the Company's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Government.
Competition
The furniture market is highly competitive, and includes numerous entities, some of which may have substantially greater financial and marketing resources than the Company. In addition, the furniture market has experienced increased competition from importers of furniture products, particularly from the Far East, and primarily China. The Company believes that the principal competitive factors in the furniture industry marketplace are price, quality, function, innovative product design, style, supply chain management and the ability to offer customers a full product line.
Competition in the surface technology segment comes not only from other manufacturers employing derivatives of the Company's production methods, but also from alternative product design methods that are available to produce decorated surfaces. The Company believes it provides high quality, cost effective surface decorating through a wide range of options that include painting, the application of the HydroGraFix process and the use of other surface technologies.
Environmental Compliance
Environmental aspects of the Company's business are regulated primarily by federal and state laws and by the ordinances of the localities where the Company's facilities are located. See Item 3,
"Legal Proceedings", for additional information regarding environmental compliance.
Employees
As of the 2002 fiscal year end, the Company employed a total of approximately 3,050 employees. As part of the Company's restructuring that was announced in the first quarter of 2003, approximately 300 of these employees will be laid off. Since Rohr-Bush is an active member of the German employers' association for the wood and plastics processing industry, it is governed by the collective bargaining agreements for this industry. There are no other collective bargaining agreements covering any of the Company's employees.
Important Factors and Considerations
With respect to forward-looking statements of the Company, as more fully described in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operation," the Company cautions that its forward-looking statements are further qualified by those factors and considerations that could cause actual results to differ materially from those in the forward-looking statements. Certain of such important factors and considerations are set forth in Exhibit 99.1 to this Annual Report on Form 10-K. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
(d) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS --------------------------------------------
For the 2002 fiscal year ended December 28, 2002, the Company generated domestic sales of approximately $278,727,000 (or approximately 81.9% of total sales) and foreign sales of approximately $61,443,000 (or approximately 18.1% of total sales). Of the total foreign sales, approximately $10,654,000 (or approximately 3.1% of total sales) represented products exported by the Company from the United States. For the 2001 fiscal year ended December 29, 2001 and the 2000 fiscal year ended December 30, 2000, the Company generated domestic sales of approximately $280,689,000 and $384,171,000, respectively (or approximately 81.2% of total sales for the 2001 fiscal year and approximately 85.1% of total sales for the 2000 fiscal year). Foreign sales for the fiscal years ended December 29, 2001 and December 30, 2000, respectively, were approximately $65,117,000 and $67,026,000 (or approximately 18.8% of total sales for the 2001 fiscal year and approximately 14.9% of total sales for the 2000 fiscal year). Of such total foreign sales, approximately $10,858,000 and $11,170,000 represented products exported by the Company from the United States for the fiscal years ended December 29, 2001 and December 30, 2000, respectively (or approximately 3.1% for the 2001 fiscal year and 2.5% for the 2000 fiscal year).
ITEM 2.
ITEM 2. PROPERTIES - ------- ----------
The following table summarizes the Company's principal facilities as of March 1, 2003. All properties primarily relate to the furniture segments, except for the Greensboro, NC and Rutherfordton, NC facilities which relate to the surface technologies segment. As part of the Company's restructuring that was announced in the first quarter of 2003, the Company plans to close its St. Paul, Virginia facility and, if possible, sell such property.
- ---------------- (1) Legal title to the facility is in EIDCO, Inc. in accordance with the terms of low interest financing being provided by the Commonwealth of Pennsylvania.
(2) In the first quarter of fiscal year 2003, the Company entered into a seventh amendment to its revolving credit facility with JPMorgan Chase Bank and other lending institutions. As a result of this amendment, the Company has agreed to place mortgages on these properties in favor of JPMorgan Chase Bank and the other lending institutions.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - ------- -----------------
On June 17, 1996, an approximate five-mile long area in Little Valley, New York was added to the federal Superfund national priorities list, and with respect thereto, the Company is not aware of any potentially responsible parties having been identified as of the date hereof. In December 1996, the Company responded to a request for information from the United States Environmental Protection Agency ("EPA"), relating to the Company's Little Valley, New York property. No assurance can be given that the Company's response will be sufficient for the EPA, or that the EPA will not pursue further inquiries. The Company understands that the EPA has provided the New York State Department of Environmental Conservation ("DEC") with comments on the investigatory work developed and implemented by the Company with respect to a DEC Order on Consent, as more fully described below. Previously, in November 1995, the Company was notified by the DEC of an alleged violation of a certain environmental regulation concerning the presence of contaminates in the groundwater, including trichloroethene, beneath the Company's property located in Little Valley, New York.
Between November 1995 and March 1999, the Company and the DEC had discussions concerning the scope of a work plan to conduct a subsurface investigation at the property. Those discussions resulted in the Company entering into an Order on Consent with the DEC to perform investigatory work as set forth in a work plan. As a result of the implementation of the work under the DEC Order on Consent, a groundwater evaluation report was submitted to the DEC on July 6, 1999. The Company received comments on the groundwater evaluation from the DEC on or about September 30, 1999, which included a request for additional information and investigatory work. During November and December 1999, the Company's consultant implemented that additional investigatory work, and submitted a revised groundwater evaluation report to the DEC on February 21, 2000. That report was approved by the DEC on March 31, 2000. As a result of that approval, on July 6, 2000, the Company's consultant submitted a remediation report which evaluated the potential for unacceptable risk to human health or the environment, and evaluated remedial alternatives. The report included a recommended course of action, with supporting rationale. The Company is awaiting the DEC's response.
By letter dated July 7, 2000, the EPA requested access to the Company's property in Little Valley to implement additional environmental sampling. The Company, the EPA and the DEC representatives discussed this request for access and related technical aspects. By letter dated August 23, 2000, the Company indicated to the EPA that it would not refuse access for the EPA or its authorized representatives or contractors to implement the investigatory work, and requested a number of tasks be completed prior to and after entry. The EPA mobilized in mid-November 2000, and implemented the work during various times through early January 2001. The Company also
took additional environmental samples at this time. Except for one subsequent site walk over by the EPA, the Company has not received any further information or requests from the EPA with respect to its sampling or otherwise.
By letter dated February 24, 2003, the EPA has requested that the Company enter into a "Tolling Agreement". EPA contends that it has a cause of action against the Company for the recovery of response costs incurred by EPA in connection with or related to the Little Valley Superfund Site ("the Site"). On March 13, 2003, the Company executed a Tolling Agreement with EPA and submitted the Agreement to EPA. Although no assurance can be given, the Company believes that its financial statements will not be materially adversely affected by the foregoing.
The Company has also become aware of the possible presence of certain levels of contaminates on the Greensboro, North Carolina property owned by The ColorWorks, Inc., a wholly owned subsidiary of the Company. The Company has procured a $20,000,000 environmental insurance policy relating thereto. The Company is responsible for certain deductibles under the insurance policy and, in the unlikely event any such environmental costs are not covered by insurance, the Company may be responsible for certain costs. However, based on an initial assessment of the situation, the Company believes, although no assurance can be given, that the Company's financial statements will not be materially adversely affected by the foregoing.
As of December 28, 2002, the Company is a party to various other legal proceedings arising in the ordinary course of business. The Company believes that these pending actions would not materially adversely affect the Company's financial statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- ---------------------------------------------------
No matters were submitted to a vote of the stockholders of the Company during the fourth quarter of the fiscal year ended December 28, 2002.
PART II -------
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------- ---------------------------------------------------------------------
(a) Market Information. The Company's Class A Common Stock is traded on the ------------------- New York Stock Exchange ("NYSE"). The Company's Class B Common Stock is not publicly traded. The ability of the Company to continue to have its Class A Common Stock included for trading on the NYSE is dependent upon the Company's ability to satisfy the continued listing requirements of the NYSE; including having a market capitalization of $15 million and/or a per share price of at least $1.00 per share. No assurance can be given that the continued listing requirements will be satisfied and that the Company's Class A Common Stock will continue to be traded on the NYSE.
The following table sets forth the high and low sales prices of the Company's Class A Common Stock, as reported on the NYSE for the periods indicated:
Quarter High Low - ------- ---- ---
January 1, 2001 - March 31, 2001 $15.30 $11.44 April 1, 2001 - June 30, 2001 $16.05 $12.30 July 1, 2001 - September 30, 2001 $13.25 $8.10 October 1, 2001 - December 31, 2001 $12.05 $8.10
January 1, 2002 - March 31, 2002 $13.00 $10.55 April 1, 2002 - June 30, 2002 $13.90 $10.00 July 1, 2002 - September 30, 2002 $12.68 $7.10 October 1, 2002 - December 31, 2002 $8.10 $3.85
(b) Holders. As of December 28, 2002, the number of holders of record of -------- the Company's Class A Common Stock was approximately 400. The Company believes that there are approximately an additional 1,100 holders who own shares of the Company's Class A Common Stock in street name. As of the same date, there were approximately 17 holders of record of the Company's Class B Common Stock.
(c) Dividends. The Company has suspended the payment of all cash dividends ---------- on its Class A and Class B Common Stock effective as of the first quarter of 2003 to conserve cash, fund the restructuring initiative that was announced in the first quarter of fiscal 2003 and to comply with the seventh amendment to the Company's revolving credit facility, dated as of February 28, 2003, which prohibits the payment of cash dividends by the Company. The Company had previously instituted a quarterly cash dividend for holders of Class A and Class B Common Stock during the fourth quarter of 1992. Dividends had been declared and paid for each succeeding quarter, and the Company declared cash dividends of $0.05 per share in each quarter of 2001 and 2002.
The Company's Certificate of Incorporation, as amended, also provides that any dividends paid on Class A Common Stock must be at least equal to the dividends paid on the Company's Class B Common Stock on a per share basis. Moreover, no dividend may be paid to Class B stockholders without first being paid to Class A stockholders.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - ------- -----------------------
The following selected financial data of the Company for the 1998 through 2002 fiscal years has been derived from the Consolidated Financial Statements of the Company. This selected financial data should be read in conjunction with the Consolidated Financial Statements and notes thereto included elsewhere herein.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------ ----------------------------------------------------------------------- OF OPERATION ------------
Except for the historical information contained herein, the matters discussed in this Annual Report on Form 10-K constitute "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause the Company's actual results in future periods to differ materially from forecasted results. Forward-looking statements include statements regarding the intent, belief, projected or current expectations of the Company or its Officers (including statements preceded by, followed by or including forward-looking terminology such as "may," "will," "should," "believe," "expect," "anticipate," "estimate," "continue" or similar expressions or comparable terminology), with respect to various matters. The Company cannot guarantee future results, levels of activity, performance or achievements. Factors that could cause or contribute to such differences include, but are not limited to, economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services, prices, changes in estimates regarding the Company's future contractual obligations and other factors discussed in the Company's filings with the Securities and Exchange Commission.
OVERVIEW
The Company's results of operations for fiscal 2002 have been adversely affected by the continuing economic slowdown and the uncertain geopolitical environment. These effects relate to all segments of the Company's business, including the Company's domestic and German operations. In addition, the Company's furniture operations have been negatively impacted by the increased competition from lower cost imports, particularly from the Far East, and primarily from China.
As a consequence, in part, of the continued economic slowdown, the Company has announced a restructuring of some of its operations to reduce costs and streamline its operations.
On February 27, 2003, the Company approved plans to restructure certain of its operations. In conjunction with such plans the Company will close its St. Paul, Virginia manufacturing facility and relocate certain operations to other plants, close three of its retail outlet stores and utilize third party liquidators to expedite the sale of excess inventory (which will create space in the Company's Erie, Pennsylvania facility to launch new production strategies), and terminate production and management level employees in various locations. The Company expects to incur losses in the range of approximately $16 to $18 million associated with implementing these plans during 2003.
In addition, the Company has recently amended its revolving credit facility, as discussed below, to modify some of the financial covenants and ratios required. Further, the amendment prohibits the Company from paying any cash dividends on its capital stock and requires the Company, among other things, to place a mortgage on certain of its real property in favor of its lenders. The outstanding principal amount of the loan, plus accrued interest, is due under the revolving credit facility, absent any extension or further amendment, in June 2004. The Company is exploring
various alternatives with respect to such debt obligation, the ultimate outcome of which no assurance can be given.
The Company's net sales declined approximately 1.6% in fiscal year 2002 from the Company's 2001 fiscal year and 24.6% from the Company's 2000 fiscal year. The Company believes that the following factors will continue to impact the Company's results of operations and financial condition: any slowdown of consumer spending in North America and Europe, particularly in superstores; any stalling of growth in sales of personal computers, which reduces the need for computer desks and workcenters; inventory reductions by the Company's customers, particularly at office superstores; competition from imports using alternative materials, including metal and glass, and competition from imported assembled furniture; consolidation and/or liquidation of furniture retailers; the uncertain international political climate; and changing consumer demand and/or changing technologies resulting in the obsolescence of certain products.
The Company operates its business in four reportable segments: (1) Bush Business Furniture, which concentrates on the business office and the home office markets with sales to the office superstore and dealer channels; (2) Bush Furniture, which focuses on home entertainment, home office and other home furnishings products; (3) Bush Furniture Europe, which sells commercial, home office and other furnishings in the European market; and (4) Bush Technologies, which is focused on the cell phone accessories after-market, as well as the utilization of surface technologies in automotive interiors, cosmetics, sporting goods and consumer electronics. The Company operates several manufacturing and warehouse facilities throughout North America and in Germany.
On June 30, 1997, the Company acquired a 51% interest in the Rohr Gruppe, a German furniture manufacturer, which name was subsequently changed to Rohr-Bush GmbH & Co. ("Rohr-Bush"). On February 29, 2000, the Company executed a definitive agreement with certain members of the Rohr family to acquire the family's approximately 49% remaining interest in Rohr-Bush. This transaction closed in October 2000.
RESULTS OF OPERATIONS
The following table shows the approximate percentage of certain items included in the Consolidated Statements of Earnings relative to net sales for the fiscal years indicated:
The following paragraphs provide an analysis of the changes in net sales, selected cost and expense items, and net earnings for fiscal years 2000 through 2002.
RESULTS OF OPERATIONS: FISCAL 2002 COMPARED TO FISCAL 2001
The Company's net sales for the 2002 fiscal year compared to the 2001 fiscal year decreased $5,636,000, or approximately 1.6%, to $340,170,000. The sales decrease primarily reflects decreases in Bush Furniture, Bush Technologies and Bush Furniture Europe, partially offset by an increase in Bush Business Furniture. The current economic slowdown in both North America and Germany continues to create a challenging environment in which to grow sales and exerts a downward pressure on prices. In addition, competition from imports using alternative materials, including metal and glass, are pressuring the low end of the product mix at Bush Business Furniture, primarily at the office superstores. The Company believes imports of RTA furniture are up from approximately 6% in 1999 to approximately 15% of the market today.
The Company's cost of sales were $247,645,000 in fiscal year 2002 compared to $252,424,000 in fiscal year 2001, or a decrease of $4,779,000. This decrease is primarily the result of a $5,226,000 pre-tax, non-cash inventory write-down that was incurred in the fourth quarter of fiscal year 2001. The cost of sales as an approximate percentage of net sales decreased by 0.2 percentage points from 73.0% in 2001 to 72.8% in 2002. Without the $5,226,000 inventory write-down, the cost of sales as an approximate percentage of net sales was 71.5% in fiscal year 2001. The 1.3 percentage point increase to 72.8% in fiscal year 2002 primarily reflects the impact of lower gross
margins in the Bush Technologies segment resulting from competitive market pressures. As a result of such competitive market pressures and lower gross margins, Bush Technologies incurred a loss before income taxes of $2,850,000 in fiscal year 2002, as compared to earnings before income taxes of $5,586,000 in fiscal year 2001. In addition, due to the continued economic softness in Europe, particularly in Germany, Bush Furniture Europe incurred a loss before income taxes of $5,316,000 in fiscal year 2002, as compared to a loss before income taxes of $3,423,000 in fiscal year 2001.
For fiscal year 2002, selling, general and administrative expenses were virtually unchanged from fiscal year 2001, decreasing by $58,000. Selling, general and administrative expenses increased as an approximate percentage of net sales from 24.0% in 2001 to 24.4% in fiscal year 2002, primarily as a result of selling, general and administrative expenses not decreasing proportionally as much as the sales decrease.
Interest expense decreased to $7,194,000 in fiscal year 2002 (or approximately 2.1% of net sales) from $8,553,000 in fiscal year 2001 (or approximately 2.5% of net sales). The decrease in interest expense was primarily due to a reduction in the Company's long-term debt.
The Company's overall effective federal, state and local tax rate decreased from 84.8% in fiscal year 2001 to 58.3% in fiscal year 2002. The decrease is primarily due to a lower overall effective state tax rate (attributable to the greater impact in 2001 of the Bush Technologies segment income on the state tax rate) and the reduced impact related to non-deductible goodwill no longer required to be amortized in 2002 under Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.142").
For fiscal year 2002, the Company generated earnings before cumulative effect of accounting change of $940,000 (or $.07 basic and diluted earnings per share), as compared to $257,000 (or $0.02 basic and diluted earnings per share) for fiscal year 2001. Had the non-amortization provisions of SFAS No.142 been applied in fiscal year 2001, earnings before cumulative effect of accounting change would have been $1,364,000 (or $0.10 basic and diluted earnings per share).
Pursuant to SFAS No. 142, goodwill is no longer being amortized and must be periodically tested for impairment. Upon adoption of SFAS No. 142, the Company concluded that goodwill related to the Bush Furniture Europe segment was impaired. As a result, effective December 30, 2001 (the first day of fiscal year 2002), the Company has recorded a non-cash charge for goodwill impairment of $2,398,000 as a cumulative effect of accounting change (or $0.17 basic and diluted loss per share).
Net loss for fiscal year 2002 was $1,458,000 (or $0.10 basic and diluted loss per share), as compared to net earnings of $257,000 (or $0.02 basic and diluted earnings per share) for fiscal year 2001. Had the non-amortization provisions of SFAS No.142 been applied in fiscal year 2001, net earnings would have been $1,364,000 (or $0.10 basic and diluted earnings per share).
RESULTS OF OPERATIONS: FISCAL 2001 COMPARED TO FISCAL 2000
The Company's net sales for the 2001 fiscal year compared to the 2000 fiscal year decreased $105,391,000, or approximately 23.4%, to $345,806,000. The sales decrease primarily reflects a decrease in orders from the Company's North American furniture customers due to the economic slowdown. Sales were also negatively impacted by the inventory rationalization programs undertaken at the office superstores in the second quarter of fiscal year 2001 and by customer delays in new product launches at Bush Technologies.
The Company's cost of sales were $252,424,000 in fiscal year 2001 compared to $307,686,000 in fiscal year 2000, or a decrease of $55,262,000. This decrease primarily reflects the lower sales levels as compared to the prior year. The cost of sales as an approximate percentage of net sales increased by 4.8 percentage points from 68.2% in 2000 to 73.0% in 2001. The increase in cost of sales as a percentage of net sales primarily reflects lower absorption of manufacturing overhead as a result of decreased production volumes, both as the result of the decreased sales levels and the reduction of finished goods inventory levels, and as a result of a $5,226,000 pre-tax, non-cash inventory write-down in the fourth quarter of fiscal year 2001.
For fiscal year 2001, selling, general and administrative expenses decreased by $14,795,000 compared to fiscal year 2000. The decrease in selling, general and administrative expenses was primarily the result of a reduction in various selling expenses such as commissions, marketing and promotional incentives. These reductions were a result of both the Company's lower sales volumes and as a result of a change in sales terms with two customers. This change, in which various marketing and promotional incentives were replaced with a reduction in sales prices to the two customers, had no impact on net earnings, but resulted in a decrease in selling, general and administrative expenses and a corresponding decrease in net sales. Since this change occurred in mid fiscal year 2000, it impacted the second half of such year and all of fiscal year 2001. Selling, general and administrative expenses increased as an approximate percentage of net sales from 21.7% in fiscal year 2000 to 24.0% in fiscal year 2001.
Interest expense decreased to $8,553,000 in fiscal year 2001 (or approximately 2.5% of net sales) from $11,890,000 in fiscal year 2000 (or approximately 2.6% of net sales). The decrease in interest expense was primarily due to decreases in the interest rates paid on the Company's revolving credit facility.
The Company's overall effective federal, state and local tax rate increased from 39.0% in fiscal year 2000 to 84.8% in fiscal year 2001. The increase was primarily due to the effects of permanent non-deductible items (such as certain travel and entertainment expenses and the amortization of certain goodwill costs), fixed taxes (such as Delaware franchise taxes) and a change in the mix of the allocation of income for state income tax purposes. The impact of these items was exaggerated by the lower level of earnings before income taxes upon which the effective tax rates are computed.
For fiscal year 2001, the Company generated net earnings after taxes of $257,000 (or $0.02 basic earnings per share and $0.02 diluted earnings per share), as compared to $22,777,000 (or $1.66 basic earnings per share and $1.60 diluted earnings per share) for fiscal year 2000.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at fiscal year end 2002 decreased $8,722,000 over fiscal year end 2001, primarily as a result of an increase in accounts payable. The increase in accounts payables reflects actions taken to reduce working capital requirements. Total assets at fiscal year end 2002 decreased $11,072,000 over fiscal year end 2001, primarily as a result of a decrease in property, plant and equipment which reflects capital expenditures that are less than the level of depreciation. Total liabilities at fiscal year end 2002 decreased by $7,184,000, as compared to fiscal year end 2001. Such decrease in total liabilities was due primarily to a decrease in long-term debt, partially offset by an increase in accounts payable and deferred income taxes.
Net cash provided by operating activities for the fiscal year ended December 28, 2002 was $34,448,000, resulting primarily from an increase in current liabilities, mostly accounts payable, and depreciation, amortization (including the accounting charge for goodwill), and deferred taxes, partially offset by the net loss.
During fiscal year 2002, the Company expended $5,533,000 on capital expenditures versus $9,444,000 in the previous fiscal year. Capital expenditures for 2003 are currently forecasted to be approximately $5 to $7 million. Other assets increased $1,137,000 in fiscal year 2002, primarily as a result of an increase in the cash surrender value of insurance policies and costs associated with amending the Company's credit agreement. In fiscal year 2002, the Company received $621,000 from the exercise of stock options by employees, received a tax benefit of $103,000 from the exercise of such options and paid four quarterly dividends totaling $2,766,000 to its stockholders. The cash dividend for each of the quarters in 2002 was $0.05 per share. Cash flows provided by operating activities in excess of other cash flow requirements were primarily used to pay down $25,045,000 principal amount of long-term debt.
The Company has a revolving credit facility, initially dated as of June 26, 1997 and as amended, with JPMorgan Chase Bank and other lending institutions. In the first quarter of fiscal year 2003 the Company entered into a seventh amendment, dated as of February 28, 2003. This amendment, among other things, modified certain covenants under the credit facility, evidenced the lenders' consent to certain transactions, including the restructuring to be effectuated by the Company in the first quarter of 2003, granted a security interest in the Company's real property in Jamestown, NY, Erie, PA and Greensboro, NC, prohibits the payment of cash dividends by the Company and modified the amount of money the Company can borrow under the credit facility from an aggregate $173,000,000 to an aggregate $163,000,000.
The credit facility provides for revolving credit loans, swing line loans and multi-currency loans, within the parameters described below. The loan is due June 30, 2004 with a balloon payment of the then remaining principal and any accrued interest. The Company has classified all of the line of credit as long-term debt, as there are no required principal payments due within the next 12 months. At the Company's option, borrowings may be effectuated, subject to certain conditions, on a NYBOR rate, an eurocurrency rate for dollars, an applicable eurocurrency rate for certain foreign currencies, a money market rate, or an alternative base rate. Eurocurrency loans bear interest at the then current applicable LIBOR rate, plus an applicable margin, which varies from 2.0% to 3.5%,
depending upon the Company's ability to satisfy certain quarterly financial tests. Alternative base rate loans generally bear interest at the prime rate, plus an applicable margin, which varies from 0.0% to 0.75% depending upon the Company's ability to satisfy certain quarterly financial tests. In addition, the credit agreement permits the Company to request the issuance of up to a maximum of $20,000,000 in letters of credit, which issuance will be deemed part of the $163,000,000 maximum amount of borrowing permitted under the credit facility.
The line of credit agreement, as amended, provides for achieving certain consolidated cash flow coverage and leverage ratios, prescribes minimum consolidated net worth requirements, limits capital expenditures and new leases and provides for certain other affirmative and restrictive covenants. The Company is in compliance with all of these requirements.
Inflation affects the Company's business principally in the form of cost increases from materials and wages. Historically, the Company has generally been able to offset these cost increases by improved productivity, cost and waste reduction, more effective purchasing practices, and to a lesser extent, price increases.
As of December 28, 2002, the following table illustrates the Company's contractual obligations due in the future:
CRITICAL ACCOUNTING POLICIES
The policies identified below are important to the Company's business operations and the understanding of its results of operations. The listing is not intended to be a comprehensive list of all of the Company's accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for management's judgment in their application. In other cases, management is required to exercise judgment in the application of accounting principles with respect to particular transactions. For a summary of all of the Company's accounting policies, including the accounting policies discussed below, see Note 1 to the Notes to Consolidated Financial Statements. The preparation of this Annual Report on Form 10-K requires the Company to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.
Revenue Recognition and Accounts Receivable
Revenues are recognized when products are shipped. Provisions for discounts, rebates to customers, returns and other adjustments are provided for in the same period that related sales are recorded. The recording of these provisions requires the use of estimates, and future periods will be impacted if the actual costs differ from the estimated amounts. For all sales, the Company uses purchase orders from the customer, whether written, oral or electronically transmitted, as evidence of the transaction. Collateral is generally not requested from customers.
The Company performs periodic credit evaluations of its customers. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon the Company's historical experience and any specific customer collection issues that it has identified. While such credit losses have historically been within the Company's expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has experienced in the past. In addition, in part, to limit credit risk on occasion and to accelerate collections of certain outstanding accounts receivables, the Company has sold certain accounts receivables, without recourse to it in the event of non-payment, to certain banks. The Company's accounts receivable balance was $16.5 million, net of allowance for doubtful accounts of $0.94 million as of December 28, 2002 and $16.9 million, net of allowance for doubtful accounts of $0.98 as of December 29, 2001.
Inventories
Inventories, consisting of raw materials, work-in-progress and finished goods, are stated at the lower of cost or market as determined by the first-in, first-out method. Inventories that the Company estimates as either obsolete or unmarketable are written down based upon the difference between the cost of the inventory and its estimated market value. The Company's estimates as to such value are based, in part, on projected future demand and market conditions. If these estimates or related projections change in the future, additional write-downs may be required. Obsolete and slow moving inventory reserves were approximately $4,809,000 and $7,917,000 at December 28, 2002 and December 29, 2001, respectively.
Property, Plant and Equipment
Property, plant and equipment is carried at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets, which are as follows: buildings and improvements 10-50 years; machinery and equipment 3-20 years; transportation equipment 3-7 years; office equipment 3-10 years; and leasehold improvements 3-10 years or the lease term, if less. Construction in progress is recorded in property, plant and equipment and amounted to $5,582,000 and $7,500,000 at December 28, 2002 and December 29, 2001, respectively. Interest associated with construction indebtedness is capitalized. Interest amounting to approximately $283,000, $971,000, and $1,984,000 associated with construction in progress was capitalized for 2002, 2001 and 2000, respectively.
The cost of repairs and maintenance is charged to expense as incurred. Renewals and betterments are capitalized. Upon retirement or sale of an asset, its cost and related accumulated depreciation or amortization are removed from the accounts and any gain or loss is recorded in income or expense. The Company continually reviews property, plant and equipment to determine that the carrying values have not been impaired by estimating the future undiscounted cash flows expected to result from the use of the property, plant and equipment.
Other Assets/Goodwill
Other assets consist primarily of goodwill, cash value of life insurance policies, advances on split dollar insurance arrangements, an investment at cost, and other intangible assets. The Company tests long-lived assets, exclusive of goodwill, for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. An impairment loss shall be recognized if the carrying amount of long-lived assets, to be held and used is not recoverable and exceeds its fair value based on the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. In the Company's review of such assets, it is required to make certain estimates and projections. If these estimates or related projections change in the future, the Company may be required to record impairment charges for these assets.
At least annually and whenever events and changes in circumstances warrant, the Company compares the fair value of the reporting unit to its carrying amount to determine if there is potential impairment of goodwill. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than their carrying value. Fair values for goodwill are determined based on discounted cash flows, market multiples or appraised values as appropriate. The conditions that would trigger an impairment assessment of goodwill include a significant negative trend in the Company's operating results or cash flows, a decrease in demand for the Company's products, a change in the competitive environment and other industry and economic factors.
Accounting for Income Taxes
As part of the process of preparing the consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves the Company estimating its actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, for tax and book purposes. These differences result in deferred tax assets and liabilities, which are included within the Company's consolidated balance sheet. The Company must then assess the likelihood that its deferred tax assets will be recovered from future taxable income and to the extent the Company believes that recovery is not likely, it must establish a valuation allowance. To the extent the Company establishes a valuation allowance or increases this allowance in a period, the Company must include an expense within the tax provision in the statement of operations. Significant management judgment is required in determining the provision for income taxes, the deferred tax assets and liabilities and any valuation allowance recorded against the net deferred tax assets. In the event that actual results differ from the Company's estimates or it adjusts these estimates in future periods, the Company may need to establish an additional valuation allowance which could impact its financial position and results of operations.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 143, "Accounting for Obligations Associated with the Retirement of Long-Lived Assets" (SFAS No. 143). SFAS No. 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS No. 143 is effective in fiscal years beginning after June 15, 2002, with early adoption permitted. The Company plans to adopt the provisions of SFAS No. 143 on December 29, 2002 (the first day of fiscal 2003) and does not expect that the adoption of SFAS No. 143 will have a material impact on its consolidated financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal of Activities" (SFAS No. 146). SFAS No. 146 revises the accounting for exit and disposal activities under Emerging Issues Task Force Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity." The provisions of SFAS No. 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002.
In 2002, the Company adopted Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". This standard provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, the standard also requires prominent disclosures in the Company's financial statements about the method of accounting used for stock-based employee compensation, and the effect of the method used when reporting financial results.
The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). As permitted in that standard, the Company has elected to continue to follow the recognition provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for employee stock-based compensation. No employee stock-based compensation expense was recorded for 2002, 2001 and 2000.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------- ----------------------------------------------------------
Market risk represents the risk of loss that may impact the consolidated financial position, results of operations or cash flows of the Company. The Company is exposed to market risk in the areas of interest rates and foreign currency exchange rates.
The Company's exposure to market risk for changes in interest rates relates primarily to the Company's revolving credit facility due to its variable pricing. Based on the outstanding balance of long-term debt at fiscal year end 2002, a one percentage point change in interest rates would result in annual interest expense fluctuating approximately $1.0 million.
The Company's exposure to foreign currency exchange risk relates primarily to the cost of imported supplies and the cost/profitability of exported items, the income statement and cash flow impact of converting foreign currency denominated profit/loss into U.S. dollars and the balance sheet impact of converting foreign currency denominated assets and liabilities into U.S. dollars. The Company believes the primary impact on the Company of a reasonably possible change of 10% in any foreign currency exchange rate would be an increase or decrease of approximately $5.0 million in the US dollar equivalent in foreign currency denominated debt.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------- -------------------------------------------
The financial information required by Item 8 is included elsewhere in this Report (see Part IV, Item 15).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------- --------------------------------------------------------------- FINANCIAL DISCLOSURE --------------------
None.
PART III -------- ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------- -------------------------------------------------- The information required by Item 10 is hereby incorporated by reference from the Registrant's definitive Proxy Statement for the Annual Meeting scheduled to be held on May 15, 2003, under the caption, "Election of Directors", to be filed by the Registrant.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION - ------- ---------------------- The information required by Item 11 is hereby incorporated by reference from the Registrant's definitive Proxy Statement for the Annual Meeting scheduled to be held on May 15, 2003, under the caption, "Executive Compensation", to be filed by the Registrant.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND - ------- ------------------------------------------------------------------ RELATED STOCKHOLDER MATTERS --------------------------- The information required by Item 12 is hereby incorporated by reference from the Registrant's definitive Proxy Statement for the Annual Meeting scheduled to be held on May 15, 2003, under the caption, "Security Ownership of Management and Principal Stockholders", to be filed by the Registrant.
The following table sets forth information about the Company's Class A Common Stock that may be issued upon the exercise of options, warrants and rights under all of the Company's equity compensation plans as of December 28, 2002, including the 1995 Stock Plan and the 1999 Stock Plan.
(1) The 1999 Stock Plan provides for the issuance of up to 350,000 shares of Class A Common Stock to employees, agents, independent contractors, consultants, directors and executive officers of the Company and its affiliates, except that no shares can be issued to the Company's executive officers and directors unless the 1999 Stock Plan is approved by the Company's stockholders. The Board of Directors, or a committee appointed by the Board of Directors, has the power to select the recipients of awards and to establish the terms of the awards.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS - ------- ---------------------------------------------
The information required by Item 13 is hereby incorporated by reference from the Registrant's definitive Proxy Statement for the Annual Meeting scheduled to be held on May 15, 2003, under the caption "Certain Transactions", to be filed by the Registrant.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES - -------- -----------------------
The Company's Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the "Evaluation Date") within 90 days before the filing date of this annual report, have concluded that as of the Evaluation Date, the Company's disclosure controls and procedures were adequate and designed to ensure that material information relating to the Company and its consolidated subsidiaries is recorded, processed, summarized and reported in a timely manner. It should be noted that the design of any system of controls is based in part upon certain assumptions, and there can be no assurance that any design will succeed in achieving its stated goals.
Changes in internal controls. There were no significant changes in the Company's internal controls or, to the Company's knowledge, in other factors that would significantly affect such controls subsequent to the Evaluation Date.
PART IV -------
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - ------- ----------------------------------------------------------------
(A) The consolidated balance sheets as of December 28, 2002 and December 29, 2001 and the related consolidated statements of operations, stockholders' equity, cash flows and financial statement schedule for each of the three years in the period ended December 28, 2002 are filed as part of this report:
(1) Financial Statements Page -------------------- ----
Independent Auditors' Report.................................. Consolidated Balance Sheets................................... Consolidated Statements of Operations......................... Consolidated Statements of Stockholders' Equity............... Consolidated Statements of Cash Flows......................... Notes to Consolidated Financial Statements....................
(2) Consolidated Financial Statement Schedules ------------------------------------------
Schedule II - Valuation and Qualifying Accounts............... S-1
All other schedules are omitted because they are not applicable, or not required because the required information is included in the Consolidated Financial Statements or notes thereto.
(3) Exhibits --------
3.1 Certificate of Incorporation. (1)
3.2 Amendment to Certificate of Incorporation, dated June 30, 1994.(6)
3.3 Amendment to Certificate of Incorporation, dated July 9, 1993.(4)
3.4 By-Laws, as amended.(1)(14)(17)
10.1 The Registrant's 1985 Stock Plan, as amended.(4)
10.2 The Registrant's 1985 Incentive Stock Option Plan, as amended.(4)
10.3 Lease Agreement between County of Chautauqua Industrial Development Agency and the Registrant dated January 1, 1990.(2)
10.4 Employment Agreement between the Registrant and Paul S. Bush dated July 29, 1992, as amended.(3)
10.5 Employment Agreement between the Registrant and Robert L. Ayres dated July 29, 1992, as amended.(3)
10.6 Employment Agreement between the Registrant and Lewis H. Aronson dated July 29, 1992, as amended.(3)
10.7 Amendment, dated as of February 26, 2000, to Employment Agreement between the Registrant and Lewis H. Aronson dated July 29, 1992, as amended.(17)
10.8 Employment Agreement between the Registrant and Gregory P. Bush dated October 10, 2000.(17)
10.9 Employment Agreement between the Registrant and Larry C. Genareo dated October 16, 2000.(17)
10.10 Employment Agreement between the Registrant and Neil A. Frederick dated October 16, 2000.(17)
10.11 Employment Agreement between the Registrant and David E. White dated March 21, 2002.
10.12 Split Dollar Insurance Agreements between the Registrant and Paul S. Bush dated November 1, 1990 and March 15, 1991 and related Collateral Assignment Agreements of same dates.(3)
10.13 Split Dollar Insurance Agreement between the Registrant and Robert L. Ayres dated December 19, 1991 and related Collateral Assignment Agreement. (3)
10.14 Performance Bonus Plan.(5)
10.15 The Registrant's 1995 Stock Plan.(7)
10.16 The Registrant's 1999 Stock Plan.(12)
10.17 Stock Redemption Agreement between the Registrant and Paul S. Bush dated July 10, 1997.(8)
10.18 Credit and Guarantee Agreement, dated as of June 26, 1997, by and among the Registrant, as Borrower, the Lenders party thereto from time to time, The Chase Manhattan Bank as administrative agent and Mellon Bank, N.A., as co-agent.(8)
10.19 First Amendment, dated as of August 17, 1998, to the Credit and Guarantee Agreement dated as of June 26, 1997.(9)
10.20 Second Amendment, dated as of December 31, 1998, to the Credit and Guarantee Agreement dated as of June 26, 1997.(10)
10.21 Third Amendment, dated as of March 31, 1999, to the Credit and Guarantee Agreement dated as of June 26, 1997.(11)
10.22 Fourth Amendment, dated as of February 29, 2000, to the Credit and Guarantee Agreement dated as of June 26, 1997.(13)
10.23 Fifth Amendment, dated as of May 2, 2000, to the Credit and Guarantee Agreement dated as of June 26, 1997.(15)
10.24 Sixth Amendment, dated as of December 28, 2001, to the Credit and Guarantee Agreement dated as of June 26, 1997.(16)
10.25 Seventh Amendment dated as of February 28, 2003, to the Credit and Guarantee Agreement dated as of June 26, 1997.(18)
21.1 List of Subsidiaries of Registrant.
23.1 Consent of Deloitte & Touche LLP, independent auditors.
99.1 Statement regarding Forward Looking Information. - -------------
(1) Incorporated by reference to the Registrant's Registration Statement on Form S-1 dated March 14, 1985 (File No. 2-96428). (2) Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 29, 1989. (3) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993. (4) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994. (5) Incorporated by reference to the Registrant's definitive Proxy Statement, dated May 16, 1994. (6) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (7) Incorporated by reference to the Registrant's definitive Proxy Statement, dated March 29, 1995. (8) Incorporated by reference to the Registrant's Current Report on Form 8-K, filed September 10, 1997.
(9) Incorporated by reference to the Registrant's Current Report on Form 8-K, filed September 14, 1998. (10) Incorporated by reference to the Registrant's Current Report on Form 8-K, filed March 10, 1999. (11) Incorporated by reference to the Registrant's Current Report on Form 8-K, filed June 15, 1999. (12) Incorporated by reference to the Registrant's Registration Statement on Form S-8 dated November 3, 1999 (File No. 333-90255). (13) Incorporated by reference to the Registrant's Current Report on Form 8-K, filed March 17, 2000. (14) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 2000. (15) Incorporated by reference to the Registrant's Current Report on Form 8-K, filed June 5, 2000. (16) Incorporated by reference to the Registrant's Current Report on Form 8-K, filed March 14, 2002. (17) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 29, 2001. (18) Incorporated by reference to the Registrants Current Report on Form 8-K, filed March 19, 2003.
(B) Reports on Form 8-K.
During the first quarter of fiscal year 2003, an 8-K was filed on March 19, 2003 regarding an amendment to the Company's existing credit facility with JPMorgan Chase Bank and other lending institutions.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
REGISTRANT:
BUSH INDUSTRIES, INC.
March 26, 2003 By /s/Paul S. Bush -------------------------- Paul S. Bush, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
CERTIFICATIONS
I, Paul S. Bush, certify that:
1. I have reviewed this annual report on Form 10-K of Bush Industries, Inc;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 By: /s/ Paul S. Bush --------------- ----------------- (Signature) Paul S. Bush Chairman of the Board and Chief Executive Officer
I, Robert L. Ayres, certify that:
1. I have reviewed this annual report on Form 10-K of Bush Industries, Inc;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 By: /s/ Robert L. Ayres --------------- ---------------------- (Signature) Robert L. Ayres President, Chief Operating Officer and Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders Bush Industries, Inc. Jamestown, New York
We have audited the accompanying consolidated balance sheets of Bush Industries, Inc. and subsidiaries (the "Company") as of December 28, 2002 and December 29, 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 28, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15 (A) (2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Bush Industries, Inc. and subsidiaries as of December 28, 2002 and December 29, 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 28, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets."
Deloitte & Touche, LLP
Buffalo, New York February 3, 2003 (February 28, 2003 as to Note 14)
BUSH INDUSTRIES, INC. AND SUBSIDIARIES
See notes to consolidated financial statements.
BUSH INDUSTRIES, INC. AND SUBSIDIARIES
See notes to consolidated financial statements.
BUSH INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 28, 2002, DECEMBER 29, 2001 AND DECEMBER 30, 2000
See notes to consolidated financial statements.
See notes to consolidated financial statements.
BUSH INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 28, 2002, DECEMBER 29, 2001 AND DECEMBER 30, 2000 - -------------------------------------------------------------------------------- 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations--The Company is a diversified global furniture manufacturer and supplier of surface technologies. The Company operates its business in four reportable segments: (1) Bush Business Furniture, which concentrates on the business office and the home office markets with sales to the office superstore and dealer channels; (2) Bush Furniture, which focuses on home entertainment, home office and other home furnishings products; (3) Bush Furniture Europe, which sells commercial, home office and other furnishings in the European market; and (4) Bush Technologies, which is focused on the cell phone accessories after-market, as well as the utilization of surface technologies in automotive interiors, cosmetics, sporting goods and consumer electronics. The Company operates several manufacturing and warehouse facilities throughout North America and in Germany.
Principles of Consolidation--The consolidated financial statements consist of Bush Industries, Inc. and its wholly owned subsidiaries (collectively, the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation.
Accounting Change--Effective December 30, 2001 (the first day of fiscal 2002), the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 142 addresses the financial accounting and reporting for acquired goodwill and other intangible assets with indefinite lives. Pursuant to SFAS No. 142, goodwill is no longer being amortized and must be periodically tested for impairment. Upon adoption of SFAS No. 142, the Company concluded that goodwill related to the Bush Furniture Europe segment was impaired. As a result, the Company has recorded a non-cash charge for goodwill impairment of $2,398,000 as a cumulative effect of accounting change effective December 30, 2001. The fair value of the Bush Furniture Europe reporting unit was estimated using an average of the price to revenues method and the discounted cash flow method and reflect the losses and declining financial condition at the Company's German subsidiary.
Actual results of operations for each of the three years in the period ended December 28, 2002 and as adjusted results of operations for 2001 and 2000 had the non-amortization provisions of SFAS No. 142 been applied in those periods are as follows:
Cash Equivalents--The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents.
Inventories--Inventories, consisting of raw materials, work-in-progress and finished goods, have been stated at the lower of cost or market as determined by the first-in, first-out method.
Property, Plant and Equipment--Property, plant and equipment is carried at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets, which are as follows: buildings and improvements 10-50 years; machinery and equipment 3-20 years; transportation equipment 3-7 years; office equipment 3-10 years; and leasehold improvements 3-10 years or the lease term, if less. Construction in progress is recorded in property, plant and equipment and amounted to $5,582,000 and $7,500,000 at December 28, 2002 and December 29, 2001, respectively. Interest associated with construction indebtedness is capitalized. Interest amounting to approximately $283,000, $971,000 and $1,984,000 associated with construction in progress was capitalized for 2002, 2001 and 2000, respectively.
The cost of repairs and maintenance is charged to expense as incurred. Renewals and betterments are capitalized. Upon retirement or sale of an asset, its cost and related accumulated depreciation or amortization are removed from the accounts and any gain or loss is recorded in income or expense. The Company continually reviews property, plant and equipment to determine that the carrying values have not been impaired by estimating the future undiscounted cash flows expected to result from the use of the property, plant and equipment.
Other Assets--Other assets consist primarily of goodwill, cash value of life insurance policies, advances on split dollar insurance arrangements, an investment at cost, and other intangible assets. The Company tests long-lived assets, exclusive of goodwill, for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." An impairment loss shall be recognized if the carrying amount of long-lived assets, to be held and used is not recoverable and exceeds its fair value based on the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.
Goodwill approximated $13.0 million and $15.4 million at December 28, 2002 and December 29, 2001, respectively. SFAS No. 142 requires the Company to compare the fair value of the reporting unit to its carrying amount on at least an annual basis to determine if there is potential impairment. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than their carrying value. Fair values for goodwill are determined based on discounted cash flows, market multiples or appraised values as appropriate.
Fair Value of Financial Instruments--The fair value of financial instruments is determined by reference to various market data and other valuation techniques, as appropriate. Unless otherwise disclosed, the fair value of short-term instruments approximates their recorded values due to the short-term nature of the instruments. The fair value of long-term debt instruments approximates their recorded values primarily due to interest rates approximating current rates available for similar instruments.
Foreign Currency Translation--Essentially all assets and liabilities are translated into U.S. dollars at year-end exchange rates, while elements of the income statement and cash flow statement are translated at average exchange rates in effect during the year. Adjustments arising from the translation of net assets located outside the United States are recorded as a component of comprehensive income.
Stock-Based Compensation--In 2002, the Company adopted Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". This standard provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, the standard also requires prominent disclosures in the Company's financial statements about the method of accounting used for stock-based employee compensation, and the effect of the method used when reporting financial results.
The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). As permitted in that standard, the Company has elected to continue to follow the recognition provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for employee stock-based compensation. No employee stock-based compensation expense was recorded for 2002, 2001 and 2000.
Pro forma information regarding net earnings (loss) and earnings (loss) per share is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options and awards under the fair value method of that standard. The fair value of those options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2002, 2001 and 2000, respectively: risk free interest rate of 5.25%, 5.02% and 6.37%; dividend yield of 2.07%, 1.59% and 1.45%; volatility factors of the expected market price of the Company's common stock of 67%, 46% and 34%; and a weighted-average expected life of seven years for all three years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period.
The Company's net earnings (loss) and earnings (loss) per share as if the fair value based method had been applied to all outstanding and unvested awards in each year is as follows (in thousands except per share data):
Income Taxes--Deferred taxes are recorded for temporary differences between the financial reporting and tax basis of assets and liabilities using the anticipated tax rate when taxes are expected to be paid or recovered. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized.
Supplemental Cash Flow Information--Cash paid for interest, net of amounts capitalized was $6,918,000, $8,650,000 and $11,772,000 and cash paid for income taxes was $798,000, $6,301,000 and $9,783,000 in 2002, 2001 and 2000, respectively. In addition, the Company received a refund of taxes amounting to $5,335,000 in 2002.
Revenue Recognition--Revenues are recognized when products are shipped. Provisions for discounts, rebates to customers, returns and other adjustments are provided for in the same period the related sales are recorded.
Financial Statement Year End--The Company's year-end is the closest Saturday to December 31. Fiscal years for the consolidated financial statements included herein ended on December 28, 2002 (52 weeks), December 29, 2001 (52 weeks) and December 30, 2000 (52 weeks). The accounts of two of the Company's wholly owned subsidiaries, Rohr-Bush GmbH & Co. and Bush-Viotechnik GmbH, have been consolidated on the basis of a year ending in October. Such fiscal period corresponds with those companies' fiscal year end.
Earnings Per Share (EPS)--Basic EPS excludes dilution and is computed by dividing net income by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The dilutive effect of outstanding options issued by the Company are reflected in diluted EPS using the treasury stock method. Under the treasury stock method, options will only have a dilutive effect when the average market price of common stock during the period exceeds the exercise price of the options. There were 172,419, 168,859 and 133,983 stock options excluded from the computation of diluted earnings per share due to their antidilutive effect in 2002, 2001 and 2000, respectively.
Comprehensive Income--Comprehensive income includes all changes in stockholders' equity during the period except those resulting from investments by owners and distribution to owners. The Company's comprehensive income includes net loss or earnings, an amount for foreign currency translation and a minimum pension liability adjustment.
Use of Estimates--The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that effect the reported amounts of revenues and expenses during the reported period and the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
Recent Accounting Pronouncements--In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 143, "Accounting for Obligations Associated with the Retirement of Long-Lived Assets" (SFAS No. 143). SFAS No. 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS No. 143 is effective in fiscal years beginning after June 15, 2002, with early adoption permitted. The Company plans to adopt the provisions of SFAS No. 143 on December 29, 2002 (the first day of fiscal 2003) and does not expect that the adoption of SFAS No. 143 will have a material impact on its consolidated financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal of Activities" (SFAS No. 146). SFAS No. 146 revises the accounting for exit and disposal activities under Emerging Issues Task Force Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity." The provisions of SFAS No. 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002.
2. INVENTORIES
Inventories consist of (in thousands):
December 28, December 29, 2002 2001
Raw materials $13,766 $16,137 Work in progress 7,150 5,570 Finished goods 35,288 33,590 ------- ------- Total $56,204 $55,297 ======= =======
3. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consist of:
December 28, December 29, 2002 2001 (in thousands)
Land $ 6,465 $ 6,173 Buildings and improvements 128,289 124,082 Machinery and equipment 194,827 189,117 Transportation equipment 1,181 1,103 Office equipment 14,299 14,942 Leasehold improvements 1,668 1,466 --------- -------- 346,729 336,883 Less accumulated depreciation (149,807) (129,549) --------- ------- Total $ 196,922 $207,334 ========= ========
Depreciation expense was $19,886,000, $18,124,000 and $17,053,000 for 2002, 2001 and 2000, respectively.
4. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of (in thousands):
5. LONG-TERM DEBT
Long-term debt consists of:
The Company has a revolving credit facility with a consortium of banks. Effective December 28, 2001, the Company entered into an amendment to its revolving credit facility which modified the aggregate commitments under the amended revolving credit facility to a maximum of $173.0 million from $210.0 million. In addition, certain financial covenant ratios were amended. The amended revolving credit facility is available through June 30, 2004 and borrowings are secured by all domestic tangible personal property and intangible assets of the Company. Maximum borrowings under the revolving credit facility are subject to certain limitations as defined in the agreement. The Company classifies borrowings under the facility as long-term because there are no contractual obligations for repayment until June 30, 2004. At the Company's option, borrowings may be effectuated, subject to certain conditions, primarily on a NYBOR based rate, an applicable eurocurrency rate for certain foreign currencies, or an alternative base rate. At December 28, 2002, borrowings outstanding were primarily at the eurocurrency rate (6.0625%) and at the alternative base rate (4.25%). In addition, the credit agreement permits the Company to request the issuance of up to a maximum of $20.0 million in letters of credit, which issuance will be deemed part of the $173.0 million maximum amount of borrowing permitted under the credit facility. As of December 28, 2002, letters of credit amounting to approximately $4.6 million were outstanding.
The revolving credit facility provides for achieving certain consolidated cash flow coverage and leverage ratios, prescribes minimum consolidated net worth requirements, limits capital expenditures and new leases and provides for certain other affirmative and restrictive covenants. In addition, the revolving credit facility provides for certain limitations of the amount of cash dividends that the Company can declare.
A five-year summary of aggregate principal payments on outstanding long-term debt is (in thousands):
Fiscal Year
2003 $ 462 2004 97,095 2005 410 2006 423 2007 437 Thereafter 1,858 -------- Total $100,685 ========
6. COMMITMENTS AND CONTINGENCIES
The Company is a party to various other legal proceedings arising in the ordinary course of business. The Company believes that these pending actions would not materially adversely affect the Company's consolidated financial statements.
The Company has incurred rental expense for manufacturing and warehouse space and equipment. A summary of rent expense follows (in thousands):
2002 2001 2000
Real estate $2,224 $1,882 $1,094 Equipment 2,409 2,372 2,259
Minimum future obligations over the next five years under operating leases that have initial or remaining noncancelable terms in excess of one year are summarized as follows (in thousands):
Fiscal Year
2003 $2,985 2004 2,093 2005 1,334 2006 373 2007 91
7. INCOME TAXES
The provision for income taxes is as follows (in thousands):
The types and tax effects of temporary differences included in deferred tax assets and liabilities are as follows (in thousands):
The Company has recorded a valuation allowance primarily in anticipation that certain state investment tax credits will expire prior to their usage. State investment tax credits and subsidiary net operating loss carryforwards of approximately $7.5 million and $9.5 million begin to expire in 2003. Substantially all of the subsidiary net operating loss carryforwards are a result of foreign operations and have no expiration date.
The provision for income taxes differs in each of the years from the federal statutory rate due to the following:
2002 2001 2000
Statutory rate 35.0 % 35.0 % 35.0 % State taxes, net of federal benefits 12.9 25.2 2.8 Effect of non-deductible costs 6.8 19.1 0.9 Effect of foreign tax rates 1.2 2.0 0.5 Other, net 2.4 3.5 (0.2) ---- ---- ---- Effective tax rate 58.3 % 84.8 % 39.0 % ==== ==== ====
The Company realized tax benefits amounting to $103,000, $185,000 and $108,000 as the result of stock option transactions during 2002, 2001 and 2000, respectively. The benefit has been credited to paid-in capital and is not reflected in the current year provision for taxes.
8. CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of Class A Common Stock, $.10 par value, and 6,000,000 shares of Class B Common Stock, $.10 par value. Dividends may be declared and paid on Class A Common Stock without being paid on Class B Common Stock. No dividend may be paid on Class B Common Stock without equal amounts paid concurrently on Class A Common Stock. Holders of Class A Common Stock have one-tenth vote per share and are entitled to elect at least 25% of the Board of Directors as long as the number of outstanding shares of Class A Common Stock is at least 10% of the total of all Common Stock outstanding. Holders of Class B Common Stock have one vote per share.
The Company has a stock redemption agreement with the principal shareholder, which provides that upon his death the Company may be required to redeem a portion of the Company's stock then owned by the shareholder's estate. The redemption price per share shall be determined at the then market price based upon a thirty-day average prior to the closing of any such stock redemption. The amount of the redemption is limited to approximately $21.4 million, which will be funded by the proceeds from life insurance policies maintained on the life of the principal shareholder. The shareholder's estate can request the Company to redeem shares under the agreement until the maximum time period permitted to pay estate taxes has elapsed.
In the fourth quarter of 1999, the Company sold 268,574 shares of common stock at fair value to certain employees and directors of the Company in exchange for notes receivable. Repayment of the notes will commence in the fourth quarter of 2003 through payroll deductions.
9. STOCK PLANS
The Company currently has two open stock plans, which provide for the issuance of Class A Common Stock. As of December 28, 2002, there were 568,465 shares of Class A Common Stock available for issuance under the 1995 Stock Plan and 166,961 shares of Class A Common Stock under the 1999 Stock Plan. Incentive Stock Options granted under the 1995 Stock Plan must have an option price of at least 100% (110% for stockholders with more than 10% of the total combined voting power) of the fair market value of the Class A Common Stock on the date of the grant. The option price of the Non-Qualified Stock Options granted pursuant to this plan shall be determined by the Compensation Committee of the Board of Directors, in its sole discretion. The vesting of outstanding stock options vary, however, they generally vest over a two to seven year period and expire ten years from the date of grant. No option can be exercised within one year after the date of grant. Under the 1999 Stock Plan, shares may be awarded for such consideration as determined by the Company.
As of December 28, 2002, there were outstanding options to purchase 1,281,062 shares of Class A Common Stock under the current and prior plans at prices ranging from $8.91 to $29.93 that were vested and could be exercised. Of these outstanding options, 1,190,462 have an exercise price of $8.91.
The following is a summary of option transactions:
All of the options outstanding expire at various dates from 2003 through 2012. The option price of the shares exercised in 2002 was $8.91. The weighted-average exercise prices of options were $8.91, $8.51 and $8.50 for fiscal years 2002, 2001 and 2000, respectively. The weighted-average grant-date fair value of options granted were $12.40, $12.98 and $13.88 for fiscal years 2002, 2001 and 2000, respectively.
In addition to the options under the aforementioned plans, 48,375 non-qualifying options previously granted to key individuals were exercised in 2002 at an exercise price of $8.91. At December 28, 2002, there were no non-plan options outstanding.
10. PENSIONS
The Company sponsors a defined benefit plan for eligible non-U.S. employees at its German facility.
The following are reconciliations of the benefit obligation, the funded status of the plan, and the amounts recognized in the consolidated balance sheets (in thousands):
Amounts recognized in the balance sheets consist of:
There were no plan assets at December 28, 2002 and December 29, 2001. The plan is funded to the extent of benefits paid.
Weighted average assumptions for the years:
The Company also sponsors defined contribution plans, which cover substantially all of the Company's eligible U.S. employees. The plans provide for a general employer contribution, a wage reduction feature under Section 401(k) and a matching contribution. The general employer contribution provides for a discretionary Company contribution of the Company's Class A common stock. The matching contribution is made on behalf of each eligible participant who makes a wage reduction contribution. This matching contribution is made in cash and includes certain limitations. Net pension cost related to the plans was $165,000, $1,276,000 and $1,366,000 for 2002, 2001 and 2000, respectively. There was no discretionary Company contribution in 2002.
11. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
The Company operates in four operating segments based principally on the natural alignment of its customers, markets and products. Inter-segment sales were made at prices approximating current market value. Certain expenses relating to the North American furniture segments, Bush Business Furniture and Bush Furniture were allocated to these two segments based on certain percentages and assumptions that the Company believes are reasonable.
In evaluating segment performance, management focuses on earnings from operations before income taxes. The earnings (loss) before income taxes exclude nonrecurring charges such as gains or losses on the sale of assets and the cumulative effect of accounting change. The accounting policies of the segments are the same as those described in Note 1.
The changes in the carrying amount of goodwill by operating segment for the year ended December 28, 2002 are as follows (in thousands):
An analysis and reconciliation of the Company's business segment information to the respective information in the consolidated financial statements is as follows (all dollars are in thousands):
(1) The Company's North American furniture segments, Bush Business Furniture and Bush Furniture, share certain productive assets. These productive assets manufacture components for both Bush Business Furniture and Bush Furniture products. As a result, expenses related to depreciation and amortization, and capital expenditures for long-lived assets are not allocated between these two furniture segments. Further, identifiable assets including goodwill, are not allocated between Bush Business Furniture and Bush Furniture.
(2) Excludes cumulative effect of accounting change for goodwill impairment of $2,398.
The Company's geographic operations outside of the United States principally include Germany. The Company's products are sold throughout the world. Net sales by geographic area are presented by attributing net sales to external customers based on the domicile of the selling location in thousands:
2002 2001 2000
Net sales by geographic area:
United States $289,381 $291,547 $395,341 Germany 50,789 54,259 55,856 -------- -------- -------- Total $340,170 $345,806 $451,197 ======== ======== ========
December 28, December 29, 2002 2001
Long-lived assets by geographic area: United States $182,520 $193,289 Germany 41,440 42,639 -------- -------- Total $223,960 $235,928 ======== ========
Electronic and office product superstores and mass merchandisers, throughout the United States and furniture stores in Europe, comprise a significant portion of the Company's customer base. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. Although the Company's exposure to credit risk associated with nonpayment by customers is affected by conditions or occurrences within the retail industry, the majority of trade receivables were current at December 28, 2002.
In 2002, the Company has four customers that individually exceeded 10 percent or more of the Company's gross revenues. Gross revenues and accounts receivable balances, which primarily relate to Bush Business Furniture and Bush Furniture, for these customers, are as follows (in thousands):
Accounts Receivable Gross Revenues --------------------------- -------------------------- December 28, December 29, 2002 2001 2000 2002 2001
Customer A 17% 14% 20% 8% 5% Customer B 14% 14% 18% 22% 13% Customer C 13% - - 2% - Customer D 12% - - 12% -
Gross revenues for customer C and D did not exceed 10% in 2001 or 2000.
12. ACQUISITION
In October 2000, the Company acquired the 49% minority interest in Rohr-Bush GmbH & Co. and, as a result, the Company owns 100% of Rohr-Bush GmbH & Co. The purchase price has been allocated primarily to property, plant and equipment based on fair market value at the date of acquisition in accordance with the purchase method of accounting. The purchase price, including transaction costs, amounted to approximately $6.5 million.
13. SALE OF ASSETS
In December 2000, the Company sold substantially all of the assets of its retail service business, a division of the Company, to a third party in exchange for shares of stock of the purchaser. Net sales of this retail service business were not significant to the consolidated financial statements. The Company recorded the shares of stock received at fair value of approximately $5.0 million, which resulted in a pre-tax gain of approximately $3.6 million. The investment is included in other assets on the consolidated balance sheets since the Company expects to hold the investment on a long-term basis. The cost method is used to account for this investment because the Company does not have the ability to exercise significant influence over the purchaser's operating and financial policies.
14. SUBSEQUENT EVENTS
Restructuring--On February 27, 2003, the Company approved plans to restructure certain of its operations. In conjunction with such plans the Company will close its St. Paul, VA manufacturing facility and relocate certain operations to other plants, close three of its retail outlet stores and utilize third party liquidators to expedite the sale of excess inventory (which will create space in the Company's Erie, PA facility to launch new production strategies), and terminate production and management level employees in various locations. The Company expects to incur material losses associated with implementing these plans during 2003.
Debt Amendment-- Subsequent to December 28, 2002, the Company entered into a seventh amendment, dated February 28, 2003, related to the Company's revolving credit facility (see Note 5). This amendment, among other things, modified certain covenants of the Company under the credit facility, provided for additional security interest, and prohibits the payment of cash dividends. In addition, the amendment modified the maximum amount of borrowing permitted under the credit facility from an aggregate of $173.0 million to an aggregate of $163.0 million.
15. QUARTERLY SALES AND EARNINGS DATA - UNAUDITED
(a) In accordance with the transition provisions of SFAS No. 142, the impairment loss associated with goodwill is reported as a change in accounting principle as of the beginning of the period in which the change is made, or December 30, 2001 (the first day of fiscal 2002). Accordingly, the first quarter 2002 net loss includes a charge of $2.4 million recorded as a cumulative effect of accounting change.
(b) Fourth quarter 2002 and 2001 diluted earnings per share were calculated using basic weighted average shares outstanding because using diluted weighted average shares outstanding would have been antidilutive.
(c) Fourth quarter 2001 gross profit and net loss includes a $5.2 million pre-tax non-cash inventory write down.
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SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS (In Thousands)
(1) Accounts written off, net of collections on accounts receivable previously written off
S-1