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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, 1997
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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
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
201 Cahaba Valley Parkway, Pelham, Alabama 35124
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(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
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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 February 27, 1998, was approximately $98,959,828 based on
a $19.00 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 February 27, 1998, was 7,542,258.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive Proxy Statement for the registrant's
1998 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.
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.............................. 19
Item 8. Financial Statements and Supplementary Data...................... 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................. 42
Part III
Item 10. Directors and Executive Officers of the Registrant............... 42
Item 11. Executive Compensation........................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................................42
Item 13. Certain Relationships and Related Transactions................... 42
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K......................................................... 43
Signatures................................................................ 46
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. During the third quarter of 1997, the Company disposed of
certain assets of its Lyon Shaw wrought iron furniture manufacturing business
in the casual furniture product line (See Note 3 of Notes to the Financial
Statements).
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. Futons 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.
During 1997, the Company adopted a plan to dispose of its "RTA" operations and
recorded a pretax non-cash charge totaling $12.4 million in the fourth quarter
of 1997 relating to the disposal of the "RTA" operations (See Note 2 of Notes
to the Financial Statements for a summary of the charges). The Company plans
to sell two of the businesses and is in the process of liquidating the assets
related to the futon business.
3
PRODUCT LINES
WinsLoew has two principal product lines (Casual Furniture and Contract
Seating) that are produced or distributed in 4 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
Texacraft Contract casual Apartment developers
Houston, Texas furniture constructed and management
of aluminum, wrought companies, hospitality
iron, wood and fiberglass providers and manufactures
Winston International Imported residential Specialty patio stores,
Haleyville, Alabama casual furniture department stores and
constructed of cast furniture stores
aluminum and wrought iron
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
The Company's third product line, RTA, was produced and distributed out
of three manufacturing facilities during 1997 as follows:
Southern Wood Promotional RTA furniture Mass merchandisers and
Sparta, Tennessee catalog wholesalers
Continental Ergonomically designed Catalog firms and office
Irwindale, California space savers for home and furniture wholesalers
office use
New West Futons, frames, covers, and Specialty retailers and
Cookeville, Tennessee related accessories selected mass
merchandisers
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
market through: (i) continued leadership in new products and merchandising
programs, (ii) expanding existing market penetration, (iii) broadening
distribution channels, (iv) developing off season products for its distribution
channel and other channels, (v) expanding the Winston International division's
product line.
4
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 consists of three
products: (i) promotionally priced RTA products sold directly to mass
merchandisers and catalog wholesalers under the Southern Wood name, (ii) upper
priced ergonomically designed "space savers", consisting of modular computer
workstations, sold to catalog firms and office furniture wholesalers under the
MicroCentre name, and (iii) 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. During
1997, the Company decided to discontinue the operation of its RTA product line
and currently has the Continental and Southern Wood businesses for sale.
Also during 1997, the Company discontinued the manufacturing and distribution
of futons and accessories and started the process of liquidating the assets of
this operation.
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 International
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
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.
5
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
295,000 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:
WinsLoew seeks to increase its 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 seeks to take advantage of its position as a low cost producer.
During 1997, the Company adopted a plan to dispose of its "RTA" operations and
recorded a pretax non-cash charge totaling $12.4 million in the fourth quarter
of 1997 relating to the disposal of the "RTA" operations (See Note 2 of Notes
to the Financial Statements for a summary of the charges). The Company plans
to sell two of the businesses and is in the process of liquidating the assets
related to the futon business.
6
PRODUCTS
WinsLoew designs, manufactures and distributes two principal product lines: (i)
casual furniture for both the residential and contract markets and (ii)
contract seating designed for restaurant, lodging, office or other general
institutional use. During 1997, the Company decided to discontinue its RTA
product line.
Casual Furniture
WinsLoew's casual furniture products for residential use consist principally of
medium to upper-medium priced indoor and outdoor furniture sold under three
brand names: "Winston" residential extruded and tubular aluminum 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 with glider action, adjustable positions and rocking and
swivel motions. WinsLoew's casual seating products feature cushions and vinyl
strapping 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 $600 to $1,400.
WinsLoew's casual contract products include chairs, chaise lounges, tables and
umbrellas constructed of extruded, tubular and cast 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
numerous 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
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.
7
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 consisted of futons (mattresses),
frames, covers and related accessories. Frames were constructed of hardwood
and pine, and came in a variety of sizes. Hardwood frames were finished in a
variety of stains, while pine frames were unfinished. Futons were constructed
of fabric shells stuffed with foam and cotton. Covers for futons were
available in a variety of fabrics. Accessories included ottomans, end tables
and cocktail tables. Frames were sold unassembled in a box containing all
components, hardware, and instructions necessary for assembly. In addition to
manufactured frames, the Company imported and distributed frames that accounted
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, and Houston, Texas. The facilities in Haleyville
manufacture extruded and tubular aluminum casual furniture and most related
accessories, including cushions and umbrellas. 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 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
furniture industry, and that the efficiencies attributable to these plants are
a significant factor in WinsLoew's relatively low manufacturing costs.
8
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.
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
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. This business
is currently being held for sale.
9
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. This business is currently being held for sale.
New West Futon Division - Sparta, Tennessee. During 1997, this facility
manufactured futons, chairs, tables and related accessories marketed under the
New West trademark. The futon unit consisted of three distinct components:
frame, mattress and cover. Each of these components were manufactured,
although WinsLoew purchased some items both domestically and overseas.
Dimension stock was then assembled as a frame and one of a variety of finishes
was applied to the frame. The mattress was produced with specialized equipment
and was usually filled with cotton. however, upgrades included polyurethane
foam and pocketed coil springs. Finally, covers, in a wide variety of fabric
options (including the customer's own materials), were cut and sewn to fit the
mattress. Each of these components were then boxed and sold separately or in
combination. As of November 21, 1997, this operation was closed down and its
assets are in the process of being liquidated.
Manufacturing Capacity
Management believes that the Company's manufacturing facilities in the casual
and contract seating product lines 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 plans to dispose of its futon division facilities in Tennessee.
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 800
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.
WinsLoew's marketing program assists its representatives in various ways,
including: (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.
10
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,
including: (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.
BACKLOG
As of December 31, 1997, WinsLoew's backlog of orders was approximately $17.6
million, compared to $13.1 million at December 31, 1996. 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.
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 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.
11
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 consist of component
chair parts purchased from several Italian 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.
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. Since WinsLoew believes that
it is an innovator of styles and designs, it is the Company's policy to apply
for design and utility patents for those designs which it believes may be of
significance to WinsLoew.
12
EMPLOYEES
At December 31, 1997, WinsLoew had approximately 797 full-time employees, of
whom 25 were employed in management, 125 in sales, general, and administrative
positions, and 647 in manufacturing, shipping, and warehouse positions.
The only employees subject to collective bargaining agreements are
approximately 144 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 former 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 $4,000. In January 1998, the EPA proposed complete and final
settlement at it relates to PRP where the PRP's responsibility is de mininis,
and Lyon Shaw fell into this group. The Company intends to accept this
settlement.
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 |
|-----------|----------|-------------|-----------|-----------|------|----------|
|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 |
|----------------------|-------------|-----------|-----------|------|----------|
|Irwindale,| |Manufacturing| | | | |
| CA |Continental| and Offices | 91,655 | N/A |Leased| 6/30/02 |
|__________|___________|_____________|___________|___________|______|__________|
__________________________
For additional information with respect to the Company's lease
obligations, see Note 9 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 4 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
1996
First Quarter.......... $6 $4 7/8
Second Quarter......... $6 $5
Third Quarter.......... $8 $5
Fourth Quarter......... $10 1/8 $6 7/8
1997
First Quarter.......... $11 7/8 $8 1/8
Second Quarter......... $11 $8 3/8
Third Quarter.......... $15 $10 15/16
Fourth Quarter......... $16 13/16 $13 5/16
As of February 27, 1998, there were approximately 117 holders of record of
Common Stock. The closing sale price for the Common Stock on February 27,
1998, was $19.
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 4 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,
---------------------------------------------------
1997 1996 1995 1994 1993 (1)
---------------------------------------------------
(In thousands, except per share amounts)
Income Statement Data:
Net sales $114,749 $106,695 $ 95,443 $ 83,284 $77,789
Cost of sales 73,329 68,757 64,999 55,878 51,265
-------- -------- -------- -------- -------
Gross profit 41,420 37,938 30,444 27,406 26,524
Selling, general and
administrative expenses 20,548 20,082 17,719 14,731 14,263
Amortization 976 1,426 2,077 2,000 1,922
Non-recurring charges -- -- 917 1,814
-------- -------- -------- -------- -------
Operating income 19,896 16,430 10,648 9,758 8,525
Interest expense 2,296 3,083 3,841 2,795 3,136
-------- -------- -------- -------- -------
Income from continuing
operations before
income taxes and
extraordinary items 17,600 13,347 6,807 6,963 5,389
Provision for income taxes 6,686 4,822 2,739 3,068 2,172
-------- -------- -------- -------- -------
Income from continuing
operations before
extraordinary items 10,914 8,525 4,068 3,895 3,217
Income (loss) from
discontinued operations
net of taxes (471) (241) (7,519) 2,457 2,001
(Loss) from sale of
discontinued operations, (8,200) -- -- -- --
net of taxes
Extraordinary items -- -- (593) -- (1,223)
-------- -------- -------- -------- -------
Net income (loss) $2,243 $8,284 ($4,044) $6,352 $3,995
======== ======== ======== ======== =======
Basic earnings (loss) per share:
Income (loss) from continuing
operations before
extraordinary items $1.46 $0.98 $0.45 $0.40 $0.40
Income (loss) from
discontinued operations, (0.06) (0.03) (0.83) 0.26 0.25
net of taxes
(Loss) from sale of
discontinued operations, (1.10) -- -- -- --
net of taxes
Extraordinary items -- -- (0.07) -- (0.15)
-------- -------- -------- -------- ------
Net income (loss) per share $0.30 $0.95 ($0.45) $0.66 $0.50
======== ======== ======== ======== =====
Weighted average shares 7,484 8,724 9,029 9,655 8,075
======== ======== ======== ======== =======
17
Years Ended December 31,
---------------------------------------------------
1997 1996 1995 1994 1993(1)
---------------------------------------------------
(In thousands, except per share amounts)
Dilutive earnings (loss)
per share:
Income (loss) from
continuing operations
before extraordinary items $1.44 $0.98 $0.45 $0.40 $0.40
Income (loss) from
discontinued operations,
net of taxes (0.06) (0.03) (0.83) 0.26 0.25
Gain (loss) from sale of
discontinued operations,
net of taxes (1.08) -- -- -- --
-------- -------- -------- -------- -------
Net income (loss) per share $0.30 $0.95 ($0.45) $0.66 $0.50
======== ======== ======== ======== =======
Weighted average shares and
common share equivalents
outstanding 7,563 8,730 9,029 9,655 8,075
======== ======== ======== ======== =======
December 31,
---------------------------------------------------
1997 1996 1995 1994 1993(1)
---------------------------------------------------
(In thousands)
Balance Sheet Data:
Working capital $29,337 $40,102 $43,677 $51,957 $33,984
Total Assets 79,339 99,624 104,608 110,261 89,457
Long-term debt
(less current portion) 15,908 38,726 40,130 39,094 21,221
Total debt 16,423 40,681 41,941 40,893 24,160
Stockholders' equity 51,026 48,400 53,228 60,680 56,536
(1) Represents the combined results of Winston and Loewenstein, which are
the predecessor companies to WinsLoew.
18
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 and contract
seating furniture. WinsLoew's casual furniture products are
distributed through independent manufacturer's representatives and
are constructed of extruded and tubular aluminum 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.
During 1997 the Company adopted a plan to dispose of its RTA
operations. 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. As a result of this decision, the Company recorded a
pre-tax non-cash charge totaling $12.4 million in the fourth
quarter of 1997 relating to the disposal of the RTA operations.
The charge can be summarized as follows:
Write-off of goodwill in connection with
sale of assets $ 3,902,000
Reduction of inventory value 2,791,000
Reduction of property to net realizable
value 2,067,000
Reduction of accounts receivable value 1,390,000
Other liabilities / reserves 1,050,000
Accrual for losses through disposition 1,200,000
-----------
Total $12,400,000
===========
The Company plans to sell two of the businesses and is in the
process of liquidating the assets related to the futon business.
During 1995 the Company's Board of Director's adopted a plan to
redirect the marketing and operations of certain of the Company's
businesses. As a result of the changes to be implemented, the
Company recorded a charge of $7.1 million for restructuring. This
charge was 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 plan included exiting
certain markets and products.
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 products 3,372,000
Severance costs for certain former
management 390,000
-----------
Total $7,136,000
===========
19
Management's 1995 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 $2.1
million (6.2% of net sales). These additional charges include $1.4
million for inventory which was considered excess, unusable or
obsolete and $650,000 for accounts receivable which were considered
uncollectable. These charges have been included in the net loss
from discontinued operations in 1995. The balance of the following
discussion focuses on the Company's continuing operations.
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,
1997, 1996 and 1995 for each of the Company's product lines (in
thousands, except for percentages):
1997 1996 1995
---------------------- ---------------------- ----------------------
Net Gross Gross Net Gross Gross Net Gross Gross
Sales Profit Margin Sales Profit Margin Sales Profit Margin
------- ------- ------ ------- ------- ------ ------- ------- ------
Casual
furniture $56,363 $24,164 42.9% $58,066 $23,812 41.0% $55,758 $19,681 35.3%
Contract
seating 58,386 17,256 29.6% 48,629 14,126 29.0% 39,685 10,763 27.1%
--------- ------- --------- ------- -------- -------
Total $114,749 $41,420 36.1% $106,695 37,938 35.6% $95.443 $30,444 31.9%
========= ======= ========= ======= ======== =======
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,
1997 1996 1995
Gross profit 36.1% 35.6% 31.9%
Selling, general and
administrative expense 17.9% 18.8% 18.6%
Amortization 0.9% 1.3% 2.2%
Operating income 17.3% 15.4% 11.2%
Interest expense 2.0% 2.9% 4.0%
Provision for income taxes 5.8% 4.5% 2.9%
Income from continuing
operations before
extraordinary item 9.5% 8.0% 4.3%
(Loss) from discontinued
operations,
net of taxes (0.4%) (0.2%) (7.9%)
(Loss) from sale of
discontinued
operations, net of taxes (7.1%) --- ---
Extraordinary item --- --- (0.6%)
Net income (loss) 2.0% 7.8% (4.2%)
Comparison of Years Ended December 31, 1997 and 1996
Net Sales: WinsLoew's consolidated net sales for 1997 increased
$8.0 million or 7.5% to $114.7 million, compared to $106.7 million
in 1996. The casual product line sales increased by 7.6%, after
excluding sales for the Company's wrought iron business sold during
1997. 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 20.1% due to growth in the core business and
increased demand from the lodging industry.
20
Gross Margin: Consolidated gross margin increased $3.5 million in
1997 to $41.4 million compared to $37.9 million in 1996. The casual
and contract seating product lines improved gross margins in 1997
due to greater operating efficiencies, increased sales volumes and
improved raw material costs.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased $466,000 in 1997, compared to
1996, due to commissions expense and other variable costs related
to the increased sales volume in 1997.
Amortization: Amortization expense decreased due to the intangible
assets that became fully amortized in 1996.
Operating Income: As a result of the above, WinsLoew recorded
operating income of $19.9 million (17.3% of net sales) in 1997,
compared to operating income of $16.4 million (15.4% of net sales)
in 1996.
Interest Expense: WinsLoew's interest expense decreased $787,000
in 1997, compared to 1996. The Company has reduced its debt by
$24.3 million from December 31, 1996.
Provision for Income Taxes: WinsLoew's effective tax rate from
continuing operations of 38.0% in 1997 and 36.1% in 1996 is greater
than the federal statutory rate due to the effect of state income
taxes and non-deductible goodwill amortization.
Comparison of Years Ended December 31, 1996 and 1995
Net Sales: The Company's consolidated net sales increased $11.3
million, or 11.8% to $106.7 million in 1996 from $95.4 million in
1995. Net sales increased in both product lines. Net sales
increased in the casual furniture product line 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% due to increased demand resulting from
construction in the lodging industry.
Gross Profit: The consolidated gross margin increased to 35.6% in
1996, compared to 31.9% in 1995. The casual and contract seating
product lines improved gross margins in 1996, due to greater
operating efficiencies and increased sales volumes. The casual
product line also experienced favorable raw material costs in 1996.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased by $2.4 million in 1996, compared
to 1995, due to increased commissions and other variable selling
costs related to the higher volume in 1996 and an increased
provision for doubtful accounts.
Amortization: Amortization expense decreased due to the intangible
assets that became fully amortized in 1996
Operating Income: As a result of the above, the Company's
operating income was $16.4 million (15.4% of net sales) in 1996,
compared to $10.6 million (11.2% of net sales) in 1995.
Interest Expense: The Company's net interest expense decreased by
$758,000 in 1996, compared to 1995. The Company had reduced its
debt by $10.7 million 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 its lenders. These lower spreads
decreased the Company's effective interest rate below those
incurred in 1995.
21
Income Tax Expense: WinsLoew's 1996 effective tax rate from
continuing operations of 36.1% and 40.2% in 1995 is greater than
the federal statutory rate due to the effect of state income taxes
and non-deductible 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 the
following: (i) high retail demand for casual furniture in the
second quarter, preceding the summer months and (ii) 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. During the third
quarter of 1997, the Company sold its Lyon Shaw wrought iron
division (See Note 3 of the Notes to the Financial Statements).
The following table presents the Company's unaudited quarterly data
for 1997 and 1996. 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)
1997 Quarters First Second Third Fourth
-------- -------- -------- --------
Net sales $23,136 $37,524 $27,985 $26,104
Gross profit 7,353 14,511 9,864 9,692
Operating Income 2,667 8,047 4,432 4,750
Interest expense 857 645 590 204
Income from continuing
operations 1,093 4,565 2,350 2,906
(Loss) from discontinued
operations (275) (61) (68) (67)
(Loss) on sale of discontinued
operations -- -- -- (8,200)
-------- -------- -------- --------
Net income (loss) $ 818 $4,504 $2,282 ($5,361)
======== ======== ======== ========
Basic earnings per share:
Income from continuing
operations $0.15 $0.61 $0.31 $0.39
(Loss) from discontinued
operations (1) (0.04) (0.01) (0.01) (0.01)
(Loss) on sale of
discontinued
operations (1) -- -- -- (1.09)
-------- -------- -------- --------
Net income (loss) $0.11 $0.60 $0.30 ($0.71)
======== ======== ======== ========
Weighted average shares 7,443 7,456 7,508 7,524
======== ======== ======== ========
Diluted earnings per share:
Income from continuing
operations (1) $0.15 $0.61 $0.31 $0.38
(Loss) from discontinued
operations (1) (0.04) (0.01) (0.01) (0.01)
(Loss) on sale of
discontinued
operations (1) -- -- -- (1.07)
Net income (loss) (1) $0.11 $0.60 $0.30 ($0.70)
======== ======== ======== ========
Weighted average shares and
common share equivalents
outstanding 7,495 7,502 7,602 7,630
======== ======== ======== ========
1996 Quarters First Second Third Fourth
-------- -------- -------- --------
Net sales $21,021 $34,539 $25,110 $26,025
Gross profit 6,256 13,594 8,384 9,704
Operating Income 1,186 6,856 3,301 5,087
Interest expense 1,187 647 682 567
Income from continuing
operations 4 3,846 1,757 2,918
Income (loss) from
discontinued operations 86 (228) 363 (462)
-------- -------- -------- --------
Net income $ 90 $ 3,618 $ 2,120 $ 2,456
======== ======== ======== ========
Basic earnings per share:
Income from continuing
operations (1) $0.00 $0.43 $0.21 $0.35
Income (loss) from
discontinued
operations (1) 0.01 (0.03) 0.04 (0.06)
-------- -------- -------- --------
Net income $0.01 $0.40 $0.25 $0.29
======== ======== ======== ========
Weighted average shares 8,967 8,967 8,589 8,383
======== ======== ======== ========
Diluted earnings per share:
Income from continuing
operations (1) $0.00 $0.43 $0.21 $0.35
Income (loss) from
discontinued
operations (1) 0.01 (0.03) 0.04 (0.06)
-------- -------- -------- --------
Net income $0.01 $0.40 $0.25 $0.29
======== ======== ======== ========
Weighted average shares and
common share equivalents
outstanding 8,967 8,967 8,595 8,413
======== ======== ======== ========
(1) Quarter amounts do not add to annual figures due to rounding.
23
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, 1997 the
Company had $29.3 million of working capital and $18 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 (see Note 4 to the Consolidated Financial
Statements). 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 decline. 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, 1997, from an available maximum line of credit of $40 million,
WinsLoew has elected to set the amount available at $25 million.
In July 1996, WinsLoew amended its senior credit facility to allow
the Company to borrow under its line of credit to purchase shares
of the Company's common stock (see Note 5 to the Consolidated
Financial Statements). As of December 31, 1997, there was $2.1
million available for such repurchases.
Cash Flows From Operating Activities: Net cash provided by
operations increased to $22.6 million in 1997 primarily due to
improved profitability from continuing operations.
Cash Flows From Investing Activities: During 1997, the Company
spent $1.0 million on capital expenditures and received $2.1
million in proceeds related to the disposition of certain assets of
its wrought iron business.
At December 31, 1997, the Company had no material commitments for
capital expenditures.
Cash Flows From Financing Activities: The Company used the cash
generated by operations and from investing activities to repay
$24.3 million of debt during 1997.
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. The Company elected to hedge a
portion of its exposure to purchases made in 1997 by entering into
foreign currency forward contracts with a value of $2.2 million at
December 31, 1997. The Company did not incur significant gains or
losses from these foreign currency transactions.
24
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.
Year 2000
The Company began an assessment of Year 2000 issues on its computer
system in mid-1995 and began the process of updating hardware and
software at each of its facilities. The Company is completing the
software and hardware installation at the last facility which is
expected to be completed during the first half of 1998.
The Company has no plans to address these issues with its
discontinued operations as the expected date of disposition is
mid-1998.
The Company estimates the cost to complete the project for the 1995
to 1998 period at approximately $550,000 of which approximately
$310,000 was capitalized and approximately $150,000 was expensed
through December 1997. From an ongoing cost standpoint, the Year
2000 issues are not expected to have a significant impact on the
Company's financial position, results of operations or liquidity.
25
ITEM 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Ernst & Young LLP, Independent Auditors.................... 27
Consolidated Balance Sheets as of
December 31, 1997 and 1996................................... 28
Consolidated Statements of Income
For the Years Ended December 31, 1997, 1996, and 1995........ 29
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995......... 30
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996, and 1995........ 31
Notes to Consolidated Financial Statements........................... 32
26
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, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Birmingham, Alabama
February 6, 1998
27
WinsLoew Furniture, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands except per share amounts)
December 31,
--------------------------
1997 1996
---------- ----------
Assets
Cash and cash equivalents $ 707 $ 897
Accounts receivable, less allowances
for doubtful accounts of $2,702
and $1,531 at December 31, 1997
and 1996, respectively 21,124 22,851
Inventories 9,096 10,716
Prepaid expenses and deferred
income taxes 7,391 3,748
Net assets of discontinued
operations 2,057 12,711
-------- --------
Total current assets 40,375 50,923
Net assets of discontinued
operations 6,860 13,937
Property, plant and equipment, net 10,320 11,954
Goodwill, net 21,021 21,699
Other assets 763 1,111
-------- --------
$ 79,339 $ 99,624
======== ========
Liabilities and Stockholders' Equity
Current portion of long-term debt $ 515 $ 1,955
Accounts payable 3,187 3,926
Other accrued liabilities 7,336 4,940
-------- --------
Total current liabilities 11,038 10,821
Long-term debt, net of current portion 15,908 38,726
Deferred income taxes 1,367 1,677
-------- --------
Total liabilities 28,313 51,224
-------- --------
Commitments and contingencies (note 9)
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 December 31, 1997
and 1996, respectively 75 75
Additional paid-in capital 24,926 24,543
Retained earnings 26,025 23,782
-------- --------
Total stockholders' equity 51,026 48,400
-------- --------
$ 79,339 $ 99,624
======== ========
See accompanying notes.
28
WinsLoew Furniture, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share amounts)
Year Ended December 31
-----------------------------------------
1997 1996 1995
------------ ---------- -------------
Net sales $114,749 $106,695 $ 95,443
Cost of sales 73,329 68,757 64,999
-------- -------- --------
Gross profit 41,420 37,938 30,444
Selling, general and
administrative expenses 20,548 20,082 17,719
Amortization 976 1,426 2,077
-------- -------- --------
Operating income 19,896 16,430 10,648
Interest expense 2,296 3,083 3,841
-------- -------- --------
Income (loss) before
income taxes and
extraordinary item 17,600 13,347 6,807
Provision for income taxes 6,686 4,822 2,739
-------- -------- --------
Income (loss) before
extraordinary item 10,914 8,525 4,068
(Loss)from discontinued
operations, net of taxes (471) (241) (7,519)
(Loss)from sale of discontinued
operations, net of taxes (8,200) -- --
Extraordinary item -- -- (593)
-------- -------- --------
Net income (loss) $2,243 $8,284 $(4,044)
======== ======== ========
Basic Earnings (loss) per share:
Income from continuing
operations before
extraordinary item $1.46 $0.98 $0.45
(Loss) from discontinued
operations, net of taxes (0.06) (0.03) (0.83)
(Loss) from sale of
discontinued operations, (1.10) -- --
net of taxes
Extraordinary item -- -- (0.07)
------- ------- --------
Net income (loss) $0.30 $0.95 ($0.45)
======== ======== ========
Weighted average number
of shares 7,484 8,724 9,029
======== ======== ========
Diluted earnings (loss) per share:
Income from continuing
operations before
extraordinary item $1.44 $0.98 $0.45
(Loss) from discontinued
operations, net of taxes (0.06) (0.03) (0.83)
(Loss) from sale of
discontinued operations, (1.08) -- --
net of taxes
Extraordinary item -- -- (0.07)
------- ------- --------
Net income (loss) $0.30 $0.95 ($0.45)
======== ======== ========
Weighted average number
of shares 7,563 8,730 9,029
======== ======== ========
See accompanying notes.
29
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, 1994 9,541,135 $95 $41,043 $19,542 $60,680
Repurchase and
cancellation
of stock (574,023) (5) (3,403) -- (3,408)
Net income -- -- -- (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
Exercise of stock
options 94,725 1 872 -- 873
Repurchase and
cancellation
of stock (50,000) (1) (489) -- (490)
Net loss -- -- -- 2,243 2,243
--------- ------ ---------- -------- -------
Balance,
December 31, 1997 7,526,508 $75 $24,926 $26,025 $51,026
========= ====== ========== ======== =======
See accompanying notes.
30
WinsLoew Furniture, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year ended December 31,
---------------------------------
1997 1996 1995
------- -------- -------
Cash flows from operating activities:
Net income (loss) $2,243 $8,284 ($4,044)
Adjustments to reconcile net
income to net cash provided
(used in) operating activities:
Depreciation and amortization 2,293 2,630 3,258
Provision for losses on accounts
receivable 11 1,699 240
Change in net assets held for sale 17,731 4,249 4,894
Write-off of loan costs related
to early retirement of debt -- -- 953
Changes in operating assets and
liabilities, net of effects
from acquisitions:
Accounts receivable 1,716 (1,731) (2,340)
Inventories 657 8 1,826
Prepaid expenses and
deferred income taxes (3,870) 64 (781)
Other assets 50 (144) (21)
Accounts payable (654) 2,022 (1,390)
Other accrued liabilities 2,700 (1,608) 2,501
Deferred income taxes (310) 690 (360)
-------- -------- --------
Total adjustments 20,324 7,879 8,780
-------- -------- --------
Net cash provided by
(used in) operating
activities 22,567 16,163 4,736
------- -------- --------
Cash flows from investing activities:
Capital expenditures, net of
disposals (1,001) (1,290) (1,649)
Proceeds from disposition of business 2,119 -- --
-------- -------- --------
Net cash provided by
(used in) investing
activities 1,118 (1,290) (1,649)
-------- -------- --------
Cash Flows from financing activities:
Net borrowings under revolving
credit agreements (19,872) (65) 329
Payments on long-term debt (4,386) (4,225) (1,861)
Proceeds from issuance of
common stock, net 873 187 --
Repurchase and cancellation of stock (490) (3,964) (3,408)
Repurchase and cancellation of stock
from affiliated company -- (9,335) --
Proceeds from issuance of long-term
debt -- 3,030 1,020
Increase in term loan upon refinancing -- -- 1,560
Loan costs -- -- (1,385)
-------- -------- --------
Net cash provided by
(used in) financing
activities (23,875) (14,372) (3,745)
-------- -------- --------
Net increase (decrease) in
cash and cash equivalents (190) 501 (658)
Cash and cash equivalents at
beginning of year 897 396 1,054
-------- -------- --------
Cash and cash equivalents at
end of period $707 $897 $1,054
======== ======== ========
Supplemental disclosures:
Interest paid $2,318 $3,296 $4,010
Income taxes paid $6,048 $3,937 $1,347
See accompanying notes.
31
WinsLoew Furniture, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of WinsLoew
Furniture, Inc. 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 and contract
seating 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. The Company
performs periodic credit evaluations of its customers' financial
condition and determines if collateral is needed on a customer by
customer basis. The Company has one lodging customer that
accounted for 17%, 11% and 6% of revenues in the years ended
December 31, 1997, 1996 and 1995.
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.
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
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.
32
Deferred Costs (Other Assets)
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
In 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share. Statement 128 replaced
the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented, and where
appropriate, restated to conform to the Statement 128
requirements.
The numerators for the earnings per share calculation are set
forth on the face of the accompanying income statement. The only
difference between the denominator for the basic and dilutive
calculations are the number of shares added to basic for the
dilutive effect of employee stock options.
Revenue Recognition
Sales are recorded at time of shipment from the Company's
facilities to customers.
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.
Under provisions of APB No. 25, no compensation expense has been
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. These forward
contracts are accounted for as hedges, therefore, 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 Company is exposed to losses on
the forward contracts in the event it does not purchase the raw
materials, however, the Company does not anticipate this event.
At December 31, 1997 the Company had forward contracts to
purchase 3.8 billion lira for $2.2 million. There were no
significant deferred gains or losses and actual gains included in
cost of sales were $30,000, $15,000 and $178,000 for the years
ended December 31, 1997, 1996 and 1995.
Impact of Recently Issued Accounting Standard
33
Statement of Financial Accounting Standard No. 131, Disclosures
about Segment of an Enterprise and Related Information
establishes standards for the disclosure of information about
operating segments in financial statements. The standard will be
applicable to the Company's December 31, 1998 financial
statements. The Company has not yet determined whether the
Statement will result in any change in financial statement
disclosure, however, the Statement will have no effect on the
Company's consolidated financial position, results of operations
or liquidity.
2. Discontinued Operations
As of November 21, 1997, the Company's Board of Directors adopted
a plan to discontinue the Company's ready to assemble ("RTA")
operations. Of the three businesses comprising these operations,
two are being held for sale and one is in the process of being
liquidated. It is expected the plan will be completed by July
1998. As a result during the fourth quarter the Company recorded
a loss on the disposition of its RTA operations of $12,400,000,
or $8,200,000 after taxes, including a provision for estimated
losses prior to disposal, which is summarized below:
Write-off of goodwill in connection with sale of assets $ 3,902,000
Reduction of inventory value 2,791,000
Reduction of property to net realizable value 2,067,000
Reduction of accounts receivable value 1,390,000
Other liabilities / reserves 1,050,000
Accrual for losses through disposition 1,200,000
-----------
Total $12,400,000
===========
The operating results of the discontinued operations are
summarized as follows (dollars in thousands, except for per share
amounts):
For the year ended December 31,
-------------------------------
1997 1996 1995
Net sales $23,317 $37,284 $51,759
Income before taxes (779) (355) (9,973)
Net (loss) (471) (241) (7,519)
Net (loss) per share ($0.06) ($0.03) ($0.83)
During 1995, management reviewed the products, markets and
strategy of the combined operations of the Company. The review
culminated with decisions to redirect the marketing and
operations of certain of the Company's businesses. As a result of
the changes to be implemented, the Company recorded a charge of
$7.1 million for restructuring. This charge was 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 plan included exiting certain
markets and products.
In connection with the restructuring charge, the Company recorded
other adjustments in 1995, primarily to increase inventory
reserves and allowances for uncollectable accounts receivable.
These adjustments resulted in charges of $1.4 million to cost of
sales and $650,000 to selling, general and administrative
expenses. These have also been included above.
34
The net assets of the discontinued operations at December 31,
1997 and 1996 are as follows:
(In thousands) 1997 1996
------- --------
Current assets $5,711 $14,495
Current liabilities, including reserve
for estimated losses through
disposal date (3,654) (1,784)
------- --------
Net assets of discontinued
operations, current $2,057 $12,711
======= ========
Property, net 2,781 5,771
Goodwill, net 4,018 8,127
Other assets 61 39
------- --------
Net assets of discontinued
operations, non-current $6,860 $13,937
======= ========
As a result of the Board approval of the plan, the consolidated
financial statements of the Company have been restated to reflect
the results of operations and net assets of the RTA operations as
a discontinued operation in accordance with generally accepted
accounting principles.
3. Acquisition and Disposition
During the third quarter of 1997 the Company disposed of certain
assets of its wrought iron business in the casual furniture
product line. The sale generated proceeds of $2.1 million. This
business accounted for net sales of $5.7 million, $11.0 million
and $11.6 million in the years ended December 31, 1997, 1996, and
1995 respectively. The operating income of this business was not
material to consolidated operating income. During the third
quarter of 1997, the Company recorded approximately $230,000 of
costs associated with the sale in selling, general and
administrative expenses.
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 discontinued operations
since the date of acquisition.
4. Long-Term Debt
Long-term debt consisted of the following at December 31, 1997
and 1996:
(In thousands) 1997 1996
------- -------
Revolving line of credit $ 1,546 $21,418
Term loan 2,287 5,471
Acquisition line of credit 12,500 12,500
Other 90 1,292
------- -------
16,423 40,681
Less: current portion 515 1,955
------- -------
$15,908 $38,726
======= =======
35
Senior Credit Facilities
The Company's senior credit facility, as amended, provides for
$62.5 million which matures in February 2001, and is
collateralized by substantially all of the assets of the Company.
The facility consists of a working capital revolving line of
credit (maximum of $40 million), a term loan (originally $10
million) and an acquisition line of credit (maximum of $12.5
million). 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 term loan
currently requires quarterly repayments of $190,000. The
acquisition line of credit converts to a term loan with principal
payments due in quarterly installments totaling 15% in 1998, 35%
in 1999 and 50% in 2000. Additionally, a payment equal to 50% of
cash flow, as defined, is required for each year within 90 days
of year-end. This is estimated to be $11.7 million for 1997 and
will be financed on the revolver. 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 each June 30. The Company
may, at its option, elect to increase the revolving line of
credit at each December 31 through the following June 30 to a
maximum of $40 million. As of December 31, 1997, WinsLoew elected
to increase the revolving line of credit to $25 million.
In July 1996, the Company 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 (see Note
5 below). Currently there is $2.1 million available for this
purpose.
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, 1997, the
loans are priced at the base rate plus .25% (8.75% at December
31, 1997) and the LIBOR rate plus 1.25% (7.14% at December 31,
1997). In addition, WinsLoew pays an unused facility fee of
.375% per annum on a quarterly basis in arrears.
The agreement requires the Company to meet certain financial
ratios for leverage, interest coverage, t