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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1996
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
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Commission file number 0-25246
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WINSLOEW FURNITURE, INC.
(Exact name of registrant as specified in its charter)
Florida 63-1127982
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
201 Cahaba Valley Parkway, Pelham, Alabama 35124
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (205) 403-0206
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock,
$.01 par value per share Nasdaq National Market
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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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. [ ]
The aggregate market value of shares of Common Stock held by non-affiliates
of the registrant as of March 11, 1997, was approximately $47,250,973 based
on a $9.31 closing sale price for the Common Stock quoted on the Nasdaq
National Market System on such date. For purposes of this computation, all
executive officers, directors, and 5% beneficial owners are, in fact,
affiliates of the registrant.
The number of shares of Common Stock, $.01 par value per share, of the
registrant outstanding as of March 11, 1997, was 7,438,083.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive Proxy Statement for the registrant's
1997 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission not later than 120 days after the end of the fiscal year
covered by this report, are incorporated into Part III hereof.
Page 1 of 46 pages.
Exhibit Index begins on page 41.
INDEX TO ITEMS
Part I Page
Item 1. Business .............................................. 3
Item 2. Properties ............................................ 14
Item 3. Legal Proceedings ..................................... 15
Item 4. Submission of Matters to a Vote
of Security Holders ........................... 15
Part II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters ................ 16
Item 6. Selected Financial Data ............................... 17
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations ......... 18
Item 8. Financial Statements and Supplementary Data ........... 25
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ................ 40
Part III
Item 10. Directors and Executive Officers of the Registrant .... 40
Item 11. Executive Compensation ................................ 40
Item 12. Security Ownership of Certain Beneficial Owners
and Management ........................................ 40
Item 13. Certain Relationships and Related Transactions ........ 40
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K .................................. 41
Signatures ............................................................ 44
2
PART I
ITEM 1. BUSINESS
GENERAL
WinsLoew Furniture, Inc. (the "Company" or "WinsLoew") designs, manufactures
and distributes casual furniture, contract seating and ready-to-assemble
("RTA") furniture.
Casual Furniture. WinsLoew produces and distributes casual furniture for both
the residential and contract markets. WinsLoew's residential products are
constructed of extruded and tubular aluminum, wrought iron and cast aluminum.
WinsLoew markets its residential products through independent sales
representatives primarily to specialty patio stores, department stores and
furniture stores. WinsLoew's contract products are constructed of extruded,
tubular and cast aluminum, steel, wrought iron, wood and fiberglass. Contract
products are marketed primarily through an in-house sales force, primarily to
apartment developers and management companies, hospitality providers (hotel,
motel, restaurants, country clubs and resorts), and city and state
municipalities.
Contract Seating. WinsLoew assembles and distributes contract seating products
constructed of contemporary, traditional and transitional styles of wood and
metal. Products include upholstered chairs, sofas and love seats offered in
a variety of finish and fabric options. Products are designed for use in the
restaurant, lodging, office, healthcare facilities and retail stores. These
products are assembled pursuant to specific orders and are distributed to a
broad customer base which includes architectural design firms, office furniture
dealers, and restaurant and lodging chains through independent sales
organizations.
RTA Furniture. WinsLoew's RTA products consist of a promotionally priced
product line, upper priced ergonomically designed products and extensive line
of futons and related accessories. Futons (as used herein) consists of a frame,
mattress and cover which easily converts from a comfortable sofa to a bed.
WinsLoew designs, manufactures, and distributes RTA promotionally priced
"spindle" and "flatline" furniture designed for household use. Products include
coffee tables, end tables, wall units, desks, children's furniture and rolling
carts. Distribution is primarily through mass merchants and catalog
wholesalers. WinsLoew's upper priced ergonomically designed "space savers"
include computer desks, work stations and modular units. Marketing of these
products is through in-house and independent sales representatives to office
furniture wholesalers and catalog firms. Futon are manufactured in a variety
of styles and finishes, and are constructed of selected hardwood and pine.
The Company manufactures the futons and accessories, including coffee tables
and end tables. In addition, the Company imports a line of frames from
Indonesia. Futon products are distributed through specialty retailers,
selected mass merchants, and national accounts.
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PRODUCT LINES
WinsLoew has three principal product lines of furniture (Casual Furniture,
Contract Seating and RTA) that are produced or distributed in 9 manufacturing
locations as follows:
DIVISION AND LOCATION PRINCIPAL PRODUCTS PRINCIPAL CUSTOMERS
CASUAL FURNITURE:
Winston Residential casual Specialty patio stores,
Haleyville, Alabama furniture constructed department stores and
of aluminum furniture stores
Lyon-Shaw Residential casual Specialty stores,
Salisbury, North Carolina furniture constructed department stores and
of wrought iron furniture stores
Texacraft Contract casual furniture Apartment developers
Houston, Texas constructed of aluminum, and management companies
wrought iron, wood and hospitality providers
fiberglass and municipalities
Winston International Imported residential Specialty patio stores,
Haleyville, Alabama casual furniture department stores and
constructed of cast furniture stores
luminum
CONTRACT SEATING:
Loewenstein Contemporary, transitional Architectural design
Pompano Beach, Florida and traditional seating for firms, restaurant and
hospitality, office and lodging chains, office
other institutional uses furniture dealers and
retail store planners
Gregson Traditional office and Office furniture dealers
Liberty, North Carolina other institutional seating and lodging chains
RTA FURNITURE:
Southern Wood Promotional RTA furniture Mass merchandisers and
Sparta, Tennessee catalogue wholesalers
Promotional RTA furniture
Continental Ergonomically designed Catalog firms and
Irwindale, California space savers for home office furniture
and office use wholesalers
New West Futons, frames, covers, Specialty retailers
Cookeville, Tennessee and related accessories and selected mass
Sparta, Tennessee merchandisers
Santa Clara, California
COMPETITIVE STRENGTHS
WinsLoew believes that it has the following competitive strengths.
Casual Furniture. Management attributes casual furniture's historical success
to its (i) commitment to producing a quality product delivered "in time and on
time"; (ii) emphasis on providing extensive customer service; (iii) cost-
efficient manufacturing operations; (iv) innovatively styled products and
merchandising programs; and (v) results-oriented management, team philosophy and
culture. Management believes that WinsLoew can continue the growth it has
experienced in the casual furniture line by capitalizing on its existing
distribution channels, manufacturing capabilities and reputation for quality
and customer service. Specifically, WinsLoew intends to grow in its existing
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market through: (i) continued leadership in new products and merchandising
programs; (ii) expanding existing market penetration; (iii) increasing West
Coast sales and export sales; and (iv) expanding the Winston International
division's product line. Within WinsLoew's market, management will consider
attractive acquisition opportunities.
Contract Seating. WinsLoew is committed to providing value to its contract
seating customers by offering innovative designs, a broad range of high quality
products at competitive prices and responsive customer service with quick and
timely delivery. WinsLoew ensures that its products provide both superior
structural integrity and aesthetic styling through its adherence to strict
manufacturing and quality control standards and through its long-standing and
frequently exclusive relationships with a number of leading Italian designers
and manufacturers. These suppliers have extensive experience in the design,
engineering and production of contemporary and transitional-styled chairs.
The suppliers use steam-bending of solid wood components, intricate joinery
and other sophisticated manufacturing techniques generally unavailable in the
United States. In addition, WinsLoew's electrostatically applied, ultraviolet
cured wood finishing system produces one of the most consistent, durable and
vibrant finishes in the industry. The system also increases manufacturing
efficiency and reduces waste and air emissions. WinsLoew's commitment to
providing high levels of customer service is also typified by its policies of
paying freight charges if a guaranteed shipping date is missed and, under its
"Quick Ship" program, guaranteeing shipment of a significant portion of its
product line within 10 working days from receipt of a customer's order.
WinsLoew offers a broad selection of wood, metal and upholstered chairs, sofas
and love seats designed for restaurant, lodging, office and other institutional
uses, with prices generally ranging from $150 to $550. WinsLoew's custom
design capabilities also allow it to modify styles, materials and production
in order to provide customers with products that meet particular specifications.
WinsLoew's strategy of offering a broad selection of product styles and price
ranges provides it with access to distribution channels serving a variety of
end users, including restaurants, hotels, healthcare facilities, retail store
planners, corporate offices, schools, sports facilities, airport lounges and
cruise lines.
RTA Furniture. WinsLoew's RTA furniture product line consist of three products:
1) promotionally priced RTA products sold directly to mass merchandisers and
catalog wholesalers under the Southern Wood name, 2) upper priced ergonomically
designed "space savers", consisting of modular computer workstations, sold to
catalog firms and office furniture wholesalers under the MicroCentre name, and
3) futons, frames, covers and accessories under the New West name. Southern
Wood's low cost structure is based on its use of inexpensive raw materials, its
relatively low labor rates and its use of equipment to achieve cost savings.
WinsLoew believes that its focused price strategy will allow the Company to
maintain or increase market share and provide opportunities for product line
extensions. WinsLoew believes Continental increases its opportunities for
growing furniture distribution channels without incurring significant marketing
and selling expenses. Management believes WinsLoew is one of the largest
manufacturer of futons and accessories in the United States. During 1995,
management refocused the product line on serving specialty store retailers,
selected mass merchants and national accounts. Management efforts during
1996 emphasized: (i) a commitment to produce a quality product with prompt
delivery; (ii) consistent and extensive customer service; (iii) low cost
efficient operations; (iv) innovative product development; (v) uniform
merchandising/marketing programs; and (vi) nationwide independent sales
representative force.
BUSINESS STRATEGY
Casual Furniture
The business strategy of the Casual Division emphasizes the following elements:
Expansion of Sales and Market Share. WinsLoew's growth objectives for the
casual furniture line are primarily focused on areas where WinsLoew can
capitalize on its existing distribution channels, manufacturing capabilities
and reputation for quality and customer service, including (i) new product
introductions in WinsLoew's extruded and tubular aluminum and wrought iron
divisions; (ii) expansion into new geographic areas, particularly west of the
Rocky Mountains; and (iii) increased sales to commercial customers such as
hotels, restaurants, country clubs, interior designers and apartment and hotel
developers.
Provide Value to Customers. WinsLoew is committed to providing value to its
retailing customers by designing and manufacturing high quality, competitively
priced products and responding to its customers' needs for "in time and on
time" delivery. WinsLoew maintains a strong customer service orientation that
is typified by its PDQ shipping program, where WinsLoew either ships within 15
5
business days after credit approval or pays for the freight costs. Quick
delivery is particularly important to casual furniture retailers because of the
short selling season and the retailer's general desire to minimize inventory
levels. Another principal component of WinsLoew's marketing strategy is its
focus on special sales programs for customers. These programs also reduce
the effects of seasonality on WinsLoew's operations and minimize WinsLoew's
finished good inventory.
Commitment to Product and Industry Leadership. Management believes that the
high fashion style and variety of WinsLoew's casual furniture designs provide
a strong competitive advantage and WinsLoew therefore devotes significant
resources to new product development and introductions.
Enhanced Use of Manufacturing Capabilities. WinsLoew operates approximately
420,000 square feet of manufacturing space for casual furniture products and
produces most of such products from basic raw materials using strict quality
control measures. WinsLoew's vertical integration permits WinsLoew to (i)
produce a variety of chairs, tables and other furniture products; (ii)
manufacture cushions; and (iii) cut and assemble the fabric covers that are
combined with preassembled poles to produce outdoor umbrellas. WinsLoew also
maintains strict cost containment measures in order to ensure that its products
are manufactured in a cost-efficient manner.
Develop or Acquire Complementary Product Lines. WinsLoew continues to seek
opportunities to develop or acquire complementary product lines in order to
capitalize on its existing distribution channels, manufacturing capabilities
and reputation for quality and customer service.
CONTRACT SEATING
The business strategy of the contract seating divisions emphasizes the
following elements:
Historical Base Business. WinsLoew's base contract seating business has
historically been concentrated within the hospitality market. This market has
fluctuated with general economic cycles because many end users defer
expenditures for building new or refurbishing existing restaurant and lodging
facilities during economic downturns. Based upon its past experience, the
management believes that WinsLoew's core hospitality business will grow as
expenditures by the hospitality industry increase for new construction and
refurbishment of restaurants and lodging facilities.
Private Label Program. WinsLoew offers a "private label" program through
which contract seating products are marketed to nationally recognized designers
and manufacturers of office furniture systems. WinsLoew believes that its
success in generating private label business is primarily attributable to its
proven ability to produce a quality product on short lead time, its state-of-
the-art finishing capabilities, its competitive prices and the direct
involvement of its senior executives in private label marketing.
Develop or Acquire Complementary Product Lines. WinsLoew continues to seek
opportunities to develop or acquire complementary product lines in order to
capitalize on its existing distribution channels, manufacturing capabilities
and reputation for quality and customer service.
RTA FURNITURE
The business strategy of the RTA division emphasizes the following elements:
During 1996 WinsLoew brought the New West and Southern Wood operations under
one management team. WinsLoew intends to increase its futon and promotional
RTA product sales by marketing its products to its core customer base and to
broader channels of distribution within the furniture industry, including
national accounts and selected mass merchants. The Company has increased its
independent sales representative force and prepared new sales literature.
Continental Engineering is in the process of increasing its product offering
of ergonomically designed furniture, strengthening its in-house sales force
and making its products available through broader channels of distribution.
In each of these operations, WinsLoew will take advantage of its position as
a low cost producer.
Developing or Acquiring Complementary Product Lines. WinsLoew continues to seek
opportunities to develop or acquire complementary product lines in order to
capitalize on its existing distribution channels and manufacturing capabilities.
6
PRODUCTS
WinsLoew designs, manufactures and distributes three principal product lines:
(i) casual furniture for both the residential and contract markets, (ii)
contract seating designed for restaurant, lodging, office or other general
institutional use, and (iii) RTA furniture.
Casual Furniture
WinsLoew's casual furniture products for residential use consist principally
of medium to upper-medium priced indoor and outdoor furniture sold under four
brand names; "Winston" residential extruded and tubular aluminum furniture,
"Lyon-Shaw" residential wrought iron furniture, "Texacraft" contract casual
furniture, and "Winston International" imports casual furniture. WinsLoew
currently manufactures and sells numerous style collections that include
traditional, European, and contemporary design patterns. Within each style
collection there are multiple products including chairs, tables, chaise
lounges, and accessory pieces such as ottomans, cocktail tables, end tables,
tea carts, and umbrellas. WinsLoew offers extruded and tubular aluminum and
wrought iron products with glider action, adjustable positions and rocking and
swivel motions. WinsLoew's casual seating products feature cushions, vinyl
strapping or mesh seats and backs in a variety of colors and patterns. All of
WinsLoew's casual furniture products feature a durable painted finish which is
also offered in a wide selection of colors. The suggested retail prices for
a table and four chairs currently range from approximately $500 to $1,700.
WinsLoew's casual contract products include chairs, chaise lounges, tables, and
umbrellas constructed of extruded, tubular and case aluminum, steel, wrought
iron, wood and fiberglass. WinsLoew's casual contract products include a
selection of restaurant and outdoor seating and site furnishings. Casual
contract products are marketed through Company and independent sales
representatives, primarily to apartment developers and management companies,
hospitality providers (hotel, motel, restaurants, country clubs, and resorts),
and city and state municipalities.
WinsLoew continually reviews and evaluates its casual furniture designs, and
annually adds and discontinues designs it deems appropriate. WinsLoew
identifies trends in shapes, colors and patterns through independent research,
contacts with WinsLoew's dealers and the occasional use of independent
designers. Management also solicits opinions from its manufacturer's
representatives, dealers and employees prior to final design selection.
WinsLoew has generally replaced or modified approximately one-third to one-half
of its casual furniture product lines annually. The costs of implementing these
annual changes have historically included certain: (i) research and development
costs; (ii) capital expenditures for tooling; and (iii) advertising and catalog
expenses. Shipments of WinsLoew's new designs generally begin in September of
each year.
Contract Seating
WinsLoew's contract seating products (other than the casual contract products
described above) include wood, metal and upholstered chairs, as well as
reception area love seats and sofas. WinsLoew's broad product line consists
of approximately 350 distinct models of chairs in contemporary, traditional
and transitional styles. WinsLoew's general merchandising strategy for
contract seating is to provide innovative seating products that are practical,
comfortable, sturdy and moderately priced.
Wood frames are produced from a variety of wood species and are finished with
one of WinsLoew's numerous standard colors or can be finished to customer's
specification. WinsLoew's metal chairs are available in chrome or in a
selection of standard powder coat finishes. For upholstered products, the
customer may select from a number of catalog fabrics, vinyls and leathers, or
may specify or supply its choice of materials. WinsLoew maintains an inventory
of unassembled chair components that enables it to respond quickly to large
quantity orders in a variety of finish and fabric combinations.
See " ---Manufacturing."
WinsLoew believes that an important element of its success in the contract
seating business is its long-standing and frequently exclusive relationships
with leading Italian design firms, as well as its proven ability to offer
innovative products that are sturdy, aesthetically appealing and scaled for the
United States market. This belief is based upon WinsLoew's extensive industry
experience and discussions with key customers, sales representatives and
competitors. WinsLoew continually reviews and reconsiders its contract
furniture designs, and annually adds and deletes designs as it deems
7
appropriate to address perceived marketing opportunities. WinsLoew generally
begins the design process by identifying marketing needs and conceptualizing
product ideas through regular meetings of its senior management team.
Reflecting its focus on both sales and manufacturing, WinsLoew also solicits
opinions with respect to trends in styles, colors and other design elements
from its sales representatives, customers, and employees prior to final design
selection. Preliminary sketches are provided to either WinsLoew's manufacturing
personnel or WinsLoew's European suppliers, who in turn engineer the product's
construction and produce one or more prototypes in preparation for actual full
- -scale production. New products are generally introduced at national or
regional furniture markets. WinsLoew's custom design capabilities also allow it
to modify styles, materials and production in order to provide customers with
products that meet their particular needs.
RTA Furniture
WinsLoew's promotionally priced RTA furniture "spindle" products include
coffee tables, end tables, wall units, desks, chairs, children's furniture and
rolling carts. Promotionally priced furniture products also include "flatline"
products such as bookcases and wall units. RTA products also include
ergonomically designed "space savers", including modular desk and computer
workstations. WinsLoew's futon products consist of futons (mattresses), frames,
covers and related accessories. Frames are constructed of hardwood and pine,
and come in a variety of sizes. Hardwood frames are finished in a variety of
stains, while pine frames are unfinished. Futons are constructed of fabric
shells stuffed with foam and cotton. Covers for futons are available in a
variety of fabrics. Accessories include ottomans, end tables and cocktail
tables. Frames are sold unassembled in a box containing all components,
hardware, and instructions necessary for assembly. In addition to manufactured
frames, the Company imports and distributes frames that account for
approximately one half of the frames sold.
RTA furniture products are sold unassembled in a box that contains all
components and hardware necessary for home-assembly. WinsLoew's merchandising
approach for RTA furniture products emphasizes products with a stable,
predictable demand, as well as self-service convenience. For example, the
lithographed product boxes include color pictures, a listing of product features
and assembly instructions that allow retailers to utilize available floor space
and shelf space efficiently.
MANUFACTURING
Casual Furniture
WinsLoew has manufacturing facilities for casual furniture products in
Haleyville, Alabama, Salisbury, North Carolina, and Houston, Texas. The
facilities in Haleyville manufacture extruded and tubular aluminum casual
furniture and most related accessories, including cushions and umbrellas. The
facility in Salisbury manufactures wrought iron casual furniture and most
related accessories. In the Houston facility, the Company manufactures
extruded and tubular aluminum, steel and wood furniture. WinsLoew's goal at its
facilities is to produce a high quality product at the lowest possible
manufacturing cost and deliver it in a timely manner to dealers. WinsLoew's
international products are manufactured in Mexico. See "---Marketing and Sales."
Winston Division - Haleyville, Alabama. WinsLoew's aluminum furniture
manufacturing facility in Haleyville manufactures goods exclusively to order.
Products are normally shipped on the day completed, eliminating the need to
maintain finished goods inventory. WinsLoew provides timely delivery service
by typically shipping goods within three weeks after credit approval.
In the manufacturing process, extruded aluminum tubes are cut to size and shaped
or bent in specially designed machinery. The aluminum is then welded to form
a solid frame, and the frame is subjected to a grinding and buffing process to
eliminate any rough spots that may have been caused during welding. After this
process is completed, the frame is cleaned, painted in a state-of-the-art powder
coating system and heat cured. WinsLoew then adds to vinyl strapping, cushions,
fabric slings, or other accessories to the finished frame, as appropriate.
The product is then packaged with umbrellas, tempered glass and other
accessories, as applicable, and shipped to the customer.
WinsLoew's Haleyville facilities were extensively refurbished and modernized in
late 1984 and significantly expanded in 1990 and 1993. WinsLoew believes that
its Haleyville facilities are some of the most modern in the casual aluminum
8
furniture industry, and that the efficiencies attributable to these plants are
a significant factor in WinsLoew's relatively low manufacturing costs.
WinsLoew's vertical integration provides additional manufacturing efficiencies.
WinsLoew manufactures cushions for its aluminum furniture in Haleyville, and,
in addition, cuts, sews and assembles the fabric covers that are combined with
pre-assembled poles to produce outdoor umbrellas.
WinsLoew believes that it manufactures the highest quality aluminum casual
furniture in its price range. The major frame components of the aluminum
furniture are welded, and not riveted or bolted, thereby increasing the
durability and enhancing the appearance of the aluminum product line. The
powder coated painting process results in an attractive and durable finish.
To ensure that only the highest quality products are shipped to customers,
WinsLoew's quality control department has established control check points
where the quality of 100% of its aluminum products is examined during the
manufacturing process. These processes allow WinsLoew to offer a two-year
frame and finish guarantee on all of its aluminum products for residential
use. Warranty expense to date has been negligible.
Lyon-Shaw Division - Salisbury, North Carolina. The process of manufacturing
the wrought iron products of this division is essentially the same as
WinsLoew's aluminum line. WinsLoew offers a two-year frame guarantee on its
wrought iron products for residential use. To date, warranty expense has been
negligible.
Texacraft Division - Houston, Texas. WinsLoew's Houston facility includes an
aluminum furniture manufacturing facility with processes essentially the same
as WinsLoew's aluminum line in Haleyville. Additionally, the Houston facility
manufactures steel and wood furniture and includes a fiberglass manufacturing
facility for tables, umbrellas, and accessories.
Contract Seating
WinsLoew currently utilizes approximately 226,000 square feet of manufacturing
space for contract seating production in facilities located in Florida and
North Carolina.
Loewenstein Division - Pompano Beach, Florida. This facility assembles and
finishes to customer order most of WinsLoew's contract seating products (other
than the casual contract products described above). Component parts are either
purchased from a variety of suppliers, including a number of European
manufacturers, or manufactured by WinsLoew's Gregson division. The principal
elements of wood chair assembly include: (i) frame glue-up; (ii) sanding; (iii)
seat assembly (in which upholstered seats are constructed from component
bottoms, foam padding and cloth coverings); and (iv) painting/lacquering. To
provide consistency and speed in this finishing process, WinsLoew utilizes a
state-of-the-art conveyorized paint line with electrostatic spray guns and a
three-dimensional ultraviolet drying system. For upholstered products, the
specified fabric cloth is stretched to the chair frame over foam padding.
Metal chairs are generally assembled from imported components. After rework
and leveling, chairs are cartoned to prevent damage in transportation. The
manufacturing process also includes a number of product inspections and other
quality control procedures.
Gregson Division - Liberty, North Carolina. This manufacturing facility is
vertically integrated and includes such operations as kiln-drying, cutting,
planing, gluing, veneering, sanding, routing, carving, shaping, assembling,
upholstering, and finishing. Based on WinsLoew's experience during the past
several years, WinsLoew believes that this manufacturing flexibility minimizes
the risks of relying on third-party suppliers for component parts and frequently
permits a faster response to customer needs. While styling is continuously
updated, the basic construction process does not change significantly from year
to year, which reduces the need for substantial modifications to the production
process.
RTA Furniture
Southern Wood Division - Sparta, Tennessee. This facility constructs RTA
furniture from high density particle board, dowels, and wood scrap materials.
The particle board is available from various manufacturers. For "spindle"
furniture the dowels and wood scrap materials are available from various
sources and are generally the by-product of other processes such as the
production of wooden tool handles and dimension stock. WinsLoew is generally
9
able to purchase these scrap materials at an attractive cost because the
primary alternative use for such materials is as a waste fuel source. A wood
grain pattern is imprinted on the particle board using a laminating process,
and these boards are then cut to the proper length and width, shaped and
completed with plastic molding. Spindles are produced by automated lathes,
sanded, stained and lacquered. Each piece of furniture is individually boxed
and includes board, spindles, bolts and assembly instructions.
Continental - Irwindale, California. This facility designs and manufactures
ergonomically designed "space savers", modular computer desks and workstations.
The particle board is laminated and then cut and drilled, if necessary, on
automated machinery. The board moves from station to station on a conveyor
system, which moves material through the facility. The individual pieces then
have the appropriate hardware attached, and then are boxed along with assembly
instructions.
New West Futon Division - Sparta, Tennessee. This facility manufactures futons,
chairs, tables and related accessories marketed under the New West trademark.
The futon unit consists of three distinct components: frame, the mattress and
cover. Each of these components are manufactured, although WinsLoew purchases
some items both domestically and overseas. Dimension stock is then assembled
as a frame and one of a variety of finishes is applied to the frame. The
mattress is produced with specialized equipment and is usually filled with
cotton. However, upgrades include polyurethane foam and pocketed coil springs.
Finally, covers, in a wide variety of fabric options (including the customer's
own materials), are cut and sewn to fit the mattress. Each of these components
is then boxed and can be sold separately or in combination.
New West Division - Santa Clara, California. The California facility is used
primarily for distribution of product to West Coast customers. Mattresses are
produced at this facility using essentially the same processes as the Tennessee
facility.
Manufacturing Capacity
Management believes that the Company's manufacturing facilities are currently
operating, in the aggregate, at approximately 75% of capacity, assuming a
one-shift basis. Management considers the Company's present manufacturing
capacity to be sufficient for the foreseeable future and believes that, by
adding multiple shift operations, the Company can significantly increase the
total capacity of its facilities to meet growing product demand with minimal
additional capital expenditures. In addition, the Company engages in an ongoing
maintenance and upgrading program, and considers its machinery and equipment
to be in good condition and adequate for the purposes for which they are
currently used.
The Company has excess space in its futon production facilities and has plans
to consolidate and dispose of a portion of these facilities.
MARKETING AND SALES
Casual Furniture
WinsLoew markets its residential casual furniture products throughout the
United States, Canada and the Caribbean. Substantially all of WinsLoew's
residential sales are currently made to customers located east of the Rocky
Mountains. WinsLoew's residential products are marketed to approximately
2,500 active customers, including specialty patio stores, full-line furniture
retailers, and department stores. WinsLoew also sells its contract casual
products to certain commercial end-users such as hotels, restaurants, country
clubs, exporters, interior designers, and developers of apartments and motels.
Substantially all of WinsLoew's residential products are sold through
approximately 30 independent manufacturer's representatives. Each
representative (i) is assigned a territory in which to promote, solicit, and
sell WinsLoew's products; (ii) agrees to assist in the collection of
receivables and adjustment of any complaints with regard to his or her sales;
and (iii) receives commissions based on the net sales made in his or her
territory. WinsLoew determines the prices at which its products will be sold
and may refuse to accept any orders submitted by a sales representative for
credit-worthiness or other reasons. WinsLoew's representatives may carry
other products which do not directly compete with WinsLoew's product lines.
WinsLoew has long-standing relationships with most of its representatives.
10
WinsLoew's marketing program assists its representatives in various ways.
WinsLoew: (i) holds exhibitions at national and regional furniture shows and
leases a year-round showroom at the Merchandise Mart in Chicago, Illinois;
(ii) provides retailers with annual four-color catalogs of its products, sample
materials illustrating available colors and fabrics, point of sale materials,
and special sales brochures; (iii) provides information directly to
representatives at annual sales meetings attended by senior management and
manufacturing personnel; (iv) maintains a customer service department which
ensures that WinsLoew promptly responds to the needs and orders of WinsLoew's
customers; (v) maintains regular contact with key retailers; and (vi) conducts
ongoing surveys to determine dealer satisfaction. WinsLoew's casual contract
products are marketed nationally through a team of company and independent sales
representatives.
The Winston International division of WinsLoew was organized primarily for
the purpose of distributing casual furniture products that are not manufactured
by WinsLoew. Winston International's current product offerings include a line
of cast aluminum products. This product line is inventoried, distributed, and
administered in Haleyville, Alabama.
Contract Seating
WinsLoew's hospitality and other institutional contract seating products are
sold primarily to architectural design firms, restaurant, lodging chains,
office furniture dealers, and retail store planners. WinsLoew's office and
other institutional seating products are sold primarily to office furniture
dealers and lodging chains. Substantially all of WinsLoew's contract seating
products are sold through approximately 40 independent sales representative
organizations that employ approximately 100 sales associates. Each sales
representative (i) promotes and sells WinsLoew's products in an assigned
territory; (ii) assists WinsLoew in responding to customer service request;
and (iii) receives commissions based on the net sales made in his or her
territory. WinsLoew determines the prices at which its products will be sold,
and may refuse to accept any orders submitted by a sales representative for
creditworthiness or other reasons.
WinsLoew's marketing program assists its representatives in various ways.
WinsLoew (i) holds exhibitions at national shows; (ii) provides its
representatives and customers with four color catalogs of its products; (iii)
provides information to representatives at sales meetings, and (iv) maintains
a customer service department that ensures WinsLoew promptly responds to the
needs and orders of customers.
RTA Furniture
WinsLoew's promotional RTA furniture products are sold primarily by outside
sales representatives. The Company distributes price lists and catalogs of
its products. Promotionally priced RTA products are sold primarily to mass
merchandisers, discounters, and warehouse clubs.
Upper priced "space savers" are sold by a team of in-house and independent
representatives primarily to catalog and office furniture wholesalers. Product
catalogs, brochures and price lists are prepared by the Company as sales
material for its salespersons. Additionally the Company purchases "pages" in
catalogs issued by the wholesalers as a means of marketing its products to
retailers. The Company holds exhibitions at national shows and maintains a
customer service department to ensure WinsLoew promptly responds to the needs
and orders of customers.
Futons, frames, covers and related accessories are sold by independent sales
personnel to specialty store retailers and selected mass merchants and national
accounts. WinsLoew has distribution facilities in Tennessee and California.
The Company exhibits at national and regional shows and leases a showroom in
High Point, NC. The Company provides its representatives with four color
catalogs and price lists. WinsLoew maintains a customer service department
in Tennessee to assist customers nationwide.
BACKLOG
As of December 31, 1996, WinsLoew's backlog of orders was approximately $13.1
million, compared to $16.0 million at December 31, 1995. WinsLoew, in
accordance with industry practice, generally permits orders to be canceled
prior to shipment without penalty. Management does not consider backlog to be
predictive of future sales activity because of WinsLoew's short manufacturing
cycle and delivery time, and, especially in the case of casual furniture, the
seasonality of sales.
11
RAW MATERIALS AND FOREIGN SOURCING
WinsLoew manufactures most of its products to order from basic raw materials,
and, consequently, is able to avoid carrying large amounts of finished goods
inventory particularly in its casual and contract seating product lines.
WinsLoew also attempts to maintain minimum levels of raw material inventory.
WinsLoew's principal raw materials consist of extruded aluminum tubes, steel
rods, woven vinyl fabrics, paint/finishing materials, vinyl strapping, cushion
filler materials, cartons, glass table tops, component parts for contract
seating, particle board and other lumber products and hardware. Although
WinsLoew has no long-term supply contracts, it generally has a number of sources
for its raw materials and has not experienced any significant problems in
obtaining adequate supplies for its operations. Nevertheless, the purchase of
aluminum is, from time to time, highly competitive, and its price, as a
commodity, is subject to market conditions largely beyond WinsLoew's control.
In addition, fluctuations in lumber prices and the costs of other raw materials
have not historically had a material adverse effect on WinsLoew's results of
operations.
However, there can be no assurance that future price increases will not have
a material adverse effect on WinsLoew's financial condition and results of
operations. Management believes that WinsLoew's policy of maintaining several
sources for most supplies contributes to its ability to obtain competitive
pricing.
A significant portion of the Loewenstein raw materials and New West finished
goods consist of component chair parts and bed frames purchased from several
Italian, European, and Indonesian manufacturers. WinsLoew views its suppliers
as "partners" and works with such suppliers on an ongoing basis to design and
develop new products. WinsLoew believes that these cooperative efforts, its
long-standing relationships with these suppliers and its experience in
conducting on-site, quality control inspections provide it with a competitive
advantage over many other furniture manufacturers, including a competitive
purchasing advantage in times of product shortages. In addition, in the case
of Italian and European suppliers, WinsLoew generally contracts for its
purchases of such component parts in such manner as to minimize its exposure
to foreign currency fluctuations. Although WinsLoew has close working
relationships with its foreign suppliers, WinsLoew's future success may
depend, in part, on maintaining such or similar relationships. Given the
special nature of the manufacturing capabilities of these suppliers, in
particular certain wood-bending capabilities, and sources of specialized wood
types, the Loewenstein division could experience a disruption in their
operations in the event of any required replacement of such suppliers. There
can also be no assurance that situations beyond WinsLoew's control, including
political instability; significant and prolonged foreign currency fluctuations,
economic disruptions, the imposition of tariffs and import and export controls,
changes in government policies and other factors will not have a material
adverse effect on WinsLoew.
FURNITURE INDUSTRY AND COMPETITION
The furniture industry is cyclical and affected by changes in general economic
conditions, consumer confidence and discretionary income, interest rate levels,
and credit availability. Sales of casual furniture products are also affected
by weather conditions during the peak retail selling season and the resulting
impact on consumer purchases of outdoor furniture products.
The furniture industry is highly competitive and includes a large number of
manufacturers, none of which dominate the market. Certain of the companies
which compete directly with WinsLoew may have greater financial and other
resources than WinsLoew. Based on its extensive industry experience, management
believes that competition in casual furniture and contract seating is generally
a function of product design, construction quality, prompt delivery, product
availability, customer service and price. Management similarly believes that
competition in WinsLoew's promotional price niche of the RTA furniture industry
is limited, and is based primarily on prompt delivery, product availability,
customer service and price.
WinsLoew believes that it successfully competes in the furniture industry
primarily on the basis of its innovatively styled product offerings and
merchandising programs, the quality of its products, and WinsLoew's emphasis
on providing high levels of customer service. While sales of imported, foreign
- -produced casual furniture have increased significantly in recent years,
WinsLoew's sales have not been adversely affected because such foreign products
are generally (i) limited in design, styles and colors; (ii) of lesser quality
than WinsLoew's products; (iii) marketed in the lower-end price range; and
(iv) not supported with competitive customer service and responsiveness to
customers' needs for quick delivery. WinsLoew's futon operations comprises one
of the largest futon manufacturers in the United States, with distribution
facilities coast-to-coast.
12
TRADEMARKS AND PATENTS
WinsLoew has registered the following trademarks with the United States Patent
and Trademark Office: Winston, Lyon-Shaw, Loewenstein/Oggo, From the Source,
Gregson, Southern Wood Products, and LeCasso. Management believes that
WinsLoew's trademark position is adequately protected in all markets in which
WinsLoew does business. WinsLoew also believes that its various trade names are
generally well recognized by dealers and distributors, and are associated with
a high level of quality and value.
WinsLoew holds several design and utility patents, and has applications pending
for issuance of other design and utility patents. Because WinsLoew believes
that it is an innovator of styles and designs, it is WinsLoew's policy to apply
for design and utility patents on those designs which WinsLoew believes may be
of significance to WinsLoew.
EMPLOYEES
At December 31, 1996, WinsLoew had approximately 1,266 full-time employees, of
whom 64 were employed in management, 161 in sales, general, and administrative
positions, and 1,041 in manufacturing, shipping, and warehouse positions.
The only employees subject to collective bargaining agreements are approximately
147 of WinsLoew's hourly employees in Haleyville, Alabama, who are represented
by the Retail, Wholesale, and Department Store Union. The labor agreement
between WinsLoew and such union, which expires on July 31, 2001, provides that
there shall be no strikes, slowdowns, or lockouts. WinsLoew considers its
employee relations to be good.
ENVIRONMENTAL MATTERS
WinsLoew's management believes that WinsLoew complies in all material respects
with all applicable federal, state and local provisions relating to the
protection of the environment. The principal environmental regulations that
apply to WinsLoew govern air emissions, water quality, and the storage and
disposition of solvents. Compliance with environmental protection laws and
regulations has not had a material adverse impact on WinsLoew's financial
condition or results of operations in the past, and is not expected to have
a material adverse impact in the future.
On November 23, 1993, WinsLoew was named as a potentially responsible party
by the United States Environmental Protection Agency ("EPA") for cleanup at
the Carolawn Superfund Site in Ft. Lawn, Chester County, South Carolina.
WinsLoew denied it sent any waste to the site, nor is responsible in any way
for its cleanup. The EPA has produced documents showing that in 1972 (prior
to the acquisition of WinsLoew's Lyon-Shaw division), Lyon-Shaw may have had
Southeastern Pollution Control, Inc. ("SEPCO") pick up waste for disposal at
another site, and suspects that SEPCO may have moved some waste from that
site to the Carolawn site, which it also operated. In 1987, WinsLoew purchased
certain assets of Lyon-Shaw from a seller which is still in existence. The
agreement did not provide for an assumption of this type of liability. Based
on the percentage of the Lyon-Shaw waste to the total waste, it would appear
that if WinsLoew did have any liability at the Carolawn Superfund Site, it
would not exceed $10,000. Pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act, however, any potentially responsible party
may be held jointly and severally liable for all remedial costs.
13
ITEM 2. Properties
The following table provides information with respect to each of the Company's
facilities:
________________________________________________________________________________
| | | |Approximate| | | |
| | | |Building |Approximate| | |
| | | |Area | Land Area | Owned| Lease |
| | | |(square) | Owned | or |Expiration|
| Location | Division | Primary Use | feet) | (acres) |Leased| Date |
|-----------|----------|-------------|-----------|-----------|------|----------|
|Pelham, | | | | | | |
| AL | All |Headquarters | 11,500 | 1.8 | Owned| N/A |
|-----------|----------|-------------|-----------|-----------|------|----------|
|Haleyville,| |Manufacturing| | | | |
| AL | Winston | and Offices | 155,000 | 17 | Owned| N/A |
|-----------|----------|-------------|-----------|-----------|------|----------|
|Haleyville,| | | | | | |
| AL | Winston | Warehouse | 20,000 | 1 | Owned| N/A |
|-----------|----------|-------------|-----------|-----------|------|----------|
|Haleyville,| | | | | | |
| AL | Winston |Sewing Plant | 30,000 | 1 | Owned| N/A |
|-----------|----------|-------------|-----------|-----------|------|----------|
|Salisbury, | |Manufacturing| | | | 10/31/99 |
| NC |Lyon-Shaw | and Offices | 130,000 | N/A |Leased| (a) |
|-----------|----------|-------------|-----------|-----------|------|----------|
|Salisbury, | | | | | | |
| NC |Lyon-Shaw |Sewing Plant | 15,000 | N/A |Leased| 10/09/05 |
|-----------|----------|-------------|-----------|-----------|------|----------|
|Chicago, | Casual |Merchandise | | | | |
| IL | Division |Mart Showroom| 12,000 | N/A |Leased| 8/31/02 |
|-----------|----------|-------------|-----------|-----------|------|----------|
|Houston, | |Manufacturing| | | | |
| TX |Texacraft | and Offices | 89,500 | N/A |Leased| 4/15/05 |
|----------------------|-------------|-----------|-----------|------|----------|
|Pompano | |Manufacturing| | | | |
|Beach, FL |Loewenstein| and Offices | 100,000 | 13.8 | Owned| N/A |
|----------|-----------|-------------|-----------|-----------|------|----------|
|Pompano | | | | | | |
|Beach, FL |Loewenstein| Warehouse | 6,500 | N/A |Leased| 12/2/95 |
|----------|-----------|-------------|-----------|-----------|------|----------|
|Liberty, | |Manufacturing| | | | |
| NC |Gregson | and Offices | 126,000 | 9.5 | Owned| N/A |
|----------|-----------|-------------|-----------|-----------|------|----------|
|Sparta, |Southern | | | | | |
| TN | Wood |Manufacturing| 94,300 | 10.0 | Owned| N/A |
|----------|-----------|-------------|-----------|-----------|------|----------|
|Sparta/ | | | |(three | | |
|Cookeville| | | |facilities)| | |
| TN |New West |Manufacturing| 190,400 | 43.5 | Owned| N/A |
|----------------------|-------------|-----------|-----------|------|----------|
|Santa Clara| |Manufacturing| | | | |
| CA |New West | and Offices | 47,680 | N/A |Leased| 6/30/99 |
|----------------------|-------------|-----------|-----------|------|----------|
|Irwindale,| |Manufacturing| | | | |
| CA |Continental| and Offices | 91,655 | N/A |Leased| 1/31/98 |
|______________________________________________________________________________|
__________________________
(a) Renewable for two successive five-year terms.
For additional information with respect to the Company's lease
obligations, see Note 8 of Notes to the Company's Consolidated Financial
Statements included in this Annual Report on Form 10-K.
Substantially all of the company's assets are currently pledged as
collateral for a credit facility. See Note 3 of Notes to the Company's
Consolidated Financial Statements included in this Annual Report on Form 10-K.
14
ITEM 3. Legal Proceedings
From time to time, the Company is subject to legal proceedings and other
claims arising in the ordinary course of its business. The Company maintains
insurance coverage against potential claims in an amount which it believes to
be adequate. Based primarily on discussions with counsel and management
familiar with the underlying disputes, the Company believes that it is not
presently a party to any litigation, the outcome of which would have a
material adverse effect on its business or operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
None
15
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock has been listed for quotation on the Nasdaq National
Market System under the symbol "WLFI" since January 1, 1995. The following
table sets forth, for the period indicated, the high and low sales prices per
share of Common Stock as reported by the Nasdaq National Market System:
High Low
1995
First Quarter ............. $7 $5 1/4
Second Quarter ............ $6 1/8 $3 5/8
Third Quarter ............. $6 5/8 $4 1/8
Fourth Quarter ............ $6 7/8 $5 1/4
1996
First Quarter ............. $6 3/4 $4 7/8
Second Quarter ............ $6 1/4 $5 1/2
Third Quarter ............. $8 1/2 $5
Fourth Quarter ............ $10 1/8 $6 7/8
As of March 10, 1997, there were approximately 215 holders of record of Common
Stock. The closing sale price for the Common Stock on March 10, 1997, was
$9-5/16.
The Company has not declared nor paid any cash dividends on its Common Stock,
does not anticipate that any dividends will be declared nor paid in the
foreseeable future, and intends to retain earnings to finance the development
and expansion of the Company's operations. In addition, the Company's payment
of dividends is also restricted under the terms of its credit facilities (see
Note 3 of Notes to the Company's Consolidated Financial Statements).
16
Item 6. Selected Financial Data
The following selected financial data are derived from the Consolidated
Financial Statements of WinsLoew included elsewhere herein. The following
data should be read in conjunction with WinsLoew's Consolidated Financial
Statements and related notes, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the other financial
information included herein.
Years Ended December 31,
---------------------------------------------------
1996 1995 1994 1993 (1) 1992 (1)
---------------------------------------------------
(In thousands, except per share amounts)
Income Statement Data:
Net sales $143,979 $147,202 $137,842 $102,863 $93,296
Cost of sales 97,760 110,468 98,434 69,876 61,467
-------- -------- -------- -------- -------
Gross profit 46,219 36,734 39,408 32,987 31,829
Selling, general and
administrative expenses 28,501 26,699 22,256 17,516 16,257
Amortization 1,643 2,224 2,000 1,922 1,903
Charges for restructuring (2) -- 7,136 -- -- --
Non-recurring charges (2) -- -- 1,462 1,814 --
-------- -------- -------- -------- -------
Operating income 16,075 675 13,690 11,735 13,669
Interest expense 3,083 3,841 2,795 3,136 5,483
-------- -------- -------- -------- -------
Income (loss) before
income taxes and
extraordinary items 12,992 (3,166) 10,895 8,599 8,186
Provision for income taxes 4,708 285 4,543 3,381 3,196
-------- -------- -------- -------- -------
Income (loss) before
extraordinary items 8,284 (3,451) 6,352 5,218 4,990
Extraordinary items (2) -- (593) -- (1,223) --
-------- -------- -------- -------- -------
Net income (loss) $8,284 ($4,044) $6,352 $3,995 $4,990
======== ======== ======== ======== =======
Earnings (loss) per share:
Income (loss) before
extraordinary items $0.95 ($0.38) $0.66 $0.65 $0.76
Extraordinary items -- (0.07) -- (0.15) --
-------- -------- -------- -------- -------
Net income (loss) per share $0.95 ($0.45) $0.66 $0.50 $0.76
======== ======== ======== ======== =======
Weighted average shares and
common share equivalents
outstanding 8,724 9,029 9,655 8,075 6,596
======== ======== ======== ======== =======
December 31,
---------------------------------------------------
1996 1995 1994 1993 (1) 1992 (1
---------------------------------------------------
(In thousands)
Balance Sheet Data:
Working capital $40,152 $43,677 $51,957 $33,984 $19,159
Total Assets 101,408 105,370 114,925 93,424 75,027
Long-term debt
(less current portion) 38,776 40,191 39,098 21,330 43,132
Total debt 40,733 42,006 40,907 24,286 48,943
Stockholders' equity 48,400 53,228 60,680 56,536 14,806
(1) Represents the combined results of Winston and Loewenstein, which are
the predecessor companies to WinsLoew.
(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for discussion ofthese items.
17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
WinsLoew is comprised of companies engaged in the design, manufacture and
distribution of casual furniture, contract seating, and ready-to-assemble
("RTA") furniture. WinsLoew's casual furniture products are distributed
through independent manufacturer's representatives, and are constructed of
extruded and tubular aluminum, wrought iron and cast aluminum. These
products are distributed through fine patio stores, department stores and
full line furniture stores nationwide. WinsLoew's contract seating products
are distributed to a broad customer base which includes architectural design
firms, and restaurant and lodging chains. WinsLoew's RTA products include
ergonomically-designed computer workstations, which the company denotes as
"space savers", promotionally-priced coffee and end tables, wall units and
rolling carts and an extensive line of futons, futon frames and related
accessories. Distribution of RTA furniture products is primarily through
mass merchandisers, catalogue wholesalers and specialty retailers.
Results of Operations
The following table sets forth net sales, gross profit and gross margin as a
percent of net sales for the years ended December 31, 1996, 1995 and 1994
for each of the Company's product lines (in thousands, except for percentages):
1996 1995 1994
---------------------- ---------------------- ----------------------
Net Gross Gross Net Gross Gross Net Gross Gross
Sales Profit Margin Sales Profit Margin Sales Profit Margin
------- ------- ------ ------- ------- ------ ------- ------- ------
Casual
furniture $58,066 $23,812 41.2% $55,758 $19,681 35.3% $46,505 $17,061 36.7%
Contract
seating 48,629 14,126 29.3% 39,685 10,763 27.1% 36,779 10,345 28.1%
RTA 37,284 8,281 22.2% 51,759 6,290 12.2% 54,558 12,002 22.0%
--------- ------- --------- ------- -------- -------
Total $143,979 $46,219 32.1% $147,202 $36,734 25.0% $137,842 $39,408 28.6%
========= ======= ========= ======= ======== =======
The following table sets forth certain information relating to the Company's
operations expressed as a percentage of the Company's net sales:
For the Years Ended December 31,
----------------------------------
1996 1995 1994
-------- -------- --------
Gross profit 32.1% 25.0% 28.6%
Selling, general and
administrative expense 19.8% 18.1% 16.1%
Amortization 1.1% 1.5% 1.5%
Charges for restructuring -- 4.8% --
Operating income 11.2% 0.5% 9.9%
Interest expense 2.1% 2.6% 2.0%
Income (loss) before income
taxes and extraordinary item 9.0% (2.2%) 7.9%
Net income (loss) 5.8% (2.7%) 4.6%
18
Comparison of Years Ended December 31, 1996 and 1995
Net Sales: WinsLoew's consolidated net sales for 1996 decreased $3.2 million
to $144.0 million, compared to $147.2 million in 1995. Two of the Company's
three product lines experienced sales increases. Casual product line sales
increased by 4.1%. The Company believes that due to its high quality and
innovative designs, existing retail customers have allocated more floor space,
requiring larger inventories of the Company's casual aluminum furniture. The
contract seating product line experienced a sales increase of 22.5% since
construction in the lodging industry increased demand. RTA product line sales
decreased by 28.0% due to the Company's restructuring of this product line in
September, 1995. This restructuring resulted in the Company exiting the
promotionally-priced seating market, beginning a transition from traditional
lower margin RTA products to higher margin products. Also in 1996, some mass
merchants purchased fewer products as a result of price increases in the RTA
product line. In late 1995, WinsLoew began rebuilding its specialty store
futon business. However, sales of futon products to the specialty store market
have declined from the levels of 1995. These decreases were offset by
Continental Engineering Group, Inc., which was included for all of 1996.
Gross Margin: Consolidated gross margin increased to 32.1% in 1996, compared
to 26.1% (excluding provisions for excess and obsolete inventory of $1.4 million
for RTA and $325,000 for contract seating) in 1995. Each of WinsLoew's
product lines experienced increases in gross margin. The casual and contract
seating product lines had improved gross margins in 1996, due to greater
operating efficiencies from increased sales volumes. The casual product line
also experienced favorable raw material costs in 1996. The RTA product line
gross margin improved by 10.0 percentage points. This increase is primarily
the result of the acquisition of Continental Engineering Group, Inc., whose
products have higher gross margins than the Company's traditional RTA products
and the Company's sale of its promotionally-priced seating business which
eliminated sales of these lower margin products. As noted above, WinsLoew has
reduced lower margin product offerings and certain mass merchant market sales.
The Company has also reduced manufacturing overhead, labor and material costs
in the RTA product line. These factors have allowed WinsLoew to improve
margins at a lower level of sales.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased in 1996 due to the addition of Continental
for all of 1996, increased commissions as a result of increased sales volume
in the casual and contract seating product lines, increased sales promotional
expenses and increased provisions for uncollectable accounts receivable.
Operating Income: As a result of the above, WinsLoew recorded operating
income of $16.1 million (11.2% of net sales) in 1996 compared to operating
income of $675,000 (0.5% of net sales) in 1995.
Interest Expense: WinsLoew's interest expense decreased $758,000 in 1996,
compared to 1995. The Company had reduced its debt by $10.7 million up until
December 31, 1996, when it purchased $9.3 million of its common stock. This
stock purchase resulted in a net debt reduction in 1996 of $1.4 million. These
reductions in debt levels and the Company's increased profitability have led to
improved financial ratios and, in turn, allowed the Company to pay lower
spreads between the base rate and LIBOR and the rates which the Company is
obligated to pay to its lenders. These lower spreads decreased the Company's
effective interest rate below those incurred in 1995.
Provision for Income Taxes: WinsLoew's 1996 effective tax rate of 36.2% is
greater than the federal statutory rate due to the effect of state income
taxes and non-deductible goodwill amortization. The Company recorded an
income tax provision of $285,000 in 1995 while incurring a net loss for the
period. This anomaly in 1995 is due primarily to the non-deductibility of
goodwill amortization and the write-off of goodwill which was included in the
$2.5 million charge recorded for exiting the RTA seating product market as
described below.
19
1995 Charges for Restructuring
As discussed below and in Note 5 of the Notes to Consolidated Financial
Statements for 1996, WinsLoew recorded a charge in 1995 of $7.1 million
related to a plan to redirect the marketing and operations of the Company's RTA
product line. The restructuring plan was substantially completed during 1995.
However, as part of the restructuring, the Company had excess capacity at its
RTA manufacturing facilities. The Company disclosed plans to consolidate these
production facilities into fewer locations and sell any excess facilities. As
a result, WinsLoew recorded a charge of $655,000 to reduce excess facilities to
their estimated realizable value. In the first quarter of 1996, management
completed its review of its facilities, culminating in a decision to
consolidate its Tennessee operations from four facilities to two facilities.
This consolidation has resulted in no material change to the charge recorded
in 1995. WinsLoew's management is exploring ways to minimize the cost of this
consolidation effort so as to have an insignificant effect on cash flows. As a
result, while originally scheduled to be completed during the third quarter of
1996, the consolidation effort has extended into the first quarter of 1997.
Comparison of Years Ended December 31, 1995 and 1994
Charges for Restructuring and Other Special Charges: As described above, the
Company is the product of a merger of two companies which operated before the
merger in a variety of furniture markets, businesses and product line offerings.
Following the merger, management undertook a review of the marketing and
operations strategy of certain of the Company's businesses, including a
review of recorded asset balances, particularly inventories, for possible
reduction in carrying values.
As a result of this review, the Board of Directors adopted a plan to redirect
the marketing and operations of certain of the Company's businesses. The plan
included exiting certain markets and product lines. As a result of the changes
to be implemented, the Company recorded a charge of $7.1 million for
restructuring. This charge is the result of management's plan to make
changes in the product lines, management, marketing focus, and operational
strategy in the Company's RTA product line.
The table below summarizes the charges for restructuring recorded in 1995:
Reduction in carrying value of
promotionally-priced
seating subsidiary held for sale $2,526,000
Reduction in carrying values of
manufacturing facilities
held for sale and other asset write-downs 848,000
Reduction in inventory values from exiting
certain futon product lines 3,372,000
Severance costs for certain former management 390,000
-----------
Total $7,136,000
===========
Management's review also identified other operating and financial issues related
to ongoing operations of the Company, which were not recorded as part of the
charges for restructuring. The review resulted in additional operating charges
totaling $2.4 million (6.2% of net sales). These additional charges include
$1.7 million for inventory which was considered excess, unusable or obsolete and
$650,000 for accounts receivable which were considered uncollectable.
Management reviewed the marketing strategy and operating philosophies of the
RTA division and proposed several changes, noted below, that were approved as
part of the plan. The plan generally is to move the Company to higher margin
products and away from lower margin products.
20
In March, 1995, the Company acquired Continental Engineering Group, Inc.
("Continental"), a manufacturer of ergonomically-designed "space savers".
Continental's products are designed and priced in the upper-end price points
of the RTA furniture market, and provide a higher gross margin and growth rates
than current RTA product offerings of the Company. Continental's success led
management to explore the development of higher margin product lines within
its traditional RTA businesses.
Prior to the purchase of Continental, this division had served the low-end
price points of the RTA market by distributing through mass merchant retailers.
During 1995, the Division's margins declined due to a switch in product mix
from predominately spindle products to a more balanced mix of spindle and
flatline products. As part of the plan, the division expects to increase its
gross margins through new product introductions in both spindle and flatline
products, and at the same time, discontinue its traditional lower margin
products.
Another part of the plan was to re-focus the Company's marketing of its futon
products. During 1994, sales of futon products grew rapidly as a result of
the introduction of low-end products offered to mass merchants. In an effort
to serve those customers, service and quality suffered in the core specialty
store business. In 1995, the Company discontinued serving the low-end mass
merchant business and re-focused efforts on rebuilding the specialty store
business. The Company reduced the number of futon products offered to this
niche in order to improve manufacturing efficiencies, focus on its best selling
products and to reduce overall inventory levels.
As a result, Management determined that there were excess inventory levels
related to the old product lines from which the Company was exiting. The
Company reviewed the inventory for these product lines and, during the third
quarter, recorded a charge of $2,622,000 to reduce the carrying value of
related inventory. During the fourth quarter, Management continued its
review of the futon product line and identified additional inventory to be
included in the discontinued product lines which increased this charge to a
total of $3,372,000 for the year.
As an additional part of the restructuring of the RTA business, the Board of
Directors approved a plan to exit the market for promotionally-priced seating
products for office furniture wholesalers through the sale of a subsidiary
which manufactured and distributed this product line. These products, which
were generally at the lower price points in this market, produced low profit
margins, which no longer fit the strategy for the RTA division. During the
third quarter, the Company recorded a $3,276,000 charge to reduce the carrying
value of this subsidiary to an estimated net asset value of $600,000. During
the fourth quarter, the Company sold the subsidiary and reduced the recorded
loss by $750,000, to a loss of $2,526,000. The sales and operating income of
this subsidiary were not significant to the operations of the Company.
As final result of its restructuring plan, the Company had excess manufacturing
capacity. As part of its effort to reduce overhead costs and to improve
manufacturing efficiencies, the Company has consolidated its RTA production
facilities into fewer locations and is selling its excess facilities. As a
result, the Company recorded a charge of $655,000 to reduce these facilities
to their estimated realizable value. The sale of these facilities would lower
operating expenses by $178,000.
Also, included in the charge for restructuring is $193,000 for the write-off
of other assets related to the mass merchant product line and $390,000 for
severance costs for terminated division management.
Net Sales: The Company's consolidated net sales increased $9.4 million, or
6.8% to $147.2 million in 1995 from $137.8 million in 1994. Net sales
increased in all product lines except for RTA. Net sales increased
in the casual furniture product line primarily due to sales from Texacraft,
Inc., purchased in September, 1994, being included for a full year, and the
addition of new customers. Net sales in contract seating grew due to increased
sales to the Company's core business customers. Net sales in RTA decreased due
primarily to the Company's decision in the first quarter of 1995 to begin
discontinuing futon sales to mass merchants and the overall weakness in the
futon market. This decrease was offset by the addition of Continental
Engineering Group, Inc. in March, 1995, and the introduction and expansion of
the Company's flatline products.
21
Gross Profit: The consolidated gross margin decreased to 25.0% in 1995,
compared to 28.6% in 1994. The consolidated margin was unfavorably impacted
by the RTA product line. The contract seating and RTA gross margins declined
due primarily to increased reserves totaling $1.7 million for excess, unusable
and obsolete inventory. Gross margins also declined in RTA due to raw material
price increases that could not be immediately passed on to customers since
WinsLoew was committed to sell at a fixed price during the customer's catalog
season. RTA gross margin also decreased due to under-absorption of fixed
overhead expenses.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased by $4.4 million in 1995 compared to 1994.
The increase was due to additional expenses from the acquisitions of Texacraft
and Continental, marketing expenses associated with increased sales volume in
the contract seating division and increased provisions for uncollectable
accounts receivable of $650,000 in 1995. These increases were offset by
reductions in the RTA division.
Operating Income: As a result of the above, the Company's operating income was
$675,000 (0.5% of net sales) (including the charges for restructuring of $7.1
million and the other adjustments identified by management during the third
quarter of 1995 totaling $2.4 million) in 1995, compared to operating income
of $13.7 million (9.9% of net sales) in 1994.
Interest Expense, Net: The Company's net interest expense increased by
$1.0 million in 1995 due to increased average debt balances as a result of
borrowing $7.2 million for the Continental acquisition and $3.4 million to
repurchase common stock, offset by lower interest rates in 1995.
Income Tax Expense: The Company recorded an income tax provision of $285,000
in 1995 while incurring a net loss for the period. This anomaly is due
primarily to the non-deductibility of goodwill amortization and the write-off
of goodwill which is included in the $2.5 million charge recorded for exiting
the RTA seating product market described above. The Company's effective tax
rate of 41.7% for 1994 was more than the federal statutory rate due to the
effect of state income taxes and the non-deductibility of goodwill amortization.
Extraordinary item: The Company incurred an extraordinary charge of $593,000
(net of an income tax benefit of $360,000) related to prepayment penalties
and the write-off of unamortized deferred loan costs associated with the
retirement of the separate credit facilities in the first quarter of 1995.
Seasonality and Quarterly Information
The furniture industry is cyclical and sensitive to changes in general
economic conditions, consumer confidence, and discretionary income, interest
rate levels and credit availability.
Sales of casual products are typically higher in the second quarter and
fourth quarters of each year, primarily as a result of: (1) high retail
demand for casual furniture in the second quarter, preceding the summer months,
and (2) the impact of special sales programs on fourth quarter sales. The
Company's casual product sales can also be affected by weather conditions during
the peak retail selling season and the resulting impact on consumer purchases
of outdoor furniture products.
The following table presents the Company's unaudited quarterly data for 1996
and 1995. Such operating results are not necessarily indicative of results
for future periods. WinsLoew believes that all necessary and normal recurring
adjustments have been included in the amounts in order to present fairly and
in accordance with generally accepted accounting principles the selected
quarterly information when read in conjunction with WinsLoew's Consolidated
Financial Statements included elsewhere herein.
22
(In thousands, except per share amounts)
1995 Quarters First Second Third Fourth
------- ------- ------- -------
Net sales $29,463 $44,366 $38,326 $35,047
Gross profit 6,454 13,515 8,020 8,745
Charges for restructuring -- -- 7,136 --
Income (loss) from operations 564 5,245 (7,294) 2,160
Interest expense 1,011 1,222 826 782
Extraordinary item (593) -- -- --
Net income (loss) ($988) $2,396 ($6,288) $836
Earnings (loss) per share:
Income (loss) before
extraordinary item ($0.04) $0.27 ($0.70) $0.09
Extraordinary item (0.07) -- -- --
Net income (loss) ($0.11) $0.27 ($0.70) $0.09
Weighted average shares
and common share
equivalents outstanding 9,218 8,967 8,967 8,967
1996 Quarters First Second Third Fourth
------- ------- ------- -------
Net sales $30,957 $43,914 $37,332 $31,776
Gross profit 8,420 15,660 11,238 10,901
Income from operations 1,332 6,513 3,921 4,309
Interest expense 1,187 647 682 567
Net income $90 $3,618 $2,120 $2,456
Net income per share $0.01 $0.40 $0.25 $0.29
Weighted average shares
and common share
equivalents outstanding 8,967 8,967 8,589 8,383
Liquidity and Capital Resources
The Company's short-term cash needs are primarily for working capital to support
its debt service, accounts receivable and inventory requirements. The Company
has historically financed its short-term liquidity needs with internally
generated funds and revolving line of credit borrowings. At December 31, 1996,
the Company had $40.2 million of working capital and $9.0 million of unused and
available funds under its credit facilities.
The Company has a senior credit facility with a consortium of banks and other
institutional lenders. The facility, which matures in February 2001 and is
collateralized by substantially all of the assets of the Company, consists of
a revolving line of credit, term loan and an acquisition line of credit. The
working capital revolving line of credit allows the Company to borrow funds
up to a certain percentage of eligible inventory and accounts receivable. The
$12.5 million acquisition line of credit can be used for capital expenditures
and purchases of the Company's common stock.
In June 1996, WinsLoew amended its senior credit facility to provide the
Company with a variable amount available under the revolving line of credit
(as limited by its available accounts receivable and inventory). Due to the
seasonal nature of the casual furniture product line, WinsLoew's cash
requirements are usually greater in the first quarter of each year. The June
1996 amendment allows the amount available to fluctuate with the seasonal
nature of the Company's business. After the first quarter of each year, the
Company's cash requirements from its credit line are less. By use of a
variable amount of credit availability, the Company can avoid the cost of an
available but unused line of credit. At December 31, 1996, from an available
maximum line of credit of $40 million, WinsLoew has elected to set the amount
available at $39 million.
23
In July 1996, WinsLoew amended its senior credit facility to allow the Company
to borrow up to $6.6 million under its line of credit to purchase shares of
the Company's common stock. As of December 31, 1996, WinsLoew has $2.6 million
of this amount remaining to purchase shares of its common stock.
See Note 3 to the Company's Consolidated Financial Statements for a discussion
of the Company's credit facility.
Cash Flows From Operating Activities: For 1996, cash provided by operating
activities was $16.4 million, compared to $12.7 million provided in 1995. The
primary reasons for the increase in cash provided by operating activities were
the Company's program to reduce accounts receivable levels, increased
collections due to improved gross margins and increases in accounts payable.
Cash Flows From Investing Activities: The Company's net cash used in
investing activities was $1.5 million in 1996, compared to $9.7 million 1995.
The Company paid $7.3 million in cash, including capitalized acquisition costs,
to purchase Continental Engineering in 1995. WinsLoew also reduced its 1996
capital expenditures by $800,000 from 1995 levels.
At December 31, 1995, the Company has no material commitment for capital
expenditures.
Cash Flows From Financing Activities: Net cash used in financing activities
was $14.4 million in 1996, compare to $3.7 million in 1995. This increase was
due to cash used to repurchase $13.3 million of the Company's common stock in
1996.
Foreign Exchange Fluctuations and Effects of Inflation
WinsLoew purchases some raw materials from several Italian suppliers. These
purchases expose the Company to the effects of fluctuations in the value of the
U.S. dollar versus the Italian lira. If the U.S. dollar declines in value
versus the Italian lira, the Company will pay more in U.S. dollars for these
purchases. To reduce its exposure to loss from such potential foreign exchange
fluctuations, the Company will occasionally enter into foreign exchange forward
contracts. These contracts allow the Company to buy Italian lira at a
predetermined exchange rate, thereby transferring the risk of subsequent
exchange rate fluctuations to a third party. However, if the Company is
unable to continue such forward contract activities, and the Company's
inventories increase in connection with expanding sales activities, a
weakening of the U.S. dollar against the Italian lira could result in reduced
gross margins. In 1996, the Company purchased $7.5 million of these materials.
The Company elected to hedge a portion of its exposure to purchases made in
1996 by entering into foreign currency forward contracts with a value of
$515,000, none of which is outstanding and unsettled at December 31, 1996.
The Company did not incur significant gains or losses from these foreign
currency transactions.
Inflation has not had a significant impact on the Company in the past three
years, nor is it expected to have a significant impact in the foreseeable
future.
24
ITEM 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Ernst & Young LLP, Independent Auditors ....................... 26
Consolidated Balance Sheets as of
December 31, 1996 and 1995 ...................................... 27
Consolidated Statements of Income
For the Years Ended December 31, 1996, 1995, and 1994 ........... 28
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1996, 1995 and 1994 ............ 29
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995, and 1994 ........... 30
Notes to Consolidated Financial Statements .............................. 31
25
REPORT OF INDEPENDENT AUDITORS
Stockholders of WinsLoew Furniture, Inc.
We have audited the accompanying consolidated balance sheets of WinsLoew
Furniture, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of WinsLoew
Furniture, Inc. and Subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young, LLP
Birmingham, Alabama
January 31, 1997
26
WinsLoew Furniture, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands except per share amounts)
December 31,
--------------------------
1996 1995
---------- ----------
Assets
Cash and cash equivalents $ 897 $ 396
Accounts receivable, less allowances
for doubtful accounts of $2,702
and $1,531 at December 31, 1996
and 1995, respectively 27,203 30,162
Inventories 20,714 19,920
Prepaid expenses and deferred
income taxes 3,893 4,163
-------- --------
Total current assets 52,707 54,641
Property, plant and equipment, net 17,725 18,293
Goodwill, net 29,826 30,720
Other intangible assets, net -- 448
Other assets 1,150 1,268
-------- --------
$101,408 $105,370
======== ========
Liabilities and Stockholders' Equity
Current portion of long-term debt $ 1,957 $ 1,815
Accounts payable 4,640 2,690
Other accrued liabilities 5,958 6,459
-------- --------
Total current liabilities 12,555 10,964
Long-term debt, net of current portion 38,776 40,191
Deferred income taxes 1,677 987
-------- --------
Total liabilities 53,008 52,142
-------- --------
Stockholders' equity:
Preferred stock, par value
$.01 per share, 5,000,000 shares
authorized, none issued -- --
Common stock; par value $.01 per
share, 20,000,000 shares
authorized, 7,481,783 and
8,967,112 shares issued and
outstanding at Decbember 31, 1996
and 1995, respectively 75 90
Additional paid-in capital 24,543 37,640
Retained earnings 23,782 15,498
-------- --------
Total stockholders' equity 48,400 53,228
-------- --------
$101,408 $105,370
======== ========
See accompanying notes.
27
WinsLoew Furniture, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share amounts)
Year Ended December 31
-----------------------------------------
1996 1995 1994
------------ ---------- -------------
Net sales $143,979 $147,202 $137,842
Cost of sales 97,760 110,468 98,434
-------- -------- --------
Gross profit 46,219 36,734 39,408
Selling, general and
administrative expenses 28,501 26,699 22,256
Amortization 1,643 2,224 2,000
Charges for restructuring -- 7,136 --
Non-recurring charges -- -- 1,462
-------- -------- --------
Operating income 16,075 675 13,690
Interest expense 3,083 3,841 2,795
-------- -------- --------
Income (loss) before
income taxes and
extraordinary item 12,992 (3,166) 10,895
Provision for income taxes 4,708 285 4,543
-------- -------- --------
Income (loss) before
extraordinary item 8,284 (3,451) 6,352
Extraordinary item -- (593) --
-------- -------- --------
Net income (loss) $8,284 ($4,044) $6,352
======== ======== ========
Earnings (loss) per share:
Income (loss) before
extraordinary item $0.95 ($0.38) $0.66
Extraordinary item -- (0.07) --
------- ------- --------
Net income (loss) $0.95 ($0.45) $0.66
======== ======== ========
Weighted average number
of shares 8,724 9,029 9,655
======== ======== ========
See accompanying notes.
28
WinsLoew Furniture, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands, except share amounts)
Common Stock Additional
------------------ Paid-in Retained
Shares Amount Capital Earnings Total
--------- ------ ---------- -------- -------
Balance,
December 31, 1993 9,250,760 $93 $43,253 $13,190 $56,536
Exercise of Warrant 531,625 5 7 -- 12
Repurchase and
cancellation
of stock (241,250) (3) (2,217) -- (2,220)
Net income -- -- -- 6,352 6,352
--------- ------ ---------- -------- -------
Balance,
December 31, 1994 9,541,135 95 41,043 19,542 60,680
Repurchase and
cancellation
of stock (574,023) (5) (3,403) -- (3,408)
Net loss -- -- -- (4,044) (4,044)
--------- ------ ---------- -------- -------
Balance,
December 31, 1995 8,967,112 90 37,640 15,498 53,228
Exercise of stock
options 25,100 -- 187 -- 187
Repurchase and
cancellation
of stock (576,925) (6) (3,958) -- (3,964)
Repurchase and
cancellation
stock from
affiliated company (933,504) (9) (9,326) -- (9,335)
Net Income -- -- -- 8,284 8,284
--------- ------ ---------- -------- -------
Balance,
December 31, 1996 7,481,783 $75 $24,543 $23,782 $48,400
========= ====== ========== ======== =======
See accompanying notes.
29
WinsLoew Furniture, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year ended December 31,
---------------------------------
1996 1995 1994
------- -------- -------
Cash flows from operating activities:
Net income (loss) $8,284 ($4,044) $6,352
Adjustments to reconcile net
income to net cash provided
(used in) operating activities:
Depreciation and amortization 3,702 4,125 3,663
Provision for losses on accounts
receivable 2,507 1,848 351
Write-off of goodwill included in
charges for restructuring -- 2,209 --
Write-off of loan costs related
to early retirement of debt -- 953 --
Changes in operating assets and
liabilities, net of effects
from acquistions:
Accounts receivable 452 210 (6,060)
Inventories (794) 12,266 (13,430)
Prepaid expenses and
deferred income taxes 270 (654) (1,273)
Other assets (183) 43 (89)
Accounts payable 1,950 (4,292) 588
Other accrued liabilities (501) 432 (409)
Deferred income taxes 690 (399) 14
-------- -------- --------
Total adjustments 8,093 16,741 (16,645)
-------- -------- --------
Net cash provided by
(used in) operating
activities 16,377 12,697 (10,293)
------- -------- --------
Cash flows from investing activities:
Capital expenditures, net of
disposals and reserves (1,491) (2,316) (4,206)
Payments for acquisitions, including
acquisition costs, less cash acquired -- (7,345) (3,409)
-------- -------- --------
Net cash provided by
(used in) investing
activities (1,491) (9,661) (7,615)
-------- -------- --------
Cash Flows from financing activities:
Repurchase and cancellation of stock (3,964) (3,408) (2,220)
Repurchase and cancellation of stock
from affiliated company (9,335) --
Payments on long-term debt (4,238) (1,861) (3,038)
Proceeds from issuance of long-term
debt 3,030 1,071 --
Net borrowings under revolving
credit agreements (65) 329 19,330
Proceeds from issuance of common
stock, net 187 -- 12
Loan costs -- (1,385) --
Increase in term loan upon refinancing -- 1,560 --
-------- -------- --------
Net cash provided by
(used in) financing
activities (14,385) (3,694) 14,084
-------- -------- --------
Net increase (decrease) in
cash and cash equivalents 501 (658) (3,824)
Cash and cash equivalents at
beginning of year 396 1,054 4,878
-------- -------- --------
Cash and cash equivalents at
end of period $897 $396 $1,054
======== ======== ========
Supplemental disclosures:
Interest paid $3,296 $4,010 $2,514
Income taxes paid $3,937 $1,347 $5,513
Investing activities included the acquisition of Continental Engineering
Group, Inc. in 1995, and Texacraft, Inc. in 1994.
Assets acquired, liabilities assumed and consideration paid for these
acquisitions were as follows:
Fair value of assets acquired $8,660 $4,047
Cash acquired (131) (90)
Liabilities assumed (1,184) (548)
-------- --------
$7,345 $3,409
======== ========
See accompanying notes.
30
WinsLoew Furniture, Inc.
Notes to Consolidated Financial Statements
December 31, 1996
1. Summary of Significant Accounting Policies
Basis of Presentation
In December, 1994, stockholders of Winston Furniture Company, Inc., ("Winston")
and Loewenstein Furniture Group, Inc., ("Loewenstein") approved a definitive
merger agreement whereby each of Winston and Loewenstein merged with and into
WinsLoew Furniture, Inc., ("WinsLoew" or the "Company").
The merger has been accounted for as a pooling of interests and, accordingly,
financial statements for all prior periods have been restated to reflect the
results of the operations, financial positions and cash flows of both companies
from the earliest period presented. There were no material intercompany
transactions. In connection with the merger, approximately $917,000 of merger
costs were charged to non-recurring expense in the fourth quarter of 1994.
In February 1994, New West Industries ("New West") was merged with and into
Loewenstein, and 650,999 shares of common stock were issued in exchange for
all of the outstanding common stock of New West. This transaction has been
accounted for as a pooling of interests and, accordingly, the consolidated
financial statements have been restated for all periods prior to the merger to
include the results of operations, financial positions and cash flows of New
West. In connection with the merger, approximately $545,000 of merger costs
were charged to non-recurring expense in 1994.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All material intercompany balances and transactions have
been eliminated.
Business
WinsLoew is comprised of companies engaged in the design, manufacture and
distribution of casual furniture, contract seating and ready-to-assemble ("RTA")
furniture. WinsLoew's casual furniture products are distributed through
independent manufacturer's representatives, and are constructed of extruded
and tubular aluminum, wrought iron and cast aluminum. These products are
distributed through fine patio stores, department stores and full line
furniture stores nationwide. WinsLoew's contract seating products are
distributed to a customer base which includes architectural design firms, and
restaurant and lodging chains. WinsLoew's RTA products include ergonomically
- -designed computer workstations, which the Company denotes as "space savers",
promotionally-priced coffee and end tables, wall units and rolling carts, and
futons, futon frames and related accessories. Distribution of RTA furniture
products is primarily through mass merchandisers, catalogue wholesalers and
specialty retailers. The Company performs periodic credit evaluations of its
customers' financial condition and determines if collateral is needed on a
customer by customer basis.
Cash and Cash Equivalents
The Company classifies as cash and cash equivalents all highly liquid
investments which have maturities at the date of purchase of three months or
less. The Company maintains its cash in bank deposit accounts which, at times,
may exceed the federally insured limits. The Company has not experienced any
losses in such accounts.
31
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
utilizing the first-in, first-out ("FIFO") and weighted average methods.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The Company provides for
depreciation on a straight-line basis over the following estimated useful
lives: building and improvements, 8 to 40 years; manufacturing equipment, 2
to 10 years; office furniture and equipment, 3 to 7 years; and vehicles, 3 to
5 years.
Goodwill and Other Intangible Assets
Goodwill is amortized on a straight-line basis over forty years from the date
of the respective acquisition. The carrying value of goodwill is reviewed if
the facts and circumstances suggest it may be impaired. If the review, using
undiscounted cash flows over the remaining amortization period, indicates that
the cost of goodwill will not be recoverable, the Company's carrying value will
be reduced.
Other intangible assets, primarily customer lists, are amortized on a straight
- -line basis over their estimated lives, typically no more than seven years.
Deferred Costs
Loan acquisition costs and related legal fees, included in other assets, are
deferred and amortized over the respective terms of the related debt.
Income Taxes
Deferred income taxes are provided for temporary differences between the basis
of assets and liabilities for financial reporting purposes and the related basis
for income tax purposes in accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes.
Earnings Per Share
Earnings per share is based on the weighted average number of shares of common
stock and common stock equivalents, when dilutive, outstanding during each of
the periods presented.
Revenue Recognition
Sales are recorded at time of shipment from the Company's facilities to
customers.
32
Use of Estimates
The preparation of the consolidated financial statements requires the use of
estimates in the amounts reported. Actual results could differ from those
estimates.
Accounting for Stock-Based Compensation Plans
The Company follows the provisions of Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees and related Interpretations to
account for its stock option plan. Accordingly, no compensation expense is
recognized for stock option grants.
Foreign Currency Forward Contracts
The Company has exposure to losses which may result from settlement of certain
raw materials purchases denominated in a foreign currency. To reduce this
exposure, the Company enters into forward contracts to buy foreign currency.
Gains and losses from settlement of the forward contracts are used to offset
gains and losses from settlement of the liability for the purchased raw
materials. Gains and losses are recognized in the same period in which gains
or losses from the raw material purchases are recognized. The volume of such
forward contract transactions and gains and losses from them are not
significant.
2. Acquisitions
In March, 1995, the Company purchased all of the stock of Continental
Engineering Group, Inc. for $7,345,000. Continental is a manufacturer of
ergonomically designed "space-savers" (computer workstations, desks, chairs,
modular systems and accessories). The acquisition resulted in goodwill of
$4,248,000. Funds for the acquisition were provided under WinsLoew's credit
facility. The acquisition was accounted for under the purchase method and,
accordingly, the operating results of Continental have been included in the
consolidated operating results since the date of acquisition.
The following unaudited pro forma information has been prepared assuming that
the acquisition of Continental occurred on January 1, 1994. Permitted pro forma
adjustments include only the effects of events directly attributable to the
transaction that are factually supportable and expected to have a continuing
impact. The pro forma results are not necessarily indicative of what actually
would have occurred if the acquisition had been in effect for the entire period
presented. In addition, they are not intended to be a projection of future
results and do not reflect any synergies that might be achieved from combined
operations.
(In thousands) For the Years Ended December 31,
---------------------------------
1995 1994
--------- --------
Net sales $148,977 $149,613
Net income (loss) before
extraordinary items (3,449) 6,753
Net income (loss) ($4,042) $6,753
Net income (loss) per share ($.45) $.70
In September 1994, the Company acquired certain assets and liabilities of a
manufacturer of aluminum casual furniture for the contract market ("Texacraft")
for a total purchase price of $3,409,000, paid in cash at closing. The
acquisition was accounted for as a purchase and, accordingly, the operating
results of Texacraft have been included in the consolidated operating results
since the date of acquisition. The acquisition resulted in goodwill of
$1,880,000, which is being amortized over forty years on a straight-line basis.
The operations of Texacraft are not material to the Company and have not been
included in the pro forma results above.
33
3. Long-Term Debt
Long-term debt consisted of the following at December 31, 1996 and 1995:
(In thousands) 1996 1995
------- -------
Revolving line of credit $21,418 $21,114
Term loan 5,471 8,333
Acquisition line of credit 12,500 11,214
Other 1,344 1,345
------- -------
$40,733 $42,006
Less: current portion 1,957 1,815
------- -------
$38,776 $40,191
======= =======
Senior Credit Facilities
In February, 1995, the Company refinanced separate senior credit facilities
with a new $75 million senior credit facility with a group of lenders and banks.
This facility was reduced to $62.5 million in November, 1995. The facility,
which matures in February, 2001, and is collateralized by substantially all of
the assets of the Company, consists of a working capital revolving line of
credit, a term loan and an acquisition line of credit. The working capital
revolving line of credit allows the Company to borrow funds up to a certain
percentage of eligible inventory and accounts receivable. The $10,000,000
term loan requires quarterly repayments of $342,000 and a payment equal to
50% of cash flow, as defined, for each year within 90 days of year-end. No
cash flow payment is required for 1997. The $12,500,000 acquisition line of
credit can be drawn down and repaid during the first three years of the line
of credit. At the end of the third year, the outstanding balance of the
acquisition line of credit converts to a term loan with principal payments
due in annual installments of 15% in 1998, 35% in 1999 and 50% in 2000. In
June 1996, WinsLoew amended its senior credit facility to provide the Company
with a variable amount available under the revolving line of credit. The
amendment reduced the amount available under its revolving line of credit to
$20 million effective June 30, 1996. The Company may, at its option, elect to
increase the revolving line of credit at December 31, 1996, to a maximum of
$40 million. Thereafter, on each June 30, the amount available will
automatically decrease to $20 million and on each December 31, the Company
may elect to increase the revolving line of credit to a maximum of $40 million.
As December of 31, 1996, WinsLoew has elected to increase the revolving line of
credit to $39 million.
In July 1996, the Company amended its senior credit facility to allow the
Company to borrow up to $6.6 million under its acquisition line of credit to
purchase shares of the Company's common stock (see Note 4 below).
The interest rates on the components of the senior credit facility are either
the base rate plus a spread, or the LIBOR rate plus a spread as elected by the
Company. The spread is determined by the leverage ratio, as defined, for the
twelve month period ending each quarter. At December 31, 1996, the loans are
priced at the base rate plus .25% (8.5% at December 31, 1996) and the LIBOR
rate plus 1.25% (7.0% at December 31, 1996). In addition, WinsLoew pays an
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