ITEM 1. BUSINESS - ------- --------
(a) GENERAL DEVELOPMENT OF BUSINESS -------------------------------
Bush Industries, Inc. and its majority owned subsidiaries (the "Company" or the "Registrant"), are primarily engaged in the design, manufacture and sale of ready-to-assemble ("RTA") and set up furniture products for business and consumer use. The Company 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.
The Company completed in 1996, a one million square-foot manufacturing and distribution facility in Erie, Pennsylvania, which is approximately 50 miles west of the Company's corporate headquarters in Jamestown, New York. The first phase of this expansion, approximately 500,000 square feet, replaced the Company's leased distribution and warehouse facility in Saybrook, Ohio in April 1996. The second phase of the expansion program, consisting of an approximate 500,000 square foot facility, became operational in 1997. During 1998, construction began on a new approximately 80,000 square foot automated material handling system. Additional manufacturing capacity, incorporating newly developed advanced technology, will be added incrementally to this facility as demand requires.
In 1996, the Company acquired all of the outstanding and issued capital stock of The ColorWorks, Inc., a North Carolina corporation ("ColorWorks"). ColorWorks, with headquarters located in Greensboro, North Carolina, is a finishing, design and decorating company which holds the master license to the "HydroGraFix" film processing technology in the Western Hemisphere, portions of Central Europe and South Africa.
In the first quarter of 1997, the Company formed a wholly-owned German subsidiary, Bush-Viotechnik GmbH ("Bush-Viotechnik"), to service the global market for advanced "surface technologies" in diverse applications. These applications include products associated with the furniture, automotive, electronics, building and construction industries. Bush-Viotechnik has developed an advanced surface technology manufacturing line which is installed in the Company's Erie, Pennsylvania facility.
On June 30, 1997, the Company acquired a 51% interest in the Rohr Gruppe, a German furniture manufacturer. The Rohr Gruppe consisted of limited partnerships and corporate entities, which were reorganized into a limited partnership prior to the Company's acquisition, which name was subsequently changed to Rohr-Bush GmbH & Co. ("Rohr-Bush").
On April 22, 1998, the Company acquired all of the issued and outstanding stock of Fournier Furniture, Inc. ("Fournier"), a Virginia based manufacturer of RTA furniture.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS ---------------------------------------------
For financial information reporting purposes, the Company is deemed to engage in one industry segment, the design, manufacture and sale of furniture products. The Company's geographic operations outside the United States principally include Germany.
(c) NARRATIVE DESCRIPTION OF BUSINESS ---------------------------------
The Company is engaged primarily in the design, manufacture and sale of ready-to-assemble ("RTA") and set up furniture products in various price ranges for both business and consumer use. The Company's furniture product line, inclusive of Rohr-Bush, includes audio/video home entertainment centers, home theater furniture systems, audio cabinets, television/VCR carts, wall units, bookcases, bedroom and kitchen/utility furniture, computer desks and workstations, desks, hutches, armoires and file cabinets.
The Company's diverse RTA furniture product line 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 Bush products. The Company's diverse set up furniture, primarily produced and sold by Rohr-Bush, is designed to be a high quality product that appeals to popular price points. The component parts for the set up furniture are manufactured using RTA technology and equipment.
ColorWorks is engaged in the finishing and decoration of various substrate materials. ColorWorks holds the master license to the "HydroGraFix" film processing technology in the Western Hemisphere, portions of Central Europe, and South Africa. This process permits the decoration of a variety of geometric shapes, including complex three-dimensional parts. Cellular phones, pagers, firearms, archery equipment and automotive interior components are examples of major product lines decorated by ColorWorks.
The objective of Bush-Viotechnik is to service the global market for advanced "surface technologies" in diverse applications, including the furniture, automotive, electronics, building and construction industries. Bush-Viotechnik has developed an advanced surface technology manufacturing line that is installed in the Company's Erie, Pennsylvania facility. The formation of Bush-Viotechnik complements the Company's acquisition of ColorWorks.
MARKETING AND DISTRIBUTION
The Company's furniture products, inclusive of Rohr-Bush, are marketed to a variety of retailers for sale to both business and consumer end-users. The Company's customers include national chains, electronic and computer superstores, catalog showrooms, discount mass merchants, warehouse clubs, office supply superstores, office furniture retailers, home furnishings retailers, department stores, home improvement centers, furniture stores, buying groups in Germany, and
independent wholesale distributors. The Company's furniture products, inclusive of Rohr-Bush, are sold both through independent manufacturers' representatives and directly by the Company's sales personnel. The Company's furniture products, inclusive of Rohr-Bush, are currently sold to approximately 3,100 customers, and the Company estimates that its products are currently carried in approximately 20,000 retail outlets.
ColorWorks offers finishing and decorating processing services to manufacturers and end-users of various products. ColorWorks either provides such services directly or sublicenses the "HydroGraFix" film processing technology to third parties in varying fields of application and/or geographic areas.
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.
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.
WORKING CAPITAL PRACTICES
The Company engages in no unusual practices regarding inventories, receivables or other items of working capital.
CUSTOMERS
For the fiscal year ended January 2, 1999, the Company had two customers which accounted for approximately 15% and 11% 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 January 2, 1999. While the loss of any substantial customer could have a material short-term impact on the Company's business, the Company believes that its diverse furniture distribution channels would minimize the long-term impact of any such loss.
BACKLOG
The Company believes that order backlog at any particular point in time is not predictive of future sales performance since, as is standard in the furniture industry, a customer may cancel a product order prior to shipment without penalty. The Company has historically filled orders within approximately one to six weeks of the receipt of a purchase order.
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 Company believes that, based on information reported in furniture trade publications, it is the second largest United States-based manufacturer of RTA furniture products (based on consolidated world wide sales) and that Rohr-Bush is the eighth largest furniture manufacturer in Germany (excluding kitchen cabinets and upholstered furniture). The furniture market is highly competitive, and includes numerous entities, some of which may have substantially greater financial and marketing resources than the Company. The Company believes that the principal competitive factors in the furniture industry marketplace are price, quality, function, innovative product design, style, prompt delivery, and the ability to offer customers a full product line. The Company's varied product line is designed based on the foregoing factors to achieve customer satisfaction and, accordingly, the Company believes that its products effectively compete in such marketplace.
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 1998 fiscal year end, the Company employed a total of approximately 4,100 employees. 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. The Company believes it has good employee relations.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES ----------------------------------------------------------------------------
For the 1998 fiscal year ended January 2, 1999, the Company generated domestic sales of approximately $313,908,000 (or approximately 75.9% of total sales) and foreign sales of approximately $99,619,000 (or approximately 24.1% of total sales). Of the total foreign sales, approximately $14,288,000 (or approximately 3.5% of total sales) represented products exported by the Company from the United States. For the 1997 fiscal year ended January 3, 1998 and the
1996 fiscal year ended December 28, 1996, the Company generated domestic sales of approximately $283,019,000 and $245,158,000, respectively (or approximately 87.0% of total sales for the 1997 fiscal year and approximately 95.6% of total sales for the 1996 fiscal year). Foreign sales for the fiscal years ended January 3, 1998 and December 28, 1996, respectively, were approximately $42,270,000 and $11,174,000 (or approximately 13.0% of total sales for the 1997 fiscal year and approximately 4.4% of total sales for the 1996 fiscal year). Of such total foreign sales, approximately $16,960,000 and $11,174,000 represented products exported by the Company from the United States for the fiscal years ended January 3, 1998 and December 28, 1996, respectively (or approximately 5.2% for the 1997 fiscal year and 4.4% for the 1996 fiscal year).
ITEM 2.
ITEM 2. PROPERTIES - ------- ----------
The following table summarizes the Company's existing facilities as of March 1, 1999:
- ------------------------- (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) Legal title to the facility is in the County of Chautauqua Industrial Development Agency in
accordance with the terms of financing for the facility.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - ------- -----------------
In November 1995, the Company was notified by the New York State Department of Environmental Conservation ("DEC") of an alleged violation of a certain environmental regulation concerning the presence of contaminates in the groundwater, including trichloroethene ("TCE"), beneath the Company's property located in Little Valley, New York. Based on available data, the Company believes there is no conclusive evidence its property is the source of such contamination, nor has the Company ever used TCE in its manufacturing operations. The Company has proposed to the DEC, in a "Subsurface Investigation Work Plan", certain monitoring and testing procedures to be undertaken by the Company to obtain more reliable data as to the source of the TCE contamination. Such Work Plan, if acceptable to the DEC, may form the basis of an Order On Consent with the DEC with respect to those measures to be undertaken by the Company. As of the date hereof, the DEC and the Company are working towards an acceptable Work Plan and Order on Consent. 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 (the "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. 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 ColorWorks, of which the Company became the sole stockholder in September 1996. The Company has been indemnified to a certain extent by the former shareholders of ColorWorks, and has procured a $20,000,000 environmental insurance policy relating thereto. In the unlikely event any such environmental costs are not covered by such indemnification or 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.
The Company has also become aware of the presence of certain levels of contaminates on property located in Germany and owned by Rohr-Bush, of which the Company became a 51% stockholder on June 30, 1997. The associated liability, the quantification of which was based on the assessment of outside consultants, was recorded in the allocation of the purchase price to the acquired assets and liabilities as of June 30, 1997. Accordingly, 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 January 2, 1999, 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 January 2, 1999.
PART II -------
ITEM 5.
ITEM 5. MARKET FOR THE 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. The Company's Class B Common Stock is not publicly traded.
The following table sets forth the high and low sales prices of the Company's Class A Common Stock, as reported on the New York Stock Exchange for the periods indicated:
Quarter High Low - -------------------------------- ------ ------
January 1, 1997 - March 31, 1997 $22.38 $17.25 April 1, 1997 - June 30, 1997 $24.88 $18.88 July 1, 1997 - September 30, 1997 $28.38 $23.38 October 1, 1997 - December 31, 1997 $28.25 $23.50
January 1, 1998 - March 31, 1998 $29.31 $24.13 April 1, 1998 - June 30, 1998 $30.63 $21.75 July 1, 1998 - September 30, 1998 $23.25 $13.63 October 1, 1998 - December 31, 1998 $18.25 $12.00
(b) Holders. As of March 1, 1999, the number of holders of record of the ------- Company's Class A Common Stock was approximately 445. The Company believes that there are approximately an additional 2,400 holders who own shares of the Company's Class A Common Stock in street name. As of the same date, there were approximately 13 holders of record of the Company's Class B Common Stock.
(c) Dividends. The Company instituted a quarterly cash dividend for holders --------- of Class A and Class B Common Stock during the fourth quarter of 1992. Dividends have been declared and paid for each succeeding quarter. The Company declared cash dividends of $0.035 per share for each of the four quarters of 1997. The Company increased the quarterly cash dividend from $0.035 to $0.05 per share effective with the May 1998 dividend payment.
The determination as to the payment and the amount of future cash dividends will depend upon the Company's then current financial condition, capital requirements, results of operations and other factors deemed relevant by the Company's Board of Directors. In addition, a certain loan agreement to which the Company is a party limits the amount of cash dividends that the Company can declare, and also imposes certain conditions with respect thereto. 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 1994 through 1998 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.
- ------------------------------------- (1) Effective for the year ended January 3, 1998, the Company adopted SFAS No. 128, "Earnings per Share". In accordance with SFAS No. 128, the basic and diluted EPS and weighted average shares outstanding have been restated for all periods presented. Earnings per share and the number of weighted average Class A and Class B Shares of Common Stock outstanding have been adjusted to reflect the 3-for-2 stock split effectuated in the form of a fifty percent dividend paid on June 28, 1996 to stockholders of record as of June 14, 1996, and the 5-for-4 stock split effectuated in the form of a twenty-five percent dividend paid on January 20, 1995 to stockholders of record as of January 6, 1995.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------- ----------------------------------------------------------------------- OF OPERATIONS ------------- General The domestic ready-to-assemble ("RTA") furniture market has experienced significant growth over the past several years and has emerged as a key component of the overall U.S. home and office furnishings industry. The growing popularity and acceptance of RTA furniture products at both the retail and consumer levels are the result, in the opinion of the Company, of basic structural changes in the retail channels of distribution and increased demand engendered by fundamental demographic trends.
In recent years, the Company has committed substantial resources to the development and implementation of a diversified sales, marketing, and product strategy in order to capitalize on growth opportunities presented by emerging retail channels of distribution and changes in consumer demographics and preferences. Accordingly, the Company has structured its business to offer a wide variety of RTA furniture products through increasingly popular retail distribution channels, including electronics superstores, office superstores, discount mass merchants, home improvement centers and home furnishings retailers. The Company continues to strive towards building long-term relationships with quality retailers in existing and emerging high-growth distribution channels to develop and sustain its future growth.
In 1998, the Company was involved in advancing several strategic business initiatives, including integration of the newly acquired Virginia facility (Fournier), the launching of new surface technology, a facility expansion to automate the warehouse operation at the Erie, Pennsylvania facility, the adaptation of Rohr-Bush manufacturing and the nationwide roll-out of a delivery and assembly operation. The Company is continually monitoring these initiatives in an effort to reduce costs and enhance profitability.
On April 22, 1998, the Company acquired all of the issued and outstanding stock of Fournier Furniture, Inc. ("Fournier"), a Virginia based manufacturer of RTA furniture, for a purchase price of $7.0 million in cash. Substantially all of Fournier's debt that existed on April 22, 1998 has been repaid utilizing the Company's existing credit facility. The acquisition of Fournier has been accounted for using the purchase method of accounting and accordingly, the operating results of Fournier have been included in the consolidated financial statements of the Company from the date of acquisition.
On June 30, 1997, the Company acquired a 51% interest in the Rohr Gruppe, a German furniture manufacturer. The Rohr Gruppe consisted of limited partnerships and corporate entities, which were reorganized prior to the Company's acquisition into a limited partnership, which name was subsequently changed to Rohr-Bush GmbH & Co. ("Rohr-Bush").
In the first quarter of 1997, the Company formed a wholly-owned German subsidiary, Bush-Viotechnik GmbH ("Bush-Viotechnik"), to service the global market for advanced "surface
technologies" in diverse applications. These applications include products associated with the furniture, automotive, electronics, building and construction industries. Bush-Viotechnik has developed an advanced surface technology manufacturing line which is completed and installed in the Company's Erie, Pennsylvania facility.
As described below, the Company is actively addressing its ability to resolve any potential Year 2000 issues. The Year 2000 issue is the result of computer software programs being written using two digits rather than four to define the applicable year. Any of the Company's software programs, computer hardware or equipment that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000, resulting in system failures or miscalculation.
The Company has appointed a Year 2000 Corporate Compliance Team, which has prepared an international compliance program and work plan for the Company and is responsible for coordinating and inspecting compliance activities. The Company's plan to resolve the Year 2000 issue includes five major phases. First, in the inventory phase, all resources are inventoried to identify those that have any type of software or hardware Year 2000 issues. Second, in the assessment phase, all inventoried items are assessed to confirm that a Year 2000 related issue is present and the extent of remediation required. Third, in the strategy phase, a remediation strategy is created to ensure substantial completion of upgrades for critical systems by the middle of calendar 1999. Fourth, in the conversion / upgrade phase, upgrades are performed on all items identified in the inventory and assessment phases. Finally, in the testing phase, all upgraded items are tested to verify Year 2000 readiness.
The Company has substantially completed the inventory, assessment and strategy phases for both information technology ("IT") and non-IT systems. As of March 1, 1999, the conversion / upgrade and testing phases of IT systems was approximately 60% complete and is targeted to be completed by the middle of 1999. For non-IT systems, the Company is dependent on equipment manufacturers to supply the upgrades required to remediate Year 2000 issues. As of March 1, 1999, the conversion / upgrade and testing phases for non-IT systems was approximately 60% complete and is targeted to be completed by the middle of 1999.
Part of the Company's initial assessment phase included a detailed Year 2000 questionnaire sent to all active vendors and customers. This questionnaire included questions on products, services, IT and non-IT systems. As of March 1, 1999, the Company had received responses from approximately 75% of those questioned. The Company is following up the questionnaires, where necessary, to ensure Year 2000 compliance and uninterrupted services and supplies to the Company.
The Company utilizes both internal and external resources to address the Year 2000 issue. The Company does not separately track the internal costs incurred on the Year 2000 project. Such costs are principally payroll and related costs for its internal IT personnel. Certain mainframe computer software upgrades necessary to become Year 2000 compliant will be not be an incremental expense, as the software upgrade is provided as part of the Company's software maintenance agreement. The
total cost of the Year 2000 project, excluding the above items, is estimated to be less than $500,000.
The Company presently believes it has an effective plan in place to anticipate and resolve any material potential Year 2000 issues in a timely manner. In the event, however, that the Company does not properly identify Year 2000 issues or complete the conversion / upgrade phase and testing phase of its systems on a timely basis with respect to the Year 2000 issues that are identified, there can be no assurance that Year 2000 issues will not materially and adversely affect the Company's results of operations or relationships with third parties. In addition, disruptions in the economy generally resulting from Year 2000 issues also could materially and adversely affect the Company. The amount of potential liability and lost revenue that would be reasonably likely to result from the failure by the Company and certain key third parties to achieve Year 2000 compliance on a timely basis cannot be reasonably estimated at this time.
The Company is developing a contingency plan for Year 2000 issues and expects to have it in place by October 31, 1999. In addition, the Company is forming a rapid response team as part of its IT group that will respond to any operational problems during the Year 2000 date change period.
During the first quarter of 1999 the Company commenced a review of certain aspects of its operations to reduce costs and increase its efficiencies and intends to initiate a restructuring plan before the end of the quarter. Although the final details of the plan are still being formulated, the restructuring plan will impact manufacturing and selling, general and administrative costs in European as well as domestic operations. The Company expects to incur severance and related restructuring charges of approximately seven to eleven million pre tax dollars as the result of its re-evaluation of certain operations and costs.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activity", which is required to be adopted by the Company in 2001. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges of underlying transactions must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitment through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Management has not yet determined the effect SFAS No. 133 will have, if any, on the Company's consolidated financial position, results of operations or cash flows.
Except for the historical information contained herein, the matters discussed in this Annual Report on Form 10-K are forward-looking statements which involve risks and uncertainties, including, but not limited to, economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices, and other factors discussed in the Company's filings with the Securities and Exchange Commission.
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:
Percentage of Net Sales ---------------------------- 1998 1997 1996 ---- ---- ---- Net Sales 100.0% 100.0% 100.0% Cost of Sales 72.8% 70.2% 68.8% ----- ----- ----- Gross Profit 27.2% 29.8% 31.2%
Selling, General and Administrative Expenses 21.3% 17.9% 18.9% ----- ----- ----- Operating Income 5.9% 11.9% 12.3%
Interest Expense 1.4% 1.1% 0.8% ----- ----- ----- Earnings Before Income Taxes 4.5% 10.8% 11.5%
Income Taxes 1.7% 4.0% 4.3% ----- ----- ----- Net Earnings 2.8% 6.8% 7.2% ===== ===== =====
The following paragraphs provide an analysis of the changes in net sales, selected cost and expense items, and earnings for fiscal years 1996 through 1998.
RESULTS OF OPERATIONS: FISCAL 1998 COMPARED TO FISCAL 1997
The Company's net sales for the 1998 fiscal year compared to the 1997 fiscal year increased $88,238,000, or approximately 27.1%, to $413,527,000. The increase in net sales was attributable to the inclusion of a full year of sales from the Company's majority owned German subsidiary, Rohr-Bush (only four months of Rohr-Bush sales were included in fiscal year 1997) and good sales momentum at the retail level. Revenues were, however, negatively impacted by new product introduction delays which occurred as a result of the assignment of substantial internal resources to advance recent strategic business initiatives. These initiatives include the integration of the newly acquired Virginia facility (Fournier), the launching of new surface technology, a facility expansion to automate the warehouse operation at the Erie facility, the adaptation of Rohr-Bush manufacturing and the nationwide roll-out of a delivery and assembly operation.
The cost of sales increased by $72,627,000 in 1998 primarily as a result of higher sales volumes. The cost of sales as an approximate percentage of net sales increased by 2.6% from 70.2% in 1997 to 72.8% in 1998. Higher cost of sales as a percentage of net sales was primarily the result of increased costs associated with the business initiatives described above.
For 1998, selling, general and administrative expenses increased by $29,873,000 compared to 1997. The increase in selling, general and administrative expenses was primarily due to the inclusion of a full year of Rohr-Bush and approximately eight months of Fournier in the Company's consolidated financial statements, the costs associated with the business initiatives described above, increased variable selling expenses (such as commissions, marketing and promotional incentives), and other administrative costs associated with the Company's higher sales volumes. Selling, general
and administrative expenses increased as an approximate percentage of net sales from 17.9% in 1997 to 21.3% in 1998.
Interest expense increased to $5,897,000 in 1998 (or approximately 1.4% of net sales) from $3,542,000 in 1997 (or approximately 1.1% of net sales). The increase in interest expense was primarily due to an increase in average debt related to the Company's capital expenditures, inventory growth and acquisitions. The Company's overall effective federal, state and local tax rate increased from 36.8% in 1997 to 37.5% in 1998. The exercise of stock options during 1998 resulted in a tax benefit amounting to $1,011,000, which has been credited directly to paid-in capital and is not reflected in 1998's provision for taxes.
For 1998, the Company generated net earnings after taxes of $11,482,000 (or $0.83 basic earnings per share and $.78 diluted earnings per share), as compared to $22,120,000 (or $1.64 basic earnings per share and $1.52 diluted earnings per share) for 1997. This was an approximate 48.1% decrease in net earnings. The decrease in net earnings is primarily due to increased costs associated with the business initiatives described above.
RESULTS OF OPERATIONS: FISCAL 1997 COMPARED TO FISCAL 1996
The Company's net sales for the 1997 fiscal year compared to the 1996 fiscal year increased $68,957,000, or approximately 26.9%, to $325,289,000. The increase in net sales was attributable to the inclusion of $25,310,000 of Rohr-Bush sales in the consolidated financial statements, the growing domestic market acceptance for ready-to-assemble furniture products at both the retail and consumer levels and to strong domestic sales in the office superstore and consumer electronics distribution channels.
The cost of sales increased by $52,127,000 in 1997 primarily as a result of higher sales volumes. The cost of sales as an approximate percentage of net sales increased by 1.4% from 68.8% in 1996 to 70.2% in 1997. Higher cost of sales as a percentage of net sales was primarily the result of the integration of the European operations.
For 1997, selling, general and administrative expenses increased by $9,785,000 compared to 1996. The increase in selling, general and administrative expenses was primarily a result of increased variable selling expenses (such as commissions, marketing and promotional incentives) and other administrative costs associated with the Company's higher sales volumes. Selling, general and administrative expenses decreased as an approximate percentage of net sales from 18.9% in 1996 to 17.9% in 1997.
Interest expense increased to $3,542,000 in 1997 (or approximately 1.1% of net sales) from $2,131,000 in 1996 (or approximately 0.8% of net sales). The increase in interest resulted from an increase in average long-term debt. The Company's overall effective federal, state and local tax rate decreased from 37.0% in 1996 to 36.8% in 1997. The exercise of stock options during 1997 resulted in a tax benefit amounting to $1,563,000, which has been credited directly to paid-in capital and is not reflected in 1997's provision for taxes.
For 1997, the Company generated net earnings after taxes of $22,120,000 (or $1.64 basic earnings per share and $1.52 diluted earnings per share), as compared to $18,487,000 (or $1.42 basic earnings per share and $1.31 diluted earnings per share) for 1996. This was an approximate 19.7% increase in net earnings. The increase in net earnings is primarily due to increased sales.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at fiscal year end 1998 increased by $11,935,000 over fiscal year end 1997. Such increased working capital was primarily due to an increase in inventory partially offset by an increase in accounts payable. Total assets at fiscal year end 1998 increased $85,352,000 over fiscal year end 1997, primarily as a result of an increase in net property, plant and equipment, inventory and other assets. Additional inventory was put in place primarily to enable the Company to improve its serviceability to its customers. In addition, total liabilities at fiscal year end 1998 increased $74,163,000 over fiscal year end 1997, due primarily to an increase in long-term debt and accounts payable. The increase in long-term debt was primarily a result of the Company's capital expenditures, inventory growth and the acquisition of Fournier. Capital expenditures for fiscal 1998 included the cost of the additional equipment purchased to increase serviceability to its customers and the previously mentioned initiatives, including the integration of Fournier, the development of new surface technology equipment, a facility expansion to automate the warehouse operation at the Erie, Pennsylvania facility, and the adaptation of Rohr-Bush manufacturing. In order to maximize cash flow the Company's accounts payable increased. Total assets, including property, plant and equipment and other assets, and total liabilities were all impacted as the result of the inclusion of the Fournier acquisition in the Company's financial statements.
During 1998, the Company paid $7,000,000 for the purchase of Fournier and $48,182,000 on capital expenditures company wide, which were financed primarily with increased debt. Capital expenditures in 1999 are currently forecasted to be approximately $30 million, which includes the completion of the automation of the warehouse operation at the Erie, Pennsylvania facility. The cash dividend for the first quarter of 1998 was $0.035 per share. The Company increased the quarterly cash dividend from $0.035 to $0.05 per share effective with the May 1998 dividend payment.
The Company entered into a first amendment, dated as of August 17, 1998 to its existing credit facility with The Chase Manhattan Bank, Mellon Bank, N.A. and other lending institutions. The amendment modified the amount of money the Company can borrow from an aggregate $155,000,000 to an aggregate $175,000,000. In addition, the term of the credit facility was extended until June 30, 2003, certain covenants were amended, and borrowings were permitted under the anticipated single currency of participating member states of the European Union (the Euro). The Company entered into a second amendment, dated as of December 31, 1998 to its existing credit facility with The Chase Manhattan Bank, Mellon Bank, N.A. and other lending institutions. This amendment modifies both the allowable consolidated leverage ratio and the allowable consolidated cash flow coverage ratio. In addition, the pricing grid was modified primarily to reflect the newly permitted ratios.
The credit facility provides for revolving credit loans, swing line loans and multi-currency loans,
within the parameters described below. A balloon payment of the then remaining principal and accrued interest is due on the termination date of the loan. 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. The applicable margin, which pertains only to LIBOR and NYBOR rate loans, varies from 0.5% to 2.00%, 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 $175,000,000 maximum amount of borrowing permitted under the credit facility.
The line of credit agreement 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. In addition, the credit agreement limits the amount of cash dividends that the Company can declare, and also imposes certain conditions with respect thereto.
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.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS - ------- -----------------------------------------------------------
Not Applicable
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 14).
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 13, 1999, 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 13, 1999, under the caption, "Executive Compensation", to be filed by the Registrant.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------- --------------------------------------------------------------
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 13, 1999, under the caption, "Security Ownership of Management and Principal Stockholders", to be filed by the Registrant.
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 13, 1999, under the caption "Certain Transactions", to be filed by the Registrant.
PART IV -------
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------- ----------------------------------------------------------------
(A) The consolidated balance sheets as of January 2, 1999 and January 3, 1998 and the related consolidated statements of earnings, stockholders' equity, cash flows and financial statement schedule for each of the three years in the period ended January 2, 1999 are filed as part of this report:
(1) Financial Statements Page -------------------- ----
Independent Auditors' Report..............................................F-1 Consolidated Balance Sheets...............................................F-2 Consolidated Statements of Earnings.......................................F-3 Consolidated Statements of Stockholders' Equity...........................F-4 Consolidated Statements of Cash Flows.....................................F-5 Notes to Consolidated Financial Statements................................F-6
(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. (1)
3.5 Amendment to By-Laws, dated March 9, 1998.
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 Employment Agreement between the Registrant and David G. Messinger dated July 29, 1992, as amended. (3)
10.8 Second Supplemental Indenture of Trust between the County of Chautauqua Industrial Development Agency and the Trustee, with the consent of Marine Midland Bank, N.A., Mellon Bank, N.A. and the Registrant dated June 23, 1992. (3)
10.9 Split Dollar Insurance Agreements between the Registrant and Paul Bush dated November 1, 1990 and March 15, 1991 and related Collateral Assignment Agreements of same dates. (3)
10.10 Split Dollar Insurance Agreement between the Registrant and Robert L. Ayres dated December 19, 1991 and related Collateral Assignment Agreement. (3)
10.11 Performance Bonus Plan. (5)
10.12 The Registrant's 1995 Stock Plan. (7)
10.13 Stock Redemption Agreement between the Registrant and Paul S. Bush dated July 10, 1997. (8)
10.14 Credit 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)
10.15 First Amendment, dated as of August 17, 1998, to the Credit and Guarantee Agreement dated as of June 26, 1997. (9)
10.16 Second Amendment, dated as of December 31, 1998, to the Credit and Guarantee Agreement dated as of June 26, 1997. (10)
21.1 List of Subsidiaries of Registrant.
23.1 Consent of Deloitte & Touche LLP, independent public auditors.
- -------------------------------- (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.
(B) Reports on Form 8-K. -------------------- During the first quarter of fiscal year 1999, an 8-K was filed on March 10, 1999 regarding an amendment to the Company's existing credit facility with The Chase Manhattan Bank, Mellon Bank, N.A. 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 18, 1999 By /s/ Paul S. Bush --------------------------- Paul S. Bush, President
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.
SIGNATURE TITLE DATE --------- ----- ----
/s/ Paul S. Bush - ----------------------- Paul S. Bush President, Chief Executive Officer, and Chairman of the Board of Directors March 18, 1999
/s/ Robert L. Ayres - ----------------------- Robert L. Ayres Executive Vice President, Chief Operating Officer, Chief Financial Officer, and Director March 18, 1999
/s/ Lewis H. Aronson - ----------------------- Lewis H. Aronson Senior Vice President of Operations, and Director March 18, 1999
/s/ Douglas S. Bush - ----------------------- Douglas S. Bush Vice President of Merchandising and Director March 18, 1999
/s/ Gregory P. Bush - ----------------------- Gregory P. Bush Vice President of Furniture Research and Development and Advanced Systems Technology and Director March 18, 1999
/s/ Donald F. Hauck - ----------------------- Donald F. Hauck Senior Vice President and Director March 18, 1999
/s/ David G. Messinger - ----------------------- David G. Messinger Senior Vice President of Sales and Marketing and Director March 18, 1999
/s/ Paul A. Benke - ----------------------- Paul A. Benke Director March 18, 1999
/s/ Jerald D. Bidlack - ----------------------- Jerald D. Bidlack Director March 18, 1999
/s/ David G. Dawson - ----------------------- David G. Dawson Director March 18, 1999
/s/ Robert E. Hallagan - ----------------------- Robert E. Hallagan Director March 18, 1999
Schedule II
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 as of January 2, 1999 and January 3, 1998, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended January 2, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14 (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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Bush Industries, Inc. and Subsidiaries as of January 2, 1999 and January 3, 1998, and the results of their operations and their cash flows for each of the three years in the period ended January 2, 1999 in conformity with generally accepted accounting principles. 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.
Deloitte & Touche LLP Buffalo, New York
February 12, 1999
BUSH INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996
BUSH INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996 - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
BUSH INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996
See notes to consolidated financial statements.
BUSH INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996 - -------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements consist of Bush Industries, Inc. and its majority-owned subsidiaries (collectively, the "Company"). All significant intercompany accounts and transactions have been eliminated.
Nature of Operations - The Company operates primarily in one industry segment - the design, manufacture and sale of both RTA (ready to assemble) and set-up furniture for the home and office. The majority of the Company's customer base is electronic and office product superstores and mass merchandisers throughout the United States and furniture stores in Europe.
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. Construction in progress is recorded in property, plant and equipment and amounted to $24,040,000 and $15,703,000 at January 2, 1999 and January 3, 1998, respectively. Interest associated with construction indebtedness is capitalized. Interest amounting to approximately $338,000, $258,000 and $252,000 associated with construction in process was capitalized for 1998, 1997 and 1996, 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 plant and equipment to determine that the carrying values have not been impaired by estimating the future discounted cash flows expected to result from the use of the plant and equipment.
Other Assets - Other assets consist primarily of goodwill, cash value of officer's life insurance policies and certain intangible assets. The Company continually reviews these assets to determine that the carrying values have not been impaired by estimating the future discounted cash flows expected to result from the use of the asset.
Postretirement and Postemployment Benefits - The Company has no material postretirement or postemployment benefits as defined in Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Other Than Pensions," or SFAS No. 112, "Employers' Accounting for Postemployment Benefits."
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 nature of the instruments. The fair value of long-term debt instruments approximates their recorded values due primarily to their recent issuance and interest rates which approximate 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 most net assets located outside the United States are recorded as a component of stockholders' equity.
Stock-Based Compensation - The Company accounts for stock-based compensation in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted in that standard, the Company has elected to continue to follow Accounting Principles Board 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 the years ended January 2, 1999, January 3, 1998 and December 28, 1996.
Income Taxes - Deferred taxes are recorded for temporary differences between the financial statement and tax basis of assets and liabilities using the anticipated tax rate when taxes are expected to be paid or recovered.
Supplemental Cash Flow Information - Cash paid for interest was $5,898,000, $3,824,000 and $2,579,000 and cash paid for income taxes was $5,689,000, $12,814,000 and $10,389,000 in 1998, 1997 and 1996, respectively.
Revenue Recognition - Revenues are recognized when products are shipped.
Financial Statement Year End - The Company's year end is the closest Saturday to December 31. The accounts of two majority 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.
Environmental Compliance - Environmental compliance expenditures that relate to current operations are expensed or capitalized, as appropriate. Expenditures that relate to an existing condition caused by past operations and that do not contribute to current or future revenue generations are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and costs can be reasonably estimated.
Earnings Per Share - The Company reports its earnings per share (EPS) in accordance with SFAS No. 128 which requires a dual presentation of basic and diluted 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.
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles 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 the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," and restated prior years' consolidated financial statements to conform to the new reporting standard. SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income includes all changes in stockholders' equity during a period except those resulting from investments by owners and distributions to owners. The adoption of SFAS No. 130 resulted in revised and additional disclosures but had no effect on the consolidated financial position, results of operations, or cash flows of the Company.
In 1998, the Company also adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" which specifies the presentations and disclosure of operating segment information. SFAS No. 131 requires that segment information of earlier years be restated to conform to the new standard. The adoption of SFAS No. 131 resulted in revised and additional disclosures but had no effect on the consolidated financial position, results of operations, or cash flows of the Company.
In 1998, the Company adopted the provisions of SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits." SFAS No. 132 requires additional disclosures about the Company's defined benefit and defined contribution pension plans but had no effect on the consolidated financial position or results of operations, or cash flows of the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activity," which is required to be adopted by the Company in 2001. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges of underlying transactions must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Management has not yet determined the effect SFAS No. 133 will have, if any, on the Company's consolidated financial position, results of operations or cash flows.
2. INVENTORIES
Inventories consist of (in thousands):
3. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consist of (in thousands):
4. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of (in thousands):
5. LONG-TERM DEBT
Long-term debt consists of:
The Company finances operations through a $175 million revolving credit facility with a consortium of banks. The revolving credit facility is available through June 30, 2003. Interest is payable on the average daily balance of loans outstanding on a NYBOR based rate (7.875% at January 2, 1999) or a FIBOR based rate (4.4375% at January 2, 1999) option. As part of this revolving line, the Company may also issue letters of credit, not to exceed $20 million, which issuance will be deemed part of the $175 million maximum amount of borrowing permitted. As of January 2, 1999, letters of credit amounting to $4,655,250 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. The Company is in compliance with all these covenants as of January 2, 1999. In addition, the revolving credit facility provides for certain limitations of the amount of cash dividends that the Company can declare. The Company classifies this facility as long-term because there are no contractual requirements for repayment of principal until the year 2003.
The Industrial Development Revenue Bonds are supported by a $681,250 letter of credit (which is included in the total letters of credit outstanding of $4,655,250 as discussed above) expiring in February 1999. The bonds are further collateralized by land, building and certain equipment acquired with the proceeds.
A five-year summary of aggregate principal payments on outstanding long-term debt is (in thousands):
6. COMMITMENTS AND CONTINGENCIES
The Company has incurred rental expense for manufacturing and warehouse space and equipment. A summary of rent expense follows (in thousands):
Minimum future obligations over the next five years under all operating leases are summarized as follows (in thousands):
The Company is a party to various legal actions arising in the normal course of business. The Company does not believe that any such pending activities should have a material adverse effect on its financial statements.
7. INCOME TAXES
The provision (benefit) for income taxes is as follows (in thousands):
The tax effects of the principal temporary differences resulting in deferred taxes are as follows (in thousands):
The types and tax effects of temporary differences included in deferred tax assets and liabilities are as follows (in thousands):
1998 1997
Reported as (in thousands): Current asset (included in prepaid expenses and other current assets) $ 4,389 $ 6,607 Long-term liability (5,998) (8,976) ------- -------- Net deferred tax liability $(1,609) $ (2,369) ======= ========
The Company has recorded a valuation allowance primarily in anticipation that certain state investment tax credits will expire prior to their usage.
The provision for income taxes differs in each of the years from the federal statutory rate due to the following:
1998 1997 1996
Statutory rate 35.0 % 35.0 % 35.0 % State taxes 1.8 1.6 1.8 Effect of non-deductible costs 1.1 0.7 0.4 Effect of foreign tax rates 1.3 0.0 0.0 Other, net (1.7) (0.5) (0.2) ----- ----- -----
Effective tax rate 37.5 % 36.8 % 37.0 % ===== ===== =====
The Company realized tax benefits amounting to $1,011,000, $1,563,000 and $772,000 as the result of stock option transactions during 1998, 1997, and 1996, 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.
On July 10, 1997, the Company entered into 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.
On May 21, 1996, the Board of Directors declared a 3-for-2 stock split payable in the form of a dividend to all holders of Class A and Class B Common Stock of record on June 14, 1996, paid on June 28, 1996.
9. STOCK OPTION PLANS
The Company currently has one open stock option plan with 375,000 shares of Class A Common Stock available for issuance subsequent to the 3-for-2 stock split effective June 28, 1996. As of January 2, 1999, there were 241,500 shares available for issuance under the plan. Incentive Stock Options granted under the 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 the plan shall be determined by the Compensation Committee of the Board of Directors, in its sole discretion. No option can be exercised within one year after the date of grant.
As of January 2, 1999, there were options to purchase 1,049,748 shares of Class A Common Stock under the current and prior plans at prices ranging from $1.69 to $28.02 that could be exercised, as adjusted for stock splits effectuated in the form of stock dividends. Of these outstanding options, 1,019,804 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 1999 through 2008. The option price of the shares subject to options exercised in 1998 was $8.91. The weighted-average exercise prices of options were $8.91, $8.95 and $8.49 for fiscal years 1998, 1997 and 1996, respectively. The weighted- average grant-date fair value of options granted were $25.14, $23.12 and $14.97 for fiscal years 1998, 1997 and 1996, respectively.
In addition to the options granted under the aforementioned plans, the Company has outstanding 48,376 shares subject to non-qualifying options granted to certain key individuals which can be exercised through 2003 at an exercise price of $8.91, as adjusted for stock splits effectuated in the form of stock dividends.
Pro forma information regarding net income and earnings per common 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 were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the years ended January 2, 1999, January 3, 1998 and December 28, 1996, respectively: risk free interest rate of 4.8%, 5.5% and 6.3%; dividend yield of .90%, .60% and .75%; volatility factors of the expected market price of the Company's common stock of 39%, 30% and 45%; and a weighed-average expected life of 7 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 pro forma net earnings, basic and diluted earnings per common share for the years ended January 2, 1999, January 3, 1998 and December 28, 1996 were $11,126,000, $.80 and $.75; $22,092,000, $1.64 and $1.52: and $18,482,000, $1.42 and $1.31, respectively.
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 balance sheets (in thousands):
Amounts recognized in the balance sheets consist of:
There were no plan assets at January 2, 1999 and January 3, 1998. Valuations of the pension plan as shown above were conducted as of October 31, 1998 and 1997. The plan is funded to the extent of benefits paid.
Weighted average assumptions for the years ended:
Components of net periodic benefit cost consisted of the following:
The Company also sponsors defined contribution plans which cover substantially all of the Company's eligible U.S. employees. The plans provide for both direct employer contributions and a salary reduction feature under Section 40l(k). Employer contributions can be paid in cash or in shares of Class A Common Stock at the discretion of the Board of Directors. Net pension cost related to the plans were $1,315,000, $1,259,000 and $877,000 for the years ended January 2, 1999, January 3, 1998 and December 28, 1996, respectively.
11. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates and manages it business in one reportable industry segment - the design, manufacture and sale of both RTA (ready to assemble) and set-up furniture for the home and office. The Company's geographic operations outside of the United States principally include Germany. The Company's products are sold throughout the world. There were no significant segment operations by geographic area prior to 1997. Net sales by geographic area are presented by attributing net sales to external customers based on the domicile of the selling location. This data (in thousands) is presented in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which the Company has retroactively adopted for all periods presented.
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 January 2, 1999. The Company has one United States customer that accounted for total gross sales of approximately 15% in 1998, 16% in 1997 and 15% in 1996, and approximately 11% and 15% of accounts receivable at January 2, 1999 and January 3, 1998, respectively. The Company has a second United States customer that accounted for total gross sales of approximately 11% in 1998, 9% in 1997 and 12% in 1996, and approximately 14% and 4% of accounts receivable at January 2, 1999 and January 3, 1998, respectively.
12. ACQUISITIONS
On April 22, 1998, the Company acquired all of the issued and outstanding shares of Fournier Furniture, Inc. ("Fournier"), a Virginia based manufacturer of RTA furniture, for a purchase price of $7.0 million in cash. Substantially all of Fournier's debt that existed on April 22, 1998 was repaid utilizing the Company's existing credit facility. The acquisition of Fournier has been recorded under the purchase method of accounting and accordingly, the results of operations of Fournier have been included in the consolidated financial statements from the date of acquisition. The excess of purchase price over fair value of the net tangible assets acquired resulted in an allocation of goodwill of approximately $11.9 million which is being amortized over 15 years.
Unaudited, pro forma consolidated net sales, net income and basic earnings per share assuming the acquisition had taken place at the beginning of 1997 was $426.7 million, $11.4 million and 83c per share for fiscal 1998, and $361.9 million, $17.8 million and $1.33 per share for fiscal 1997. Such pro forma results are not necessarily indicative of what the actual consolidated results of operations might have been if the acquisition had been effective at the beginning of fiscal 1997.
On June 30, 1997, the Company acquired a 51% interest in Rohr Gruppe (Rohr), a German furniture manufacturer by issuing 123,075 shares of Class A Common Stock (approximate market value on June 30, 1997 of $3,000,000). The transaction had been recorded under the purchase method of accounting and accordingly, the results of operations are included in the accompanying consolidated financial statements from the date of acquisition. The purchase price has been allocated to the assets acquired and liabilities assumed based on fair market value at the date of acquisition. The excess of purchase price over fair value of the net tangible assets acquired resulted in an allocation to goodwill of approximately $2.5 million which is being amortized over 15 years. All of the Company shares issued in connection with this transaction are being held in escrow for three years to secure any indemnification claims under the Purchase Agreement.
During 1996, the Company acquired all of the outstanding stock of The ColorWorks, Inc. for 338,067 shares of the Company's Class A Common Stock, approximately $231,000 in equipment and other assets and approximately $827,000 in cash. The acquisition was recorded under the purchase method of accounting and accordingly, The ColorWorks, Inc. financial statements are included in the accompanying consolidated financial statements from the date of acquisition. The majority of the purchase price has been assigned to goodwill, which is being amortized over 15 years.
13. QUARTERLY SALES AND EARNINGS DATA - UNAUDITED
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Schedule II
S-1