FBI WIND DOWN, INC. 10-K 2005
Documents found in this filing:
SECURITIES AND EXCHANGE
Furniture Brands International, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No_____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K (X) Yes X No_____
by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2004, was approximately $1,363,217,700.
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
56,482,541 shares as of February 28, 2005
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Definitive Proxy
Statement for Annual Meeting
Item 1. Business
(a) General Development of Business
On February 10, 2004, the Company announced the election of John T. (Tom) Foy as President and Chief Operating Officer of the Company.
On February 13, 2004, the Company announced the appointment of Randall C. (Randy) Spak as President and Chief Executive Officer of Lane Furniture Industries, Inc., a subsidiary of the Company.
On June 24, 2004, the Company announced that, effective immediately, the Pearson Company operations will report through Henredon Furniture Industries, Inc. rather than through Thomasville Furniture Industries, Inc.
On September 3, 2004, the Company announced, effective October 30, 2004, the appointment of Stephen K. McKee as Chief Executive Officer of Henredon Furniture Industries, Inc., a subsidiary of the Company.
On January 28, 2005, the Company announced, effective February 7, 2005, the appointment of Denise L. Ramos as Senior Vice President, Treasurer and Chief Financial Officer of the Company.
(c) Narrative Description of Business
The Company, one of the largest manufacturers of residential furniture in the United States, markets its products through its four operating subsidiaries: Broyhill Furniture Industries, Inc.; Lane Furniture Industries, Inc.; Thomasville Furniture Industries, Inc., and HDM Furniture Industries, Inc.
The Company manufactures and distributes (i) case goods, consisting of bedroom, dining room and living room furniture, (ii) stationary upholstery products, consisting of sofas, loveseats, sectionals and chairs, (iii) occasional furniture, consisting of wood, metal and glass tables, accent pieces, home entertainment centers and home office furniture, (iv) recliners, motion furniture and sleep sofas, and (v) accessories. The Company's brand name positioning by price and product category is shown below.
BROYHILL FURNITURE INDUSTRIES
Broyhill produces collections of medium-priced bedroom, dining room and living room furniture aimed at middle-income consumers. Broyhill's wood furniture offerings consist of bedroom, dining room and living room furniture, occasional tables, accent items, free-standing home entertainment centers and home office furniture. Upholstered products include sofas, sleep sofas, loveseats, sectionals, chairs, and fully reclining furniture all offered in a variety of fabrics and leathers. Broyhill's residential furniture divisions produce a wide range of furnishings in country, traditional, European, contemporary and lifestyle designs.
The widely recognized Broyhill trademarks include Broyhill and Broyhill Indulgence. The flagship Broyhill product line concentrates on living room, bedroom, dining room, upholstered and occasional furniture designed for the "good" and "better" price categories. The Broyhill Indulgence product line enjoys an excellent reputation for highly styled, case goods and upholstery collections in the "best" price category.
LANE FURNITURE INDUSTRIES
Lane manufactures and markets a broad range of high quality furniture targeting the "good" and "better" price categories. Lane targets niche markets with its three operating divisions, which participate in such segments of the residential furniture market as reclining chairs and motion furniture, cedar chests and wicker and rattan.
Lane's upholstery division manufactures and markets reclining chairs and motion furniture in the "good" and "better" price categories under the Lane brand name. Motion furniture consists of sofas and loveseats with recliner-style moving parts and comfort features. Other upholstered furniture consists of wall saver recliners, pad-over chaise recliners, hi-leg recliners, sleep sofas and motion sectionals. Royal Development Company, a division of Lane, designs and manufactures the mechanisms used in Lane's reclining furniture products. The Lane Leather collection represents an important source of growth for Lane's upholstery division, as leather is the fastest-growing category in upholstered furniture. The collection, priced in the "better" category comes in
three styles - American ranch, American traditional and urban contemporary. Lane has also recently introduced a stationary line of upholstered furniture which is enjoying good success.
Lane's wood furniture division markets cedar chests, living room, bedroom and dining room furniture, wall systems, desks, console tables and mirrors and other occasional wood pieces. Sold under the Lane brand name, the case goods collections and individual products are sold in the "good" and "better" price categories.
Laneventure manufactures and markets wicker, rattan, bamboo, exposed aluminum and teak furniture, tables, occasional wood pieces and two lines of upholstered furniture under the Laneventure brand name. One line is comprised of contemporary and modern upholstered furniture and metal and glass occasional and dining room tables, and the other is comprised of traditional and contemporary upholstered furniture, primarily sofas, loveseats, chairs and ottomans. Laneventure also manufactures outdoor and patio furniture featuring fast drying upholstered cushions under the sub-brand name WeatherMaster, which has developed significant consumer acceptance.
THOMASVILLE FURNITURE INDUSTRIES
Thomasville manufactures and markets wood furniture, upholstered products and promotional/RTA furniture. Thomasville markets its products primarily under the Thomasville brand name, and has several other divisions which market products under separate brands. Thomasville offers an assortment of upholstery and wood furniture under one brand name that targets the "best" price category. Upholstery is primarily marketed in three major styles: traditional, American traditional/country and casual/lifestyle contemporary. Upholstery style is determined by both frame style and fabric or leather selection. Thomasville's frame assortment allows the consumer to select from a wide variety of different styles within the general style categories, and as much as 45% of the Thomasville fabric and leather offering changes in a 12 month period, insuring that the latest colors and textures are available. Wood furniture is primarily marketed in four major styles: American traditional/country, 18th century, European traditional and casual contemporary.
HBF manufactures and sells a line of office furniture, including chairs, tables, conference tables, desks and credenzas, in the upper-middle price range.
Founders offers assembled bedroom sets, bookcases and home entertainment centers under the Founders and Vignettes brand names to a variety of retailers for sale to consumer end-users and certain contract customers. Creative Interiors markets RTA (ready-to-assemble) furniture such as home entertainment centers, bookcases, bedroom and kitchen/utility furniture and computer desks under the Creative Interiors brand name.
HDM FURNITURE INDUSTRIES
HDM Furniture Industries has three operating subsidiaries: Henredon Furniture Industries, Inc., Drexel Heritage Furniture Industries, Inc. and Maitland-Smith Furniture Industries, Inc.
Henredon manufactures and markets living room, bedroom, dining room, occasional and upholstered furniture in the premium price category. Henredon markets its furniture in 14 collections and is the furniture licensee for the Ralph Lauren Home Collection and Historic Natchez. Henredon is an industry style and fashion leader and provides the consumer with unique and distinct products ranging from contemporary to traditional. An agreement was signed in 2003 to launch the Barbara Barry brand in 2005.
Hickory Chair, an operating division of Henredon, manufactures and markets traditional styles of upholstered furniture, dining room and bedroom collections and occasional tables in the "premium" price categories. The Hickory Chair division has been crafting fine reproductions of 18th century furniture for over 80 years. For example, Hickory Chair offers the James River collection which features reproductions of fine furnishings from Virginia plantations, and the Mount Vernon collection, which features reproductions from George Washington's home. In October 2000, Hickory Chair introduced its Thomas O'Brien collection, which includes upholstery, chairs, tables, beds and cabinetry in O'Brien's acclaimed "warm modernist" style.
Pearson, an operating division of Henredon, has been manufacturing and selling contemporary and traditional styles of finely tailored upholstered furniture including sofas, loveseats, chairs and ottomans for over 50 years. Pearson furniture sells in the "premium" price category and is distributed to high-end furniture stores and interior designers.
Drexel Heritage launched its new tri-branding strategy in 2002, marketing case goods and upholstered furniture under three distinct brands: Heritage, Drexel and dh. The price categories range from "mid to upper premium," targeting female consumers from 27-year-olds to 50-plus, with beautifully made and designed products. Furniture styles range from French and European traditional to contemporary and transitional. Drexel Heritage also manufactures and markets a line of sophisticated and elegant upholstery and case goods under the Lillian August brand and produces furniture for the hospitality and government markets. Drexel Heritage currently produces approximately 25 collections with four to six new collections offered each year.
Maitland-Smith is a leading designer and manufacturer of "premium" hand crafted, antique-inspired furniture, accessories and lighting, utilizing a wide range of unique materials, including distinctive leather, fancy faced veneer, stone and hand-painted metal. Maitland-Smith markets under the Maitland-Smith and LaBarge brand names. The Maitland-Smith brand is inspired by designs from the master craftsmen of 17th, 18th and 19th century England. The LaBarge brand name emphasizes Continental European design in mirrors and occasional furniture.
The Companys strategy of targeting diverse distribution channels such as furniture centers, independent dealers, national and local chain stores, department stores, specialty stores and decorator showrooms is supported by dedicated sales forces covering each of these distribution channels. The Company continues to explore opportunities to expand international sales and to distribute through non-traditional channels such as wholesale clubs and catalog retailers.
The Companys breadth of product and national scope of distribution enable it to effectively service national retailers such as J.C. Penney and key regional retailers such as Havertys, Raymour & Flanigan, Bloomingdales, Marshall Fields, Dillards, Baers and Kittles. The consolidation of the retail residential furniture industry has made access to distribution channels an important competitive advantage for manufacturers. The Company has developed dedicated distribution channels by expanding its gallery programs and the network of independent dealer-owned dedicated retail locations, such as Thomasville Home Furnishings Stores, Drexel Heritage Home Inspiration Stores, Lane Home Furnishing Stores, and Broyhill Home Collections Stores. The Company primarily distributes its products through a diverse network of independently owned retail locations, which includes 229 freestanding stores, 1,088 galleries and 768 furniture centers.
Broyhill, Lane, Thomasville and Drexel Heritage have all developed gallery programs with dedicated dealers displaying furniture in complete room ensembles. These retailers employ a consistent showcase gallery concept wherein products are displayed in complete and fully accessorized room settings instead of as individual pieces. This presentation format encourages consumers to purchase an entire room of furniture instead of individual pieces from different manufacturers. Each operating company offers substantial services to retailers to support their marketing efforts, including coordinated national advertising, merchandising and display programs and extensive dealer training.
Thomasville Home Furnishings Stores, Drexel Heritage Home Inspiration Stores, Lane Home Furnishings Stores and Broyhill Home Collections Stores are primarily dealer-owned, free-standing retail locations that exclusively feature Thomasville, Drexel Heritage, Lane and Broyhill furniture, respectively. The Company believes distributing its products through dedicated, single-branded stores strengthens brand awareness, provides well-informed and focused sales personnel and encourages the purchase of multiple items per visit.
Showrooms for the national furniture market are located in Thomasville and High Point, North Carolina and for regional markets in Atlanta, Georgia; Chicago, Illinois; San Francisco, California; and Tupelo, Mississippi.
BROYHILL FURNITURE INDUSTRIES
Broyhill distribution is focused on major national or regional chains and dedicated distribution - free-standing Broyhill Home Collections Stores, Broyhill Furniture Showplaces and Broyhill Showcase Galleries. Each dealer in the Broyhill Showcase Gallery, Broyhill Furniture Showplace and Broyhill Home Collections Store programs owns the Gallery, Showplace or Home Collections Store and the Broyhill furniture inventory.
The Broyhill Showcase Gallery program began in 1983 and now involves 255 domestic and international participating dealer locations. A Broyhill Showcase Gallery consists of a minimum of 7,500 square feet of Broyhill furniture displayed in complete and fully accessorized room settings. Introduced in 2001 as a higher level of dedicated distribution, the Broyhill Furniture Showplace program now numbers 72 locations owned and operated by retail dealers who commit a minimum of 10,000 square feet of display space to Broyhill products. In 2003, Broyhill introduced the Broyhill Home Collections freestanding store concept for retail dealers who, as of January 2, 2005, commit a minimum of 15,000 square feet of display space to Broyhill products in a single-branded environment. In 2004, Broyhill opened eight Broyhill Home Collections Stores bringing the total to 9 of which one is Company-owned. Comprehensive merchandising, design, marketing and advertising support programs are provided for all three dedicated distribution programs.
For the retailer that is currently not a participant in the Showcase Gallery, Furniture Showplace or Home Collections Store programs, Broyhill offers the Broyhill Furniture Center Program. This concept, initiated in 1987, is designed to strengthen Broyhill's relationship with these retailers by assisting them in overcoming some of the significant difficulties in running an independent furniture business. The 768 participating retailers in the Broyhill Furniture Center Program commit to a minimum of at least 2,500 square feet devoted exclusively to Broyhill products arranged in gallery-type room settings. This program includes additional marketing, design and advertising assistance. The Company seeks to develop these Furniture Center relationships so that some of these retailers may become participants in the Broyhill Showcase Gallery, Broyhill Furniture Showplace or Broyhill Home Collections Store programs.
LANE FURNITURE INDUSTRIES
Lane distributes its products nationally and internationally through a well-established network of approximately 9,000 retail locations. A diverse distribution network is utilized in keeping with Lane's strategy of supplying customers with highly specialized products in selected niche markets. This distribution network primarily consists of independent furniture stores, regional chains such as Havertys and Art Van, and department store companies such as J.C. Penney, May Department Stores, Federated Department Stores and Dillard's Department Stores.
Lane has established specialty gallery programs with 501 participating dealers. This includes 396 dealer-owned Comfort Showcase Galleries and 91 Comfort Furnishings Galleries established by Lane's Upholstery division. These galleries average approximately 3,000 square feet of retail space specifically dedicated to the display, promotion and sale of Lane upholstery and wood products. Lane is developing its own single-branded stores program through independent retailers to complement but not compete with their existing distribution networks. Lane currently has 14 such stores, two of which are company-owned.
THOMASVILLE FURNITURE INDUSTRIES
Thomasville products are offered at 431 retail locations, including 144 Thomasville Galleries, 157 Thomasville Home Furnishings Stores of which five are Company-owned and 130 authorized dealers. The Thomasville Gallery concept was initiated in 1983. Thomasville Galleries have an average 7,500 square feet of retail space specifically dedicated to the display, promotion and sale of Thomasville products. The first Thomasville Home Furnishings Store opened in 1988. The typical Thomasville Home Furnishings Store is a 13,000 square foot, independently-owned store offering a broad range of Thomasville products, presented in a home-like setting by specially trained salespersons.
The Founders division sells promotional furniture to a variety of retailers for sale to consumer end-users and certain contract customers. Promotional furniture is sold to retail chains such as Badcock, Value City, as well as independent furniture stores. Promotional furniture is also sold in the hospitality and health care markets of Thomasville's contract business. The Creative Interiors division sells RTA furniture to customers which include national chains such as Target and Wal-Mart, catalog showrooms, discount mass merchandisers, warehouse clubs and home furnishings retailers.
HDM FURNITURE INDUSTRIES
Henredon distributes its products through a network of approximately 450 fine furniture dealers, department stores and wholesale showrooms in this country and abroad. The Ralph Lauren Home Collection is also distributed through Polo Ralph Lauren retail stores. The typical Henredon display is 3,000 to 8,000 square feet. Henredon dealers include Louis Shanks of Texas, Gabberts, Kittles, Boyles, Robb & Stucky, Treasures, Marshall Fields, Richs, Lazarus, Macys West and Dillards. Hickory Chair distributes through premium-quality dealers including 30 gallery locations as well as through Henredons Interior Design showrooms. Henredon opened its first free standing, independently-owned store in 2003 and plans to expand this channel of distribution over the next 3 years. Henredon also opened two new wholesale showrooms during 2003 in New York and Chicago and now operates 8 wholesale to the trade showrooms. Pearson distributes its products primarily through premium-quality dealers and the interior design trade.
Drexel Heritage products are offered at 608 independently-owned retail locations, including 68 Drexel Heritage galleries, 46 dedicated Drexel Heritage Home Inspiration stores, one of which is Company-owned and 494 authorized dealers. Drexel Heritage galleries have an average of 6,500 square feet of dedicated space. The typical Drexel Heritage Home Inspiration store is a 14,000 square foot independently-owned store offering a broad range of Drexel Heritage products, presented in a home-like setting by a salesperson or design consultant.
Maitland-Smith distributes its products nationally and internationally through a well-established network of high-end retail furniture stores, designer showrooms, antique dealers and specialty gift stores. The dealers are selected to preserve and enhance the prestige and reputation of the Maitland-Smith brand names.
MARKETING AND ADVERTISING
Advertising is used to increase consumer awareness of the Company's brand names and is targeted to specific consumer segments through national and regional television as well as leading shelter and other popular magazines such as Better Homes and Gardens, Good Housekeeping and Architectural Digest. Each operating company uses focused advertising in major markets to create buying urgency around specific sale events and to provide dealer location information, enabling retailers to be listed jointly in advertisements for maximum advertising efficiency and shared costs. Each operating company seeks to increase consumer buying and strengthen relationships with retailers through cooperative advertising and selective promotional programs, and focuses its marketing efforts on prime potential customers utilizing information from databases and from callers to each operating company's toll-free telephone number. Extensive use of Internet web-based technology for customer and consumer awareness and service is also used by each operating company.
BROYHILL FURNITURE INDUSTRIES
Broyhill's advertising programs focus on translating its strong consumer awareness into increased sales. Broyhill's current marketing strategy features a national print advertising program and traditional promotional programs such as dealer-based promotions including product mailings, local television, newspaper and brochures. The national print advertising program, which consists of multi-page layouts, is designed to appeal to the consumer's desire for decorating assistance and increased confidence in making the decision to purchase a big ticket product such as furniture. These advertisements are run in publications such as Good Housekeeping and Better Homes and Gardens which appeal to Broyhill's consumer base. An extensive public relations campaign also exposes Broyhill products in leading magazine and newspaper editorial features.
LANE FURNITURE INDUSTRIES
Lane's marketing approach reflects the diversity of its various divisions and product lines. Lane employs an integrated marketing/advertising strategy in which it coordinates magazine, newspaper, circular and television advertising with other marketing programs to promote a single product. Each of the Lane divisions advertises extensively in trade and consumer publications targeting various niche markets.
THOMASVILLE FURNITURE INDUSTRIES
Thomasvilles current advertising appears on national network and cable television during peak promotional periods. The campaign emphasizes Thomasvilles fashion and quality leadership through the use of dramatic commercials featuring individual, high quality wood and upholstery pieces. National cable networks include A&E, Lifetime, HGTV, Food, The Travel Channel and TLC.
To help retailers sell its product through to consumers, Thomasville offers a full twelve-month schedule of promotional support which includes promotional concepts, selected product discounts, cooperative advertising funds, and a complete advertising package with color newspaper layouts plus radio and television commercials dealers can use as supplied. Thomasville runs national sales events to coincide with major industry sale periods. These events include national print ads or Thomasville-designed newspaper inserts for dealer use.
Thomasville's other divisions (Founders and Creative Interiors) use or participate in various advertising publications throughout the year.
HDM FURNITURE INDUSTRIES
Henredons national advertising is focused in magazines such as Architectural Digest and House & Garden. Henredon produces full color catalogs in support of each collection and maintains a web site which provides the consumer the opportunity to view all current collections, order catalogs and locate dealers in their local trading areas.
Drexel Heritage offers a fully integrated marketing program that includes national brand advertising and a full calendar of promotional events. These events include themed promotional concepts, selected product discounts, cooperative advertising support and a complete advertising marketing portfolio. This portfolio includes national branded television commercials, dealer television commercials, consumer sales circulars, direct mail postcards, newspaper advertisements, radio commercials, in-store events and a complete in-store point of sale package.
Maitland-Smith has chosen to do little advertising over the years. This approach has created an aura of mystique around the brand that adds to its charm and has worked well within its dealer base. Promotional activities with dealers are designed to preserve and enhance Maitland-Smith's brand name in the home furnishings industry.
Broyhill operates 13 finished case goods and upholstery production and warehouse facilities totaling approximately 4.6 million square feet. All finished good plants are located in North Carolina. Broyhill pioneered the use of mass production techniques in the furniture industry and by utilizing longer production runs achieves economies of scale.
Lane operates 8 upholstery production and warehouse facilities in Mississippi and North Carolina totaling over 3.7 million square feet. Significant capital expenditures have been made to acquire technologically advanced manufacturing equipment, which has increased factory productivity as well as capacity.
Thomasville manufactures or assembles its products at 12 finished case goods and upholstery production and warehouse facilities located in North Carolina and Virginia, totaling approximately 4.4 million square feet.
Each plant is specialized, manufacturing premium furniture products allowing more efficient production runs while maintaining high quality standards.
The manufacturing process for Thomasville's Founders and Creative Interiors divisions are highly automated. Large fiberboard and particleboard sheets are machine-finished in long production runs, then stored using highly automated assembly lines. Completed goods are either assembled (Founders) or flat packed (Creative Interiors) and stored in an automated warehouse to provide quicker delivery to customers. Ninety percent of Creative Interiors products are shipped within 14 days of production.
Henredon manufactures in 6 case goods and upholstery production and warehouse facilities encompassing approximately 2.2 million square feet all located in North Carolina. Henredon is a leader in cellular manufacturing which allows for the efficient production of relatively small production runs.
Drexel Heritage operates 4 case goods and upholstery production and warehouse facilities that total approximately 1.3 million square feet. All facilities are located in western North Carolina except for an upholstery plant located in High Point, North Carolina. Each facility is specialized to manufacture premium quality furniture in a cellularized manufacturing environment.
Maitland-Smith and LaBarge products are manufactured at facilities in the Philippines and Indonesia and by selected sub-contractors located throughout Asia, Italy and Mexico. Each production facility utilizes specialized craftsmen to produce premium home furnishings products.
RAW MATERIALS AND SUPPLIERS
The raw materials used by the Company in manufacturing its products include lumber, veneers, plywood, fiberboard, particleboard, steel, paper, hardware, adhesives, finishing materials, glass, mirrored glass, fabrics, leathers, metals, stone, synthetics and upholstered filling material (such as synthetic fibers, foam padding and polyurethane cushioning). The various types of wood used in the Company's products include cherry, oak, maple, pine, pecan, mahogany, alder, ash, poplar, and teak which are purchased both domestically and abroad. Fabrics, leathers and other raw materials are purchased both domestically and abroad. Management believes that its supply sources for these materials are adequate.
The Company has an agreement with Furniture Brands Import Services Organization (formerly Outlook International, Ltd.) which is the exclusive representative for the Company for the manufacture of products in the Far East. Furniture Brands Import Services, an independently owned company, provides sourcing assistance, product quality control and other import-related services to the Company.
The Company has strategic alliances with several foreign manufacturers whereby the operating companies have the ability to purchase, on a coordinated basis, a significant portion of the foreign manufacturers' capacity, subject to quality control and delivery standards. While an alliance represents a significant portion of the foreign manufacturers' operations, no one foreign manufacturer represents a material portion of the Company's consolidated import requirements.
The Company has no long-term supply contracts and has experienced no significant problems in supplying its operations. Although the Company has strategically selected suppliers of raw materials, the Company believes that there are a number of other sources available, contributing to its ability to obtain competitive pricing for raw materials. Raw materials prices fluctuate over time depending upon factors such as supply, demand and weather. Increases in prices may have a short-term impact on the Company's profit margins for its products.
The majority of raw materials for promotional and RTA products are purchased domestically, although paper and certain hardware is purchased abroad. The Company believes, however, that its proximity to and relationship with suppliers are advantageous for the sourcing of such materials. In addition, by combining the purchase of various raw materials (such as foam, cartons, springs and fabric) and services, the operating companies have been able to realize cost savings.
The Company is subject to a wide-range of federal, state and local laws and regulations relating to protection of the environment, worker health and safety and the emission, discharge, storage, treatment and disposal of hazardous materials. These laws include the Clean Air Act of 1970, as amended, the Resource Conservation and Recovery Act, the Federal Water Pollution Control Act and the Comprehensive Environmental, Response, Compensation and Liability Act ("Superfund"). Certain of the Company's operations use glues and coating materials that contain chemicals that are considered hazardous under various environmental laws. Accordingly, the Company closely monitors environmental performance at all of its facilities. The Company believes it is in substantial compliance with all environmental laws. While the Company may be required to make capital investments from time to time at some of its facilities to ensure compliance, the Company believes it will continue to meet all applicable requirements in a timely fashion and that the cost required to meet these requirements will not materially affect its financial condition or its results of operations.
The Company has been identified as a potentially responsible party ("PRP") at a number of superfund sites. The Company believes that its liability with respect to most of the sites is de minimis, and the Company is entitled to indemnification by others with respect to liability at certain sites. The Company believes that any liability as a PRP with regard to the superfund sites will not have a material adverse effect on its financial condition or results of operations.
The residential furniture manufacturing industry is highly competitive. The Company's products compete with products made by a number of furniture manufacturers, including La-Z-Boy Incorporated, Ethan Allen Interiors Inc. and Ashley Furniture Industries, Inc., as well as approximately 600 smaller producers. The elements of competition include pricing, styling, quality and marketing.
As of December 31, 2004, the Company employed approximately 17,800 full-time employees. None of the Company's employees is represented by a union.
The combined backlog of the Company's operating companies as of December 31, 2004 was approximately $275 million compared to approximately $312 million as of December 31, 2003.
The Company's operating results are subject to quarterly and annual fluctuations as a result of a number of factors. Such factors include:
An economic downturn could result in a decrease in the Company's sales and earnings.
The residential furniture industry has historically been subject to cyclical variations in the general economy and to uncertainty regarding future economic prospects. Economic downturns could affect consumer spending habits by decreasing the overall demand for home furnishings. Such events would also impact retailers, the Company's primary customers, resulting in a decrease in sales and earnings.
Loss of market share due to competition would result in a decrease in future sales and earnings.
The residential furniture manufacturing business is highly competitive and fragmented. The Company competes with many other manufacturers some of which offer widely advertised, well known, branded products. The highly competitive nature of the industry means the Company is constantly subject to the risk of losing market share to those privately held competitors who have lower sales and profitability targets. As a result, the
Company may not be able to maintain or to raise the prices of its products in response to such inflationary pressures as increasing costs. Also due to the large number of competitors and their wide range of product offerings, the Company may not be able to differentiate its products (through styling, finish and other construction techniques) from those of its competitors.
Failure to anticipate or respond to changes in consumer tastes and fashion trends in a timely manner could result in a decrease in future sales and earnings.
Residential furniture is a highly styled product subject to fashion trends and geographic consumer tastes. Consumer tastes and fashion trends can change rapidly. If the Company is unable to anticipate or respond to changes in consumer tastes and fashion trends in a timely manner it may lose sales and be faced with excess inventory (both raw materials and finished goods). Disposal of excess inventory may result in a decrease in sales and earnings.
Failure to achieve the Company's projected mix of product sales could result in a decrease in its future sales and earnings.
Some of the Company's products are sold for a higher profit than other of its products. An increase in the sales of lower profit products at the expense of the sales of higher profit products could result in a decrease in earnings.
Business failures of large customers could result in a decrease in the Company's future sales and earnings.
Although the Company has no customers who individually represent 10% or more of its total annual sales, the possibility of business failures of large customers could result in a decrease in its future sales and earnings in that these sales are difficult to replace. For example, in 2004 the bankruptcy filing of Breuner's resulted in a charge to earnings of 9 cents per diluted share.
Distribution realignments and cost savings programs can result in a decrease in the Company's near-term sales and earnings.
At times it is necessary for the Company to discontinue certain relationships with customers (retailers) who do not meet its growth and profitability standards. Until realignment is established, there can be a decrease in near-term sales and earnings. The Company continually reviews relationships with its customers (retailers) and future realignments are possible based upon such ongoing reviews.
Manufacturing realignments could result in a decrease in the Company's near-term earnings.
The Company continually reviews its domestic manufacturing operations and offshore (import) sourcing capabilities. Effects of periodic manufacturing realignments and cost savings programs could result in a decrease in near-term earnings until the expected cost reductions are achieved. Such programs can include the consolidation and integration of facilities, functions, systems and procedures. Certain products may also be shifted from domestic manufacturing to offshore sourcing. Such actions may not be accomplished as quickly as anticipated and the expected cost reductions may not be achieved in full.
Increased reliance on offshore (import) sourcing of various products could adversely affect the Company's ability to service customers which could result in a decrease in sales.
During the last several years, the Company has been increasing its offshore (import) capabilities to provide flexibility in product programs and pricing to meet competitive pressures. The mix of various product lines has been moving from domestically manufactured to offshore sourced. Offshore (import) sourcing is subject to political instability in countries where contractors and suppliers are located and possible delay due to managing at a distance. Either could make it more difficult for the Company to service its customers. Other risks include the imposition of regulations and quotas relating to imports; duties, taxes and other charges on imports; and,
significant fluctuation of the value of the U.S. dollar against foreign currencies, all of which could increase costs and decrease earnings.
Fluctuations in the price, availability and quality of raw materials could cause delay which could result in a decrease in the Company's sales and increase costs which would result in a decrease in earnings.
Fluctuations in the price, availability and quality of the raw materials that the Company uses in manufacturing residential furniture could have a negative effect on its cost of sales and ability to meet the demands of customers (retailers). Inability to meet the demands of customers could result in the loss of future sales. The Company uses various types of wood, fabrics, leathers, glass, upholstered filling material, steel, and other raw materials in manufacturing furniture. The costs to manufacture furniture depend in part on the market prices of the raw materials used to produce the furniture. The Company may not be able to pass along to its customers all or a portion of the costs of higher raw materials due to competitive and marketing pressures. For example, in 2004 the price of steel increased by 88%.
A successful product liability claim brought against the Company in excess of available insurance coverage would result in a decrease in earnings and any claim or product recall that results in significant adverse publicity against the Company may result in a decrease in sales and earnings.
The Company faces the business risk of exposure to product liability claims in the event that the use of any of its products results in personal injury or property damage. In the event that any of its products prove to be defective, the Company may be required to recall or redesign such products. The Company maintains insurance against product liability claims, but there can be no assurance that such coverage will continue to be available on terms acceptable to it or that such coverage will be adequate for liabilities actually incurred.
Future acquisitions and investment could result in dilution to earnings per share and a decrease in the valuation of the Company's common stock.
As part of the Company's business strategy, it has made and expects to continue to make acquisitions and investments in businesses that offer complementary products. Risks commonly encountered in acquisitions include the possibility that the Company pays more than the acquired company or assets are worth, the difficulty of assimilating the operations and personnel of the acquired business, the potential disruption of our ongoing business and the distraction of management from ongoing business. Consideration paid for future acquisitions could be in the form of cash or stock or a combination thereof. Dilution to existing stockholders and to earnings per share may result in connection with any such future acquisition.
Impairment of goodwill and other intangible assets would result in a decrease in earnings.
Accounting rules require that goodwill and other intangible assets with indefinite useful lives be tested for impairment at least annually. The Company has substantial goodwill and other intangible assets which based upon the outcome of the annual test could result in the write-down of all or a portion of these assets and a corresponding reduction in earnings and net worth.
Certain anti-takeover provisions and preferred stock could result in a decrease in a potential acquirer's valuation of the Company's common stock.
Certain provisions of the Company's Certificate of Incorporation could make it more difficult for a third party to acquire control of the Company, even if such change in control would be beneficial to stockholders. Also, the Certificate of Incorporation allows the Company to issue preferred stock without stockholder approval. Such issuances could also make it more difficult for a third party to acquire the Company.
The Company's growth strategy requires it to open a significant number of new stores each year. If the Company and its dealers are not able to open new stores or effectively manage the growth of these stores, the Company's ability to grow and its profitability could be adversely affected.
The Company's growth in part depends on the ability of the Company and its dealers to open and operate new stores successfully. The Company and its dealers opened a net total of 39 stores in fiscal 2004. In fiscal 2005, the Company and its dealers plan to open a total of 59 single brand stores and anticipates further store openings in subsequent years. The ability of the Company and its dealers to identify and open new stores in desirable locations and operate such new stores profitably is a factor in the Company's ability to grow successfully. Increased demands on the Company's operational, managerial and administrative resources could cause the Company to operate its business less effectively, which in turn could cause deterioration of its profitability.
Forms 10-K, 10-Q, 8-K and all amendments to those reports are available without charge through the Companys Internet web site as soon as reasonably practicable after electronically filed with, or furnished to, the Securities & Exchange Commission. The Companys website can be accessed at www.furniturebrands.com.
ITEM 2. Properties
The Company owns or leases the following principal plants, offices and warehouses.
The Tupelo, Mississippi facility is encumbered by a mortgage and first lien securing revenue bonds. The Company believes its properties are generally well maintained, suitable for its present operations and adequate for current production requirements. Productive capacity and extent of utilization of the Companys facilities are difficult to quantify with certainty because in any one facility maximum capacity and utilization varies periodically depending upon the product that is being manufactured, the degree of automation and the utilization of the labor force in the facility. In this context, the Company estimates that overall its production facilities were utilized during 2004 at a moderate level of productive capacity and believes that in conjunction with its import capabilities the Companys facilities have the capacity, if necessary, to expand production to meet anticipated product requirements.
Item 3. Legal Proceedings
The Company is or may become a defendant in a number of pending or threatened legal proceedings in the ordinary course of business. In the opinion of management, the ultimate liability, if any, of the Company from all such proceedings will not have a material adverse effect upon the consolidated financial position or results of operations of the Company and its subsidiaries.
The Company is also subject to regulation regarding environmental matters, and is a party to certain actions related thereto. For information regarding environmental matters, see Item 1. Business Environmental Matters.
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Market for The Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Market Information
The following table sets forth aggregate information regarding the Companys equity compensation plans as of December 31, 2004:
Annually, the Board of Directors determines the amount of fees to be paid to non-employee Directors, including an award of restricted shares of Company common stock, as described under Compensation of Board of Directors in the 2005 Proxy Statement, hereby incorporated by reference. These shares are purchased in open-market transactions.
Annually, Lane Furniture Industries, Inc., a subsidiary of the Company, awards a limited number of shares of Company common stock to a few of its truck drivers as safety awards. 345 shares of the Companys common stock were issued as safety awards in 2004. These shares are purchased in open market transactions.
Information regarding the 1992 Stock Option Plan and 1999 Long-Term Incentive Plan set forth in Note 7 of Notes to Consolidated Financial Statements is hereby incorporated by reference.
(c) Repurchase Of Equity Securities
On October 24, 2002, the Companys Board of Directors authorized a program to repurchase $100 million of its Common Stock over a period of 24 months. This authorization expired on October 24, 2004, at which time 3,431,600 shares had been purchased at a total cost of $88,800,842.
On July 27, 2004, the Companys Board of Directors authorized the repurchase of an additional $50 million of its Common Stock over a period of 12 months. As of December 31, 2004 no shares have been purchased under this authorization.
Item 6. Selected Financial Data
FIVE-YEAR CONSOLIDATED FINANCIAL REVIEW
On December 28, 2001, the Company acquired through a wholly owned subsidiary HDM Furniture Industries, Inc. substantially all of the assets and liabilities of Henredon Furniture Industries, Drexel Heritage Furnishings and Maitland-Smith. Because the acquisition occurred prior to the last business day of 2001, it was reflected in the Companys consolidated balance sheet as of December 31, 2001; however, the Companys consolidated results of operations for 2001 do not include any of the operations of the acquired companies.
Item 7. Managements Discussion and Analysis of Results of Operations and Financial Condition
DISCUSSION AND ANALYSIS OF RESULTS OF
Furniture Brands International, Inc. (the Company) is one of the largest home (residential) furniture manufacturers in the United States. The Company markets its products through four primary operating subsidiaries: Broyhill Furniture Industries, Inc.; Lane Furniture Industries, Inc.; Thomasville Furniture Industries, Inc.; and HDM Furniture Industries, Inc. The Company manufactures, sources (i.e., imports) and distributes (i) case goods, consisting of bedroom, dining room and living room furniture, (ii) stationary upholstery products, consisting of sofas, loveseats, sectionals and chairs, (iii) occasional furniture, consisting of wood, metal and glass tables, accent pieces, home entertainment centers and home office furniture, (iv) recliners, motion furniture and sleep sofas, and (v) accessories.
The Company primarily sells its products through diverse distribution channels consisting of independent furniture dealers, national and local chain stores, department stores, specialty stores and decorator showrooms. In recent years, the Company has focused its distribution growth on single-branded, dedicated furniture centers, galleries and stores, taking advantage of its strong brand names and breadth of product. The Company recently announced its long-term strategy is to focus more heavily on single-branded stores, both independently and Company-owned.
To gain access to the premium price point segment of the home furniture market in the United States, on December 28, 2001, the Company acquired substantially all of the assets and liabilities of Henredon Furniture Industries, Drexel Heritage Furnishings and Maitland-Smith (collectively HDM Furniture Industries, Inc.). The purchase price of the acquisition was $287.6 million, consisting of $177.0 million in cash and 4.0 million shares of the Companys common stock. The acquisition established the Company as the residential furniture industrys only full-line resource in all middle and upper price categories.
During the past four years, the residential furniture manufacturers in the United States have been negatively impacted by a structural shift to offshore sourcing (primarily to Asia, but also to other countries with comparatively low labor costs) of various products particularly case goods (wood furniture). As a result, domestic manufacturing capacity utilization has been trending down, hurting the operating profitability of many companies in the industry.
In reaction to this change in sourcing activity, the Company has been implementing a plan to reduce its domestic manufacturing capacity. This plan has included the closing of 23 manufacturing facilities since 2001. In 2004, the Company recorded pretax restructuring and impairment charges of $9.2 million, consisting of $5.9 million charged to cost of operations and $3.3 million charged to selling, general and administrative expenses. In 2003, pretax restructuring and impairment charges of $17.8 million were recorded, consisting of $7.1 million charged to cost of operations and $10.7 million charged to selling, general and administrative expenses. Pretax restructuring and impairment charges of $26.4 million were recorded in 2001, consisting of $5.9 million charged to cost of operations and $20.5 million charged to selling, general and administrative expenses.
To take advantage of its strong brand names and overall breadth of product, the Company has initiated a stores development program in order to gain better control and to accelerate the growth rate of its retail distribution. This program will expand the number of stores dedicated to selling exclusively the Companys brands. Currently, there are 229 dedicated stores, nine of which are owned by the Company, with a long-term goal of over 400 stores, many of which may be owned by the Company.
Results of Operations
As an aid to understanding the Companys results of operations on a comparative basis, the following table has been prepared to set forth certain statements of operations and other data for 2004, 2003, and 2002.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Net sales for 2004 were $2,447.4 million, essentially unchanged from $2,434.1 million reported for 2003. 2004 was the fourth consecutive difficult year for the residential furniture industry primarily due to weak consumer demand for furniture. The Company was also negatively impacted by the bankruptcy of a major customer (Breuners) at mid-year which resulted in the loss of over $40.0 million in annual sales volume.
Cost of operations for 2004 was $1,781.0 million compared to $1,777.8 million in 2003. Cost of operations as a percentage of net sales decreased from 73.0% for 2003 to 72.8% for 2004. The decrease in cost of operations as a percentage of net sales was due to the increase in imported product partially offset by a decrease in domestic capacity utilization and increases in raw material prices.
Selling, general and administrative expenses increased to $461.7 million in 2004 from $440.3 million in 2003. As a percentage of net sales, these expenses increased from 18.1% in 2003 to 18.9% in 2004. The increase was due to additional bad debt expense related to the Breuners bankruptcy, increases in pension expense (due primarily to actuarial assumption changes), advertising and professional fees, partially offset by reduced asset impairment and restructuring charges.
Interest expense for 2004 totaled $15.3 million compared to $19.4 million in 2003. The decrease in interest expense reflects the Companys long-term debt reduction program and lower interest rates.
Other income, net for 2004 totaled $2.3 million compared to $3.5 million for 2003. For 2004, other income consisted of interest on short-term investments and notes receivable of $1.1 million and other miscellaneous income and expense items totaling $1.2 million.
Income tax expense for 2004 totaled $51.1 million, producing an effective tax rate of 35.8% compared with an effective tax rate of 36.6% for 2003. The decrease in the effective tax rate for 2004 was the result of increased research and development credits and reduced state income taxes.
Earnings per common share on a diluted basis were $1.66 and $1.68 for 2004 and 2003. Weighted average shares used in the calculation of earnings per common share on a diluted basis were 55,219,572 in 2004 and 56,255,788 in 2003, respectively. The reduction in average shares was due to the impact of stock repurchases during 2004. No stock repurchases occurred in 2003.
Gross profit for 2004 was $628.5 million compared with $614.8 million for 2003, an increase of 2.2%. The increase in gross profit margin from 25.3% in 2003 to 25.7% in 2004 was primarily due to an increase in imported product partially offset by a decrease in domestic capacity utilization.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Net sales for 2003 were $2,434.1 million compared to $2,458.8 million in 2002, a decrease of $24.7 million or 1.0%. 2003 was the third consecutive difficult year for the residential furniture industry primarily due to weak consumer demand for furniture particularly at the upper-end price points. However, positive comparisons were achieved during the latter part of the year as consumers reacted favorably to better economic conditions and financial markets.
Cost of operations for 2003 was $1,777.8 million compared to $1,782.8 million in 2002. Cost of operations as a percentage of net sales increased from 72.5% for 2002 to 73.0% for 2003. The increase in cost of operations as a percentage of net sales was due to $7.1 million of restructuring charges in 2003 as well as the residual effects of lowering domestic manufacturing capacity to meet sourcing requirements.
Selling, general and administrative expenses increased to $440.3 million in 2003 from $424.3 million in 2002. As a percentage of net sales, these expenses increased from 17.3% in 2002 to 18.1% in 2003. The increase was due to $10.7 million in asset impairment and restructuring costs recorded in 2003. Other major expense increases included pensions (due primarily to actuarial assumption changes) and advertising (to promote the Companys various brands).
Interest expense for 2003 totaled $19.4 million compared to $21.7 million in 2002. The decrease in interest expense reflects the Companys long-term debt reduction program and lower interest rates.
Other income, net for 2003 totaled $3.5 million compared to $3.7 million for 2002. For 2003, other income consisted of interest on short-term investments and notes receivable of $0.7 million and other miscellaneous income and expense items totaling $2.8 million.
Income tax expense for 2003 totaled $54.6 million, producing an effective tax rate of 36.6% compared with an effective tax rate of 35.6% for 2002. The increase in the effective tax rate for 2003 was the result of reduced state income tax credits derived from certain industrial revenue bonds, which the Company is repaying according to established amortization schedules.
Earnings per common share on a diluted basis were $1.68 and $2.11 for 2003 and 2002, respectively. Weighted average shares used in the calculation of earnings per common share on a diluted basis were 56,255,788 in 2003 and 56,386,827 in 2002, respectively. The reduction in average shares was due to the impact of stock options using the treasury method of calculation. No stock repurchases occurred in 2003 or 2002.
Gross profit for 2003 was $614.8 million compared with $633.6 million for 2002, a decrease of 3.0%. The decrease in gross profit margin from 25.8% in 2002 to 25.3% in 2003 was primarily due to asset impairment and restructuring costs previously discussed.
Financial Condition and Liquidity
Cash and cash equivalents at December 31, 2004 totaled $51.2 million compared to $71.7 million at December 31, 2003. For 2004, net cash provided by operating activities totaled $107.3 million. Net cash used by investing activities totaled $22.5 million. Net cash used by financing activities totaled $105.3 million.
Working capital was $711.1 million at December 31, 2004 compared to $703.2 million at December 31, 2003. The current ratio was 4.6-to-1 at December 31, 2004 compared to 4.8-to-1 at December 31, 2003.
At December 31, 2004, long-term debt totaled $302.4 million compared to $303.2 million at December 31, 2003. The Companys debt-to-capitalization ratio was 24.0% at December 31, 2004 compared to 23.9% at December 31, 2003. The company has completed its deleveraging program except for required amortization of certain industrial revenue bonds.
To meet short-term capital and other financial requirements, the Company maintains a $550.0 million revolving credit facility with a group of financial institutions. The revolving credit facility (which was refinanced on December 18, 2003) allows for the issuance of letters of credit and cash borrowings. Letter of credit outstandings are limited to no more than $150.0 million, with cash borrowings limited only by the facilitys maximum availability less letters of credit outstanding. On December 31, 2004, there were $300.0 million in cash borrowings and $19.0 million in letters of credit outstanding, leaving an excess of $231.0 million available under the facility for future liquidity needs.
Cash borrowings under the revolving credit facility bear interest at a base rate or at an adjusted Eurodollar rate plus an applicable margin which varies, depending upon the type of loan the Company executes. The applicable margin over the base rate and Eurodollar rate is subject to adjustment based upon achieving certain credit ratings. At December 31, 2004, loans outstanding under the revolving credit facility consisted of $300.0 million based on the adjusted Eurodollar rate which in conjunction with the interest rate swaps described below, under Market Risk, have a weighted average interest rate of 4.04%.
The Company believes that its revolving credit facility, together with its historically strong cash generation from operations, will be adequate to meet liquidity requirements for the foreseeable future. These requirements would include normal, historical capital expenditure levels as well as the Companys recently implemented cash dividend program. The following table summarizes the cash payments related to the Companys outstanding contractual obligations:
(1) The Company is not a party to any long-term supply contracts with respect to the purchase of raw materials or finished goods.
The Company is exposed to market risk from changes in interest rates. The Company's exposure to interest rate risk consists of its floating rate revolving credit facility. This risk is managed using interest rate swaps to fix a portion of the Company's floating rate long-term debt. Currently interest rate swaps fix the rate on the entire outstanding balance on the revolving credit facility; therefore, an increase in interest rates would have no impact on the Company's net earnings.
Funded Status of the Defined Benefit Pension Plan
As of December 31, 2004, the accumulated benefit obligation of the Company's defined benefit pension plan exceeded the fair value of the plan's assets. As a result, the minimum pension liability increased by $9.5 million. Total minimum pension liability at December 31, 2004 was $54.6 million, $34.1 million, net of tax. The after tax charge is recorded as a component of other comprehensive income (expense).
Critical Accounting Policies
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results are likely to differ from those estimates, but management believes such differences are not significant.
Revenue Recognition-The Company recognizes revenue (sales) when finished goods are shipped, with appropriate provisions for returns and uncollectible accounts. Shipping revenues have historically been netted against related expenses. We have reclassified these revenues to net sales, increasing net sales and cost of operations by $72.1 million, $66.4 million and $61.1 million in 2004, 2003, and 2002, respectively. This reclassification had no impact on earnings.
Allowance for Doubtful Accounts-The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of the Company's customers to make required payments. The allowance for doubtful accounts is based upon the review of specific customer account balances and an overall aging of the accounts receivable.
Inventories-Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories are regularly reviewed for obsolescence and appropriate adjustments recorded, if necessary, to insure their value is recoverable.
Long-lived Assets-Long-lived assets, which consist primarily of goodwill, trademarks and property, plant and equipment, are reviewed for impairment whenever events or changes in business circumstances indicate the carrying values of the assets may not be recoverable. Impairment losses are recognized if expected future cash flows of the related assets are less than the carrying value.
Retirement Plans-The Company uses various assumptions to calculate retirement plan expenses and obligations. These assumptions include the discount rate, expected return on plan assets and rate of compensation increases. The Company believes the assumptions used are reasonable; however, differences in actual experience or a change in assumptions would impact the calculated obligation and future expenses. For example, a 25 basis point reduction in the discount rate would increase the accumulated benefit obligation by $10.0 million and result in an additional charge (net of tax benefits) to shareholders' equity of $6.2 million.
Recently Issued Statements of Financial Accounting Standards
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment. This statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123 (revised 2004) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. The statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. Although management has not yet determined the final impact that SFAS No. 123 (revised 2004) will have on the Company's financial position and results of operations, it is not anticipated that the impact will be materially different than the effect disclosed in Note 2 in the Notes to Consolidated Financial Statements.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs an amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4. This statement clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) by requiring that they be recognized as current-period charges. In addition, this statement requires that allocation of fixed production overhead to inventory be based on the normal capacity of the production facilities. We are currently evaluating the impact, if any, that adoption of SFAS No. 151 will have on the Company's financial position and results of operations.
In December 2003, the FASB issued a revised FASB Interpretation No. (FIN) 46, Consolidation of Variable Interest Entities. FIN 46 clarifies the application of ARB No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. The statement is effective for financial statements issued after December 31, 2003. The Company has not created any variable interest entities and the adoption of FIN No. 46 will have no impact on the Company's consolidated financial statements.
Sales expectations for the first quarter reflect the current weakness in incoming orders compared to a strong year-ago period. The Company expects first quarter sales to be down in the mid-single digits from last year's record performance and diluted net earnings per common share to be at the lower end of the range given at the end of January.
The Company herein has made forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include the Company's expected sales, earnings per share, profit margins, and cash flows, the effects of certain manufacturing realignments and other business strategies, the prospects for the overall business environment, and other statements containing the words "expects," "anticipates," "estimates," "believes," and words of similar import. The Company cautions investors that any such forward-looking statements are not guarantees of future performance and that certain factors may cause actual results to differ materially from those in the forward-looking statements. Such factors include, but are not limited to: changes in economic conditions; loss of market share due to competition; failure to anticipate or respond to changes in consumer tastes and fashion trends; failure to achieve projected mix of product sales; business failures of large customers; distribution and manufacturing realignments and cost savings programs; increased reliance on offshore (import) sourcing of various products; fluctuations in the cost, availability and quality of raw materials; product liability uncertainty; impairment of goodwill and other intangible assets and ability to open and operate new retail stores successfully. Other risk factors may be listed from time to time in the Company's future public releases and SEC reports.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates. The Company's exposure to interest rate risk consists of its floating rate Secured Credit agreement. This risk is managed using interest rate swaps to fix a portion of the Company's floating rate long-term debt. Currently, interest rate swaps fix the rate on the entire outstanding balance on the revolving credit facility; therefore, an increase in interest rates would have no impact on the Company's net earnings.
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
OF SHAREHOLDERS EQUITY AND
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
1. The Company
Furniture Brands International, Inc. (referred to herein as the Company) is one of the largest home furniture manufacturers in the United States. During all of the years covered in these financial statements, the Company had four primary operating subsidiaries: Broyhill Furniture Industries, Inc.; Lane Furniture Industries, Inc.; Thomasville Furniture Industries, Inc. and HDM Furniture Industries, Inc.
Substantially all of the Companys sales are made to unaffiliated furniture retailers. The Company has a diversified customer base with no one customer accounting for 10% or more of consolidated net sales and no particular concentration of credit risk in one economic sector. Foreign operations and net sales are not material.
2. Significant Accounting Policies
The significant accounting policies of the Company are set forth below.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reported period. Actual results are likely to differ from those estimates, but management believes such differences are not significant.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All material intercompany transactions are eliminated in consolidation. The Companys fiscal year ends on December 31. The operating companies included in the consolidated financial statements report their results of operations as of the Saturday closest to December 31. Accordingly, the results of operations will periodically include a 53-week fiscal year. Fiscal years 2004 and 2002 were 52-week years and fiscal year 2003 was a 53-week year.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity of three months or less to be cash equivalents.
Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories are regularly reviewed for obsolescence and appropriate adjustments recorded, if necessary, to insure their value is recoverable.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost when acquired. Depreciation is calculated using both accelerated and straight-line methods based on the estimated useful lives of the respective assets, which generally range from 3 to 45 years for buildings and improvements and from 3 to 12 years for machinery and equipment. Long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate the carrying value of the assets may not be recoverable. Impairment losses are recognized if expected future cash flows of the related assets are less than their carrying value.
Intangible assets consist of goodwill and trademarks. Effective with the Companys adoption of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, on January 1, 2002, goodwill and intangible assets with indefinite lives are no longer amortized, but instead tested for impairment. Prior to adoption of SFAS No. 142, goodwill and trademarks were amortized on a straight-line basis over 20 to 40-year periods. Intangible assets are reviewed for impairment annually or whenever events or changes in business circumstances indicate the carrying value of the assets may not be recoverable. Impairment losses are recognized if future cash flows of the related assets are less than their carrying values.
Fair Value of Financial Instruments
The Company considers the carrying amounts of cash and cash equivalents, receivables, and accounts payable to approximate fair value because of the short maturity of these financial instruments.
Amounts outstanding under long-term debt agreements are considered to be carried on the financial statements at their estimated fair values because they accrue interest at rates which generally fluctuate with interest rate trends.
The Company periodically uses interest rate swap agreements (derivative financial instruments) to hedge risk associated with its floating rate long-term debt. Under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, each derivative instrument is recorded on the balance sheet as an asset or liability with any gain or loss recorded as a component of accumulated other comprehensive income (expense) until recognized in earnings. The fair value of the swap agreements is based upon quoted market prices. The net amount to be paid or received under the interest rate swap agreements is recorded as a component of interest expense. The fair value of the interest rate swap agreements is included in other assets as of December 31, 2004 and other long-term liabilities as of December 31, 2003.
The Company recognizes sales when finished goods are shipped, with appropriate provisions for returns and uncollectible accounts. Shipping revenues have historically been netted against related expenses. We have reclassified these revenues to net sales, increasing net sales and cost of operations by $72,155, $66,392 and $61,127 in 2004, 2003 and 2002, respectively. This reclassification had no impact on earnings.
Advertising production costs are expensed when advertisements are first aired or distributed. Total advertising costs for 2004, 2003 and 2002 were $82,089, $77,124 and $72,243, respectively.
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income tax expense (benefit) in the period that includes the enactment date.
The Company accounts for stock-based compensation using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Had compensation cost for the Companys stock-based compensation plan been determined consistent with SFAS No. 123, Accounting for Stock-Based Compensation, the Companys net earnings and net earnings per share would have been as follows:
The weighted average fair value of options granted is estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payment. This statement is a revision of SFAS No. 123, and supersedes APB Opinion No. 25. SFAS No. 123 (revised 2004) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. The statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. Although management has not yet determined the final impact that SFAS No. 123 (revised 2004) will have on the Companys financial position and results of operations, it is not anticipated that the annual impact will be materially different than the pro forma disclosure above.
Certain prior year amounts have been reclassified to conform to the current year presentation.
3. Restructuring and Asset Impairment Charges
In 2001 the Company began implementing a plan to reduce its domestic manufacturing capacity. As of December 31, 2004, this plan has included the closing of 23 manufacturing facilities. Restructuring activity included the closing of three manufacturing facilities in 2004 and the closing of three manufacturing facilities and the realignment of two additional facilities in 2003. Also included in both years were asset impairment
charges related to the write-down of previously closed facilities in order to accelerate their disposal. Asset impairment charges were recorded to reduce the carrying value of all idle facilities and related machinery and equipment to their net realizable value. The determination of the impairment charges were based primarily upon (i) consultations with real estate brokers retained to assist the Company in disposal efforts and (ii) proceeds from recent sales of Company facilities and the market prices being obtained for similar long-lived assets.
Restructuring and asset impairment charges were as follows:
Real estate with a carrying value of $3,301 and $7,223 was included in other assets as of December 31, 2004 and 2003, respectively. There were no restructuring charges included in other accrued expenses at December 31, 2004 and 2003.
Inventories are summarized as follows:
5. Goodwill and Other Intangible Assets
Goodwill and other intangible assets include the following:
On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and other intangible assets with indefinite lives no longer be amortized, but instead be tested annually for impairment or whenever events or changes in business circumstances indicate the carrying value of the assets may not be recoverable. No impairment was recorded in 2004 or 2003. The Companys other intangible assets consist of trademarks and trade names all having indefinite lives.
6. Long-Term Debt
Long-term debt consists of the following:
The following discussion summarizes certain provisions of the long-term debt.
Revolving Credit Facility
On December 18, 2003, the Company refinanced its revolving credit facility with a group of financial institutions. The new facility is an unsecured revolving credit facility with a commitment of $550,000 and a maturity date of June 7, 2008. The facility allows for issuance of letters of credit and cash borrowings. Letters of credit outstanding are limited to no more than $150,000, with cash borrowings limited only by the facilitys maximum availability less letters of credit outstanding.
Currently, for letter of credit issuances, a fee of 1.00% per annum (subject to increase/decrease based upon the Company achieving certain credit ratings from Standard & Poors and Moodys) is assessed for the account of the lenders ratably. A further fee of 0.125% is assessed on standby letters of credit representing a facing fee. A customary administrative charge for processing letters of credit is also payable to the relevant issuing bank. Letter of credit fees are payable quarterly in arrears.
Cash borrowings under the revolving credit facility bear interest at a base rate or at an adjusted Eurodollar rate plus an applicable margin which varies, depending upon the type of loan the Company executes. The applicable margin over the base rate and adjusted Eurodollar rate is subject to adjustment based upon achieving certain credit ratings. At December 31, 2004, loans outstanding under the revolving credit facility consisted of $300,000 based on the adjusted Eurodollar rate, which in conjunction with the interest rate swaps have a weighted average interest rate of 4.04%.
At December 31, 2004, there were $300,000 of cash borrowings and $19,018 in letters of credit outstanding under the revolving credit facility, leaving an excess of $230,982 available for future liquidity needs.
The revolving credit facility has no mandatory principal payments; however, the commitment matures on June 7, 2008. The facility requires the Company to meet certain financial covenants including a minimum consolidated net worth ($875,000 as of December 31, 2004 and $900,000 thereafter) and maximum leverage ratio (ratio of consolidated debt to consolidated EBITDA (as defined in the credit agreement) of 2.75 to 1). In addition, the facility requires repayment upon the occurrence of a change of control of the Company. As of December 31, 2004, the Company was in compliance with all financial covenants.
Other long-term debt consists of industrial revenue bonds with an interest rate of 7.0%.
Interest Rate Swap Agreements
In May 2004, in order to reduce the impact of changes in interest rates on its floating rate long-term debt, the Company entered into three interest rate swap agreements each having a notional amount of $100,000 and a termination date in May 2007. The Company pays the counterparties a fixed rate of 2.55% per annum and receives payment based upon the floating three-month LIBOR rate.
7. Common Stock
The Companys restated certificate of incorporation includes authorization to issue up to 200 million shares of Common Stock with a $1.00 per share stated value. As of December 31, 2004, 56,482,541 shares of Common Stock were issued.
The Company has been authorized by its Board of Directors to repurchase its Common Stock from time to time in open market or privately negotiated transactions. Common Stock repurchases are recorded as treasury stock and may be used for general corporate purposes. As of December 31, 2004, the Company has Board of Directors authorization for the repurchase of an additional $50,000 of its Common Stock.
Shares of Common Stock were reserved for the following purposes at December 31, 2004:
The Company has outstanding option grants pursuant to the 1992 Stock Option Plan and the 1999 Long-Term Incentive Plan. These plans are administered by the Executive Compensation and Stock Option Committee of the Board of Directors and permit certain key employees to be granted nonqualified options, performance-based options, restricted stock, or combinations thereof. Options must be issued at market value on the date of grant and expire in a maximum of ten years.
The Company issued 9,000 and 4,000 shares of restricted stock in 2004 and 2003, respectively. The restricted shares vest over various periods from three to five years. The deferred compensation cost is amortized to expense over the period of time the restrictions are in place and the unamortized portion is classified as a reduction of paid-in-capital in the Companys consolidated balance sheets.
Changes in options granted and outstanding are summarized as follows:
Summarized information regarding stock options outstanding and exercisable at December 31, 2004 follows:
Weighted average shares used in the computation of basic and diluted earnings per common share for 2004, 2003, and 2002 are as follows:
Excluded from the computation of diluted earnings per common share were options to purchase 948,449 and 432,600 shares at an average price of $31.72 and $33.94 per share during 2004 and 2003, respectively. These options have been excluded from the diluted earnings per share calculation because their inclusion would be antidilutive.
8. Income Taxes
Income tax expense is comprised of the following:
The following table reconciles the differences between the federal corporate statutory rate and the Companys effective income tax rate:
The sources of the tax effects for temporary differences that give rise to the deferred tax assets and liabilities were as follows:
9. Employee Benefits
The Company sponsors or contributes to retirement plans covering substantially all employees. The total cost of all plans for 2004, 2003, and 2002 was $16,947, $10,678, and $7,075, respectively.
Company-Sponsored Defined Benefit Plans
Employees are covered primarily by noncontributory plans, funded by Company contributions to trust funds, which are held for the sole benefit of employees. Cash contributions to the trust funds during 2004 and 2003 were $15,000 and $10,000, respectively. The Company does not expect to make an additional cash contribution during 2005. Monthly retirement benefits are based upon service and pay with employees becoming vested upon completion of five years of service. Annual plan benefit payments to retirees and/or beneficiaries are expected to average $24,000 for the next ten years.
The investment objective of the trust funds is to ensure, over the long-term life of the trusts, an adequate asset balance to support the benefit obligations to participants, retirees and beneficiaries. In meeting this objective, the Company seeks to achieve investment returns at or above selected benchmarks consistent with a prudent level of diversification. The Company retains registered investment advisors to manage specific asset classes. Investment advisors are selected from established and financially sound organizations with proven records in managing funds in the appropriate asset class. Investment advisors are given strict investment guidelines and performance benchmarks.
Annual cost for defined benefit plans is determined using the projected unit credit actuarial method. Prior service cost is amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits.
It is the Companys practice to fund pension costs to the extent that such costs are tax deductible and in accordance with ERISA. The assets of the various plans include corporate equities, government securities, corporate debt securities and insurance contracts. The table below summarizes the funded status of the Company-sponsored defined benefit plans.
The fair value adjustment relates to the Companys 1992 reorganization.
The asset allocations for the Companys defined benefit plans are as follows:
Net periodic pension expense for 2004, 2003, and 2002 included the following components:
Actuarial assumptions used to determine costs and benefit obligations are as follows:
The expected long-term rate of return assumption was developed through analysis of historical market returns, current market conditions and the funds past experience.
Other Retirement Plans and Benefits
In addition to defined benefit plans, the Company makes contributions to defined contribution plans and sponsors employee savings plans. The cost of these plans is included in the total cost for all plans reflected above.
10. Other Comprehensive Income (Expense)
Other comprehensive income (expense) consists of the following:
The components of accumulated other comprehensive income (expense), each presented net of tax, are as follows:
11. Commitments and Contingent Liabilities
Certain of the Companys real properties and equipment are operated under lease agreements. Rental expense under operating leases totaled $30,610, $30,541, and $26,882 for 2004, 2003 and 2002, respectively. Annual minimum payments under operating leases are $35,569, $35,753, $32,795, $30,282, and $28,486 for 2005 through 2009, respectively. Future minimum lease payments under operating leases, reduced by minimum rentals from subleases of $123,784, aggregate $166,194.
The Company has provided guarantees related to store leases for certain independent dealers opening Company-branded stores (e.g., Thomasville Home Furnishings Stores). The guarantees range from one to fifteen years and generally require the Company to make lease payments in the event of default by the dealer. In the event of default, the Company has the right to assign or assume the lease. The total future lease payments guaranteed at December 31, 2004 were $94,530. The Company believes the risk of significant loss from these lease guarantees is remote.
The Company is or may become a defendant in a number of pending or threatened legal proceedings in the ordinary course of business. In the opinion of management, the ultimate liability, if any, of the Company from all such proceedings will not have a material adverse effect upon the consolidated financial position or results of operations of the Company and its subsidiaries.
12. Other Income, Net
Other income, net for 2004, 2003 and 2002 consisted of interest on short-term investments and notes receivable of $1,135, $718, and $1,220 and other miscellaneous income and expense items totaling $1,163, $2,764, and $2,536, respectively.
13. Quarterly Financial Information (Unaudited)
Following is a summary of unaudited quarterly information:
Earnings per common share were computed independently for each of the quarters presented. The sum of the quarters may not equal the total year amount due to the impact of computing average quarterly shares outstanding for each period.
In the fourth quarter of 2003, the Company commenced a cash dividend program with an initial rate of $0.50 per common share on an annual basis. In the fourth quarter of 2004, the cash dividend was increased to an annual rate of $0.60 per common share. The closing market price of the Companys common stock on December 31, 2004 was $25.05 per share.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Disclosure controls and procedures
Internal Control over Financial Reporting
Item 10. Directors and Executive Officers of the Registrant
The sections entitled Nominees and Section 16(a) Beneficial Ownership Reporting Compliance of the Companys Definitive Proxy Statement for the Annual Meeting of Stockholders on April 28, 2005 are incorporated herein by reference.
Executive Officers of the Registrant
*Member of the Executive Committee
There are no family relationships between any of the executive officers of the Registrant.
The executive officers are elected at the organizational meeting of the Board of Directors which follows the annual meeting of stockholders and serve for one year and until their successors are elected and qualified.
Each of the executive officers has held the same position or other positions with the same employer during the past five years, except Denise L. Ramos, who became Senior Vice President, Treasurer and Chief Financial Officer of the Company in 2005 and prior thereto was Chief Financial Officer of the KFC division of YUM! Brands, Inc. and Senior Vice President and Treasurer of YUM! Brands, Inc.; C. Jeffrey Young who became President and Chief Executive Officer of Drexel Heritage in 2002 and prior thereto was a participant in a joint venture now known as Fine Furniture Design and Marketing; Thomas G. Tilley, Jr., who became President and Chief Executive Officer of Thomasville in 2003 and prior thereto held senior management posts with Masco Home Furnishings, Century Furniture Industries and La-Z-Boy Incorporated; and Stephen K. McKee who became President and Chief Executive Officer of Henredon Furniture Industries, Inc. in 2004 and prior thereto was President and Chief Executive Officer of Fine Furniture Direct, Inc. Fine Furniture Direct, Inc., doing business as The Home Company, filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code on March 7, 2002.
Code of Corporate Conduct
The Company has adopted a code of business conduct for directors, officers (including the Companys principal executive officer, principal financial officer and controller)and employees, known as the Code of Corporate Conduct. Stockholders may request a free copy of the Code of Corporate Conduct from:
Audit Committee and Audit Committee Financial Expert
The sections entitled "Board of Directors and Committees" and "Principal Auditor Fees and Services" of the Company's Proxy Statement for the Annual Meeting of Stockholders on April 28, 2005 are incorporated herein by reference.
Item 11. Executive Compensation
The sections entitled "Executive Compensation", "Executive Compensation and Stock Option Committee Report on Executive Compensation", "Stock Options", "Retirement Plans", "Incentive Agreements" and "Performance Graph" of the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders on April 28, 2005 are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
The section entitled "Security Ownership" of the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders on April 28, 2005 is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The section "Certain Relationships and Related Transactions" of the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders on April 28, 2005 is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The section "Principal Auditor Fees and Services" of the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders on April 28, 2005 is incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules
(a) List of documents filed as part of this report:
All other schedules are omitted as the required information is presented in the consolidated financial statements or related notes or are not applicable.
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the SEC. The Company shall furnish copies of exhibits for a reasonable fee (covering the expense of furnishing copies) upon request.
*Indicates management contact or compensatory plan, contract or arrangement
FURNITURE BRANDS INTERNATIONAL, INC. AND SUBSIDIARIES
Index to consolidated Financial Statements and Schedules
FURNITURE BRANDS INTERNATIONAL, INC. AND SUBSIDIARIES
(a) Uncollectible accounts written off, net of recoveries.
(b) Cash discounts taken by customers and claims allowed to customers.
See accompanying Report of Independent Registered Public Accounting Firm.
Managements Report on Internal Control Over Financial Reporting
Management of Furniture Brands International, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act of 1934 Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the Companys internal control over financial reporting as of December 31, 2004 as required by the Securities Exchange Act of 1934 Rule 13a-15(c). In making this assessment, we used the criteria set forth in the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control-Integrated Framework our management concluded that our internal control over financial reporting was effective as of December 31, 2004.
Our managements assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is set forth on page 54.
Furniture Brands International, Inc.
St. Louis, Missouri
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders Furniture
We have audited managements assessment, included in the accompanying Managements Report on Internal Control over Financial Reporting, that Furniture Brands International, Inc. maintained effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Furniture Brands International, Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal ControlIntegrated Framework issued by COSO. Also, in our opinion, Furniture Brands International, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based the on the criteria established in Internal ControlIntegrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Furniture Brands International, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2004, and our report dated March 11, 2005 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Report of Independent Registered Public Accounting Firm
The Board of Directors
We have audited the accompanying consolidated balance sheets of Furniture Brands International, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2004. In connection with our audits of the consolidated financial statements, we have also audited the accompanying financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Furniture Brands International, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related 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.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of internal control over financial reporting of Furniture Brands International, Inc. as of December 31, 2004, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 11, 2005 expressed an unqualified opinion on managements assessment of, and the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
Pursuant to the requirements of Section 13 of 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 11, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 11, 2005.