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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
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended January 3, 1998
Commission file Number 0-11577
LADD FURNITURE, INC.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
North Carolina 56-1311320
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(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
Post Office Box 26777, Greensboro, North Carolina 27417-6777
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(Address of Principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: 336-294-5233
Securities registered pursuant to Section 12(b) of the Act:
None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock -- $.30 par value
------------------------------
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
Market value of 6,524,317 shares held by nonaffiliates as of March 5,
1998, was $137,826,197.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
7,760,433 shares outstanding as of March 5, 1998
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 1998 Annual
Shareholders Meeting are incorporated by reference into Part III hereof.
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1
<PAGE>
PART I
Item 1. Business
General
LADD Furniture, Inc., incorporated in 1981 under the laws of the State of
North Carolina, is a leading manufacturer of residential furniture which sells
its products through diverse retail distribution channels, as well as to the
hospitality and health care industries. The Company produces a wide range of
furniture designed to appeal to a spectrum of customers seeking quality, style,
and value. The Company markets its residential wood ("casegoods") and
upholstered furniture domestically under the major brand names American Drew,
Barclay, Clayton Marcus, Lea, Pennsylvania House and Pilliod, and exports these
same brand name products worldwide through LADD International. Under the
American of Martinsville brand name, LADD is also one of the world's leading
suppliers of contract furniture to the guest room, government and health care
markets. Based upon industry data published in the trade publication
Furniture/Today, LADD is one of the largest manufacturers of residential
furniture in the United States. Unless the context otherwise indicates, "LADD"
and "Company" refer to LADD Furniture, Inc., its divisions, and consolidated
subsidiaries.
Effective November 24, 1997, the Company relocated its executive offices
to 4620 Grandover Parkway, Greensboro, North Carolina.
Industry Segments
In accordance with the instructions for this item, LADD operated in only
one business segment, manufacture and sale of furniture, for the three years
ended January 3, 1998.
LADD's Business Groups
The Company has three primary operating groups: (i) residential casegoods,
consisting primarily of bedroom, dining room and living room furniture, wall
units and occasional tables, (ii) residential upholstery, consisting primarily
of sofas, love seats, recliners and chairs, and (iii) contract sales,
consisting of casegoods and upholstery sold to the hospitality and health care
industries, the U.S. government and educational institutions (collectively,
contract sales). The Company distributes its casegoods and upholstery products
directly and through approximately 350 independent sales representatives to
approximately 8,000 customers, including leading department stores, furniture
retailers, mass merchandisers, catalog merchandisers, major hotel chains, and
various specialty stores and retail companies. The Company also sold its
furniture in 1997 internationally to customers in 53 countries.
Casegoods Group
American Drew manufactures and sells medium-priced wood residential
furniture. The products include various types of bedroom furniture (beds,
dressers, nightstands, mirrors, armoires, and dressing tables), dining room
furniture (tables, chairs, buffets, chinas, and serving pieces), living room
and family room occasional pieces (desks, end tables, coffee tables,
entertainment units, wall units, and secretaries), and computer furniture for
the home (desks, files and bookshelves). American Drew products are
manufactured in three plants located in North Wilkesboro, NC and are sold
primarily to major independent furniture retailers, department stores, and
regional furniture chains.
Lea Industries manufactures and sells wood furniture for the youth and
adult bedroom markets. Lea Industries' products include beds, dressers,
nightstands, mirrors, desks, bookshelves, hutches, armoires, and correlated
modular furniture in a variety of styles, including traditional, transitional
and contemporary. The products are priced in the medium to low-medium price
ranges and are considered high volume, promotional products to major furniture
retailers. The products are marketed under the "Lea" brand name primarily to
national and regional furniture chains, independent furniture retailers,
national general retailers and department stores. Lea Industries' products are
manufactured in four plants located in Waynesville, NC, Marion, VA, and
Morristown, TN.
Pennsylvania House manufactures and sells solid wood residential furniture
in American traditional, country and transitional styles in the upper-medium
price range. The products include various types of bedroom furniture (beds,
dressers, nightstands, mirrors, armoires, and dressing tables), dining room
furniture (tables, chairs, buffets, chinas, and serving pieces), and living
room and family room occasional pieces (desks, end tables, coffee tables,
entertainment units, wall units, and secretaries). Pennsylvania House created
and introduced the in-store gallery concept to the furniture retailing industry
in 1975, and currently has established galleries with approximately 250
independent furniture retailers in the U.S., Japan and Mexico. In 1996, the
distribution of Pennsylvania House products was expanded to include furniture
retailers without galleries. Pennsylvania House - Casegoods operates two
manufacturing plants located in Lewisburg and White Deer, PA.
2
<PAGE>
Pilliod Furniture manufactures and sells a wide range of
promotionally-priced contemporary and traditional wood residential furniture,
including master bedroom products, occasional tables, home office products,
entertainment centers, wall systems, and casual dining room products. Pilliod
Furniture's products are marketed under the "Pilliod" and "Symmetry" brand
names. The Company's products are sold throughout the United States through
large furniture chains, independent furniture retailers, and rent-to-own
dealers. Pilliod Furniture operates three manufacturing facilities in Nichols,
SC, Selma, AL, and Swanton, OH.
Upholstery Group
Barclay Furniture manufactures and sells moderately-priced upholstered
fabric and leather residential furniture, including sofas, love seats, chairs,
sleepers, and motion furniture styled in contemporary and traditional patterns.
The products are considered high volume, promotional items and are sold under
the Barclay Furniture name and various private label names. Barclay sells its
products primarily to retail furniture chains, department stores, membership
clubs, rent-to-own stores, catalog retailers, and national general
merchandisers. Barclay operates two manufacturing plants located in Sherman and
Myrtle, MS.
Clayton-Marcus manufactures and sells a full line of upholstered fabric
and leather household furniture, including sofas, love seats, chairs, sleepers,
rockers, and other upholstered living room furniture, which sells in the medium
and upper-medium price ranges. The products are marketed under the
"Clayton-Marcus", "HickoryMark", "American of Martinsville", and "Clayton
House" brand names primarily to retail furniture chains, independent furniture
retailers and department stores. Clayton-Marcus currently has established
galleries with approximately 200 independent furniture stores in the United
States, Canada, and Mexico. Clayton-Marcus operates three manufacturing plants
in Hickory, NC.
Pennsylvania House also manufactures and sells a full line of upholstered
fabric and leather residential furniture, including sofas, love seats, chairs,
sleepers, rockers, and other upholstered living room furniture, which sells in
the upper-medium price range similar to Pennsylvania House - Casegoods.
Pennsylvania House - Upholstery operates one leased manufacturing plant located
in Monroe, NC.
Contract Sales Group
American of Martinsville manufactures wood and upholstered residential
furniture which is marketed worldwide to the guest room (hotel/motel) industry
through LADD Contract Sales Corporation. The Contract Sales Group also sells to
the health care furniture market for retirement homes and assisted living
facilities, certain agencies of the U.S. government, and university and college
markets. American of Martinsville operates two manufacturing plants located in
Chilhowie and Martinsville, VA and utilizes other LADD manufacturing facilities
to meet capacity constraints.
Other
LADD Transportation, Inc. operates a modern fleet of over-the-road
tractors and trailers that are used to provide transportation services to
LADD's casegoods companies to meet the special needs of LADD's customers. LADD
Transportation, together with fleets operated by LADD's Upholstery Group,
provides approximately 27% of LADD's out-bound shipping requirements for
finished products and also hauls a portion of the Company's in-bound raw
materials and supplies. LADD Transportation has received certain contract
carrier rights from the Interstate Commerce Commission and markets its
transportation services to independent customers.
Marketing and Major Customers
The Company's brands generally market under their own trade names. The
general marketing practice followed in the furniture industry and by the
Company is to exhibit products at national furniture markets. Internationally,
the Company markets its products primarily through LADD International, a
corporate marketing unit formed to coordinate the worldwide marketing efforts
for LADD's brands.
Also, beginning in 1997, the Company entered licensing arrangements for
various product lines. At the October 1997 International Home Furnishings
Market, Pennsylvania House introduced its Bill Blass collection and Lea
Industries introduced its Stars and Stripes collection, a nautical group
endorsed by America's premier yachtsman, Dennis Conner. At the April 1998
Market, Lea will introduce a new youth bedroom furniture collection under the
name of basketball star Grant Hill.
The Company also sells its furniture products directly and through
approximately 350 independent sales representatives to a broad variety of
customers, including department stores, furniture retailers, mass
merchandisers, catalog merchandisers, major hotel chains, and various specialty
stores and rental companies. The Company currently sells to approximately 8,000
3
<PAGE>
furniture customers. While no single customer accounted for more than 9% of net
sales in 1997, at January 3, 1998, approximately 11% of the Company's trade
accounts receivable were from Heilig Meyers. Otherwise, the Company's business
is not dependent upon a single customer, the loss of which would have a
material effect on the Company.
Product Design and Development
Each operating entity develops and manages its own product lines. New
product groups are introduced at national or regional furniture markets, and,
based upon their acceptance at the markets, the products are either placed into
production or withdrawn from the market. Consistent with industry practice, the
Company designs and develops new product groups each year, replacing
collections or items that are discontinued.
Raw Materials
The most important raw materials used by the Company are hardwood lumber,
veneers, upholstery fabrics, polyfoam, leather, plywood, particleboard,
hardware, finishing materials, glass, steel springs, and high pressure
laminates. The wood species include cherry, oak, maple, white pine, poplar, and
other American species, and imports such as rubberwood, guatambue and mahogany.
The Company believes that its sources of supply for these materials are
adequate and that it is not dependent on any one supplier.
The Company's plants are heated by furnaces using gas, fuel oil, wood
waste, and other scrap material as energy sources. The furnaces located at
casegoods manufacturing plants have been adapted so that they use alternate
energy sources, and the Company has been able to fuel these furnaces
principally by wood wastes. The Company's plants use electrical energy
purchased from local utilities. The Company has not experienced a shortage of
energy sources and believes that adequate energy supplies will be available for
the foreseeable future.
Patents and Trade Names
The trade names of the Company represent many years of continued business,
and the Company believes such names are well recognized and associated with
quality in the industry. The Company owns intellectual properties which are
considered to be important to the business and which do not have a limited
duration.
Inventory Practices, Order Backlog and Credit Practices
The Company generally schedules production of its various groups based
upon orders on hand. Manufacturing efficiencies and investment in inventories
are, therefore, directly related to the current volume of orders. The Company,
and the industry generally, honors cancellation of orders made prior to
shipment. The Company's backlog of unshipped orders believed to be firm at 1997
fiscal year end was approximately $97.6 million, as compared to $72.3 million
at 1996 fiscal year end. Generally, orders in the backlog are shipped during
the following 12 months. The Company's residential brands as a whole are not
subject to significant seasonal variations; however, the Company's contract
group does have some seasonality with higher sales in the second and fourth
quarters.
Competition
The residential furniture market is highly competitive and includes a
large number of manufacturers, none of which dominate the market. Industry
estimates indicate that there are over 800 manufacturers of residential
furniture in the United States, some of which include furniture types not
manufactured by the Company. Competition within the market for furniture occurs
principally in the areas of style or design, quality, price, and service.
In recent years, foreign imports of finished furniture and component parts
have increased. Although some of the imported products compete with products
manufactured and marketed by the Company, its Pilliod Furniture subsidiary is
the only business to have experienced any significant negative impact. Where
appropriate, the Company has capitalized upon the cost advantages of importing
selected component parts and a limited number of finished products but is not
dependent upon any foreign sources. In 1997 and 1996, the Company imported
approximately $21.3 million and $16.4 million, respectively, of finished
furniture and unfinished furniture parts.
The Company has no facilities located outside the continental United
States.
Governmental Regulations
The Company is subject to a wide-range of Federal, state and local laws
and regulations relating to protection of the environment, worker health and
safety and the emission, discharge, storage, treatment and disposal of
hazardous materials.
4
<PAGE>
These laws include the Clean Air Act, the Resource Conservation and Recovery
Act, the Federal Water Pollution Control Act and the Comprehensive
Environmental, Response, Compensation and Liability Act. Certain of the
Company's operations use glues and coating materials that contain chemicals
that are considered hazardous under various environmental laws. Accordingly,
management closely monitors the Company's environmental performance at all of
its facilities. Management believes that the Company is in substantial
compliance with all environmental laws.
See "Legal Proceedings" regarding the status of environmental proceedings
in which the Company is involved.
Employees
The Company had approximately 6,200 employees as of March 1, 1998.
Substantially all of the employees were employed on a full-time basis.
Employees at four Company plants are represented by various labor unions.
The Company considers its relations with its employees to be good.
Export Sales
In 1997, the Company's export sales increased to $29.7 million
(approximately 5.7% of 1997 net sales), from $25.4 million in 1996
(approximately 5.1% of 1996 net sales). The Company's export sales in 1995 were
$37.5 million, or approximately 6.3% of 1995 net sales. Excluding the operating
companies divested in 1995 and 1996, export sales were 5.7% and 5.0% of net
sales in 1997 and 1996, respectively. None of the Company's assets are
dedicated solely to export sales.
Item 2. Properties
The following table summarizes the real estate, both owned and leased,
used in the primary business operations of the Company as of March 1, 1998.
LADD FACILITIES
<TABLE>
<CAPTION>
Approx. Owned Lease
Facility Size or Expiration
Operating Group Location Use (Square Feet) Leased Date
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<S> <C> <C> <C> <C> <C>
Casegoods .......... N. Wilkesboro, NC Manufacturing 409,000 Owned
N. Wilkesboro, NC Manufacturing 414,000 Owned
N. Wilkesboro, NC Manufacturing 122,500 Owned
N. Wilkesboro, NC Distribution/Office 109,500 Owned
Morristown, TN Manufacturing 286,380 Owned
Morristown, TN Manufacturing 139,200 Owned
Morristown, TN Distribution 160,000 Leased 4/01/99
Morristown, TN Distribution 97,500 Leased 10/31/98
Waynesville, NC Manufacturing 447,400 Owned
Marion, VA Manufacturing 204,900 Owned
Lewisburg, PA Manufacturing/Office/Dist. 614,100 Owned
White Deer, PA Manufacturing/Dist. 128,000 Owned
Selma, AL Manufacturing 310,000 Owned
Nichols, SC Manufacturing 350,000 Owned
Swanton, OH Manufacturing 290,000 Owned
Dillon, SC Distribution 45,000 Leased mo-to-mo
Sherman, MS Manufacturing/Office 302,650 Owned
Upholstery .........
Myrtle, MS Manufacturing 162,600 Owned
Hickory, NC Manufacturing/Office/Dist. 359,600 Owned
Hickory, NC Manufacturing 121,800 Owned
Hickory, NC Manufacturing 152,900 Owned
Monroe, NC Manufacturing 258,000 Leased 3/31/04
Contract Sales ..... Chilhowie, VA Manufacturing 530,000 Owned
Martinsville, VA Manufacturing 850,000 Owned
Martinsville, VA Office 50,000 Leased 5/31/02
Martinsville, VA Distribution 256,500 Leased 9/30/99
Corporate .......... Greensboro, NC Office 50,000 Leased 10/31/07
</TABLE>
5
<PAGE>
The Company believes that its manufacturing, warehouse and office space is
well maintained for its intended purposes and is adequately insured. The
Company normally operates all of its furniture manufacturing facilities on a
one shift per day, five-day week basis. Increasingly, certain departments and
facilities are operated on a multi-shift basis.
The Company also currently maintains showrooms, the majority of which are
leased, in High Point, NC, Sherman and Tupelo, MS, and Martinsville, VA.
The Company owns and leases substantial quantities of woodworking, sewing
and material handling equipment located in its various plants. The Company also
leases substantially all of its data processing equipment. The Company
considers its present equipment to be adequate, well-maintained, generally
modern, and adequately insured.
The Company currently owns and leases approximately 100 tractors and 230
trailers.
Item 3. Legal Proceedings
The Company is involved in routine litigation from time to time in the
regular course of its business. In the opinion of the Company, there are no
material legal proceedings pending or known to be contemplated to which the
Company is a party or of which any of its property is subject.
The Company presently is involved in the following environmental
proceedings:
1. The California manufacturing facility of Brown Jordan Company ("Brown
Jordan"), a former subsidiary of the Company, is located in El Monte,
California in the San Gabriel Valley Groundwater Basin. The Basin has been
designated by the United States Environmental Protection Agency ("EPA") and
the State of California as a Superfund site. Although no administrative or
judicial enforcement action has been taken by the EPA or applicable
California authorities, the State of California is seeking to identify
potentially responsible parties ("PRPs") and has ordered certain tests to
be conducted by Brown Jordan in connection with their investigation. In May
1994, the Company joined the Northwest El Monte Community Task Force, a PRP
Group formed to respond to the EPA. In March 1995, the Task Force and the
EPA finalized an Administrative Consent Order pursuant to which the Task
Force has begun a remedial investigation and feasibility study at an
approximate cost of $1.3 million. Pursuant to an interim allocation
agreement, Brown Jordan is responsible for 4.86% of all shared assets of
the Task Force.
2. In September 1995, Brown Jordan received a request from the California
Regional Water Quality Board with respect to further assessment of two
areas at the El Monte facility, the Leach Pit Area and the Clarifier Area.
Both of these areas have been the subject of significant previous
investigations (undertaken 1988 - 1993) which had concluded that it was
unlikely that Brown Jordan was contributing significantly to groundwater
contamination in the area. The Board's investigation program is separate
from the El Monte Superfund group, although both are concerned with whether
Brown Jordan is a source of groundwater contamination. There is some basis
at this time for believing that the Leach Pit and Clarifier Area problems
are limited to soil contamination.
Under the terms of the Asset Purchase Agreement with Maytag Corporation
("Maytag") dated June 1, 1989 ("the Maytag Agreement") under which the Company
acquired Brown Jordan, the Company's liabilities in El Monte matters are
limited to the first $200,000 of costs for off-site liabilities and $1,000,000
of costs for on-site liabilities. Pursuant to the terms of the Stock Purchase
Agreement between the Company and BJCL, Inc. (now known as Brown Jordan
International, Inc.) ("BJII") dated as of November 7, 1995 (the "Brown Jordan
Agreement") under which BJII acquired Brown Jordan from the Company, BJII may
assume up to $400,000 of certain post closing costs relating to Brown Jordan,
including environmental costs relating to the El Monte site. Through fiscal
1997, approximately $337,000 had been expended by the Company on the El Monte
site and approximately $60,000 of non-environmental contractual indemnification
expenses had been incurred by BJII. Accordingly, if no other claims are made by
BJII under the Brown Jordan Agreement, the next $340,000 of costs associated
with Brown Jordan environmental claims will be paid by BJII.
The Company has also been named as a PRP, along with numerous parties, at
various hazardous waste sites undergoing cleanup or investigation for cleanup.
The Company believes that at each of these sites, it has been improperly named
or will be considered a "de minimis" party. Although the Company believes
adequate accruals have been provided for environmental contingencies, it is
possible, due to uncertainties previously noted, that additional accruals could
be required in the future. However, the ultimate resolution of these
contingencies, to the extent not previously provided for, should not have a
material adverse effect on the Company's financial position and results of
operations.
The Company is cooperating fully with government authorities in each of
these matters.
6
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Item 4. Submission of Matters to a Vote of Security Holders
No such matters were submitted to security holders of the Company in the
fourth quarter of fiscal year 1997.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
Stock Transfer Agent:
Wachovia Bank of North Carolina, N.A.
Winston-Salem, NC
Shareholder Account Information: 1-800-635-4236
Stock Listing:
The Company's common stock is traded on the Nasdaq Stock Market under the
Nasdaq symbol: LADF. At year end 1997, the Company had approximately 4,400
shareholders based upon approximately 590 shareholders of record at that date
and an estimate of the number of individual shareholders represented by broker
and nominee position listings.
Major Market Makers:
Davenport & Co. Raymond, James & Associates
Huntleigh Securities Corp. SBC Warburg Dillon Read Inc.
Interstate/Johnson Lane Corp. Sherwood Securities Corp.
Jefferies & Company, Inc Troster Singer Corp.
Legg Mason Wood Walker Inc. Wheat First Union
Mayer & Schweitzer Inc.
See Item 6, Selected Financial Data, for market and dividend information
regarding the Company's Common Stock.
7
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Item 6. Selected Financial Data
LADD FURNITURE, INC. AND SUBSIDIARIES
SELECTED ANNUAL DATA
Dollar and share data in thousands, except per share amounts
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal Fiscal Fiscal
1993 1994 1995 1996 1997
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<S> <C> <C> <C> <C> <C>
Operating Statement Data
Net sales ............................................ $507,586 576,549 599,203 497,457 525,500
Cost of sales ........................................ 414,534 468,794 502,999 411,582 429,050
-------- ------- ------- ------- -------
Gross profit ........................................ 93,052 107,755 96,204 85,875 96,450
Selling, general and administrative expenses ......... 81,953 93,911 101,345 74,363 74,235
Restructuring expense ................................ -- -- 25,120 3,431 --
-------- ------- ------- ------- -------
Operating income (loss) .............................. 11,099 13,844 (30,261) 8,081 22,215
Other (income) deductions:
Interest expense .................................... 5,542 8,939 11,798 12,069 11,242
Other, net .......................................... (1,046) (199) 1,367 399 792
-------- ------- ------- ------- -------
Earnings (loss) before income taxes .................. 6,603 5,104 (43,426) (4,387) 10,181
Income tax expense (benefit) ......................... 2,639 744 (18,236) (1,952) 3,869
-------- ------- ------- ------- -------
Net earnings (loss) .................................. $ 3,964 4,360 (25,190) (2,435) 6,312
======== ======= ======= ======= =======
Depreciation ......................................... $10,508 14,143 12,671 10,887 10,119
Amortization ......................................... 2,554 3,669 3,758 4,444 4,109
Cash dividends paid .................................. 2,767 2,771 2,086 -- --
======== ======= ======= ======= =======
Weighted average shares outstanding .................. 7,686 7,697 7,721 7,722 7,744
======== ======= ======= ======= =======
Per Share Data
Net sales ............................................ $ 66.04 74.91 77.61 64.42 67.86
Net earnings (loss) -- basic ......................... 0.52 0.57 ( 3.26) (0.32) 0.81
Net earnings (loss) -- diluted ....................... 0.51 0.57 ( 3.26) (0.32) 0.81
Cash dividends ....................................... 0.36 0.36 0.27 -- --
Year-end book value .................................. 19.63 19.84 16.32 16.05 16.91
======== ======== ======== ======== ========
Balance Sheet Data
Net working capital .................................. $123,741 124,474 80,317 98,740 116,330
Net property, plant and equipment .................... 97,497 109,522 82,586 74,729 67,530
Total assets ......................................... 336,971 380,137 313,775 315,031 329,190
Total debt ........................................... 111,072 149,271 115,944 130,952 125,393
Shareholders' equity ................................. 150,840 152,695 125,986 123,900 130,925
======== ======== ======== ======== ========
Ratios, Other
Gross profit margin .................................. 18.3 % 18.7 16.1 17.3 18.4
Operating profit (loss) margin ....................... 2.2 % 2.4 ( 5.0) 1.6 4.2
Return (loss) on sales ............................... 0.8 % 0.8 ( 4.2) (0.5) 1.2
Effective income tax rate ............................ 40.0 % 14.6 42.0 44.5 38.0
Dividend payout ratio ................................ 69.8 % 63.6 N/M N/M N/M
Return (loss) on beginning assets .................... 1.3 % 1.3 ( 6.6) (0.8) 2.0
Return (loss) on beginning equity .................... 2.7 % 2.9 (16.5) (1.9) 5.1
Total debt ratio ..................................... 42.4 % 49.4 47.9 51.4 48.9
Current ratio ........................................ 3.1 x 3.0 2.3 2.6 2.7
Inventory turnover ratio ............................. 4.2 x 4.2 4.7 4.7 4.8
Asset turnover ratio ................................. 1.6 x 1.6 1.7 1.6 1.6
Year-end employees (actual number) ................... 6,670 7,860 6,880 5,800 6,150
Sales per employee (000's) ........................... $ 75.0 75.9 77.0 79.8 88.1
======== ======== ======== ======== ========
Stock Data
High ................................................. $ 44.25 35.25 19.88 15.75 19.38
Low .................................................. 22.50 14.63 12.25 9.50 12.25
Close ................................................ 30.00 19.50 13.13 14.63 15.00
Trading volume (shares) .............................. 8,260 6,473 9,599 8,000 8,685
======== ======== ======== ======== ========
</TABLE>
NOTES: Total debt ratio is defined as total debt to total debt plus
shareholders' equity. Fiscal year 1997 comprised 53 weeks; all other
years comprised 52 weeks. Stock price data for calendar years. N/M = Not
meaningful. Sales per employee based on monthly employee average.
Pilliod Furniture is included in consolidated results from its
acquisition date of January 31, 1994. Fiscal year 1995 reflects the sale
of Brown Jordan Company and Lea Lumber & Plywood -- effective December
29, 1995. Fiscal 1996 reflects the sale of Fournier Furniture --
effective February 26, 1996; and the liquidation of Daystrom Furniture
beginning June 28, 1996. Fiscal 1994, 1995 and 1996 reflect the
Company's accounts receivable securitization program which commenced
January 31, 1994 and terminated on March 28, 1996. The results have been
restated to reflect the change in 1997 in inventory accounting from the
LIFO method to the FIFO method for one of the Company's business units.
8
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
Results of Operations
The table below sets forth the percentage relationship of net sales to
certain items included in the consolidated statements of operations in each of
the last three fiscal years.
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales ............................................. 100.0% 100.0% 100.0%
Cost of sales ......................................... 83.9 82.7 81.6
----- ----- -----
Gross profit ......................................... 16.1 17.3 18.4
Selling, general and administrative expenses .......... 16.9 15.0 14.2
Restructuring expense ................................. 4.2 0.7 --
----- ----- -----
Operating income (loss) .............................. ( 5.0) 1.6 4.2
Other deductions, net ................................. 2.2 2.5 2.3
----- ----- -----
Earnings (loss) before income taxes .................. ( 7.2) ( 0.9) 1.9
Income tax expense (benefit) .......................... ( 3.0) ( 0.4) 0.7
----- ----- -----
Net earnings (loss) .................................. ( 4.2)% ( 0.5)% 1.2%
===== ===== =====
</TABLE>
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as "forward looking statements" for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended. These statements can be identified by the use of
forward looking terminology such as "believes", "expects", "may", "should", or
"anticipates". The Company cautions readers that forward looking statements,
including without limitation those relating to sales, operating costs, working
capital, liquidity, capital needs and interest costs, are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those indicated in the forward looking statements. This is due to several
important factors herein identified, including without limitation, anticipated
growth in sales; success of product introductions; increased cash flow from
operations; decreased income tax rate; and decreased interest expense, and
other risks and factors identified from time to time in the Company's reports
filed with the Securities Exchange Commission.
The following paragraphs provide an analysis of the changes in net sales,
selected cost and expense items, and net earnings (loss) over the three-year
period ended January 3, 1998.
Fiscal 1997 Compared to 1996
Consolidated net sales for fiscal 1997 increased $28.0 million, or 5.6%,
to $525.5 million from $497.5 million in 1996. On a pro forma basis, excluding
the sales of two companies (Daystrom Furniture and Fournier Furniture) divested
during 1996, fiscal 1997 consolidated net sales would have increased by 9.0%.
The following table compares net sales by business group for the two years:
<TABLE>
<CAPTION>
Increase Percent
1996 1997 (Decrease) Change
----------- --------- ------------ -----------
(in thousands)
<S> <C> <C> <C> <C>
Casegoods .................. $277,356 286,334 8,978 3.2%
Upholstery ................. 124,340 122,691 (1,649) (1.3)%
Contract Sales ............. 80,215 116,475 36,260 45.2%
Divested companies ......... 15,546 -- (15,546) N/M
-------- ------- ------- -----
$497,457 525,500 28,043 5.6%
======== ======= ======= =====
</TABLE>
Taking into account that fiscal 1997 had one more week of shipments than
the prior year, the Company's residential casegoods sales trends in 1997 were
slightly below those estimated for the industry, and the upholstery sales
trends were below industry estimates. These sales trends were due primarily to
the Company's decision during 1996 to significantly
9
<PAGE>
reduce shipments to a major furniture retailer because profit margins were not
considered to be acceptable, and the decision during the third quarter of 1997
to reduce shipments to another major furniture retailer due to its weakening
credit position. The upholstery group's sales decrease was also impacted by
continued efforts to focus on profitable product lines and to realign its sales
and manufacturing departments. The 1997 sales growth in the contract sales
group continued to exceed sales trends estimated for the hospitality sector,
where hotels/motels continue to refurbish rooms at an accelerated pace, and in
the assisted living and government sectors. The Company anticipates that the
trend in contract sales growth will moderate in 1998, but continue in the
single to lower double digit range. The Company believes that production
capacity available at its casegoods group manufacturing facilities, as well as
from a recently-announced expansion of the contract group's upholstery
operations, will be sufficient to accommodate this anticipated sales growth in
1998. The Company's backlog increased over $22.0 million during the current
year, principally due to strong late third quarter and fourth quarter orders
received in each of the three business groups. The strong order growth rate has
continued during the first two months of 1998 as orders have increased
approximately 25.0% over the comparative period of 1997.
In 1997, the Company's export sales increased to $29.7 million (5.7% of
net sales), from $25.4 million (5.1% of net sales) in 1996. Excluding the sales
of companies divested in 1996, export sales increased 22.7% in 1997 and were
5.7% and 5.0% of net sales in 1997 and 1996, respectively. Export sales will
continue to be a focus of the Company and are expected to increase generally at
a faster rate than domestic sales. Although the Company does not have a
significant presence in the Asian market, the planned export sales growth could
be affected by the economic situation in this region.
Cost of sales decreased to 81.6% of net sales from 82.7% in 1996. Cost of
sales in 1996 was positively impacted by the Company's 1996 decision to curtail
health care benefits to retirees and to terminate its qualified defined benefit
pension plan. In the aggregate, these two actions resulted in a one-time $4.4
million decrease in cost of sales in 1996. Excluding the divestiture companies
and the above-mentioned nonrecurring 1996 transactions, "pro forma" cost of
sales was 83.1% of net sales in 1996, compared to the reported 81.6% in 1997.
The "pro forma" 1996 gross margin of 16.9% increased to 18.4% in 1997 primarily
due to the following factors: (i) successful product introductions at the
October 1996 and April 1997 furniture markets were shipped in 1997; (ii) the
ongoing savings that resulted from the termination of the above mentioned
retiree and employee benefits; and (iii) increased absorption of plant overhead
due to increased sales and production. The Company believes that increases in
sales, further cost savings actions, and new product introductions will
continue to increase gross margins in 1998.
Selling, general and administrative (SG&A) expenses were 14.2% of net
sales in 1997, compared to 15.0% of net sales in 1996. On a pro forma basis,
excluding the divestiture companies, SG&A expenses were 14.2% in 1997 and 14.8%
in 1996. The decrease in SG&A expenses as a percent of net sales is due
principally to a reduction in 1997 bad debt expense. Bad debt expenses, net of
recoveries, was 0.1% of net sales in 1997, compared to 0.7% of net sales in
1996. The bankruptcy filings of large furniture retailers Montgomery Ward and
Levitz Furniture on August 7, 1997 and September 5, 1997, respectively, did not
have a significant impact on the Company. The Company's total aggregate bad
debt write-off for these two companies was less than $350,000 as a result of a
planned reduction in credit exposure. The Company anticipates that its SG&A
expense will be in the range of 14.0% to 14.5% of net sales during 1998.
Other deductions decreased in the aggregate to 2.3% of net sales from 2.5%
in the prior year. The principal reason for the decline was that interest
expense, as a percent of net sales, was 2.1% in 1997, down from 2.4% in 1996,
due mainly to a decrease of $10.0 million in average outstanding borrowings
during the 1997 fiscal year. The interest rate margin over LIBOR and prime on
the Company's bank borrowings can be reduced upon the Company meeting specified
financial ratios related to operating cash flow and debt levels. Based on the
Company's financial performance, the interest rate margin was reduced by 0.50%
effective April 16, 1997. Additionally, effective October 1, 1997, the Company
received from its bank group an interest rate margin reduction of 0.25% in both
its prime and LIBOR rate matrices. These decreases in the Company's interest
rate margin were somewhat offset by increases in the prime and LIBOR base rates
in the first quarter of 1997.
The principal reason for the decrease in the Company's effective tax rate
to 38.0% in fiscal 1997 from a tax benefit of 44.5% in the previous year was
due to a reduction in various tax credits realized in 1997. The Company's
combined effective Federal and state tax rate for 1998 is expected to
approximate 38.0%.
Fiscal 1995 and 1996 Restructuring of the Company
In 1995, the Company recorded restructuring charges of $25.1 million which
consisted of: (a) $17.4 million to write-down businesses sold or held for sale
to the estimated fair value, net of disposition expenses; (b) $1.4 million to
write-down selected machinery to estimated fair value because of changes in
manufacturing processes; (c) $6.3 million for costs associated with closing
four retail stores and to provide for severance expense and other costs. The
restructuring charge resulted from the
10
<PAGE>
Company's decision to divest four operating companies (Brown Jordan, Fournier
Furniture, Daystrom Furniture and Lea Lumber & Plywood), close four
Company-owned retail stores, and reorganize the remaining companies to improve
operating performance.
In 1996, the Company recorded restructuring charges of $3.4 million which
consisted of: (a) $1.9 million charge due to a shortfall in anticipated
proceeds on the sale of a business; (b) $2.4 million due to the necessity to
liquidate versus sell one of the remaining businesses; (c) $0.8 million for
severance related to continued restructuring of the Company; and (d) $1.7
million aggregate credits as a result of proceeds from the liquidation of idle
assets held for sale exceeding earlier estimates. The costs charged against
aggregate restructuring reserves of $7.2 million at December 30, 1995 totaled
$5.5 million in 1996 and $1.4 million in 1997.
Management believes the actions represented by these charges have
repositioned the Company to achieve improved operating performance within the
furniture manufacturing industry.
Fiscal 1996 Compared to 1995
Consolidated net sales for fiscal 1996 decreased $101.7 million, or 17.0%,
to $497.5 million from $599.2 million in 1995. On a pro forma basis, excluding
the four divestiture companies, as well as the company-owned retail stores
closed in 1995, fiscal 1996 consolidated net sales would have decreased by
0.3%. The following table illustrates the comparison of net sales by business
group for the year:
<TABLE>
<CAPTION>
Increase Percent
1995 1996 (Decrease) Change
----------- ---------- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Casegoods .................. $284,445 277,356 (7,089) ( 2.5)%
Upholstery ................. 124,535 124,340 (195) ( 0.2)%
Contract Sales ............. 68,483 80,215 11,732 17.1%
Divested companies ......... 121,740 15,546 (106,194) (87.2)%
-------- ------- -------- -----
$599,203 $497,457 (101,746) (17.0)%
======== ======== ======== =====
</TABLE>
The Company's residential casegoods and upholstery sales trends in 1996
were below those estimated for the industry largely due to the Company's
decision to discontinue selling to certain accounts with unsatisfactory
margins. The 1996 sales growth in the contract business exceeded sales trends
estimated in the hospitality sector, where hotels/motels continue to refurbish
rooms at an accelerated pace.
In 1996, the Company's export sales decreased to $25.4 million (5.1% of
net sales), from $37.5 million in 1995 (6.3% of net sales). Excluding the
divestiture companies and the four company-owned retail stores, export sales
would have been 5.0% and 5.7% of net sales in 1996 and 1995, respectively.
Cost of sales decreased by $91.4 million, or 18.2%, in fiscal 1996 and
represented 82.7% of net sales, down from 83.9% of net sales in fiscal 1995. On
a pro forma basis, excluding the divestiture companies and the company-owned
retail stores, cost of sales decreased to 82.1% of net sales in 1996, from
84.2% of net sales in 1995. Cost of sales in 1996 was positively impacted by
the Company's decision to curtail health care benefits to retirees and to
terminate its qualified defined benefit pension plan. As more fully discussed
in notes 9 and 10 to the consolidated financial statements, these two actions
in the aggregate resulted in a $4.4 million decrease in cost of sales in 1996.
Excluding the divestiture companies and the company-owned retail stores, the
above mentioned nonrecurring 1996 transactions, and non-cash charges totalling
$5.3 million recorded in 1995, cost of sales was 83.1% of net sales in both
1996 and 1995. Negatively impacting margins in 1996 and 1995 were production
decreases of 5.8% and 7.5%, respectively, to reduce inventory levels of the
casegoods group, resulting in increased amounts of unabsorbed fixed overhead
costs. SG&A expenses were 15.0% of net sales in 1996, compared to 16.9% of net
sales in fiscal 1995. On a pro forma basis, excluding the divestiture companies
and the company-owned retail stores, SG&A expenses were 14.8% of net sales in
1996, compared to 16.2% of net sales in 1995. This decrease in 1996 was
primarily attributable to the second quarter 1995 non-cash charge (totalling
$2.3 million) to increase the Company's bad debt reserves and provide for other
miscellaneous expenses, as well as to costs in 1995 associated with the
Company's accounts receivable securitization program, which was in place for
all of 1995 and was terminated at the end of 1996's first quarter. SG&A
expenses also declined during 1996 as a result of an approximate 10.0%
reduction in the Company's salaried work force, consolidation of certain
administrative functions, and cutbacks in advertising.
11
<PAGE>
Other deductions increased in the aggregate to 2.5% of fiscal 1996's net
sales from 2.2% in the prior year. Interest expense, as a percent of net sales,
was 2.4% in 1996 compared to 2.0% in 1995 due to higher interest rates. Other
deductions in 1996 were positively impacted by an $1.7 million insurance
settlement. Other deductions in 1996 and 1995 included non-cash charges
totalling $0.9 million and $2.2 million, respectively, attributable to the
write-off of unamortized financing costs and other noncurrent assets, and the
recognition of other liabilities.
The principal reason for the increase in the Company's effective tax rate
to 44.5% in fiscal 1996 from 42.0% in the previous year was the realization of
tax benefits from the utilization of tax credits.
Liquidity and Capital Resources
In July 1996, the Company refinanced its long-term and short-term bank
credit facility with a new credit facility ("the Facility") which consisted of
a $125.0 million three-year revolving credit line and a $65.0 million term
loan. On January 1, 1997, the Facility was amended to reduce the revolving
credit loan to $110.0 million. The Facility is secured by substantially all the
assets of the Company, including equipment, inventory, receivables and real
property. Borrowings under the Facility bear interest at rates selected
periodically by the Company of LIBOR plus 2.00%, or prime plus 1.00%, for the
revolving credit loan, and LIBOR plus 2.25%, or prime plus 1.25%, for the term
loan. The interest rate margin over LIBOR and prime can be reduced upon the
Company meeting a financial ratio related to operating cash flow and debt
levels. Based on the Company's financial performance, the interest rate margin
was reduced by 0.50% effective April 16, 1997. Additionally, effective October
1, 1997, the Company received from its bank group an interest rate margin
reduction of 0.25% in both its prime and LIBOR rate matrices. These decreases
in the Company's interest rate margin were somewhat offset by increases in the
prime and LIBOR base rates in the first quarter of 1997. The term loan portion
of the Facility is payable in quarterly installments of $1.625 million. The
Facility restricts the amount of the Company's capital spending, lease
obligations, borrowings, and the payment of dividends. In connection with the
refinancing, unamortized financing costs of $890,000 were charged to operations
in 1996. Due to the refinancing, the Company incurred fees and expenses in 1996
aggregating approximately $4.0 million which will be amortized over the terms
of the Facility. At January 3, 1998, there was $32.1 million available for
borrowing under the revolving credit facility.
On January 3, 1998, net working capital totaled $116.3 million and the
current ratio was 2.7:1. Both of these financial measures were improvements
over the prior year, which was primarily attributable to planned increases in
trade accounts receivable and inventories to support the improved order rate
for the last four months of 1997.
During 1997, the Company generated net cash from operating activities of
$6.7 million, a decrease of $18.8 million compared to the prior year. During
1997, capital spending totaled $7.5 million, down from the prior year's $8.3
million. An increase in working capital associated with the growth in sales
used cash of $21.9 million in 1997. Capital expenditures during 1996 and 1997
were funded from the Company's operations and from borrowings under the
Company's existing long-term credit facility.
Total debt as a percentage of total debt plus shareholders' equity (total
debt ratio) was 48.9% at the end of 1997, compared to 51.4% at the end of 1996.
The decrease in the total debt ratio was due to the Company increasing its
equity through current year earnings and the Company repaying debt from
operating cash flow and from the sale/leaseback of a manufacturing facility.
The Company anticipates spending less than $10.0 million for capital
improvements during 1998, and believes that the unused revolving credit line
available under the Facility and cash generated from operations will be
adequate to fund these planned investments, as well as its lease commitments.
The Company anticipates that its cash flow from operations will exceed its
capital expenditures in 1998, enabling the Company to further reduce its
outstanding borrowings and accordingly, its total debt ratio.
The Company will continue to review and invest in its software systems and
applications to ensure the Company is year 2000 compliant. The financial impact
on the Company is not anticipated to be material to its financial position or
results of operations in any given year.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income." This Statement establishes standards for
reporting comprehensive income and its components in consolidated financial
statements. The Statement is effective for fiscal years beginning after
December 15, 1997. The Company plans to adopt the provisions of SFAS 130 in the
1998 fiscal year and does not expect that the adoption of this Statement will
impact the Company's financial position and results of operations.
12
<PAGE>
In June 1997, the Financial Accounting Standards Board also established
new accounting standards for "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131) that requires publicly owned companies to
report certain financial information about operating segments, as well as
certain information about those operating segment's products and services, the
geographic areas in which they operate, and their major customers. The Company
intends to adopt the provisions of SFAS 131 in the 1998 fiscal year.
Impact of Inflation
Although the effects of inflation on the Company cannot be accurately
determined, in 1997 the impact of inflation marginally affected the Company's
manufacturing costs in the areas of manufacturing overhead and raw materials
other than lumber. The price of lumber, like the prices of other commodities,
is affected more by the interaction of supply and demand than by inflation.
Although 1997 margins were impacted by inflation, the Company's gross profit
margins during the past several years have, in general, been impacted more by
promotional selling discounts and plant downtime taken to curtail production
than by inflation. The Company believes it will be able to largely offset the
effects of inflation by improving its manufacturing efficiency, increasing
employee productivity, substituting raw materials, and increasing the selling
prices of its products.
13
<PAGE>
Item 8. Financial Statements and Supplementary Data
Management's Statement of Responsibility
The management of LADD Furniture, Inc. is responsible for the integrity of
the financial statements of the Company and for ascertaining that the financial
statements accurately reflect the financial position and results of operations
of the Company. The financial statements were prepared in conformity with
generally accepted accounting principles, applying estimates and management's
best judgment, as required. Information presented elsewhere in the Company's
Annual Report on Form 10-K is consistent with the financial statements.
LADD has established and maintains a system of internal controls designed
to provide reasonable assurance, at an appropriate cost, that the Company's
assets are adequately safeguarded and that the accounting records reflect the
transactions of the Company accurately, fairly and in reasonable detail. The
internal control system provides for careful selection and training of
personnel, the delegation of management authority and responsibility, the
dissemination of management control policies and procedures and an internal
audit program.
The Board of Directors, through its Audit Committee consisting of four
directors who are not officers or employees of the Company, is responsible for
reviewing and monitoring the financial statements and accounting practices of
the Company. The Audit Committee meets periodically, either separately or
jointly, with the independent auditors, representatives of management and the
Company's internal auditors to discuss auditing, accounting and financial
statement matters. To ensure complete independence, representatives of KPMG
Peat Marwick LLP, certified public accountants retained by the Company to audit
the financial statements, have full and free access to meet with the Audit
Committee with or without the presence of management representatives.
Fred L. Schuermann, Jr. William S. Creekmuir
President & Chief Executive Officer Executive Vice President &
Chief Financial Officer
February 6, 1998 February 6, 1998
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
LADD FURNITURE, INC.:
We have audited the accompanying consolidated balance sheets of LADD
Furniture, Inc. and subsidiaries as of December 28, 1996 and January 3, 1998,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the years in the three-year period ended January 3,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of LADD
Furniture, Inc. and subsidiaries as of December 28, 1996 and January 3, 1998,
and the results of their operations and their cash flows for each of the years
in the three-year period ended January 3, 1998 in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Greensboro, North Carolina
February 6, 1998
15
<PAGE>
LADD FURNITURE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 30, 1995, December 28, 1996, and January 3, 1998
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- ------------
Dollar amounts in thousands, except share
data
<S> <C> <C> <C>
Net sales .................................................... $ 599,203 497,457 525,500
Cost of sales ................................................ 502,999 411,582 429,050
---------- ------- -------
Gross profit .............................................. 96,204 85,875 96,450
Selling, general and administrative expenses ................. 101,345 74,363 74,235
Restructuring expense ........................................ 25,120 3,431 --
---------- ------- -------
Operating income (loss) ................................... (30,261) 8,081 22,215
Other deductions:
Interest expense ............................................ 11,798 12,069 11,242
Other deductions, net ....................................... 1,367 399 792
---------- ------- -------
13,165 12,468 12,034
---------- ------- -------
Earnings (loss) before income taxes ....................... (43,426) (4,387) 10,181
Income tax expense (benefit) ................................. (18,236) (1,952) 3,869
---------- ------- -------
Net earnings (loss) ....................................... $ (25,190) (2,435) 6,312
========== ======= =======
Net earnings (loss) per common share -- basic ................ $ (3.26) (0.32) 0.81
========== ======= ========
Net earnings (loss) per common share -- diluted .............. $ (3.26) (0.32) 0.81
========== ======= ========
Cash dividends per common share .............................. $ 0.27 -- --
========== ======= ========
Weighted average number of common shares outstanding ......... 7,720,783 7,722,085 7,743,986
========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
LADD FURNITURE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 28, January 3,
1996 1998
-------------- -----------
Dollar amounts in thousands,
except share data
<S> <C> <C>
ASSETS
Current assets:
Cash .................................................................................. $ 469 75
Trade accounts receivable, less allowances for doubtful receivables, discounts, returns
and allowances of $3,005 and $2,735, respectively.................................... 66,730 83,297
Inventories ........................................................................... 85,920 93,189
Prepaid expenses and other current assets ............................................. 5,768 8,016
-------- ------
Total current assets ............................................................... 158,887 184,577
-------- -------
Property, plant and equipment, net ..................................................... 74,729 67,530
Intangible and other assets, net ....................................................... 81,415 77,083
-------- -------
$315,031 329,190
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt ................................................ $ 5,093 6,807
Trade accounts payable ................................................................ 24,358 29,488
Accrued expenses and other current liabilities ........................................ 30,696 31,952
-------- -------
Total current liabilities .......................................................... 60,147 68,247
-------- -------
Long-term debt, excluding current installments ......................................... 125,859 118,586
Deferred and other liabilities ......................................................... 5,125 11,432
-------- -------
Total liabilities .................................................................. 191,131 198,265
-------- -------
Shareholders' equity
Preferred stock of $100 par value. Authorized 500,000 shares; no shares issued......... -- --
Common stock of $.30 par value. Authorized 50,000,000 shares, issued 7,719,567 shares
and 7,759,683 shares, respectively .................................................. 2,316 2,328
Additional paid-in capital ............................................................ 49,401 50,102
Retained earnings ..................................................................... 72,183 78,495
-------- -------
Total shareholders' equity ......................................................... 123,900 130,925
Commitments and contingencies -- Note 12
$315,031 329,190
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
LADD FURNITURE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 30, 1995, December 28, 1996, and January 3, 1998
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- ------------
Dollar amounts in thousands
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) .................................................................... $ (25,190) (2,435) 6,312
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation of property, plant and equipment ......................................... 12,671 10,887 10,119
Amortization .......................................................................... 3,758 4,444 4,109
Restructuring expense ................................................................. 25,120 3,431 --
Provision for losses on trade accounts receivable ..................................... 2,898 3,308 781
Gain on sales of assets ............................................................... (314) (147) (182)
Provision for deferred income taxes ................................................... (13,419) 1,953 7,319
Increase (decrease) in deferred and other liabilities ................................. 1,297 (2,564) 152
Change in assets and liabilities, net of effects from acquisition, divestitures and
classification of businesses held for sale:
(Increase) decrease in trade accounts receivable .................................... (7,988) 5,736 (17,348)
(Increase) decrease in inventories .................................................. 8,126 5,302 (7,269)
(Increase) decrease in prepaid expenses and other current assets .................... (2,084) 5,648 (2,248)
Increase (decrease) in trade accounts payable ....................................... 3,608 (3,738) 5,130
Increase (decrease) in accrued expenses and other current liabilities ............... 2,607 (6,320) (179)
--------- ------ -------
Total adjustments ..................................................................... 36,280 27,940 384
--------- ------ -------
Net cash provided by operating activities ........................................... 11,090 25,505 6,696
--------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment ............................................ (11,560) (8,347) (7,504)
Purchase leased manufacturing equipment ............................................... -- (4,648) --
Proceeds from sales of property, plant and equipment .................................. 191 246 16
Proceeds from sales of idle assets .................................................... -- 1,570 --
Proceeds from sales of businesses ..................................................... 28,004 5,284 --
(Additions to) reduction in other assets .............................................. (3,715) (2,759) 764
--------- ------ -------
Net cash provided by (used in) investing activities ................................. 12,920 (8,654) (6,724)
--------- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings .............................................................. 330 127,092 10,955
Proceeds from (repayments of) sales of trade accounts receivable ...................... 3,515 (36,000) --
Proceeds from sale leaseback of assets ................................................ 6,691 3,538 5,141
Principal payments on borrowings ...................................................... (31,706) (112,103) (16,514)
Dividends paid ........................................................................ (2,086) -- --
Other ................................................................................. (58) (181) 52
--------- -------- -------
Net cash used in financing activities ............................................... (23,314) (17,654) (366)
--------- -------- -------
Net increase (decrease) in cash ....................................................... 696 (803) (394)
Cash at beginning of year .............................................................. 576 1,272 469
--------- -------- -------
Cash at end of year .................................................................... $ 1,272 469 75
========= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
LADD FURNITURE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 30, 1995, December 28, 1996, and January 3, 1998
<TABLE>
<CAPTION>
Number Additional Total
of shares Common paid-in Retained shareholders'
issued stock capital earnings equity
------------- ------------- ------------ ------------ --------------
Dollar amounts in thousands, except share data
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 (restated) .................... 7,700,151 $2,310 48,699 101,686 152,695
Purchase of restricted stock .............................. (2,452) (1) -- -- (1)
Shares issued in connection with and amortization of
employee restricted stock awards ........................ 29,294 9 351 -- 360
Currency translation adjustment ........................... -- -- -- (66) (66)
Reclassification to businesses held for sale .............. -- -- -- 274 274
Net loss .................................................. -- -- -- (25,190) (25,190)
Dividends paid ............................................ -- -- -- (2,086) (2,086)
--------- ------- ------ ------- ---------
Balance at December 30, 1995 (restated) .................... 7,726,993 2,318 49,050 74,618 125,986
Purchase of restricted stock .............................. (7,426) (2) -- -- (2)
Amortization of employee restricted stock awards .......... -- -- 351 -- 351
Net loss .................................................. -- -- -- (2,435) (2,435)
--------- ------- ------ ------- ---------
Balance at December 28, 1996 (restated) .................... 7,719,567 2,316 49,401 72,183 123,900
Purchase of restricted stock .............................. (3,273) (1) -- -- (1)
Shares issued in connection with incentive stock option
plan .................................................... 4,500 2 51 -- 53
Shares issued in connection with employee defined
contribution plan ....................................... 38,889 11 536 -- 547
Amortization of employee restricted stock awards .......... -- -- 114 -- 114
Net earnings .............................................. -- -- -- 6,312 6,312
--------- ------- ------ ------- ---------
Balance at January 3, 1998 ................................. 7,759,683 $2,328 50,102 78,495 130,925
========= ======= ====== ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
LADD FURNITURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Company is one of the largest residential furniture manufacturers in
the United States with 20 manufacturing facilities in eight states. Following a
restructuring of its businesses in 1995, the Company's products consist
principally of casegoods and upholstery furniture in a wide range of styles for
bedrooms, family rooms, dining rooms and living rooms in the low-medium to
high-medium price ranges for the residential and contract (principally
hotel/motel) markets. Residential casegoods, residential upholstery and
contract products comprised approximately 55%, 23% and 22%, respectively, of
the Company's 1997 net sales. The Company currently sells to more than 8,000
customers, including retail furniture chains, national general retailers,
department stores, independent furniture retailers, major hotel chains and
others located throughout the United States and overseas.
Principles of Consolidation
The consolidated financial statements include the accounts of LADD
Furniture, Inc. and its subsidiaries, all of which are wholly-owned. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Fiscal Year
The Company's fiscal year ends on the Saturday nearest the end of
December. Fiscal year 1995 ended December 30, 1995; fiscal year 1996 ended
December 28, 1996; and fiscal year 1997 ended January 3, 1998. Fiscal 1997
comprised 53 weeks; fiscal years 1996 and 1995 comprised 52 weeks.
Revenue Recognition
Sales are recognized when products are shipped and invoiced to customers.
Monthly provision is made for doubtful receivables, discounts, returns and
allowances.
Substantially all of the Company's accounts receivable are due from
customers described above. Management periodically performs credit evaluations
of its customers and generally does not require collateral. At January 3, 1998,
one retail customer accounted for approximately 11.0% of the Company's trade
accounts receivable balance.
Inventories
Approximately 69% in 1996 and 68% in 1997 of the Company's inventories are
valued using the last-in, first-out (LIFO) cost method, which is not in excess
of market. All other inventories in 1996 and 1997 are valued at the lower of
first-in, first-out (FIFO) cost or market (net realizable value).
During the second quarter of fiscal 1997, the Company changed its method
of accounting for inventory from the last-in, first-out (LIFO) method to the
first-in, first-out (FIFO) method for one of its upholstery operations in order
to align all companies in the upholstery group under the same inventory
valuation method. Management believes that the FIFO method provides a better
current period matching of revenue and expense due to historically low
inflation and quick inventory turns in its upholstery operations. The Company
has notified the Internal Revenue Service of its intent to change to the FIFO
method of inventory valuation for income tax reporting purposes for the
upholstery company.
The Company has retroactively adjusted the financial statements for prior
years for this change. The effect of the restatement was to increase retained
earnings at December 31, 1994 by $789,000. The effect on the consolidated
statements of operations was not material for the periods presented.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of plant
and equipment is provided over the estimated useful lives of the respective
assets on the straight-line method. Estimated useful lives are 10 to 35 years
for buildings and improvements and 3 to 13 years for machinery and equipment.
20
<PAGE>
LADD FURNITURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Income Taxes
Deferred tax assets and liabilities are recognized for the temporary
differences between the financial statement carrying amounts and the tax bases
of the Company's assets, liabilities, and loss and tax credit carryforwards at
income tax rates expected to be in effect when such amounts are realized or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in earnings in the period that includes the enactment date.
Earnings per share
Earnings per share are calculated in accordance with SFAS No. 128,
Earnings per Share, which was effective as of January 3, 1998. SFAS No. 128
requires the Company to disclose both the basic and diluted earnings per share
on the face of the income statement. Earnings per share information has been
restated for all years presented in the consolidated financial statements.
The weighted average number of common shares outstanding for fiscal years
1995, 1996 and 1997 was 7,720,783, 7,722,085 and 7,743,986, respectively, and
in fiscal year 1997 dilutive securities, consisting of stock options, totaled
94,761.
Intangible assets
Intangible assets consist principally of values assigned to patents,
furniture designs, trade names and the excess of cost over the assigned value
of net assets acquired. These assets are being amortized using the
straight-line method over periods of 15 to 40 years. The Company assesses the
recoverability of the excess of cost over the assigned value of net assets
acquired by determining whether the amortization of the balance over its
remaining life can be recovered through undiscounted future operating cash
flows of the acquired operations. The assessment of the recoverability of the
excess of cost over the assigned value of net assets acquired will be impacted
if estimated future operating cash flows are not achieved.
Pension and Other Postretirement Plans
The Company and several of its subsidiaries are participants in a defined
benefit pension plan covering qualified salaried and hourly employees. The
defined benefit plan was amended on December 13, 1996 to provide that no
additional benefits would accrue under the defined benefit plan after December
31, 1996. The Company intends to terminate the defined benefit plan upon
receiving required regulatory approvals.
The Company provided certain health care benefits for certain retired
employees through June 1, 1996, when these benefits were curtailed. Prior to
curtailment the Company provided for the cost of its obligation over the period
the employees render the services necessary to earn the postretirement
benefits.
Prior to their termination, the cost of the above benefit plans was funded
currently.
Fair Value of Financial Instruments
The carrying amount of cash, trade accounts receivable, prepaid expenses
and other current assets, trade accounts payable and accrued expenses, and
other current liabilities approximates fair value because of the short maturity
of these financial instruments.
The fair value of the Company's long-term debt is estimated by discounting
the future cash flows at rates currently offered to the Company for similar
debt instruments of comparable maturities. The fair value of the Company's
long-term debt approximates the face value of the debt due to the variable
interest rates on the majority of long-term debt at January 3, 1998.
Stock Option Plan
On January 1, 1996, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net earnings and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and future years as
21
<PAGE>
LADD FURNITURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
if the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
Transportation Operations
The Company operates trucking fleets for its casegoods and upholstery
operations for the delivery of products to customers and inbound raw materials.
The Company accounts for the revenues and direct operating expenses of the
transportation operations as other income (net).
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
Reclassification
Certain items in the 1995 and 1996 consolidated financial statements have
been reclassified to conform with the presentation adopted in the current year.
The reclassifications did not impact the results from operations as previously
reported.
NOTE 2: NET SALES BY BUSINESS GROUP
A summary of net sales by business group follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- --------- ----------
In thousands
<S> <C> <C> <C>
Casegoods .................. $284,445 277,356 286,334
Upholstery ................. 124,535 124,340 122,691
Contract Sales ............. 68,483 80,215 116,475
Divested companies ......... 121,740 15,546 --
-------- ------- -------
$599,203 497,457 525,500
======== ======= =======
</TABLE>
NOTE 3: INVENTORIES
A summary of inventories follows:
<TABLE>
<CAPTION>
December 28, January 3,
1996 1998
-------------- -----------
In thousands
<S> <C> <C>
Inventories on the FIFO cost method:
Finished goods ..................................................... $ 45,459 49,329
Work in process .................................................... 14,093 15,697
Raw materials and supplies ......................................... 35,613 38,170
-------- ------
Total inventories on FIFO cost method ............................. 95,165 103,196
Less adjustments of certain inventories to the LIFO cost method ..... (9,245) (10,007)
-------- -------
$ 85,920 93,189
======== =======
</TABLE>
22
<PAGE>
LADD FURNITURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 4: PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
<TABLE>
<CAPTION>
December 28, January 3,
1996 1998
-------------- -----------
In thousands
<S> <C> <C>
Land and improvements ................. $ 4,888 4,496
Buildings and improvements ............ 73,690 70,342
Machinery and equipment ............... 72,923 76,810
Construction in progress .............. 1,793 2,755
--------- ------
153,294 154,403
Less accumulated depreciation ......... (78,565) (86,873)
--------- -------
$ 74,729 67,530
========= =======
</TABLE>
NOTE 5: INTANGIBLE AND OTHER ASSETS
A summary of intangible and other assets follows:
<TABLE>
<CAPTION>
December 28, January 3,
1996 1998
-------------- -----------
In thousands
<S> <C> <C>
Excess of cost over the assigned value of net assets acquired $ 54,879 54,879
Trade names .................................................. 21,700 21,700
Other ........................................................ 21,200 20,741
--------- ------
97,779 97,320
Less accumulated amortization ................................ (16,364) (20,237)
--------- -------
$ 81,415 77,083
========= =======
</TABLE>
NOTE 6: ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
A summary of accrued expenses and other current liabilities follows:
<TABLE>
<CAPTION>
December 28, January 3,
1996 1998
-------------- -----------
In thousands
<S> <C> <C>
Payrolls, commissions and employee benefits ........ $14,281 13,966
Deferred federal income taxes ...................... 3,090 5,072
Other .............................................. 13,325 12,914
------- ------
$30,696 31,952
======= ======
</TABLE>
23
<PAGE>
LADD FURNITURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 7: LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 28, January 3,
1996 1998
-------------- -----------
In thousands
<S> <C> <C>
Term loan, due at various dates ........................................................ $ 63,375 51,775
Revolving credit loan, due July 12, 1999 ............................................... 60,336 70,908
Other indebtedness, primarily fixed-rate industrial revenue bonds, due through 2009 .... 7,241 2,710
-------- ------
Total long-term debt ................................................................. 130,952 125,393
Less current installments of long-term debt ............................................ 5,093 6,807
-------- -------
Long-term debt, excluding current installments ....................................... $125,859 118,586
======== =======
</TABLE>
On July 12, 1996, the Company entered into a $190,000,000 long-term
secured credit facility (the "Facility") which consisted of a $125,000,000
three-year revolving credit loan and a $65,000,000 term loan. The term loan
portion of the Facility is payable in quarterly installments of $1,625,000. On
January 1, 1997, the Company reduced the revolving credit loan to $110,000,000.
Borrowings under the revolving credit loan and the term loan bear interest
at rates selected periodically by the Company of LIBOR plus 2.00% and 2.25%,
respectively, or prime plus 1.00% and 1.25%, respectively. At January 3, 1998,
LIBOR was 5.81% and the prime rate was 8.50%. Under the Facility, the Company
pays a commitment fee of 1/2% per annum on the unused portion of the revolving
credit facility. In connection with the refinancing, the Company incurred fees
and expenses aggregating approximately $4,000,000 which are being amortized
over the terms of the Facility. The interest rate margin over LIBOR and prime
can be reduced upon the Company meeting a financial ratio related to operating
cash flow and debt levels. Based on the Company's 1997 first quarter operating
results, the interest rate margin was reduced by 0.50% effective April 16,
1997. Additionally, effective October 1, 1997, the Company received from its
bank group an interest rate margin reduction of 0.25% in both its prime and
LIBOR rate matrices.
The Facility is secured by substantially all the existing and hereafter
acquired assets of the Company. Availability on the revolving credit loan is
determined by levels of eligible inventory and eligible trade accounts
receivable of the Company. The Facility contains customary covenants for asset
based loans which restrict future borrowings, dividends and capital spending;
require maintenance of a minimum net worth; and include financial covenant
ratios related to cash flow, earnings and debt. At January 3, 1998, the
Company's availability for future borrowings under its revolving credit loan
was approximately $32,000,000. At January 3, 1998, the Company was in
compliance with all covenants under the Facility.
In connection with amending in 1995 and refinancing in 1996 the Company's
long-term bank loans, approximately $525,000 in 1995 and $890,000 in 1996 of
unamortized financing fees were charged to operations. At December 30, 1995,
borrowings under the previous bank term loan and bank revolving credit loan
bore interest at LIBOR plus 2 1/8% or prime plus 1 1/8%.
The aggregate annual maturities of long-term debt during each of the five
fiscal years subsequent to January 3, 1998 are approximately as follows:
$6,807,000 in 1998; $77,498,000 in 1999; $6,590,000 in 2000; $6,590,000 in
2001; $6,590,000 in 2002; and $21,318,000 thereafter.
Interest paid by the Company in 1995, 1996 and 1997 amounted to
approximately $12,218,000, $12,241,000, and $12,119,000, respectively.
NOTE 8: EMPLOYEE STOCK PLANS
Stock Option Plan
Under an incentive stock option plan, the Company grants stock options to
officers, key management employees and non-employee directors. Options are
generally granted at fair market value on the dates of the grant. All optionees
must be employees or directors of the Company on the date of grant and
throughout the term of the option, except in the case of death, retirement, or
disability. The Company applies APB Opinion No. 25, and related interpretations
in accounting for the
24
<PAGE>
LADD FURNITURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 8: EMPLOYEE STOCK PLANS -- Continued
plan. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans other than for the restricted stock awards. Had
compensation cost for the Company's stock option plan been determined based
upon the fair value at the grant date for awards under this plan consistent
with the methodology prescribed under SFAS No. 123, the Company's net losses
and loss per share would have increased by approximately $38,300 or $0.00 per
share for 1995, and $378,000 or $0.05 per share for 1996, and the Company's net
earnings and earnings per share would have decreased by approximately $494,000
or $0.06 per share - basic and $0.07 per share - diluted for 1997. The
estimated weighted average fair value of the options granted was $6.32 in 1995,
$4.90 in 1996, and $6.33 in 1997. The estimates of fair value were determined
using the Black-Scholes option-pricing model with the following assumptions in
1995 and 1996: no dividend yield, volatility of 30.5%, risk-free interest rate
of 5.5%, assumed forfeiture rate of 17.8%, and an expected life of 6 years. In
1997 the assumptions are as follows: no dividend yield, volatility of 30.0%,
risk free interest rate of 5.41%, assumed forfeiture rate of 20.0%, and an
expected life of 6 years.
A total of 1,188,889 shares were reserved for option under previous and
current plans. At January 3, 1998, approximately 189,900 shares are available
for future option. Options granted prior to 1991 are generally exercisable at
the cumulative rate of 20% per year after one year from the date of grant.
Options granted subsequent to 1990 are generally exercisable at the cumulative
rate of 25% per year after one year from the date of grant. Options expire over
a period not to exceed ten years from the date of grant. Stock option activity
during 1995, 1996 and 1997 follows:
<TABLE>
<CAPTION>
Weighted
Number of average
shares exercise price
------------- ---------------
<S> <C> <C>
Outstanding at December 31, 1994 ......... 338,654 $ 25.58
Granted in 1995 .......................... 40,882 $ 15.49
Cancelled in 1995 ........................ (127,358) $ 29.07
--------
Outstanding at December 30, 1995 ......... 252,178 $ 21.90
Granted in 1996 .......................... 442,510 $ 11.86
Cancelled in 1996 ........................ (98,533) $ 21.76
--------
Outstanding at December 28, 1996 ......... 596,155 $ 14.63
Granted in 1997 .......................... 100,005 $ 15.51
Exercised in 1997 ........................ 4,500 $ 11.64
Cancelled in 1997 ........................ (43,038) $ 16.67
--------
Outstanding at January 3, 1998 ........... 648,622 $ 14.67
======== =======
Exercisable at January 3, 1998 ........... 213,466 $ 17.81
======== =======
</TABLE>
The Company had 102,097 and 96,545 shares exercisable at December 30, 1995
and December 28, 1996, respectively, with a weighted average exercise price
totalling $25.75 and $23.73, respectively.
The following table summarizes information concerning currently
outstanding and exercisable options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- ------------------------------
Number Weighted-Avg. Number
Outstanding Remaining Exercisable
Range of at Jan. 3, Contractual Weighted-Avg. at Jan. 3, Weighted-Avg.
Exercise Prices 1998 Life Exercise Price 1998 Exercise Price
- - ------------------ ------------- --------------- ---------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
$10.75-$15.75 516,692 8.3 $ 12.59 111,905 $ 12.17
$15.76-$25.00 92,472 6.7 $ 18.38 64,989 $ 18.72
$25.01-$40.50 39,458 4.5 $ 33.19 36,572 $ 33.44
------- -------
648,622 7.9 $ 14.67 213,466 $ 17.81
======= =======
</TABLE>
25
<PAGE>
LADD FURNITURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 9: EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan
The Company and several of its subsidiaries had noncontributory defined
benefit pension plans covering qualified salaried and hourly employees which
were merged into a common plan on December 31, 1996. The defined benefit plan
was amended on December 13, 1996 to provide that no additional benefits would
accrue under the plan after December 31, 1996. The Company intends to terminate
the defined benefit plan upon receiving required regulatory approvals. As a
result of these actions, the Company credited to cost of sales a gain of
approximately $738,000 in the fourth quarter of 1996. During December 1997, in
anticipation of receiving required regulatory approvals, the Company
distributed approximately 75.0% of plan assets to participants.
In addition to the qualified defined benefit plan, the Company has a
nonqualified retirement plan covering certain salaried employees. At December
28, 1996 and January 3, 1998, the Company had approximately $675,000 and
$899,000, respectively, of assets available to fund future obligations of the
nonqualified plan. These assets are included in intangible and other assets,
and the related liability is included in deferred and other liabilities in the
accompanying consolidated balance sheets. The liability for the nonqualified
retirement plan is reflected in the reconciliation of the funded status of the
plans below.
The following sets forth the funded status of the plans:
<TABLE>
<CAPTION>
December 28, 1996 January 3, 1998
--------------------------- --------------------------
Assets Accumulated Assets Accumulated
equal benefits equal benefits
accumulated exceed accumulated exceed
benefits assets benefits assets
------------- ------------- ------------- ------------
In thousands
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation ............................................ $ (49,280) (1,562) (12,565) (1,907)
========= ====== ======= ======
Accumulated benefit obligation ....................................... $ (49,280) (1,794) (12,565) (2,454)
========= ====== ======= ======
Projected benefit obligation for service rendered to date ............. $ (49,280) (2,393) (12,565) (3,123)
Less plan assets at fair value, primarily money market equivalents 49,280 -- 12,565 --
--------- ------ ------- ------
Projected benefit obligation in excess of plan assets ................. -- (2,393) -- (3,123)
Unrecognized net gain ................................................. -- (25) -- (102)
Unrecognized prior service cost ....................................... -- 593 -- 1,198
Adjustment required to recognize minimum liability .................... -- -- -- (427)
--------- ------ ------- ------
Pension liability recognized in the consolidated balance sheets ....... $ -- (1,825) -- (2,454)
========= ====== ======= ======
</TABLE>
Net pension expense for the plans for 1995, 1996 and 1997 included the
following components:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
In thousands
<S> <C> <C> <C>
Service costs -- benefits earned during the period ......................... $ 2,047 2,119 65
Interest cost on projected obligation ...................................... 3,186 3,440 2,944
Return on assets ........................................................... (9,036) (6,133) (2,765)
Amortization of unrecognized net obligation at transition and net deferrals 6,038 3,032 86
Curtailment gain ........................................................... -- (738) --
-------- ------ ------
Net pension expense ........................................................ $ 2,235 1,720 330
======== ====== ======
</TABLE>
The Company recorded in 1995 a net curtailment gain resulting from the
Brown Jordan and Lea Lumber & Plywood divestitures totalling approximately
$692,000, and in 1996 a net curtailment gain resulting from the closing of
Daystrom Furniture totalling approximately $279,000. These curtailment gains
were included in determining restructuring expense in the 1995 and 1996
consolidated statements of operations.
The projected benefit obligation of the nonqualified retirement plan at
December 28, 1996 and January 3, 1998 was determined using an assumed discount
rate of 7.50% for both years and assumes a long-term rate of salary increases
of
26
<PAGE>
LADD FURNITURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 9: EMPLOYEE BENEFIT PLANS -- Continued
4.50% to age 60, and 3.00% thereafter. The assumed long-term rate of return on
plan assets was 8.50% for 1995 and 1996. The projected benefit obligation of
the defined benefit pension plan at January 3, 1998 was determined using actual
interest rates.
Defined Contribution Plans
The Company has savings plans for employees which qualify under Section
401(k) of the Internal Revenue Code. The plans allow eligible employees to
contribute up to a fixed percentage of their compensation, with the Company
matching a portion of each employee's contributions. Company contributions
under the plans aggregated approximately $549,000 in 1995, $485,000 in 1996 and
$1,101,000 in 1997. Effective January 1, 1997, the Company amended its defined
contribution plans to increase base Company contributions by approximately
$900,000 annually. All 1997 contributions were in the form of the Company's
common stock of which 38,889 shares were newly issued and 33,675 shares were
purchased on the open market.
NOTE 10: POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Prior to 1996, the Company had plans which provided postretirement health
care benefits for certain employees. These benefits included major medical
insurance with deductible and coinsurance provisions. The Company paid all
benefits on a current basis and the plans were not funded.
On May 10, 1996, the Company curtailed the postretirement features of its
health care benefit program, effective July 1, 1996. As a result of this
curtailment, the Company had an aggregate credit of approximately $4,200,000
recognized in 1996's operating income ($3,700,000 in cost of sales and $500,000
in selling, general and administrative expenses).
The components of the net postretirement benefit cost (credit) for 1995
and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
-------- -----------
In thousands
<S> <C> <C>
Service costs ................................. $ 232 77
Interest costs of benefit obligation .......... 1,252 417
Amortization of transition obligation ......... 759 253
Curtailment gain .............................. -- (4,947)
------ ------
$2,243 (4,200)
====== ======
</TABLE>
NOTE 11: INCOME TAXES
Components of income tax expense (benefit) for 1995, 1996 and 1997 are as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ----------- -----------
In thousands
<S> <C> <C> <C>
Current:
Federal ......... $ (4,650) (4,054) (3,785)
State ........... (167) 149 335
--------- ------ ------
(4,817) (3,905) (3,450)
Deferred:
Federal ......... (11,521) 1,385 7,035
State ........... (1,898) 568 284
--------- ------ ------
(13,419) 1,953 7,319
--------- ------ ------
$ (18,236) (1,952) 3,869
========= ====== ======
</TABLE>
27
<PAGE>
LADD FURNITURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 11: INCOME TAXES -- Continued
The effective income tax rate on earnings (loss) before income taxes for
1995, 1996 and 1997 was 42.0%, 44.5% and 38.0%, respectively. The actual income
tax expense (benefit) differs from the "expected" income tax expense (benefit)
computed by applying the Federal income tax rate of 34% to earnings (loss)
before income taxes for 1995, 1996 and 1997 as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ----------- ---------
In thousands
<S> <C> <C> <C>
Computed "expected" income tax expense (benefit) .................................. $ (14,765) (1,492) 3,461
Increases (reductions) due to:
Restructuring and reorganization charges ......................................... (1,664) 1,060 --
State income taxes, net of Federal income tax benefit ............................ 53 99 409
Amortization of the excess of cost over the assigned value of net assets acquired 587 451 471
Utilization of capital loss carryforwards to offset income tax expense of realized
capital gains .................................................................. (1,655) -- --
Tax credits, net ................................................................. (571) (1,316) (709)
Foreign trade income exemptions .................................................. (193) (375) (256)
Restricted stock compensation .................................................... -- (204) (26)
Other ............................................................................ (28) (175) 519
--------- ------ -----
Actual income tax expense (benefit) ............................................... $ (18,236) (1,952) 3,869
========= ====== =====
</TABLE>
During 1995, 1996 and 1997, the Company received refunds (net of taxes
paid) of approximately $188,000, $8,360,000, and $4,235,000, respectively.
The tax effects of temporary differences and net operating loss
carryforwards that give rise to significant portions of deferred tax assets and
liabilities consist of the following:
<TABLE>
<CAPTION>
December 28, January 3,
1996 1998
-------------- -----------
In thousands
<S> <C> <C>
Deferred tax liabilities:
Inventories .............................. $ (7,075) (7,096)
Property, plant and equipment ............ (3,013) (4,025)
Intangible and other assets .............. (6,351) (7,638)
Lease obligations ........................ (5,372) (4,636)
Other .................................... (159) (187)
--------- ------
Total deferred tax liabilities ......... (21,970) (23,582)
--------- -------
Deferred tax assets:
Accounts receivable ...................... 1,081 984
Inventories .............................. 998 923
Liabilities and reserves ................. 6,601 5,447
Restructuring and reorganization ......... 337 59
Tax credit carryforwards ................. 604 1,832
Net operating loss carryforwards ......... 8,468 3,153
Other .................................... 372 185
--------- -------
Gross deferred tax assets .............. 18,461 12,583
Valuation allowances ..................... (1,885) (1,714)
--------- -------
Total deferred tax assets .............. 16,576 10,869
--------- -------
Net deferred tax liability ................ $ (5,394) (12,713)
========= =======
</TABLE>
28
<PAGE>
LADD FURNITURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 11: INCOME TAXES -- Continued
Deferred taxes are classified in the accompanying consolidated balance
sheets as follows:
<TABLE>
<CAPTION>
December 28, January 3,
1996 1998
-------------- -----------
In thousands
<S> <C> <C>
Accrued expenses and other current liabilities $ (3,090) (5,072)
Deferred and other liabilities ................ (2,304) (7,641)
-------- ------
$ (5,394) (12,713)
======== =======
</TABLE>
A valuation allowance has been provided for the deferred tax assets
related to acquired carryforward net operating loss (NOL) deductions of Pilliod
Furniture. None of the remaining $4,761,000 NOL carryforward deductions were
utilized in 1996 or 1997, but these NOL deductions may be carried forward up to
11 more years to offset future earnings, subject to normal annual limitations
prescribed by tax law. A valuation allowance of $1,714,000 remains in deferred
taxes for these unexpired future deductions. Tax benefits recognized subsequent
to 1997 relating to the valuation allowance for deferred tax assets at January
3, 1998 will be applied to reduce the excess cost over the assigned value of
Pilliod's net assets acquired.
The Company believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize the
remaining deferred tax assets.
NOTE 12: LEASES AND CONTINGENCIES
The Company leases manufacturing facilities, various warehouses, sales
offices and showrooms, as well as manufacturing, transportation and data
processing equipment under operating leases which expire at various dates
through 2026. Future minimum lease payments under noncancelable operating
leases as of January 3, 1998 are as follows:
<TABLE>
<CAPTION>
In thousands
<S> <C>
Fiscal year:
1998 ...................... $10,304
1999 ...................... 10,056
2000 ...................... 7,626
2001 ...................... 4,173
2002 ...................... 2,982
Thereafter ................ 8,356
-------
$43,497
=======
</TABLE>
In 1995 and 1996, the Company entered into sale leaseback agreements for
certain manufacturing equipment located at several of its manufacturing
facilities. These transactions have been recorded as asset sales. The cash
proceeds from the sales of approximately $6,691,000 and $3,538,000,
respectively, were used to repay long-term debt. The gains from the sales of
approximately $323,000 and $150,000, respectively, have been recorded in the
accompanying consolidated balance sheets as deferred income and are being
amortized into operations over the term of the leases. Under the agreements,
the Company will lease the equipment over 69 months. The Company has the option
to purchase the equipment at the end of the lease terms.
In 1996, the Company repurchased $4,648,000 of leased equipment utilizing
long-term debt in connection with the divestiture of Fournier Furniture and
reversed $325,000 of the previously mentioned deferred income from the
accompanying consolidated balance sheets.
In 1997, the Company sold its Monroe, NC upholstery manufacturing facility
to a private partnership for $5,300,000 and entered into a seven-year agreement
to lease the facility back, with options existing to renew the lease at the end
of its term for up to eight additional years. The net proceeds from the sale of
approximately $5,100,000 were utilized to reduce the Company's long-term debt.
A deferred gain of $580,000 is being amortized into operations over the term of
the lease.
29
<PAGE>
LADD FURNITURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 12: LEASES AND CONTINGENCIES -- Continued
Rental expense for cancelable and noncancelable operating leases charged
to operations was as folows:
<TABLE>
<CAPTION>
In thousands
<S> <C>
Fiscal year:
1995 ................ $14,870
1996 ................ 12,203
1997 ................ 12,183
</TABLE>
Rental expense includes contingent rentals based upon usage of
transportation equipment under cancelable and noncancelable operating leases
which totalled approximately $618,000 in 1995, $719,000 in 1996, and $702,000
in 1997.
At January 3, 1998, the Company was contingently liable for approximately
$1,262,000 of receivables transferred with recourse under financing
arrangements with two financial institutions. The Company maintains a $440,000
letter of credit agreement to fund any liabilities which might arise under
these arrangements.
NOTE 13: RESTRUCTURING AND DIVESTITURES
In 1995, the Company recorded restructuring charges of $25,120,000 which
consisted of: (a) $17,379,000 to write-down businesses sold or held for sale to
the estimated fair value, net of disposition expenses; (b) $1,428,000 to
write-down selected machinery to estimated fair value because of changes in
manufacturing processes; (c) $6,313,000 for costs associated with closing four
retail stores and to provide for severance expense and other costs. The
restructuring charge resulted from the Company's decision to divest four
operating companies, close four Company-owned retail stores and reorganize the
remaining companies to improve operating performance.
In 1996, the Company recorded restructuring charges of $3,431,000 which
consisted of: (a) $1,900,000 charge due to a shortfall in anticipated proceeds
on the sale of a business; (b) $2,430,000 due to the necessity to liquidate
versus sell one of the remaining businesses; (c) $815,000 for severance related
to continued restructuring of the Company; and (d) $1,714,000 aggregate credits
as a result of proceeds from the liquidation of idle assets held for sale
exceeding earlier estimates. The costs charged against aggregate restructuring
reserves of $7,128,000 at December 30, 1995 totaled $5,494,000 in 1996 and
$1,397,000 in 1997.
The following unaudited pro forma information shows consolidated operating
results for the periods presented as though the Company had divested the four
operating companies and closed the four company-owned retail stores as of
January 1, 1995, excluding the restructuring expense recorded during 1995 and
1996:
<TABLE>
<CAPTION>
1995 1996 1997
----------- --------- --------
In thousands (unaudited)
<S> <C> <C> <C>
Net sales ....................................... $483,449 481,911 525,500
Earnings (loss) before interest and income taxes (3,973) 14,476 21,423
======== ======= =======
</TABLE>
NOTE 14: ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM
During fiscal year 1995 through March 28, 1996, the Company participated
in a revolving accounts receivable facility which provided for the sale of a
defined pool of trade accounts receivable through a wholly-owned subsidiary to
a third-party purchaser. The Company and the third-party purchaser terminated
the facility on March 28, 1996 in anticipation of the Company's refinancing of
its then existing bank credit facility. The total cost of the program, which
aggregated $2,585,000 and $454,000 in 1995 and 1996, respectively, is included
in selling, general and administrative expenses in the accompanying
consolidated statements of operations. The purchaser's average investment for
1995 and 1996, through termination of the facility, was approximately
$35,011,000 and $27,675,000, respectively.
30
<PAGE>
LADD FURNITURE, INC. AND SUBSIDIARIES
SELECTED QUARTERLY DATA
Dollar and share data in thousands, except per share amounts
(Unaudited)
<TABLE>
<CAPTION>
Fiscal 1996
-------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating Statement Data
Net sales ............................... $135,260 123,483 120,447 118,267
Cost of sales ........................... 116,038 100,220 99,369 95,955
-------- ------- ------- -------
Gross profit ........................... 19,222 23,263 21,078 22,312
Selling, general and administrative
expenses ............................... 21,788 19,110 16,852 16,613
Restructuring expense ................... 5,149 (279) (892) (547)
-------- ------- ------- -------
Operating income (loss) ................ (7,715) 4,432 5,118 6,246
-------- ------- ------- -------
Other (income) deductions:
Interest expense ....................... 2,660 3,058 3,182 3,169
Other, net ............................. 1,284 317 (1,343) 141
-------- ------- ------- -------
Earnings (loss) before income taxes ..... (11,659) 1,057 3,279 2,936
Income tax expense (benefit) ............ (4,664) (108) 1,477 1,343
-------- ------- ------- -------
Net earnings (loss) .................... $ (6,995) 1,165 1,802 1,593
======== ======= ======= =======
Depreciation ............................ $ 2,837 2,609 2,691 2,750
Amortization ............................ 1,607 751 1,005 1,081
======== ======= ======= =======
Weighted average shares outstanding ..... 7,725 7,723 7,721 7,720
======== ======= ======= =======
Per Share Data
Net sales ............................... $ 17.51 15.99 15.60 15.32
Net earnings (loss) -- basic ............ ( 0.91) 0.15 0.23 0.21
Net earnings (loss) -- diluted .......... ( 0.91) 0.15 0.23 0.20
Cash dividends .......................... -- -- -- --
Quarter-end book value .................. 15.43 15.59 15.84 16.05
======== ======== ======== ========
Balance Sheet Data
Net working capital ..................... $123,899 117,479 111,136 98,740
Net property, plant and equipment ....... 82,652 82,633 78,543 74,729
Total assets ............................ 352,618 347,850 333,040 315,031
Total debt .............................. 157,250 153,148 143,370 130,952
Shareholders' equity .................... 119,215 120,426 122,275 123,900
======== ======== ======== ========
Ratios
Gross profit margin ..................... 14.2 % 18.8 17.5 18.9
Operating profit (loss) margin .......... ( 5.7) 3.6 4.2 5.3
Return (loss) on sales .................. ( 5.2) 0.9 1.5 1.3
Effective income tax rate ............... 40.0 10.2 45.0 45.7
Total debt ratio ........................ 56.9 56.0 54.0 51.4
======== ======== ======== ========
Stock Data
High .................................... $ 14.25 12.00 13.75 15.75
Low ..................................... 10.88 9.50 9.75 11.50
Close ................................... 10.88 10.00 13.50 14.63
Trading volume (shares) ................. 2,081 3,012 1,288 1,619
======== ======== ======== ========
<CAPTION>
Fiscal 1997
-----------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating Statement Data
Net sales ............................... 123,368 125,572 129,935 146,625
Cost of sales ........................... 101,437 101,393 106,791 119,429
------- ------- ------- -------
Gross profit ........................... 21,931 24,179 23,144 27,196
Selling, general and administrative
expenses ............................... 17,552 18,561 17,794 20,328
Restructuring expense ................... -- -- -- --
------- ------- ------- -------
Operating income (loss) ................ 4,379 5,618 5,350 6,868
------- ------- ------- -------
Other (income) deductions:
Interest expense ....................... 3,005 2,719 2,701 2,817
Other, net ............................. 521 194 (199) 276
------- ------- ------- -------
Earnings (loss) before income taxes ..... 853 2,705 2,848 3,775
Income tax expense (benefit) ............ 333 1,055 1,110 1,371
------- ------- ------- -------
Net earnings (loss) .................... 520 1,650 1,738 2,404
======= ======= ======= =======
Depreciation ............................ 2,568 2,520 2,492 2,539
Amortization ............................ 1,066 1,041 1,008 994
======= ======= ======= =======
Weighted average shares outstanding ..... 7,720 7,737 7,758 7,760
======= ======= ======= =======
Per Share Data
Net sales ............................... 15.98 16.23 16.75 18.89
Net earnings (loss) -- basic ............ 0.07 0.21 0.22 0.31
Net earnings (loss) -- diluted .......... 0.07 0.21 0.22 0.31
Cash dividends .......................... -- -- -- --
Quarter-end book value .................. 16.12 16.34 16.56 16.87
======== ======== ======== ========
Balance Sheet Data
Net working capital ..................... 103,680 112,364 118,018 116,330
Net property, plant and equipment ....... 68,580 67,648 66,708 67,530
Total assets ............................ 318,159 323,150 330,770 329,190
Total debt .............................. 129,370 127,864 128,530 125,393
Shareholders' equity .................... 124,478 126,422 128,476 130,925
======== ======== ======== ========
Ratios
Gross profit margin ..................... 17.8 19.3 17.8 18.5
Operating profit (loss) margin .......... 3.5 4.5 4.1 4.7
Return (loss) on sales .................. 0.4 1.3 1.3 1.6
Effective income tax rate ............... 39.0 39.0 39.0 36.3
Total debt ratio ........................ 51.0 50.3 50.0 48.9
======== ======== ======== ========
Stock Data
High .................................... 16.13 15.25 19.38 18.25
Low ..................................... 14.38 12.25 13.63 14.50
Close ................................... 14.50 13.75 17.63 15.00
Trading volume (shares) ................. 1,413 965 5,217 1,090
======== ======== ======== ========
</TABLE>
NOTES: Stock price and volume data for calendar quarters. N/M = Not Meaningful.
First Quarter 1996 reflects the sale of Fournier Furniture -- effective
February 26, 1996; and the Third and Fourth Quarters of 1996 reflect the
liquidation of Daystrom Furniture beginning June 28, 1996. The results
have been restated to reflect the change in 1997 in inventory accounting
from the LIFO method to the FIFO method for one of the Company's
business units. 1997 fourth quarter contained 14 weeks; all other
quarters contained 13 weeks. The results have been revised to reflect
the adoption of SFAS No. 128.
31
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No changes in accountants or disagreements with accountants on accounting
or financial disclosure occurred in fiscal years 1995, 1996, and 1997.
PART III
Part III is omitted as the Company intends to file with the Commission
within 120 days after the end of the Company's fiscal year a definitive proxy
statement pursuant to Regulation 14A which will involve the election of
directors. With the exception of the information specifically required by Items
10, 11, 12 and 13 of this Part III contained in the Company's proxy statement,
the Company's proxy statement is not incorporated by reference nor deemed to be
filed as a part of this report, including without limitation the Board
Compensation Committee Report on Executive Compensation required by Item 402(k)
of Regulation S-K and the Performance Graph required by Item 402(l) of
Regulation S-K.
Item 10. Directors and Executive Officers of the Registrant
See reference to definitive proxy statement under Part III. See pages 4-6
and 15-16 in the Company's definitive proxy statement.
Item 11. Executive Compensation
See reference to definitive proxy statement under Part III. See pages 7-14
in the Company's definitive proxy statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
See reference to definitive proxy statement under Part III. See pages 2-4
in the Company's definitive proxy statement.
Item 13. Certain Relationships and Related Transactions
See reference to definitive proxy statement under Part III. See page 14 in
the Company's definitive proxy statement.
32
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
<TABLE>
<CAPTION>
Page(s) in this
Form 10-K
----------------
<S> <C> <C>
(a) The following documents are filed as part of this report:
(1) Financial Statements
Consolidated Statements of Operations for the years ended, December 30, 1995, December 28,
1996, and January 3, 1998 .. 16
Consolidated Balance Sheets as of December 28, 1996 and January 3, 1998 .. 17
Consolidated Statements of Cash Flows for the years ended December 30, 1995, December 28,
1996, and January 3, 1998 .. 18
Consolidated Statements of Shareholders' Equity for the years ended December 30, 1995,
December 28, 1996, and January 3, 1998 .. 19
Notes to Consolidated Financial Statements .. 20-30
Independent Auditors' Report .. 15
(2) Index to Financial Statement Schedule:
Independent Auditors' Report .. F-1
II -- Valuation and Qualifying Accounts and Reserves .. F-2
All other schedules are omitted because they are not applicable or the required information is
shown in the financial statements or notes thereto.
(3) List of Executive Compensation Plans
LADD Furniture, Inc. 1994 Incentive Stock Option Plan
Employee Restricted Stock Purchase Agreements for the named executive officers of the
registrant as required by Item 402(a)(2) of Regulation S-K
Executive Employment Agreements with each of Fred L. Schuermann, Jr., William S.
Creekmuir, Kenneth E. Church, Donald L. Mitchell, and Michael P. Haley
LADD Furniture, Inc. Supplemental Retirement Income Plan
LADD Furniture, Inc. Long-Term Incentive Plan (1995)
LADD Furniture, Inc. Long-Term Incentive Plan (1996)
LADD Furniture, Inc. Long-Term Incentive Plan (1997)
LADD Furniture, Inc. Long-Term Incentive Plan (1998)
LADD Furniture, Inc. 1998 Management Incentive Plan
(b) Reports on Form 8-K filed in the last quarter of fiscal 1997:
Current Report on Form 8-K dated October 16, 1997, filed with the Commission on
October 22, 1997 reporting the Company's results of operations for the third fiscal quarter of
1997.
(c) Exhibits
3.1 Articles of Incorporation and Amendments.
(Previously filed as Exhibit 10 to Item 14 of the Company's Annual Report on Form 10-K for
the year ended December 29, 1990, filed with the Commission on March 28, 1991 and as
Exhibit 10.1 to Item 6 of the Company's Quarterly Report on Form 10-Q for the quarter ended
July 1, 1995, filed with the Commission on August 15, 1995)
3.2 Bylaws (as amended March 5, 1996)
(Previously filed as Exhibit 3.1 to Item 14 of the Company's Annual Report on Form 10-K for
the year ended December 30, 1995, filed with the Commission on March 28, 1996)
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Enclosed as Exhibit 10.1 to this Annual Report on Form 10-K for the year ended January 3,
1998
<S><C>
10.1 ADD Furniture, Inc. 1994 Incentive Stock Option Plan
Employee Restricted Stock Purchase Agreement between the Company and Fred L.
Schuermann, Jr. dated February 24, 1994
Employee Restricted Stock Purchase Agreement between the Company and William S.
Creekmuir dated February 24, 1994
(Previously filed as Exhibits 10.3 and 10.4 to the Company's Annual Report on Form 10-K for
the year ended January 1, 1994, filed with the Commission on March 31, 1994)
Employee Restricted Stock Purchase Agreement between the Company and Fred L.
Schuermann, Jr. dated March 2, 1995
Employee Restricted Stock Purchase Agreement between the Company and William S.
Creekmuir dated March 2, 1995
(Previously filed as Exhibits 10.2 and 10.3 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994, filed with the Commission on March 30, 1995)
Employee Restricted Stock Purchase Agreement between the Company and Kenneth E. Church
dated February 25, 1993
Employee Restricted Stock Purchase Agreement between the Company and Kenneth E. Church
dated February 24, 1994
Employee Restricted Stock Purchase Agreement between the Company and Kenneth E. Church
dated March 2, 1995
Employee Restricted Stock Purchase Agreement between the Company and Michael P. Haley
dated June 23, 1994
Employee Restricted Stock Purchase Agreement between the Company and Michael P. Haley
dated March 2, 1995
(Previously filed as Exhibits 10.2 - 10.6 to Item 14 of the Company's Annual Report on Form
10-K for the year ended December 30, 1995, filed with the Commission on March 28, 1996)
Executive Employment Agreement between the Company and Fred L. Schuermann, Jr. dated
October 28, 1994
(Previously filed as Exhibit 10.2 to Item 6 of the Company's Quarterly Report on Form 10-Q
for the quarter ended October 1, 1994, filed with the Commission on November 15, 1994)
Executive Employment Agreement between the Company and William S. Creekmuir dated
December 1, 1995
Executive Employment Agreement between the Company and Kenneth E. Church dated
May 22, 1995
Executive Employment Agreement between the Company and Donald L. Mitchell dated
January 1, 1996
Executive Employment Agreement between the Company and Michael P. Haley dated
March 5, 1996
(Previously filed as Exhibits 10.7 - 10.10 to Item 14 of the Company's Annual Report on
Form 10-K for the year ended December 30, 1995, filed with the Commission on March 28,
1996)
Asset Purchase Agreement, dated as of June 1, 1989, among the Company, Maytag
Corporation, The BJC Company and The Gunlocke Company
(Previously filed as Exhibit 10(a) to the Company's Current Report on Form 8-K, dated as of
June 1, 1989, filed with the Commission on June 2, 1989)
First Amendment and Waiver to Asset Purchase Agreement, dated as of July 7, 1989, by and
among the Company, Pennsylvania House, Inc., The McGuire Furniture Company, The
Kittinger Company, Charter Furniture, Inc., Brown Jordan Company and The Gunlocke
Company, a North Carolina corporation, and Maytag Corporation, The Gunlocke Company, a
Delaware corporation, and The BJC Company
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
(Previously filed as Exhibit 10 to the Company's Current Report on Form 8-K, filed with the
Commission on July 21, 1989, as amended by Form 8 filed with the Commission on
September 18, 1989)
<S><C>
LADD Furniture, Inc. Supplemental Retirement Income Plan, as amended and restated
effective January 1, 1994, and as further amended effective January 1, 1997
(Previously filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year
ended December 28, 1996, filed with the Commission on April 1, 1997)
LADD Furniture, Inc. Long-Term Incentive Plan (1995)
LADD Furniture, Inc. Long-Term Incentive Plan (1996)
(Previously filed as Exhibits 10.12 - 10.13 to the Company's Annual Report on Form 10-K for
the year ended December 30, 1995, filed with Commission on March 28, 1996)
LADD Furniture, Inc. Long-Term Incentive Plan (1997)
(Previously filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year
ended December 28, 1996, filed with the Commission April 1, 1997)
Enclosed as Exhibit 10.2 to this Annual Report on Form 10-K for the year ended January 3,
1998
10.2 LADD Furniture, Inc. Long-Term Incentive Plan (1998)
Loan and Security Agreement dated as of July 12, 1996, between the Company, NationsBank,
N.A. (South) as Agent, and each of the bank's signatory to the Loan and Security Agreement
(Previously filed as an Exhibit to the Company's Current Report on Form 8-K, dated July 18,
1996, filed with the Commission on July 24, 1996)
Amendment No. 1 (dated as of August 15, 1996) to Loan and Security Agreement dated as of
July 12, 1996 among the Company, NationsBank, N.A. (South) as Agent and each of the
bank's signatory thereto
Amendment No. 2 (dated as of October 10, 1996) to Loan and Security Agreement dated as of
July 12, 1996 among the Company, NationsBank, N.A. (South) as Agent, and each of the
bank's signatory thereto
Equipment Leasing Agreement dated as of September 19, 1996 between BTM Financial &
Leasing Corporation
B-4 and the Company
(Previously filed as Exhibits 10.1 - 10.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 28, 1996, filed with the Commission on November 12, 1996)
Amendment No. 3 (dated December 23, 1996) to Loan and Security Agreement dated as of
July 12, 1996 among the Company, NationsBank, N.A. (South), as Agent and each of the
bank's signatory thereto
(Previously filed as Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year
ended December 28, 1996, filed with the Commission on April 1, 1997)
Amendment No. 4 (dated as of July 24, 1997) to Loan and Security Agreement dated as of
July 12, 1996 among the Company, NationsBank, N.A. (South), as Agent and each of the
Bank's signatory thereto
Factoring Agreement dated August 1, 1997 between the Company and NationsBanc
Commercial Corporation
Amendment No. 5 (dated as of October 1, 1997) to Loan and Security Agreement dated as of
July 12, 1996 among the Company, NationsBank, N.A. (South), as Agent and each of the
Bank's signatory thereto
(Previously filed as Exhibits 10.1 - 10.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 27, 1997, filed with the Commission on November 12, 1997)
Equipment Leasing Agreement dated as of December 15, 1994 between BOT Financial
Corporation and the Company
Equipment Leasing Agreement dated as of December 15, 1994 between UnionBanc Leasing
Corporation and the Company
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
(Previously filed as Exhibits 10.1 and 10.2 to Item 7 of the Company's Current Report on
Form 8-K, dated December 28, 1994, filed with the Commission on January 15, 1995)
<S><C>
Amendment No. 1 dated as of June 7, 1995 to the Equipment Leasing Agreement dated as of
December 15, 1994 between Unionbanc Leasing Corporation and the Company
Amendment No. 1 dated as of June 7, 1995 to the Equipment Leasing Agreement dated as of
December 15, 1994 between BOT Financial Corporation and the Company
Amendment No. 1 dated as of June 15, 1995 amending Lease Supplement No. One to the
Equipment Leasing Agreement dated as of December 15, 1994 between BOT Financial
Corporation and the Company
(Previously filed as Exhibits 10.2 - 10.4 to Item 6 of the Company's Quarterly Report on
Form 10-Q for the quarter ended July 1, 1995, filed with the Commission on August 15, 1995)
Enclosed as Exhibit 10.3 to this Annual Report on Form 10-K for the year ended January 3,
1998
10.3 Master Lease Agreement dated as of October 17, 1997 between the Company and
Corestates Leasing, Inc.
Stock Purchase Agreement dated January 5, 1996 among LADD Furniture, Inc., Fournier
Furniture, Inc. and Fournier Acquisition Co.
(Previously filed as Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year
ended December 30, 1995, filed with the Commission on March 28, 1996)
First Amendment to Stock Purchase Agreement dated February 26, 1996 among LADD
Furniture, Inc., Fournier Furniture, Inc., Fournier Acquisition Co., and Furniture Acquisition
Co.
(Previously filed as Exhibit 2.1 and 2.2 to the Company's Current Report on Form 8-K dated
February 26, 1996, filed with the Commission on March 12, 1996)
Stock Purchase Agreement dated November 7, 1995 between LADD Furniture, Inc. and BJCL,
Inc.
First Amendment to Stock Purchase Agreement dated December 29, 1995 among LADD
Furniture, Inc., BJCL, Inc. and BJ Acquisition Corp.
Agreement of Sale between BJIP, Inc. and Cherry Grove, Inc. dated December 29, 1995
Asset Purchase Agreement dated November 6, 1995 between LADD Furniture, Inc. and Lea
Lumber & Plywood, L.L.C.
First Amendment to Asset Purchase Agreement dated December 29, 1995 between LADD
Furniture, Inc. and Lea Lumber & Plywood, L.L.C.
(Previously filed as Exhibits 2.1 - 2.5 to the Company's Current Report on Form 8-K dated
December 29, 1995 filed with the Commission on January 16, 1996)
Enclosed as Exhibit 10.4 to this Annual Report on Form 10-K for the year ended January 3,
1998
10.4 1998 Management Incentive Plan
22. Subsidiaries of Registrant
American Drew, Inc., a North Carolina corporation
American Furniture Company, Incorporated, a Virginia corporation
Barclay Furniture Co., a Mississippi corporation
Clayton-Marcus Company, Inc., a North Carolina corporation
Kenbridge Furniture, Inc., a North Carolina corporation
LFI Capital Management, Inc., a Delaware corporation
LADD Contract Sales Corporation, a North Carolina corporation
LADD International Sales Corporation, a Barbados corporation
LADD Transportation, Inc., a North Carolina corporation
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Lea Industries, Inc., a Tennessee corporation
<S><C>
Lea Industries of Virginia, Inc., a Virginia corporation
Pennsylvania House, Inc., a North Carolina corporation
Pilliod Furniture, Inc., a North Carolina corporation
Enclosed as Exhibit 24.1 to this Annual Report on Form 10-K for the year ended January 3,
1998
24.1 Consent of KPMG Peat Marwick LLP
Enclosed as Exhibit 27.1 to this Annual Report on Form 10-K for the year ended January 3,
1998
27.1 Financial Data Schedule (EDGAR version only)
</TABLE>
37
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
LADD FURNITURE, INC.
---------------------
(Registrant)
By: /s/ WILLIAM S. CREEKMUIR 3/31/98
-----------------------------------------
Executive Vice President, Chief (Date)
Financial Officer, Secretary, and
Treasurer (Principal Financial
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/S/ DON A. HUNZIKER 3/31/98 /S/ RICHARD R. ALLEN 3/31/98
- - ----------------------------------------- -------------------------------------------
Don A. Hunziker (Date) Richard R. Allen (Date)
Director Chairman of the Board and Director
/S/ O. WILLIAM FENN, JR. 3/31/98 /S/ DARYL B. ADAMS 3/31/98
- - ----------------------------------------- -------------------------------------------
O. William Fenn, Jr. (Date) Daryl B. Adams (Date)
Director Vice President, Corporate Controller,
Assistant Secretary, and Assistant
Treasurer (Principal Accounting Officer)
/S/ THOMAS F. KELLER 3/31/98 /S/ JAMES H. CORRIGAN, JR. 3/31/98
- - ----------------------------------------- -------------------------------------------
Thomas F. Keller (Date) James H. Corrigan, Jr. (Date)
Director Director
/S/ CHARLES R. EITEL 3/31/98 /S/ L. GLENN ORR, JR. 3/31/98
- - ----------------------------------------- -------------------------------------------
Charles R. Eitel (Date) L. Glenn Orr, Jr. (Date)
Director Director
/S/ FRED L. SCHUERMANN, JR. 3/31/98 /S/ WILLIAM S. CREEKMUIR 3/31/98
- - ----------------------------------------- -------------------------------------------
Fred L. Schuermann, Jr. (Date) William S. Creekmuir (Date)
President, Chief Executive Officer and Executive Vice President, Chief
Director Financial Officer, Secretary, and Treasurer
(Principal Financial Officer)
/S/ ZENON S. NIE 3/31/98
- - -----------------------------------------
Zenon S. Nie (Date)
Director
</TABLE>
38
EXHIBIT 10.1
LADD FURNITURE, INC.
1994 INCENTIVE STOCK OPTION PLAN
As Amended Effective March 5, 1998
<PAGE>
LADD FURNITURE, INC.
1994 INCENTIVE STOCK OPTION PLAN
TABLE OF CONTENTS
SECTION 1. PURPOSE.........................................................1
SECTION 2. ADMINISTRATION..................................................1
SECTION 3. STOCK AVAILABLE FOR OPTIONS.....................................2
SECTION 4. ELIGIBILITY.....................................................2
SECTION 5. OPTION PRICE....................................................3
SECTION 6. DIRECTOR OPTIONS................................................4
SECTION 7. EXPIRATION OF OPTIONS............................................4
SECTION 8. TERMS AND CONDITIONS OF OPTIONS..................................4
SECTION 9. EXERCISE OF OPTIONS.............................................5
SECTION 10. TERMINATION OF EMPLOYMENT - EXCEPT BY DEATH OR RETIREMENT........5
SECTION 11. TERMINATION OF EMPLOYMENT - RETIREMENT...........................6
SECTION 12. TERMINATION OF EMPLOYMENT - DEATH................................6
SECTION 13. RESTRICTIONS ON TRANSFER.........................................6
<PAGE>
EXHIBIT 10.1
SECTION 14. CAPITAL ADJUSTMENTS AFFECTING COMMON STOCK.......................6
SECTION 15. APPLICATION OF FUNDS.............................................7
SECTION 16. NO OBLIGATION TO EXERCISE OPTION.................................7
SECTION 17. TERM OF PLAN.....................................................8
SECTION 18. EFFECTIVE DATE OF PLAN...........................................8
SECTION 19. TIME OF GRANTING OF OPTIONS......................................8
SECTION 20. TERMINATION AND AMENDMENT........................................8
SECTION 21. OTHER PROVISIONS.................................................8
<PAGE>
EXHIBIT 10.1
LADD FURNITURE, INC.
1994 INCENTIVE STOCK OPTION PLAN
THIS IS THE 1994 INCENTIVE STOCK OPTION PLAN ("Plan") of LADD
Furniture, Inc. ("LADD"), a North Carolina corporation, with its principal
office in High Point, Guilford County, North Carolina, effective on February 24,
1994, with four subsequent amendments effective on March 5, 1996, March 6, 1997,
October 23, 1997 and March 5, 1998, respectively, under which options may be
granted from time to time to eligible employees and directors of LADD and LADD's
divisions and subsidiaries to purchase shares of common stock of LADD, subject
to the provisions set forth as follows:
SECTION 1. PURPOSE
The purpose of this Plan is to aid LADD in attracting capable
executives and directors and to provide a long range inducement for key
employees and directors to remain in the management of LADD, to perform at
increasing levels of effectiveness and to acquire a permanent stake in LADD with
the interest and outlook of an owner. These objectives will be promoted through
the granting to key employees and directors of options to acquire shares of
common stock of LADD pursuant to the terms of this Plan.
SECTION 2. ADMINISTRATION
The Plan shall be administered by a committee to be appointed from time
to time by the Board of Directors of LADD and shall serve at the pleasure of the
directors (the "Committee"). Any or all of the members of the Committee may be
members of the Board of Directors. The Committee shall consist of not less than
three (3) persons, all of whom shall be "disinterested persons" within the
meaning of Rule 16b-3 of the Securities Exchange Act of 1934, as amended from
time to time. The Committee, from time to time, may adopt rules and regulations
for carrying out the Plan.
Subject to the provisions of the Plan, the determinations or the
interpretation and construction of any provision of the Plan by the Committee
shall be final and conclusive upon all persons affected thereby. By way of
illustration and not of limitation, the Committee shall have the discretion (a)
to construe and interpret the Plan and all options granted hereunder and to
determine the terms and provisions (and amendments thereof) of the options
granted under the Plan (which need not be identical); (b) to define the terms
used in the Plan and in the options granted hereunder; (c) to prescribe, amend
and rescind rules and regulations relating to the Plan; (d) to determine the
individuals to whom and the time or times at which such options shall be
granted, the number of shares to be subject to each option, the option price,
the manner of exercise of the options, and the determination of leaves of
absence which may be granted to participants without constituting a termination
of their employment for the purposes of the Plan; (e) to correct any defect or
supply any omission or reconcile any inconsistency in the Plan or in any option
granted under the Plan; and (f) to make all other determinations necessary or
advisable for the administration of the Plan.
<PAGE>
It shall be in the discretion of the Committee to grant options which
qualify as "incentive stock options" (as that term is defined in Section 422 of
the Internal Revenue Code of 1986, as amended) or which will be given tax
treatment as "nonqualified stock options" (herein referred to collectively as
"options"; however, whenever reference is specifically made only to "incentive
stock options" or "nonqualified stock options," such reference shall be deemed
to be made to the exclusion of the other). Nonqualified stock options granted to
nonemployee directors pursuant to the terms of the Plan shall be referred to as
"Director Options."
Any action of the Committee with respect to the Plan shall be taken by
a majority vote at a meeting of the Committee or by written consent of all of
the members of the Committee without a meeting.
SECTION 3. STOCK AVAILABLE FOR OPTIONS
The stock to be subject to options under the Plan shall be authorized
but unissued shares of common stock of LADD or, in the discretion of the
Committee, issued shares which have been reacquired by LADD. The total amount of
stock for which options may be granted under the Plan shall not exceed Eight
Hundred Thousand (800,000) shares (as adjusted for the one-for-three reverse
stock split effective May 16, 1995). Such number of shares is subject to any
capital adjustments as provided in Section 14. In the event that an option
granted under the Plan expires or is terminated unexercised as to any shares
covered thereby, such shares thereafter shall be available for the granting of
options under the Plan; however, if the expiration or termination date of an
option is beyond the term of existence of the Plan as described in Section 17,
then any shares covered by unexercised or terminated options shall not
reactivate the existence of this Plan and therefore may not be available for
additional grants under the Plan.
SECTION 4. ELIGIBILITY
Options shall be granted only to individuals who meet the following
eligibility requirements:
(a) Such individual must be an employee of LADD or a division or
subsidiary of LADD or a director of LADD. An individual shall be considered to
be an "employee" only if there exists between LADD or a division or subsidiary
of LADD and the individual the legal and bona fide relationship of employer and
employee. In determining whether such relationship exists, the regulations of
the United States Treasury Department relating to the determination of such
relationship for the purpose of collection of income tax at the source on wages
shall be applied.
(b) Such employees must be "key employees" of LADD or a division or
subsidiary of LADD. For this purpose, "key employees" shall be considered to be
those employees who, in the judgment of the Committee, are in a position
materially to affect the operations and profitability of LADD or a division or
subsidiary of LADD by reason of the nature and extent of their duties and
responsibilities.
2
<PAGE>
EXHIBIT 10.1
(c) A director of LADD who is not also an employee of LADD is eligible
for an automatic grant of options pursuant to Section 6 hereof. A director of
LADD who is not also an employee of LADD will not be eligible to receive
incentive stock options and will only be eligible to receive Director Options.
(d) Such individual, being otherwise eligible under this Section 4,
shall have been selected by the Committee as a person to whom an option shall be
granted under the Plan.
(e) In determining the individuals to whom options shall be granted and
the number of shares to be covered by each option, the Committee shall take into
account the nature of the services rendered by the respective individuals, their
present and potential contributions to the success of LADD and such other
factors as the Committee shall deem relevant. An employee who has been granted
an option under the Plan may be granted an additional option or options under
the Plan if the Committee shall so determine.
SECTION 5. OPTION PRICE
(a) (i) Except in the case where incentive stock options are granted to
an individual who owns stock possessing more than 10 percent (10%) of the total
combined voting power of all classes of stock of LADD or its subsidiary
corporations ("ten percent shareholder"), the option price of each incentive
stock option granted under the Plan shall be not less than one hundred percent
(100%) of the market value of the stock on the date of grant of the incentive
stock option. In the case of incentive stock options granted to a ten percent
shareholder, the option price of each incentive stock option granted under the
Plan shall not be less than one hundred ten percent (110%) of the market value
of the stock on the date of grant of the incentive stock option. "Market value"
shall be determined by taking the closing price of the stock on the
over-the-counter market on that date. The option price is subject to any capital
adjustment as provided in Section 14.
(ii) The option price for nonqualified stock options granted
to employees shall be established by the Committee in its discretion and may be
less than market value of the stock on date of grant.
(iii) The option price for Director Options shall be not less
than the market value of the stock on date of grant. Market value shall be
determined as set forth in Section 5(a)(i) above.
(b) The option price shall be payable to LADD either (i) in cash or by
check, bank draft or money order payable to the order of LADD, or (ii) at the
discretion of the Committee, through the delivery of shares of the common stock
of LADD owned by the optionee with a value equal to the option price, or (iii)
at the discretion of the Committee by a combination of (i) and (ii) above. An
option agreement may, in the discretion of the Committee, provide for a
"cashless exercise" of an incentive stock option or a nonqualified stock option
by establishing procedures whereby the optionee, by a properly executed written
notice, directs (1) an immediate market sale or margin loan respecting all or a
part of the shares of common stock to which he is entitled upon exercise
pursuant to an extension of credit by LADD to the optionee of the option price,
(2) delivery of the shares of common stock from LADD directly to a brokerage
firm and (3) the delivery of the option price
3
<PAGE>
EXHIBIT 10.1
from sale or margin loan proceeds from the brokerage firm directly to LADD.
Except as provided in the preceding sentence, no shares shall be delivered until
full payment has been made. The Committee may not approve a reduction of such
purchase price in any such option, or the cancellation of any such option and
the regranting thereof to the same optionee at a lower purchase price, at a time
when the market value of the shares is lower than it was when such option was
granted.
SECTION 6. DIRECTOR OPTIONS
All eligible nonemployee directors of LADD will automatically receive
without any action required on the part of the Committee the following grants of
options ("Director Options"): 1) upon initial election to office, nonqualified
stock options to purchase two thousand (2,000) shares of LADD common stock and
2) upon subsequent elections to office each year, beginning with the election of
directors at the 1997 Annual Meeting of Shareholders, nonqualified stock options
to purchase two thousand (2,000) shares of LADD common stock. All
characteristics of the Director Options, including option price, shall be
established as provided in the Plan. The Committee shall exercise no discretion
with respect to the granting of Director Options.
SECTION 7. EXPIRATION OF OPTIONS
The Committee shall determine the expiration date or dates of each
option, but such expiration date shall be not later than ten (10) years after
the date such option is granted; provided, however, that in the case where
incentive stock options are granted to a ten percent shareholder, as defined in
Section 5(a)(i) hereof, such expiration date shall be not later than five (5)
years after the date such option is granted. The Committee, in its discretion,
may extend the expiration date or dates of an option after such date was
originally set; however, such expiration date may not exceed the maximum
expiration date described above. Notwithstanding the foregoing, all Director
Options shall be for a term of ten (10) years, and such term may not be extended
or modified by the Committee.
SECTION 8. TERMS AND CONDITIONS OF OPTIONS
(a) All options must be granted within ten (10) years of the Effective
Date of this Plan as provided in Section 18.
(b) The grant of options shall be evidenced by a written instrument
containing terms and conditions established by the Committee consistent with the
provisions of this Plan.
(c) Not less than one hundred (100) shares may be purchased at any one
time unless the number purchased is the total number at that time purchasable
under the Plan.
(d) The Committee may grant an option or options and stipulate that a
portion of such option expires or becomes exercisable at a stated interval or
that portions of such option expire or become exercisable at several stated
intervals. Director Options shall be one hundred percent (100%) exercisable
beginning one year after the date of grant.
4
<PAGE>
EXHIBIT 10.1
(e) An optionee shall have no rights as a stockholder with respect to
any shares covered by his option until payment in full by him for the shares
being purchased. No adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or distributions
or other rights for which the record date is prior to the date such stock is
fully paid for, except as provided in Section 14 hereof.
(f) Notwithstanding any other provision of the Plan, the aggregate fair
market value (determined at the time the option is granted) of the stock with
respect to which incentive stock options are exercisable for the first time by
an optionee during any calendar year (including incentive stock options granted
under all option plans of LADD or any of its subsidiary corporations) shall not
exceed $100,000.
(g) Notwithstanding any other provision of the Plan, the total number
of shares of common stock of LADD with respect to which incentive stock options,
nonqualifying options and Director Options are granted to an optionee during any
calendar year shall not exceed ten percent (10%) of the total number of shares
reserved for grant under the Plan as provided in Section 3.
SECTION 9. EXERCISE OF OPTIONS
(a) An optionee must have been continuously employed by LADD or a
division or subsidiary of LADD or be a director of LADD for 12 months before the
right to exercise any part of the option granted to such optionee shall accrue.
Each option granted under the Plan shall be exercisable in such annual
installments as may be determined by the Committee at the time of the grant, or
with respect to Director Options as provided in the Plan. The right to exercise
options in annual installments may be cumulative. Except as provided in Sections
11 and 12, no option may be exercised at any time unless the holder thereof is
then an employee of LADD or a division or subsidiary of LADD or a director of
LADD. The exercise of any stock option must be evidenced by written notice to
LADD that the optionee intends to exercise his option. In no event shall an
option granted pursuant to the terms of the Plan as amended be exercised until
the Plan, as amended, has been approved by the shareholders of LADD.
(b) No option may be exercised and no shares may be acquired under the
Plan prior to the timely filing by both the optionee and LADD of all appropriate
documents that may be required by applicable federal and state securities laws
and state corporate laws.
SECTION 10. TERMINATION OF EMPLOYMENT - EXCEPT BY DEATH OR RETIREMENT
If any optionee ceases to be employed by LADD or a division or
subsidiary of LADD or ceases to be a director of LADD for any reason other than
his death (Section 12), disability retirement (Section 11), or normal retirement
(Section 11), his option shall immediately terminate. Whether a leave of absence
shall constitute a termination of employment or termination of the directorship
shall be determined by the Committee, whose decision shall be final and
conclusive.
5
<PAGE>
EXHIBIT 10.1
SECTION 11. TERMINATION OF EMPLOYMENT - RETIREMENT
If any optionee ceases to be employed by LADD or a division or
subsidiary of LADD or ceases to be a director of LADD due to his retirement upon
attaining normal retirement age (age 65) or he ceases to be employed prior to
age 65 due to early retirement and such early retirement is acceptable to the
Committee for the purposes of this Section 11, he may, at any time within three
(3) months after his date of retirement, but not later than the date of
expiration of the option, exercise the option to the extent he was entitled to
do so on his date of retirement. If any optionee ceases to be employed by LADD
or a division or subsidiary of LADD or ceases to be a director of LADD due to
his becoming disabled for purposes of LADD's Disability Plan, he may, at any
time within twelve (12) months after his date of disability retirement, but not
later than the date of expiration of the option, exercise the option to the same
extent he was entitled to do so on his date of disability retirement. Any
options or portions of options of retired optionees not so exercised shall
terminate.
SECTION 12. TERMINATION OF EMPLOYMENT - DEATH
If an optionee dies while in the employment of LADD or a division or
subsidiary of LADD or while serving as a director of LADD, the person or persons
to whom the option is transferred by will or by the laws of descent and
distribution may exercise the same option to the same extent and upon the same
terms and conditions the optionee would have been entitled to do so had he lived
until the term of the option had expired. Any options or portions of options of
deceased optionees not so exercised shall terminate.
SECTION 13. RESTRICTIONS ON TRANSFER
Except as otherwise provided herein, an option granted under this Plan
may not be transferred except by will or the laws of descent and distribution
and, during the lifetime of the optionee to whom it was granted, may be
exercised only by such optionee. Notwithstanding the above, nonqualified options
and Director Options granted under this Plan may be transferred without payment
of consideration to immediate family members (as defined herein), trusts for the
benefit of immediate family members and partnerships consisting only of
immediate family members. For purposes of this Section 13, "immediate family
members" shall consist of the optionee's spouse, issue, whether natural,
adopted, or in the process of adoption, spouse of issue or ancestor.
SECTION 14. CAPITAL ADJUSTMENTS AFFECTING COMMON STOCK
(a) If the outstanding shares of the common stock of LADD are
increased, decreased, changed into or exchanged for a different number or kind
of shares or securities of LADD or shares of a different par value or without
par value through recapitalization, reclassification, stock dividend, stock
split, amendment to LADD's Articles of Incorporation or reverse stock split, an
appropriate adjustment shall be made in the number and/or kind of securities
allocated to the options previously and subsequently granted under the Plan,
without change in the aggregate purchase price applicable to the unexercised
portion of the outstanding options but with a
6
<PAGE>
EXHIBIT 10.1
corresponding adjustment in the price for each share or other unit of any
security covered by the options.
(b) Upon the effective date of the dissolution or liquidation of LADD,
or of a reorganization, merger or consolidation of LADD with one or more
corporations in which LADD is not the surviving corporation, or of a transfer of
substantially all the property or more than eighty percent (80%) of the then
outstanding shares of LADD to another corporation, the Plan and any option
previously granted hereunder shall terminate unless provision is made in writing
in connection with such transaction for the continuance of the Plan and for the
assumption of options previously granted, or the substitution for such options
of new options covering the shares of a successor employer corporation, or of a
parent or subsidiary thereof, with appropriate adjustments as to number and kind
of shares and prices in which event the Plan and the options previously granted
or the new options substituted therefor, shall continue in the manner and under
the terms so provided. Nevertheless, in the event of such dissolution,
liquidation, reorganization, merger, consolidation, transfer of assets or
transfer of shares, and if provision is not made in such transaction for the
continuance of the Plan and for the assumption of options previously granted or
for the substitution of such options or new options covering the shares of a
successor employer corporation or a parent or subsidiary thereof, then such
optionee under the Plan shall be entitled, prior to the effective date of any
such transaction, to purchase the full number of shares under his option which
he would otherwise have been entitled to purchase during the remaining term of
such option.
(c) To the extent that the foregoing adjustments relate to particular
stock or securities of LADD subject to option under this Plan, such adjustments
shall be made by the Committee, whose determination in that respect shall be
final and conclusive.
(d) The grant of an option pursuant to this Plan shall not affect in
any way the right or power of LADD to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure or to merge or
to consolidate or to dissolve, liquidate or sell, or transfer all or any part of
its business or assets.
(e) No fractional shares of stock shall be issued under the Plan for
any such adjustment.
SECTION 15. APPLICATION OF FUNDS
The proceeds received by LADD from the sale of common stock pursuant to
options will be used for general corporate purposes.
SECTION 16. NO OBLIGATION TO EXERCISE OPTION
The granting of an option shall impose no obligation upon the optionee
to exercise such option.
7
<PAGE>
EXHIBIT 10.1
SECTION 17. TERM OF PLAN
Options may be granted pursuant to this Plan from time to time within a
period of ten (10) years from February 24, 1994.
SECTION 18. EFFECTIVE DATE OF PLAN
This Plan was originally effective February 24, 1994, following
approval thereof by the Board of Directors and shareholders, with four
subsequent amendments effective on March 5, 1996, March 6, 1997, October 23,
1997 and March 5, 1998, respectively.
SECTION 19. TIME OF GRANTING OF OPTIONS
Nothing contained in the Plan or in any resolution adopted or to be
adopted by the Committee or the shareholders of LADD and no action taken by the
Committee shall constitute the granting of any option hereunder. The granting of
an option pursuant to the Plan shall take place only when a written option
agreement shall have been duly executed and delivered by and on behalf of LADD.
SECTION 20. TERMINATION AND AMENDMENT
The Committee may at any time alter, suspend, terminate or discontinue
the Plan, but may not, without the consent of the holder of an option previously
granted, make any alteration which would deprive him of his rights with respect
thereto or, without the approval of the stockholders, make any alteration which
would (a) increase the number of aggregate shares subject to the option under
this Plan or decrease the minimum option price except as provided in Section 14;
or (b) extend the term of this Plan as provided in Section 17 or the maximum
period during which any option may be exercised as provided in Section 7.
SECTION 21. OTHER PROVISIONS
The option agreements authorized under this Plan shall contain such
other provisions not inconsistent with the foregoing, including, without
limitation, increased restrictions upon the exercise of the option, as the
Committee may deem advisable.
8
EXHIBIT 10.2
LADD FURNITURE, INC.
1998 LONG-TERM INCENTIVE PLAN
SHAREHOLDER VALUE PROGRAM
PLAN HIGHLIGHTS
1. The Long-Term Incentive Program consists of an annual award of the following
two elements:
- Stock Option Grants
- Performance Bonus payable in cash and stock at the end of a
3-year planning period (1998-2000).
2. Award levels are based on the participant's base salary in effect when the
award is granted as follows:
a) LADD President (CEO)
Stock Options 15,000
Target Performance Bonus 40% of Base Salary
b) LADD Executive Vice Presidents
Stock Options 9,000
Target Performance Bonus 30% of Base Salary
c) Casegoods Operating Presidents
Stock Options 6,000
Target Performance Bonus 20% of Base Salary
d) Other Designated Participants
Stock Options 4,000
Target Performance Bonus 10% of Base Salary
3. Valuation of Performance Bonus at the end of the 3-year planning period
will be based on the following performance criteria achieved by LADD
Furniture, Inc. Performance will be measured by total annual compounded
stockholder return (TSR) of LADD Furniture, Inc. common stock from
1/1/98 to 12/31/00 versus a peer group defined by SIC Code 251
Household Furniture Index as utilized by Media General Financial
Services Inc. and incorporated in LADD's annual Proxy to Shareholders.
4. The Performance Bonus will be valued at the end of the performance
period (12/31/2000) using a graduated scale as follows:
<PAGE>
EXHIBIT 10.2
TSR Level I TSR Level II Bonus as a % of Target
----------- ------------ ----------------------
Below Peers Below Peers 0%
At Peers At Peers 50%
110% of Peers Peers + 1% Point 100%
120% of Peers Peers + 2% Point 150%
130% of Peers Peers + 3% Point 200%
140% of Peers Peers + 4% Point 250%
150% of Peers Peers + 5% Point 300%
Payments for Performance Bonus earned will be made no later than 75
days after the fiscal year end. Payments will be made 50% in cash and
50% in shares of LADD common stock.
Payout will be determined and paid on the lower of TSR Level I or TSR
Level II -- ie, Peer Group total return is 5% and LADD is 6%, LADD
return is 120% of Peers (TSR Level I) but only 1 point (TSR Level II).
Payout would be based on TSR Level II or 100% of Target.
5. Stock Options will be granted at market price on the day of the grant,
and, as long as the participant remains an employee of LADD, will be
vested as follows:
After 1 Year 25%
After 2 Years 50%
After 3 Years 75%
After 4 Years 100%
6. The participant must be an employee at the end of the planning period
to receive any payment for the Performance Bonus. If the participant
changes LADD business units during the planning period, a pro-rata
share of the earned Performance Bonus will be granted for the period
the individual participated in the Long-Term Incentive Program in the
respective business units.
7. Participants who enter the plan other than at the beginning of the
planning period will receive stock options and performance bonus as
recommended by management and approved by the Compensation Committee
and the Board of Directors.
8. When a plan participant retires (minimum age 55), dies or becomes
disabled during a three-year plan period, the Compensation Committee
and the Board of Directors will determine the amount and terms of
payment of performance bonus earned.
2
<PAGE>
EXHIBIT 10.2
9. The company has the sole right to exclude from the operating profits of
each organizational unit items such as, but not limited to,
extraordinary income from the sale of assets, litigation recoveries,
income or expenses attributable to changes in accounting methods, bad
debt charges and inventory valuations and similar items. Such
determinations will be made without recourse by an Incentive Plan
participant as to the effect, if any, on the incentive payment amount.
3
EXHIBIT 10.3
CORESTATES LEASING, INC. MASTER LEASE AGREEMENT
TRUE LEASE
MASTER LEASE AGREEMENT NO. __________________
THIS MASTER LEASE AGREEMENT (the "Lease"), dated as of the 17th day of
October 1997, is executed by and between CORESTATES LEASING, INC., a
Pennsylvania corporation, with a place of business located at One Meridian
Boulevard, Wyomissing, PA 19610 (together with its successors and assigns, if
any, the "Lessor") and LADD FURNITURE, INC., a corporation organized under the
laws of the State of North Carolina, with its mailing address and chief place of
business at One Plaza Center, Box HP3, High Point, NC 27261 (the "Lessee").
The Parties hereto, for good and valuable consideration and intending to be
legally bound, hereby agree as follows:
1. MASTER LEASE WITH SCHEDULES:
(a) SCHEDULES. Subject to the terms and conditions set forth below, Lessor
agrees to lease to Lessee and Lessee agrees to lease from Lessor such unit or
units of equipment (the "Equipment" and individually sometimes "Item" or "Item
of Equipment") described in any Master Lease Schedule (a "Schedule") now or
hereafter from time to time executed by the parties pursuant hereto, and any and
all such Schedules are deemed a part hereof. Each Schedule shall incorporate
this Lease by reference. Capitalized terms not otherwise defined herein will
have the meaning provided for in the related Schedules.
(b) CONDITIONS PRECEDENT. Lessor has no obligation to purchase Equipment from
the manufacturer or supplier thereof who may be the Lessee in a sale and
leaseback transaction ("Supplier") or to lease the same to Lessee under any
Schedule unless each of the following is satisfied and delivered to Lessor prior
to the Commencement Date with respect to the Schedule in form and substance
satisfactory to Lessor: (i) a Schedule relating to the Equipment then being
leased hereunder reflecting Lessor's Cost and a term and rate satisfactory to
Lessor, (ii) unless the transaction is a sale and leaseback or Lessor has
delivered its purchase order for the purchase of such Equipment, a Purchase
Order Assignment and Consent in form satisfactory to Lessor, (iii) a Certificate
of Acceptance and Closing Certificate in form satisfactory to Lessor, and (iv) a
certificate of insurance which complies with the requirements of Section 7 and
the Schedule. The execution by Lessee of the Certificate of Acceptance will (i)
confirm that each Item of Equipment described thereon has been delivered to and
irrevocably accepted by Lessee for lease hereunder, and (ii) constitute Lessee's
acknowledgment that Lessee has received a copy of and has approved the contract
under which Lessor acquired the Equipment. Lessee hereby waives as between
Lessor and Lessee any right to revoke acceptance of the Equipment under this
Lease once evidenced by its Certificate of Acceptance. Lessee shall also deliver
such other documents related to the Master Lease, Master Lease Schedule and
equipment as Lessor may reasonably request.
2. TERM:
The lease of and rent for Equipment leased under any Schedule will commence on
the day specified in the Schedule as the Commencement Date, and will continue
for the period specified as the "term" in such Schedule as the same may be
extended pursuant to the terms hereof.
3. RENT:
Lessee promises to pay rent during the term of the Lease on the due dates and
in the amount set forth in the Schedule and acknowledges that rent will not be
prorated for any cause or reason except as herein specifically provided. If one
or more advance payments of rent are required, the advance rent will be due and
paid in the amount specified in the Schedule upon acceptance by Lessor of each
Schedule providing for such rent. Lessor will apply said advance rent toward the
first basic rent payment and, provided no default is then existent hereunder,
the balance, if any, of the advance rent will be applied to the final rent
payment. Subsequent rent payments will be due periodically thereafter as
specified in the Schedule. In no event will any advance rent or any other rent
payment be refunded to Lessee, it being the intention of the parties hereto that
the rents and other amounts payable by the Lessee hereunder will continue to be
payable in all events unless the obligation to pay the same will be terminated
pursuant to the terms hereof. All rent will be paid to Lessor in immediately
available funds without notice or demand on the due dates with respect thereto
at Lessor's address set forth above or as otherwise directed by Lessor in
writing. In order to secure all obligations of Lessee hereunder, under each
Schedule and under all other obligations of Lessee to Lessor or to CoreStates
Financial Corp., or any of its direct or indirect subsidiaries (each, a
"CoreStates Company") under any other agreement, Lessee hereby grants to Lessor
and to each CoreStates Company a security interest in the amount of any advance
rent not applied to the first basic rent payment and in all other funds,
balances, accounts and/or other property of any kind of Lessee or in which
Lessee has an interest now or hereafter in the possession, custody or control of
Lessor or any CoreStates Company.
<PAGE>
EXHIBIT 10.3
4. USE, OPERATION AND INDEMNIFICATION:
(a) Lessee will not , except as expressly provided for herein, assign, sublet,
mortgage, hypothecate or alter any of the Equipment leased hereunder or any
interest in the Lease, nor will Lessee remove any of the Equipment from the
location specified in the Schedule (except in the ordinary course of its
business for use or maintenance) without the prior written consent of Lessor,
and any attempt to so assign, sublet, mortgage, hypothecate, alter or remove
will constitute a default hereunder and such assignment, sublease, mortgage, or
hypothecation will be void and without effect. Lessee may only sublease to
subsidiaries, so long as Lessee remains primarily liable. Lessee will keep all
Equipment leased hereunder free and clear from all claims, liens, and
encumbrances whatsoever, and upon becoming aware thereof, the Chief Financial
Officer of Lessee shall promptly notify Lessor of any default or event which
with notice and/or the passage of time would become a default under this Section
or otherwise under the Lease. Lessee will at all times use the Equipment only in
compliance with all applicable laws and consistent with the instructions
supplied by the Supplier and manufacturer thereof. Lessee will not use the
Equipment to carry, contain or produce directly or indirectly any hazardous
substances (as defined under applicable federal, state or local law or
regulation), except as utilized in the ordinary course of business in compliance
with all applicable laws.
(b) Lessee agrees to indemnify, save and keep harmless Lessor, its agents,
employees, successors and assigns from and against any and all losses, damages,
penalties, injuries, claims, actions and suits, including reasonable legal
expenses of whatsoever kind and nature, in contract or tort, howsoever arising
from any cause whatsoever including, but not limited to Lessor's strict
liability in tort, or otherwise arising out of (i) the selection, manufacture,
purchase, financing, acceptance or rejection of Equipment (ii) the ownership of
Equipment during the term of this Lease, (iii) liability to third parties after
disposition of the equipment by Lessor based on strict liability in tort, (iv)
Lessee's negligence in the delivery, lease, possession, maintenance, uses,
condition, environmental impact, return or operation of Equipment (including,
without limitation, latent and other defects, whether or not discoverable by
Lessor or Lessee and any claim for patent, trademark or copyright infringement).
Lessee hereby represents and warrants that each Item of Equipment acquired and
leased hereunder is new and not previously used unless specifically disclosed on
the Schedule, and Lessee agrees to indemnify, save and keep harmless Lessor
against any loss howsoever arising directly or indirectly from any subsequent
determination that the Supplier has sold Items of Equipment for lease hereunder
which have been previously used. Lessee upon request will defend, at its own
expense any and all actions based on, or arising out of, any of the foregoing
and this indemnification will survive cancellation or termination of the Lease.
(c) Lessee will not without the prior written consent of Lessor, which consent
shall not be unreasonably withheld, make or authorize any improvement, change,
addition or alteration to the Equipment (i) if such improvement, change,
addition or alteration will impair the originally intended function or use of
the Equipment or impair the value of the Equipment as it existed immediately
prior to such improvement, change, addition or alteration; or (ii) if any parts
installed in or attached to or otherwise becoming a part of the Equipment as a
result of any such improvement, change, addition or alteration shall not be
readily removable without damage to the Equipment. Any part added to the
Equipment without violating the provisions of the immediately preceding sentence
and which is not a replacement or substitution for any part of the Equipment
shall remain the property of Lessee and may be removed by Lessee at any time
prior to the termination or earlier cancellation of the term. All such parts
shall be and remain free and clear of any liens. Any such part which is not so
removed shall without further act, become the property of Lessor. Lessee and
Lessor agree that although the equipment may be attached to real estate or
personal property, it will not constitute a fixture.
5. SERVICE AND MAINTENANCE:
Unless otherwise provided in the related Schedule, Lessee will service and
maintain the Equipment as provided hereinafter. Lessee will at its sole expense
at all times maintain all Equipment consistent with recommendations of the
Supplier and manufacturer thereof and as required by the conditions of any
warranty in order to maintain same current and effective and in good operating
order, repair, condition and appearance and keep all Equipment protected from
the elements, except during use in the normally contemplated manner. Lessee will
at its own expense provide all maintenance and service and make all repairs and
replacements reasonably necessary for such purposes. If any parts of the
Equipment are worn out, lost or are otherwise rendered unfit for use, Lessee
will, at its own expense, replace such parts promptly by replacement parts of at
least equal value and utility with title thereto vesting in Lessor free and
clear of all liens and encumbrances. Upon request of Lessor, Lessee will affix
in a prominent position on each Item of Equipment plates, tags or other
identifying labels supplied by Lessor showing ownership of the Equipment by
Lessor. Lessor will at all reasonable times upon reasonable notice have the
right to inspect the Equipment and Lessee's maintenance records related thereto.
Lessee will at its sole expense make all alterations and modifications with
respect to the Equipment that may at any time during the term of the Lease be
required to comply with any applicable law or any governmental rule or
regulation for the continued use thereof.
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EXHIBIT 10.3
6. RETURN OF EQUIPMENT:
Unless otherwise provided in the Schedule, upon cancellation of the Lease or
of any Schedule upon default or by expiration of the term thereof or upon
termination for any other cause, Lessee will, at its sole cost and expense,
promptly return the Equipment to Lessor at any address specified by Lessor
within 500 miles of last location in the same condition as received, reasonable
wear and tear and normal depreciation from proper use and maintenance alone
excepted, capable of performing its originally intended use at its originally
rated capacity. Lessee will be responsible for all costs and expenses for
packing, shipping and insuring the Equipment until delivered to the location
designated by Lessor. Lessee will also provide storage to Lessor, if requested,
for up to ninety (90) days after the termination of the Lease. Lessor will pay
reasonable costs for storage at Lessee's incremental costs, including cost of
insurance, maintenance, and other similar items. At least ninety (90) days prior
to the last day of the term, Lessee shall deliver to Lessor the report of an
independent expert advising Lessor on the condition of the Equipment and its
compliance with the terms hereof. In addition to Lessor's other rights and
remedies hereunder, if the Equipment is not returned on the last day of the
term, due to Lessee's failure to act, or repairs are necessary to place the
Equipment in the condition required hereby, Lessee shall continue to pay for the
period of delay and acceptance of such rents by Lessor will not constitute a
renewal of the Lease or a waiver of Lessor's right to a prompt return.
7. INSURANCE:
Lessee hereby assumes all risks of damage, loss, theft, and destruction,
partial or complete, with respect to each Item of Equipment during the term of
the Lease and during any storage period in accordance with Section 6 above until
Lessee has returned or disposed of the Equipment as provided for herein. Lessee
will at its own expense keep each Item of Equipment insured against all risks
with extended coverage and insurance companies reasonably satisfactory to
Lessor, with Lessor named as loss payee for an amount at least equal to the
greater of (i) the fair market value of the Equipment, or (ii) the then current
Stipulated Loss Value of the Equipment determined by reference to the related
Schedule. Lessee agrees to obtain and maintain at its expense with insurance
companies of nationally known standing and financially sound condition,
liability insurance for the protection of Lessor and Lessee, as their interests
may appear, in an amount at all times reasonably satisfactory to Lessor and
otherwise as specified in the related Schedule against claims for bodily injury,
death or property damage arising out of the use, ownership, possession,
operation or condition of the Equipment. Each insurer will agree, by endorsement
upon the policy or policies issued by it, or by independent instruments
furnished to Lessor, Lessor shall be named as additional insured and additional
loss payee with respect to said policy, that it will give Lessor ten (10) days
written notice before the policy or policies in question will be altered in a
manner which would affect this Lease Agreement or coverage of equipment leased
under this Agreement, or canceled and that no act or default of any person other
than Lessor, its agents, or those claiming under Lessor, will affect Lessor's
rights to recover under such policy or policies in case of loss. Lessee will
deliver to Lessor the policies or evidence of insurance and renewal thereof
satisfactory to Lessor prior to the Commencement Date and ten (10) days prior to
each expiration date thereof for each Item of Equipment. The failure of Lessee
to secure or maintain such insurance will constitute a default under this Lease.
In the event of such breach, Lessor may, but will not be obligated to, obtain
such insurance. In the event that Lessor obtains such insurance, an amount equal
to the cost of such insurance will be deemed supplemental rent to be paid
forthwith by Lessee.
8. LOSS OR DAMAGE:
(a) Lessee hereby assumes and is solely responsible for, during the term of
the Lease and thereafter during any storage period in accordance with Section 6
until returned as provided for herein, the entire risk of use, operation and or
loss of the Equipment and for each and every accident or hazard resulting
therefrom and all losses and damages associated therewith howsoever arising.
(b) In the event of the total loss, destruction, theft or damage beyond repair
(determined without reference to the remaining term with respect thereto) of the
Equipment or any Item during the period referred to the preceding subsection
8(a) (a "Casualty Occurrence"), Lessee will pay to Lessor on the earlier of the
next due date for rent following the Casualty Occurrence or on the last day of
the term with respect to such Equipment (or if the term has expired or has been
canceled, thirty days after the Casualty Occurrence) an amount equal to the rent
then due plus an amount equal to the Stipulated Loss Value of such Equipment as
of such due date. Upon payment of such amounts, and provided no default exists
hereunder, Lessee will be entitled to recover possession of such Item and title
thereto will vest in Lessee free and clear of the right and interest of Lessor.
(c) In the event of damage to any Item of Equipment which does not amount to a
Casualty Occurrence, Lessee will give prompt notice of such damage to Lessor
and, at Lessee's sole cost and expense, Lessee will promptly repair such Item,
restoring it to its previous condition and the condition assuming Lessee had met
all of its obligations required for maintenance hereunder. Provided Lessee is
not in breach or default of this Lease, any proceeds of insurance received by
Lessor with respect to any such loss will be paid over by Lessor to Lessee or
vendor as Lessee designates to the extent necessary to reimburse Lessee for
costs incurred and paid by Lessee in repairing such damaged Equipment, but only
upon evidence satisfactory to Lessor that such repairs have been accomplished.
3
<PAGE>
EXHIBIT 10.3
9. TRANSFER OF WARRANTIES:
Notwithstanding anything contained herein to the contrary and to the extent
permitted by law and contract, Lessor will pass through without representation
to Lessee the benefit of all warranties, if any, of the Supplier of the
equipment and, so long as there exists no default hereunder, Lessee will have
the right to, and will, directly avail itself of all warranties made by the
Supplier with respect to the Equipment. Lessee will give Lessor notice of any
claim made by Lessee against the Supplier of the Equipment for breach of
warranty by supplier which may materially affect the value, use or resale of the
Equipment and any cash settlement of any such claim will be applied to
correcting the breach of warranty with respect to the Equipment.
10. TAX TREATMENT AND INDEMNIFICATIONS:
(a) Unless otherwise provided in the related Schedule, it is acknowledged and
agreed by the parties that they are entering into the Lease under each Schedule
with the assumption that Lessor and the consolidated group of which Lessor is a
member (all references to Lessor in this Section include such consolidated
group) will be treated for federal income tax purposes (and to the extent
allowable, for state and local tax purposes) as the owner of all Equipment
leased hereunder.
(b) Unless otherwise provided in the related Schedule, the Lessee acknowledges
and agrees that each Schedule has been executed by Lessor based upon the
following representations and warranties of Lessee: (i) each Item of Equipment
has been placed in service on the Commencement Date; (ii) Lessor will not under
the Internal Revenue Code of 1986, as amended, and the regulations promulgated
thereunder (the "Code"), be required to include in its gross income, for federal
income tax purposes, any amount with respect to any improvement, modification or
addition made by Lessee to any Item of Equipment; (iii) Lessor shall be entitled
to accelerated cost recovery deductions ("Recovery Deductions") for Lessor's
Cost of each Item of Equipment over the number of years indicated on the related
Schedule by using the 200% declining balance method permitted under Code Section
168 and the half year convention, unless otherwise required by operation of Code
Section 168(d) (3) (A); (iv) no Item of Equipment is limited use property within
the meaning of Rev. Proc. 76-30; and (v) for federal income tax purposes, all
amounts included in the gross income of Lessor with respect to each Item of
Equipment will be treated as derived from or allocable to sources within the
United States.
(c) If by reason of (1) the inaccuracy of any representations or warranties of
Lessee set forth in Subsections (a) or (b) of this Section, (2) the material
inaccuracy of any statement or any letter or document furnished to Lessor by or
on behalf of Lessee in connection with the transactions contemplated under the
Lease, or (3) the act, failure to act or omission of or by Lessee, Lessor will
(i) lose, will not have the right to claim or if there will be disallowed with
respect to Lessor all or any portion of the Recovery Deduction as to any Item of
Equipment on such Schedule, (ii) be required to include in its gross income any
alteration, modifications or addition to, any Item, other than an alteration,
modification or addition which is permitted without adverse tax consequences to
Lessor under Rev. Proc. 75-21, 76-30 or 79-48 (an "Improvement Loss"), or (iii)
suffer a decrease in Lessor's net return over the then remaining portion of the
term of the Lease (any such occurrence referred to hereinafter as "Loss") for
such Schedule, then at Lessee's option either (X) the rent on such Schedule
will, on and after the next succeeding date for the payment thereof upon notice
to Lessee by Lessor that a Loss has occurred and describing the amount as to
which Lessor intends to claim indemnification and the reason for such adjustment
in reasonable detail, be increased by such amount which will cause Lessor's net
return over the then remaining portion of the term of the Lease (taking into
account the tax effect from deferred utilization of tax basis resulting from
changes in the method of calculating Recovery Deductions) to equal the net after
tax return that would have been available if such Loss had not occurred, or (Y)
in lieu of a rent increase, the Lessee shall pay to Lessor on such next
succeeding date for the payment of rent such sum as will cause Lessor's net
after tax return over the term of the Lease in respect of the Equipment to equal
the net return that would have been available if such Loss had not occurred. If
such Loss occurs after the termination or cancellation of the Lease, Lessor will
notify Lessee of such Loss and Lessee will, within sixty (60) days after such
notice, pay to Lessor such sum as required by the preceding clause (Y). Lessee
will forthwith pay on demand to Lessor an amount on an after-tax basis which
will be equal to the amount of any interest and/or penalties which may be
assessed by the United States or any state against Lessor as a result of the
Loss.
(d) Unless otherwise provided in the related Schedule, for purposes of this
Section 10, a Loss will occur upon the earlier of , (1) the payment by Lessor to
the Internal Revenue Service of the tax increase, if any, resulting from such
Loss, or (2) the adjustment of the tax return of Lessor to reflect such Loss.
Lessor will be responsible for, and will not be entitled to a payment under this
Section on account of, any Loss due solely to one or more of the following
events: (i) the failure of Lessor to have sufficient taxable income to benefit
from the Recovery Deduction; (ii) any disposition of the Equipment by Lessor
prior to any default which has occurred and is continuing under the Lease; or
(iii) the failure of Lessor to properly claim the Recovery Deduction.
(e) The indemnities and assumptions of liability provided for herein and all
Lessor's rights and privileges herein will continue in full force and effect
notwithstanding the termination or cancellation of the Lease.
4
<PAGE>
EXHIBIT 10.3
11. DISCLAIMER:
LESSEE ACKNOWLEDGES THAT IT ALONE SELECTS THE EQUIPMENT AND THE SUPPLIER(S)
THEREOF. LESSEE UNDERSTANDS AND AGREES THAT LESSOR MAKES NO REPRESENTATION OR
WARRANTY OF ANY KIND, EXPRESSED OR IMPLIED, WITH RESPECT TO THE EQUIPMENT. IT IS
UNDERSTOOD AND AGREED THAT NO WARRANTY IS TO BE IMPLIED WITH RESPECT TO THE
CONDITION OF THE EQUIPMENT, ITS MERCHANTABILITY, THE FITNESS OF THE EQUIPMENT
FOR A PARTICULAR PURPOSE, OR WITH RESPECT TO PATENT, TRADEMARK, COPYRIGHT OR
OTHER INFRINGEMENT OR THE LIKE. NOTHING HEREIN CONTAINED WILL BE CONSTRUED AS
DEPRIVING THE LESSEE OF WHATEVER RIGHTS, IF ANY, LESSEE MAY HAVE AGAINST THE
SUPPLIER AND/OR MANUFACTURER OF THE EQUIPMENT AND LESSEE AGREES TO LOOK SOLELY
TO SUCH THIRD PARTIES WITH RESPECT TO ANY AND ALL CLAIMS CONCERNING THE
EQUIPMENT.
12. NO ABATEMENT:
This Lease is a net Lease, intended by the parties to constitute a "finance
lease" under Article 2A of the Uniform Commercial Code as in effect in
Pennsylvania (the "UCC") and Lessee waives any right to suspend the performance
of all or any its obligations hereunder. This is not a consumer lease and the
promises of Lessee hereunder and under each Schedule are irrevocable upon
acceptance of the Equipment under each Schedule. Lessor and Lessee each hereby
waive the provisions of the UCC, Section 2A 401 through 403 inclusive, and it is
the intent of the parties that under no circumstances is the Lease or any
Schedule to be subject to repudiation by either party. Lessee's obligation to
pay rent and all other amounts due hereunder is absolute, unconditional and not
subject to cancellation. Lessee agrees to pay rent and all other amounts due
hereunder when due without abatement or reduction, irrespective of any claims,
demands, set-offs, actions, suits or proceedings that it may have or assert
against Lessor or any Supplier or manufacturer of Equipment or any part thereof.
Lessor will have no liability to Lessee in the event that any Supplier,
manufacturer or one or more others fails to perform any obligations at any time
due to Lessor, Lessee, persons in privity with Lessor or Lessee and any other
persons, or any one or more of the foregoing.
13. DEFAULT:
Each of the following will constitute a default hereunder:
(1) Lessee fails to pay rent or any other amount when due under any Schedule
and such failure will continue for five (5) business days from the notification
date thereof; (2) Lessee fails to provide or maintain the insurance required
hereunder; (3) Lessee breaches any of the other terms or covenants hereof
(including without limitation any Schedule) or commits any other act of default
specified in any other Section of this Lease and, if and only if such breach is
capable of being cured within forty-five (45) days and Lessee has previously
reported such breach promptly to Lessor, such breach shall remain uncorrected
for a period of forty-five (45) days after notice from Lessor during which
forty-five days Lessee shall be diligently pursuing corrective action; (4) any
material representation or warranty of Lessee contained herein or in any other
document or instrument delivered in connection herewith or made from time to
time hereafter is false or misleading when made; (5) Lessee becomes insolvent or
ceases to do business as a going concern; (6) the Equipment or any Item is
abused, illegally used, or misused; (7) Lessee makes any assignment for the
benefit of creditors, receivership or the like is filed with respect to Lessee,
or any substantial part of Lessee's property is attached or a receiver, trustee
or liquidator is appointed for Lessee or any substantial part of Lessee's
property or whenever Lessor may deem itself insecure hereunder; (8) Lessee fails
to perform or observe any term, covenant, agreement or condition contained in,
or there shall occur any payment or other default under or as defined in, any
indebtedness for borrowed money, lease, installment sale obligation, or other
agreement applicable to Lessee by which Lessee is bound (as used herein, an
"Other Agreement") involving a liability, indebtedness or other obligation of
Lessee in an amount equal to or in excess of $2,000,000.00, which shall not be
remedied within the period of time (if any) within which such Other Agreement
permits such default to be remedied, if such default is not waived by any other
party to such Other Agreement or produces or results in the acceleration of such
liability, indebtedness or other obligation; (9) final judgment for the payment
of money aggregating in excess of $2,000,000.00 will be outstanding against
Lessee for more than sixty (60) days from the date of entry and will not have
been discharged in full or stayed or fully bonded.
14. REMEDIES:
(a) On the occasion of any default hereunder, Lessor, at its option, may do
any one or more of the following: (1) declare this Lease and any or all
Schedules in default upon notice to Lessee, whereupon the entire amount of rent
and all other amounts remaining to be paid over the balance of the term of all
Equipment then leased hereunder, computed from the date of Lessee's default,
will become immediately due and payable and be accelerated; (2) proceed by
appropriate court action or actions at law or in equity or in bankruptcy to
enforce performance by Lessee of the covenants and terms of this Lease and/or to
recover damages for the breach thereof; (3) cancel this Lease and any or all
Schedules upon notice to Lessee; (4) whether or not this Lease or
5
<PAGE>
EXHIBIT 10.3
any Schedules be so canceled, upon demand by Lessor, Lessee will return the
Equipment consistent with its obligation in Section 6 hereof. Lessor may without
notice to Lessee, following notice of default, with or without legal process,
peacefully enter any premises where the collateral or any portion is located and
remove the same for sale or other disposition in a commercially reasonable
manner, without liability or suit, action or other proceedings by Lessee, except
for liability for damage caused by Lessor to Lessee's real or personal property.
(b) With respect to any Equipment returned to Lessor, or repossessed by Lessor
pursuant to provision (4) in the preceding subsection, Lessor may hold or use
such Equipment for any purpose whatsoever or either sell same at a private or
public sale, cash or credit, or re-lease same for such term and upon such rental
as will be solely determined by Lessor. In the event of the sale or re-leasing
by Lessor of any such Equipment, Lessee will be liable for, and Lessor may
forthwith recover from Lessee as liquidated damages for breach of this Lease,
and not as a penalty, an amount equal to (X) the entire amount of rent which
would have accrued for the balance of the term for such Equipment computed from
the date of Lessee's default, plus (Y) an amount determined by multiplying
Lessor's Cost by the percentage indicated for the Stipulated Loss Values for the
final rent period during the term hereof, less (Z) the proceeds of any sale or
re-leasing of such Equipment, after first deducting therefrom all reasonable
costs and expenses of repossession, storage, repairs, reconditioning, sale,
re-leasing, reasonable attorneys' fees and collection fees with respect to such
Equipment. If Lessee fails to return any Equipment to Lessor or Lessor is
unable, for any reason, to effect repossession of any Equipment, then with
respect to such Equipment, Lessee will be liable for, and Lessor may forthwith
recover from Lessee as liquidated damages for breach of this Lease, and not as a
penalty, an amount equal to the sum of the amounts specified in items (X) and
(Y) above for such Equipment. Whether or not any Equipment is returned to, or
repossessed by Lessor, as aforesaid, Lessee will also be liable for, and Lessor
may forthwith recover from Lessee, all unpaid rent and other unpaid sums that
accrued prior to the date of Lessee's default. In addition to the foregoing,
Lessor may also recover from Lessee all reasonable costs and expenses, including
without limitation reasonable attorneys' fees and fees of collection agencies,
incurred by Lessor in exercising any of its rights or remedies hereunder. Since
pursuant to the foregoing Lessor may receive or recover payment of the amounts
specified in provision (1) of the preceding paragraph and items (X) and (Y)
above earlier than Lessor would otherwise be entitled to receive or recover same
but for Lessee's default, such amounts will be discounted to their then present
value at the rate of seven percent (7%) per annum, and there will be added to
such amounts, after such discount, interest at the Default Rate specified in
Section 18 hereof from the date of Lessee's default up to the date of the
payment of such amounts to Lessor.
(c) Lessee consents to the jurisdiction of the courts of Pennsylvania and the
Federal District Court for the Eastern District of Pennsylvania in any action or
proceeding which may be brought under or in connection with this Lease or any
obligation with respect thereto or to enforce any agreement contained herein or
in any such obligation, and in the event such action or proceeding will be
brought against it, Lessee agrees not to raise any objection to such
jurisdiction or the laying of venue in Berks County, Pennsylvania. Lessee
irrevocably appoints each of the Chief Executive Officer and Chief Financial
Officer of Lessee as its attorney upon whom may be served by certified mail any
process, notice or pleading in any action or proceeding against it under this
Lease or related thereto.
15. CUMULATIVE REMEDIES:
The remedies herein provided in favor of Lessor are not exclusive, but will be
cumulative and will be in addition to all other remedies in Lessor's favor
existing in law, in equity or in bankruptcy. The receipt and acceptance by
Lessor of any rent or other payment after occurrence of a default will not be
deemed to be a waiver of such default on the part of Lessor. In the event that
any court of competent jurisdiction determines that any provision of this Lease
is invalid or unenforceable in whole or in part, such determination will not
prohibit Lessor from establishing its damages sustained as a result of any
breach of this Lease in any action or proceeding in which Lessor seeks to
recover such damages. Any repossession or resale of any Equipment will not bar
an action for damages for breach of this Lease, as hereinbefore provided, and
the bringing of an action or the entry of judgment against Lessee will not bar
Lessor's right to repossess any or all Equipment.
16. ASSIGNMENTS:
Subject to the restrictions set forth in the last sentence of this Section,
Lessor may without the consent of Lessee sell, assign or otherwise transfer or
grant a security interest in, its right, title and interest in the Equipment,
this Lease or any Schedule and the rent due or to become due thereunder and when
so sold, assigned, transferred or encumbered, Lessee will after notice and
direction from Lessor make all payments under this Lease to such assignee free
of any counterclaim, set-off, defense or cross-claim by Lessee as against Lessor
or any other person whatsoever whether arising, before or after such sale,
assignment, transfer or security grant. Restrictions to this assignment would be
1) not less than all schedules: 2) not to competitor of Lessee: and 3) Assignee
to have a Tangible Net Worth greater than $25,000,000.00; as long as no default
has occurred under the Lease.
6
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EXHIBIT 10.3
17. PAYMENT OF TAXES:
Lessee agrees to pay promptly when due, and to indemnify and hold Lessor
harmless from, all license, title and registration fees whatsoever, all levies,
imposts, duties, charges or withholdings whatsoever, and all sales, use,
personal property, franchise (howsoever calculated), and other taxes whatsoever
(together with any penalties, fines or interest thereon) whether assessed,
levied or imposed by any governmental or taxing authority against or upon Lessor
or otherwise, with respect to any Equipment or the purchase, acquisition,
ownership, delivery, leasing, possession, use, operation, control, return, or
other disposition thereof, or the rents, receipts or earnings arising therefrom,
or with respect to this Lease, excluding, however (i) any such taxes or charges
to the extent they are included in Lessor's Cost, (ii) any federal taxes levied
on Lessor's net income, or (iii) state or local taxes levied on Lessor's net
income. In the event any such fees, levies, imposts, duties, charges or taxes
are paid by Lessor, or if Lessor be required to collect or pay any thereof,
Lessee will reimburse Lessor therefor (plus any penalties, fines or interest
thereon) promptly upon demand. Until Lessor notifies Lessee to the contrary,
Lessee will promptly before any penalty attaches, prepare and file in Lessor's
name or on Lessor's behalf all personal property tax returns covering the
Equipment and Lessee will pay the personal property taxes levied or assessed
thereon directly to the levying authority. If Lessor timely notifies Lessee that
Lessor will prepare and/or file any such return, Lessee will, promptly upon
being invoiced by Lessor, reimburse Lessor for the full amount of such personal
property taxes so paid by Lessor. Lessee's obligations under this Section with
respect to any fees, levies, imposts, duties, charges, withholdings and taxes
(plus any penalties, fines or interest thereon and, in the event that any of the
foregoing are deemed to be income to Lessor, any attendant income tax) assessed,
levied, imposed or accrued prior to the termination or other cancellation of
this Lease will continue in full force and effect notwithstanding such
termination or cancellation. Lessee will either provide Lessor a copy of all
property and other tax returns filed hereunder by Lessee in Lessor's name or on
Lessor's behalf or provide to Lessor an affidavit of a responsible corporate
officer certifying that the property taxes so identified therein have been
reported and are current.
18. LATE CHARGE:
If any rent or any other amount due hereunder from Lessee other than the
amounts due under this Section 18 is not paid within five (5) business days
after the due date, all amounts past due hereunder shall accrue interest at a
rate (the "Default Rate") equal to Prime + 2.5% on the amount of such delinquent
rent or other payment, but not exceeding the maximum permissible amount under
applicable law.
19. LESSOR'S PERFORMANCE OF LESSEE'S OBLIGATIONS:
In case of failure of Lessee to comply with any provision of the Lease or any
Schedule, Lessor will have the right, but will not be obligated, to effect such
compliance in whole or in part, and all money spent and expenses incurred by
Lessor in effecting such compliance will constitute additional rent and will be
paid by Lessee forthwith on demand and will bear interest at the daily
equivalent of the Default Rate from the date said amounts were paid or expenses
incurred. Lessor's action in effecting such compliance will not be a waiver of
Lessee's default.
20. SEVERABILITY:
Any provision herein contained which may be invalid under applicable law or
any governmental rule or regulation, will be deemed omitted, modified or altered
to conform thereto.
21. NOTICES:
All notices required or permitted to be given hereunder will be in writing and
will be deemed given if sent by registered or certified mail to the address of
Lessor or Lessee stated herein or in any Schedule or to such other place as
either party may in writing direct pursuant to this Section.
22. LEGAL CONSTRUCTION:
The validity, construction and performance of the Lease and any Schedule will
in all respects be governed by the laws of the Commonwealth of Pennsylvania.
7
<PAGE>
EXHIBIT 10.3
23. FINANCIAL INFORMATION:
Lessee agrees to provide Lessor with: a 10Q and 10K within 45 days of the
fiscal quarter ended, or 90 days after the fiscal year end respectively.
24. ADDITIONAL DOCUMENTS:
Lessee agrees to execute or obtain and deliver to Lessor at Lessor's request
such additional documents as Lessor may reasonably deem necessary or appropriate
to protect Lessor's interest in the Equipment and in this Lease including,
without limitation, financing statements. All financial statements proposed to
be filed by Lessor shall accurately reflect Lessor's interest in the Lease
and/or the equipment. Lessor will pay all costs and expenses incurred by Lessor
in the preparation of this Lease including the cost and expense of Lessor's
counsel, and thereafter Lessee will pay, or reimburse Lessor on demand, for any
filing fees or expenses incurred by Lessor in connection with this Master Lease
Agreement, any Master Lease schedule, and all equipment. Lessee hereby
designates Lessor its attorney-in-fact and authorizes and empowers Lessor to
execute, endorse and complete in Lessee's name and on Lessee's behalf all
instruments representing the proceeds of any security or insurance for the Lease
or Equipment thereunder, all financing statements and other documents including
Schedules and Riders and to insert thereon all dates, amounts and serial numbers
as necessary or appropriate to provide to Lessor the benefits anticipated by any
Schedule. Lessor agrees that it will file Financing Statements with the
description of collateral substantially matching that of the Description of
Equipment Rider from each Schedule. Filings will only be for the specific
equipment to be leased including all attachments, parts, accessories and
proceeds and filings will only be ordered for the Headquarter location of Lessee
and the physical location of the equipment. Filings may also be made at any
location the equipment is moved to during the term.
25. MISCELLANEOUS:
The Lease will not be binding on Lessor until executed by an authorized
officer of Lessor. Lessor and Lessee waive all rights to trial by jury in any
litigation arising herefrom or in relation hereto. Lessee will, at Lessee's sole
expense, obtain from each owner, landlord, mortgagee or other person having an
encumbrance, lien or other interest on or in the premises in which the Equipment
is or will be located, all necessary consents to the installment and use of the
Equipment therein and the removal thereof in accordance with the terms of the
Lease, together with waivers of claim with respect to the Equipment, and record
the same when and where necessary. In the event that Lessee consists of more
than one person or entity, the obligations of each such person or entity shall
be joint and several and the word "Lessee" shall mean each of them, any of them
and/or all of them. LESSOR AND LESSEE WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY
LITIGATION ARISING HEREFROM OR IN RELATION HERETO.
26. ENTIRE AGREEMENT:
This Lease and any instrument referred to herein together with any
Schedule(s), Attachment(s), or Rider(s) signed by the parties or delivered in
connection herewith constitute the entire agreement of the parties with respect
to the subject matter hereof and will collectively constitute the Lease with
respect to an Item of Equipment and supersede any prior written or oral
agreement of the parties with respect to such Equipment. No agent or employee of
the Supplier is authorized to bind Lessor to the Lease, to waive or alter any
term or condition herein or add any provision hereto. No variation or
modification of the Lease and no waiver of any of its provisions or conditions
will be valid unless in writing and signed by Lessor and Lessee.
27. ACQUISITION AND PAYMENT FOR THE EQUIPMENT.
Upon execution by Lessee and Lessor of a Schedule for any Equipment, Lessee,
or any wholly owned subsidiary that Lessee may appoint as its agent ("Agent"),
shall: (i) select and order the Equipment pursuant to a purchase order and enter
into a purchase order assignment with Supplier assigning Lessor the right to
take title to the Equipment from the Supplier and the obligation to pay for the
Equipment upon its acceptances by Lessee under the Lease, all other rights and
obligations under the purchase order shall remain with lessee, (ii) if the
Supplier requires payments prior to the execution by Lessee of a Certificate of
Acceptance for such Equipment the Lessor appoints Lessee or its Agent as
lessor's agent to make any such required payments. Lessor shall reimburse Lessee
or its Agent, as applicable, for any payments made on such Equipment upon
execution of the Certificate of Acceptance for such Equipment by Lessee. If
Lessee rejects the Equipment or does not execute the Certificate of Acceptance
for the Equipment within one hundred eighty (180) days of the execution of the
Schedule for such Equipment then the assignment of the purchase order for such
Equipment shall be terminated; Lessor's obligation to reimburse Lessee or its
Agent for any payments made on such
8
<PAGE>
EXHIBIT 10.3
Equipment shall terminate; and Lessee will hold harmless, defend and indemnify
Lessor against any claims F.O.B. the Supplier or Agent as further provided in
Section 4 hereof.
28. QUIET ENJOYMENT
Lessor warrants so long as no default exists hereunder, Lessor will allow
Lessee to quietly possess the Equipment.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease on the dates
set forth below.
CORESTATES LEASING, INC. LADD FURNITURE, INC.
(Lessor) (Lessee)
By:_______________________________ By:_______________________________________
Edward R. Bruner
Title: President Title:____________________________________
____________________________
Date:_____________________________ Date:_____________________________________
(Lessee if more than one)
By:_______________________________________________
(Signature) (Title)
THE UNDERSIGNED LESSEE HEREBY ACKNOWLEDGES AND AGREES THAT ANY MODIFICATION OR
AMENDMENT OF THIS LEASE MUST BE IN WRITING AND THAT NO MODIFICATION OR AMENDMENT
SHALL BE ENFORCEABLE UNLESS SUCH MODIFICATION OR AMENDMENT IS IN WRITING DULY
SIGNED BY LESSEE AND LESSOR.
- - -----------------------------------------
LADD FURNITURE, INC. (Lessee)
CORESTATES LEASING, INC. RIDER TO LEASE
RIDER NUMBER 2 TO
LEASE AGREEMENT NUMBER 02037 OR
MASTER LEASE AGREEMENT NUMBER OR
MASTER LEASE PURCHASE AGREEMENT NUMBER
(AS INDICATED ABOVE, HEREINAFTER THE "LEASE")
CORESTATES LEASING, INC.
ONE MERIDIAN BOULEVARD
WYOMISSING, PA 19610
This Rider is incorporated by reference into the above referenced Lease as if
set forth at length and Lessee and Lessor confirm all the terms and provisions
thereof except as specifically set forth herein to the contrary.
Lessee agrees to comply with each of the following additional covenants and the
failure of Lessee to comply with any such covenant shall constitute a default
under of the Lease:
NEGATIVE COVENANTS
Until the Leasing Line Credit Facility has been terminated and all the
Secured Obligations have been paid in full, unless CoreStates Leasing, Inc.
(CLI) otherwise consents, LADD will not directly or indirectly permit:
(a) Consolidated Net Worth of LADD and its Consolidated
Subsidiaries on a consolidated basis,
(i) as of the last day of Fiscal Year 1996 be less than
$120,000,000 or
(ii) as of the last day of any Fiscal Year ending
thereafter, to be less than the sum of
(A) consolidated Net Worth of LADD and its Consolidated
Subsidiaries on a consolidated basis as of the last day of the
immediately preceding Fiscal Year, plus
(B) an amount equal to the greater of (1) 25% of consolidated
Net Income (without deduction for any loss) of LADD and the
Consolidated Subsidiaries on a consolidated basis for the Fiscal Year
then ended and (2) $2,000,000 as to Fiscal Year 1997 or $4,000,000 as
to each Fiscal Year thereafter (prorated for any period less than a
full Fiscal Year).
(b) The Fixed Charge Coverage Ratio for any period of four consecutive
Fiscal Quarters ending on a date or during a period specified below to
be less than the ratio indicated opposite such date or period:
Period Ending Ratio
Last day of Fiscal Year 1997 1.30 to 1
<PAGE>
Last day of first Fiscal
Quarter, Fiscal Year 1998 1.35 to 1
On or after the last day of
second Fiscal Quarter, Fiscal
Year 1998 1.50 to 1
(c) The Adjusted Total Debt Coverage Ratio as of the last day of any
Fiscal Quarter ending on a date or during a period specified below to
be greater than the ratio indicated opposite such date or period:
Period Ending Ratio
Last day of third Fiscal Quarter
or final Fiscal Quarter, Fiscal
Year 1997 4.50 to 1
Last day of first Fiscal
Quarter, Fiscal Year 1998 and
thereafter 4.00 to 1
All of the above financial ratios will be tested using Forms 10-Q and 10-K filed
with the Securities and Exchange Commission.
DEFINITIONS
"Adjusted Total Debt Coverage Ratio" means, as of the last day of any
Fiscal Quarter after the Effective Date, the result obtained by dividing the
principal amount of consolidated Debt of LADD and its Consolidated Subsidiaries
as of such date, by consolidated EBITDA of LADD and its Consolidated
Subsidiaries (i) for the period of four consecutive Fiscal Quarters ended on
such date or (ii) for any shorter period beginning on June 30, 1996 and ending
on the last day of such Fiscal Quarter, multiplied by a fraction, the numerator
of which is four and the denominator of which is the number of whole Fiscal
Quarters in such shorter period.
"Administrative Agent" means NationsBank and any successor
administrative agent appointed pursuant to Section 15.9 of the Agreement.
"Agreement" means and includes the $190,000,000 Loan and Security
Agreement Dated as of July 12, 1996 between the Borrowers, the Lenders, the
Co-Agents and the Administrative Agent, including all Schedules, Exhibits and
other attachments hereto, and all amendments, modifications and supplements
hereto and thereto.
"Agreement Date" means July 12, 1996.
"Borrower" means "Borrower" as defined in the Agreement.
<PAGE>
"Capital Expenditures" means, with respect to any Person, all capital
expenditures that are not, in accordance with GAAP, treated as expense items for
such Person in the year made or incurred.
"Capitalized Lease Obligation" means Indebtedness represented by
obligations under a Capitalized Lease, and the amount of such Indebtedness shall
be the capitalized amount of such obligations determined in accordance with
GAAP.
"Commitment Percentage" means, as to any Lender at the time of
determination, the percentage of the Total Commitment at such time obtained by
dividing such Lenders Commitment at such time by the Total Commitment at such
time.
"Consolidated Subsidiaries" means, as to LADD, each other Borrower and
other Subsidiary of LADD listed on Schedule 7.1 (c) of the Agreement and any
additional Subsidiary of LADD whose accounts are at the time in question, in
accordance with GAAP and pursuant to the written consent of the Required
Lenders, which consent may be withheld in their absolute discretion or
conditioned upon, inter alia, the execution and delivery of guaranties, security
agreements, mortgages and other documents required by the Required Lenders in
their absolute discretion, consolidated with those of LADD.
"Debt" means
(a) Indebtedness for money borrowed,
(b) Indebtedness, whether or not in any such case the same was
for money borrowed,
(i) represented by notes payable, drafts accepted and
reimbursement obligations under standby letters of credit and similar
instruments that represent extensions of credit,
(ii) constituting obligations evidenced by bonds, debentures,
notes or similar instruments, or
(iii) upon which interest charges are customarily paid or that
was issued or assumed as full or partial payment for property (other than trade
credit that is incurred in the ordinary course of business),
(c) Indebtedness that constitutes a Capitalized Lease Obligation
(d) Indebtedness under Interest Rate Protection Agreements, and
(e) Indebtedness that is such by virtue of clause (c) of the definition
thereof, but only to the extent that the obligations Guaranteed are obligations
that would otherwise constitute "Debt".
"EBITDA" for a specified period means consolidated Net Income of LADD
and its Consolidated Subsidiaries for such period, before provision for interest
expense, income taxes, depreciation expense and amortization.
"Effective Date" means the later of:
(a) the Agreement Date, and
<PAGE>
(b) the first date on which all of the conditions set forth in
Article 6 of the Agreement shall have been fulfilled.
"Financed Capital Expenditures" means Capital Expenditures funded with
the proceeds of Permitted Money Debt (excluding Loans) and those represented by
Capitalized Lease Obligations
"Fiscal Quarter" means each consecutive period of 13 weeks beginning on
the first day of a Fiscal Year (and, in the case of any Fiscal Year of 53 weeks,
the 14-week period occurring at the end thereof).
"Fiscal Year" means each period of 52 or 53 weeks beginning on the
Sunday after the Saturday nearest December 31 in one calendar year and ending on
the Saturday nearest December 31 of the next succeeding calendar year and when
preceded by the designation of a calendar year (e.g., 1997 Fiscal Year) means
the 52 or 53 week period ended or ending on the Saturday nearest December 31 of
such designated calendar year.
"Fixed Charge Coverage Ratio" means, as of the last day of any Fiscal
Quarter, the result obtained by dividing (i) the sum of EBITDA minus cash income
taxes paid minus Maintenance Capex for the specified measurement period minus
Restricted Distributions of LADD and its Consolidated Subsidiaries on a
consolidated basis made during the specified measurement period, by (ii) the sum
of interest expense, plus scheduled principal payments on Debt of LADD and its
Consolidated Subsidiaries on a consolidated basis for the same period.
"GAAP" means generally accepted accounting principles consistently
applied and maintained throughout the period indicated and, when used with
reference to the Borrowers or any Subsidiary, consistent with the prior
financial practice of the Borrowers, as reflected on the financial statements,
provided however, that, in the event that changes shall be mandated by the
Financial Accounting Standards Board or any similar accounting authority of
comparable standing, or shall be recommended by the Borrowers' independent
public accountants, such changes shall be included in GAAP as applicable to the
Borrowers only from and after such date as the Borrowers, the Required Lenders
and Administrative Agent shall have amended this Agreement to the extent
necessary to reflect any such changes in the financial covenants set forth in
Article 12 of the Agreement.
"Lender" means at any time any financial institution party to this
Agreement at such time, including any such Person becoming a party hereto
pursuant tot he Provisions of Article 14 of the Agreement, and "Lenders" means
at any time all of the financial institutions party to this Agreement at such
time, including any such Persons becoming parties hereto pursuant to the
provisions of Article 14.
"Loan" means any Revolving Credit Loan or Term Loan, as well as all
such loans collectively, as the context requires.
"Maintenance Capex" for any specified period means the lesser of
consolidated Capital Expenditures of LADD and the Consolidated Subsidiaries
(other than Financed Capital Expenditures) for such period and $8,000,000 per
year or the ratable portion thereof attributable to a specified period less than
a full year.
"Net Income" means, as applied to any Person for any accounting period,
the net income or net loss, as the case may be, of such Person for the period in
question after giving effect to deduction of or provision for all operating
expenses, all taxes and reserves (including reserves for deferred taxes) and all
other proper deductions, all determined in accordance with GAAP, but excluding
in any case,
<PAGE>
(a) any net gains or losses on the sale or other disposition, not in
the ordinary course of business, of Investments, Business Units and
other capital assets, provided that there shall also be excluded any
related charges for taxes thereon, and
(b) any other "extraordinary item" as determined in accordance with
GAAP.
"Net Worth" means, with respect to any Person, such Person's total
shareholder's equity which would appear as such on a balance sheet of such
Person prepared in accordance with GAAP.
"Permitted Purchase Money Debt" means Purchase Money Debt of the
Borrowers (or any of them) incurred after the Agreement Date
(a) which is secured by a Purchase Money Lien,
(b) the aggregate principal amount of which does not exceed an
amount equal to 100% of the lesser of
(i) the cost (including the principal amount of such Debt,
whether or not assumed) of the tangible personal property (other than Inventory)
subject to such Lien, and
(ii) the fair value of such tangible personal property (other
than Inventory) at the time of its acquisition, and
(c) which, when aggregated with the principal amount of all other such
Debt and Capitalized Lease Obligations of the Borrowers at the time outstanding,
does not exceed $10,000,000.
"Person" means an individual, corporation, limited liability
corporation, partnership, association, trust or unincorporated organization, or
a government or any agency or political subdivision thereof.
"Purchase Money Debt" means Debt issued or incurred to finance the
payment of all or any part of the purchase price (not in excess of the fair
market value thereof) of any tangible personal property (other than Inventory)
and incurred at the time of or within 10 days prior to or after the acquisition
of such tangible asset.
"Purchase Money Lien" means any Lien securing Purchase Money Debt, but
only if such Lien shall at all times be confined solely to the property (other
than Inventory) the purchase price of which was financed through the incurrence
of the Purchase Money Debt secured by such Lien.
"Required Lenders" means, at any time, any combination of Lenders whose
Commitment Percentages at such time aggregate in excess of 51%.
"Restricted Distribution" by any Person means (a) its retirement,
redemption, purchase, or other acquisition or retirement for value of any
capital stock or other equity securities (except equity securities acquired on
the conversion thereof into other equity securities of such Person) or
partnership interests issued by such Person, (b) the declaration or payment of
any dividend or distribution in cash or property on or with respect to any such
securities (other than dividends payable solely in shares of its capital stock)
or partnership interests, excluding, however, any such dividend, distribution or
payment to any Borrower by any other Borrower or by any Subsidiary of such
Borrower, (c) any loan or advance by such Person to, or other investment by such
Person in, the holder of any such securities or partnership interests, and (d)
any
<PAGE>
other payment by such Person in respect of such securities or partnership
interests.
Except as expressly modified hereby, all terms and provisions of the Lease shall
remain in full force and effect. The parties hereto have caused their duly
authorized officers to execute this Rider on the dates set forth below and,
unless otherwise specifically provided herein, this Rider shall operate to amend
the Lease only as it is incorporated by reference into Schedules executed on or
after the dates set forth below and not otherwise.
CORESTATES LEASING, INC. LADD FURNITURE, INC.
(LESSOR) (LESSEE)
By:________________________________ By:_________________________________
Title:_____________________________ Title: _____________________________
Dated:_____________________________ Dated: _____________________________
9
EXHIBIT 10.4
LADD FURNITURE, INC.
1998 MANAGEMENT INCENTIVE PLAN
PLAN HIGHLIGHTS
1. Incentive payments based on financial performance and individual performance
as follows:
For Corporate Participants
o achievement of PBTDA targets
o achievement of individual objectives
For Operating Group and Company Participants
o achievement of PBTDA targets
o LADD PBTDA targets
o achievement of individual objectives
2. No individual objective incentive payments will be made to any
individual if the operating unit to which the individual is assigned
does not achieve minimum PBTDA targets. Incentive payment expense will
be accrued in results before calculation of profit.
3. Maximum incentives range from 20% to 120% of January 1, 1998 base
salary. Incentive payments are based on achieving performance criteria
established by senior management and approved by the Board of
Directors.
4. Program includes $50,000 discretionary incentive pool for extraordinary
performance by LADD employees not covered by the Management Incentive
Plan.
5. Incentives earned in 1998 will be paid in cash after completion of
annual audit (not later than March 31, 1999).
6. In the event of a transfer of a participant during the fiscal year to
an operating unit other than the unit in which originally a Plan
participant, an appropriate adjustment will be made in Incentive Plan
eligibility pro-rata for the time worked in each unit.
7. In the event of a promotion of a participant within the same operating
unit, an appropriate adjustment will be made in Incentive Plan
eligibility pro-rata. In the event of a demotion which would place
participants in a position substantially different from that in which
they were nominated as a participant, an appropriate adjustment may be
made as to the amount of incentive payment for which they are eligible
as determined by the Compensation Committee of the Board of Directors.
8. Participants will forfeit all income from plan if employment is
terminated prior to January 1, 1999 for any reason other than death,
disability or retirement (over age 55).
9. The 1998 Management Incentive Plan only applies to fiscal year 1998.
EXHIBIT 24.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
LADD Furniture, Inc.:
We consent to incorporation by reference in the Registration Statements (Nos.
33-53341, 333-3129, 333-19565, and 333-19539) on Form S-8 of LADD Furniture,
Inc. of our report dated February 6, 1998, relating to the consolidated balance
sheets of LADD Furniture, Inc. and subsidiary as of December 28, 1996 and
January 3, 1998, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended January 3, 1998, which report is included in the January 3, 1998
annual report on Form 10-K of LADD Furniture, Inc.
Greensboro, North Carolina
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> JAN-03-1998
<CASH> 75
<SECURITIES> 0
<RECEIVABLES> 83,297
<ALLOWANCES> 2,735
<INVENTORY> 93,189
<CURRENT-ASSETS> 184,577
<PP&E> 67,530
<DEPRECIATION> 86,873
<TOTAL-ASSETS> 329,190
<CURRENT-LIABILITIES> 68,247
<BONDS> 118,586
0
0
<COMMON> 2,328
<OTHER-SE> 128,597
<TOTAL-LIABILITY-AND-EQUITY> 329,190
<SALES> 525,500
<TOTAL-REVENUES> 525,500
<CGS> 429,050
<TOTAL-COSTS> 429,050
<OTHER-EXPENSES> 75,027
<LOSS-PROVISION> 781
<INTEREST-EXPENSE> 11,242
<INCOME-PRETAX> 10,181
<INCOME-TAX> 3,869
<INCOME-CONTINUING> 6,312
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,312
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.81
</TABLE>
<F-1>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
LADD Furniture, Inc.:
Under date of February 6, 1998, we reported on the consolidated balance sheets
of LADD Furniture, Inc. and subsidiaries as of December 28, 1996 and January 3,
1998 and the related consolidated statements of operations, shareholders' equity
and cash flows for each of the years in the three-year period ended January 3,
1998, as contained in the annual report on Form 10-K for the year ended January
3, 1998. These consolidated financial statements and our report thereon are
included in the annual report on Form 10-K for the year ended January 3, 1998.
In connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related financial statement schedule as
listed in the accompanying index. This financial statement schedule is the
responsibility of the company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
Greensboro, North Carolina
February 6, 1998
<F-2>
LADD FURNITURE, INC. AND SUBSIDIARIES Schedule II
Valuation and Qualifying Accounts and Reserves
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Charged
Balance at (credited) Balance at
beginning of to costs and Charged to Deductions end of
Description year expenses other accounts (c) year
- - ----------------------------- ---------------- ---------------- ------------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Year ended January 3, 1997 .
Doubtful receivables $1,625 781 - (1,177) 1,229
Discounts 83 (3)(b) - - 80
Returns and Allowances 1,297 129 (b) - - 1,426
--------------- ---------------- ------------------ ------------ -------------
$3,005 907 - (1,177) 2,735
=============== ================ ================== ============ =============
Year ended December 28, 1996
Doubtful receivables $2,553 3,308 (540)(a) (3,696) 1,625
Discounts 123 (40)(b) - - 83
Returns and Allowances 1,381 (84)(b) - - 1,297
--------------- ---------------- ------------------ ------------ -------------
$4,057 3,184 (540) (3,696) 3,005
=============== ================ ================== ============ =============
Year ended December 30, 1995
Doubtful receivables $2,832 2,898 . (1,085)(a) (2,092) 2,553
Discounts 0 123 (b) - - 123
Returns and Allowances 1,462 (36)(b) (45)(a) - 1,381
--------------- ---------------- ------------------ ------------ -------------
$4,294 2,985 (1,130) (2,092) 4,057
=============== ================ ================== ============ =============
</TABLE>
Notes
(a) Represents businesses divested or reclassified to businesses held for
sale.
(b) Represents net increase (decrease) in required reserve.
(c) Represents uncollectible receivables written-off, net of recoveries.
