-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UW4xt3fUwKHeFXu+WA3bGmfniTBsPcaLUVxX1O7v5D3QXlxewaWTaD4mk7gU0oDF sSA0Ll+TeIOmnyOFWBICDQ== 0000950168-98-000963.txt : 19980421 0000950168-98-000963.hdr.sgml : 19980421 ACCESSION NUMBER: 0000950168-98-000963 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980103 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LADD FURNITURE INC CENTRAL INDEX KEY: 0000721669 STANDARD INDUSTRIAL CLASSIFICATION: 2510 IRS NUMBER: 561311320 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-11577 FILM NUMBER: 98580686 BUSINESS ADDRESS: STREET 1: ONE PLZ CTR STREET 2: POST OFFICE BOX HP 3 CITY: HIGH POINT STATE: NC ZIP: 27261-1500 BUSINESS PHONE: 9108890333 10-K 1 LADD FURNITURE, INC. 10-K - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 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. - - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) North Carolina 56-1311320 - - ---------------------------------------- ---------------------------------- (State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.) Post Office Box 26777, Greensboro, North Carolina 27417-6777 - - ---------------------------------------- ---------------------------------- (Address of Principal executive offices) (Zip Code)
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. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 1 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 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 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 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
Approx. Owned Lease Facility Size or Expiration Operating Group Location Use (Square Feet) Leased Date - - -------------------- ------------------- ---------------------------- --------------- -------- ----------- 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
5 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 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 Item 6. Selected Financial Data LADD FURNITURE, INC. AND SUBSIDIARIES SELECTED ANNUAL DATA Dollar and share data in thousands, except per share amounts
Fiscal Fiscal Fiscal Fiscal Fiscal 1993 1994 1995 1996 1997 ------------- ----------- ------------ ----------- ----------- 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 ======== ======== ======== ======== ========
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 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.
1995 1996 1997 ----------- ----------- ----------- 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% ===== ===== =====
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:
Increase Percent 1996 1997 (Decrease) Change ----------- --------- ------------ ----------- (in thousands) 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% ======== ======= ======= =====
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 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 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:
Increase Percent 1995 1996 (Decrease) Change ----------- ---------- ------------ ------------ (in thousands) 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)% ======== ======== ======== =====
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 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 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 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 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 LADD FURNITURE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 30, 1995, December 28, 1996, and January 3, 1998
1995 1996 1997 ------------- ------------- ------------ Dollar amounts in thousands, except share data 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 ========== ========= ==========
See accompanying notes to consolidated financial statements. 16 LADD FURNITURE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 28, January 3, 1996 1998 -------------- ----------- Dollar amounts in thousands, except share data 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 ======== =======
See accompanying notes to consolidated financial statements. 17 LADD FURNITURE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 30, 1995, December 28, 1996, and January 3, 1998
1995 1996 1997 ------------- ------------- ------------ Dollar amounts in thousands 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 ========= ======== =======
See accompanying notes to consolidated financial statements. 18 LADD FURNITURE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended December 30, 1995, December 28, 1996, and January 3, 1998
Number Additional Total of shares Common paid-in Retained shareholders' issued stock capital earnings equity ------------- ------------- ------------ ------------ -------------- Dollar amounts in thousands, except share data 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 ========= ======= ====== ======= =========
See accompanying notes to consolidated financial statements. 19 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 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 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:
1995 1996 1997 ----------- --------- ---------- In thousands 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 ======== ======= =======
NOTE 3: INVENTORIES A summary of inventories follows:
December 28, January 3, 1996 1998 -------------- ----------- In thousands 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 ======== =======
22 LADD FURNITURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 4: PROPERTY, PLANT AND EQUIPMENT A summary of property, plant and equipment follows:
December 28, January 3, 1996 1998 -------------- ----------- In thousands 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 ========= =======
NOTE 5: INTANGIBLE AND OTHER ASSETS A summary of intangible and other assets follows:
December 28, January 3, 1996 1998 -------------- ----------- In thousands 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 ========= =======
NOTE 6: ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES A summary of accrued expenses and other current liabilities follows:
December 28, January 3, 1996 1998 -------------- ----------- In thousands 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 ======= ======
23 LADD FURNITURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 7: LONG-TERM DEBT Long-term debt consists of the following:
December 28, January 3, 1996 1998 -------------- ----------- In thousands 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 ======== =======
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 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:
Weighted Number of average shares exercise price ------------- --------------- 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 ======== =======
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:
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 - - ------------------ ------------- --------------- ---------------- ------------ --------------- $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 ======= =======
25 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:
December 28, 1996 January 3, 1998 --------------------------- -------------------------- Assets Accumulated Assets Accumulated equal benefits equal benefits accumulated exceed accumulated exceed benefits assets benefits assets ------------- ------------- ------------- ------------ In thousands 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) ========= ====== ======= ======
Net pension expense for the plans for 1995, 1996 and 1997 included the following components:
1995 1996 1997 ----------- ----------- ----------- In thousands 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 ======== ====== ======
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 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:
1995 1996 -------- ----------- In thousands 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) ====== ======
NOTE 11: INCOME TAXES Components of income tax expense (benefit) for 1995, 1996 and 1997 are as follows:
1995 1996 1997 ------------ ----------- ----------- In thousands 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 ========= ====== ======
27 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:
1995 1996 1997 ------------- ----------- --------- In thousands 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 ========= ====== =====
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:
December 28, January 3, 1996 1998 -------------- ----------- In thousands 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) ========= =======
28 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:
December 28, January 3, 1996 1998 -------------- ----------- In thousands Accrued expenses and other current liabilities $ (3,090) (5,072) Deferred and other liabilities ................ (2,304) (7,641) -------- ------ $ (5,394) (12,713) ======== =======
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:
In thousands Fiscal year: 1998 ...................... $10,304 1999 ...................... 10,056 2000 ...................... 7,626 2001 ...................... 4,173 2002 ...................... 2,982 Thereafter ................ 8,356 ------- $43,497 =======
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 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:
In thousands Fiscal year: 1995 ................ $14,870 1996 ................ 12,203 1997 ................ 12,183
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:
1995 1996 1997 ----------- --------- -------- In thousands (unaudited) Net sales ....................................... $483,449 481,911 525,500 Earnings (loss) before interest and income taxes (3,973) 14,476 21,423 ======== ======= =======
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 LADD FURNITURE, INC. AND SUBSIDIARIES SELECTED QUARTERLY DATA Dollar and share data in thousands, except per share amounts (Unaudited)
Fiscal 1996 ------------------------------------------------- 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ------------- ----------- ----------- ----------- 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 ======== ======== ======== ======== Fiscal 1997 ----------------------------------------------- 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- 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 ======== ======== ======== ========
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 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 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Page(s) in this Form 10-K ---------------- (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)
33
Enclosed as Exhibit 10.1 to this Annual Report on Form 10-K for the year ended January 3, 1998 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
34
(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) 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
35
(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) 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
36
Lea Industries, Inc., a Tennessee corporation 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)
37 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. /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
38 EX-10 2 EXHIBIT 10.1 EXHIBIT 10.1 LADD FURNITURE, INC. 1994 INCENTIVE STOCK OPTION PLAN As Amended Effective March 5, 1998 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 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 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. 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 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 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 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 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 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 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 EX-10 3 EXHIBIT 10.2 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: 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 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 EX-10 4 EXHIBIT 10.3 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. 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. 2 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 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 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 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 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 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 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 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. "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 (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, (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 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 EX-10 5 EXHIBIT 10.4 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. EX-24 6 EXHIBIT 24.1 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 EX-27.1 7 FDS -- LADD FURNITURE EXHIBIT 27.1
5 12-MOS JAN-03-1998 JAN-03-1998 75 0 83,297 2,735 93,189 184,577 67,530 86,873 329,190 68,247 118,586 0 0 2,328 128,597 329,190 525,500 525,500 429,050 429,050 75,027 781 11,242 10,181 3,869 6,312 0 0 0 6,312 0.81 0.81
EX-99 8 EXHIBIT 99 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 LADD FURNITURE, INC. AND SUBSIDIARIES Schedule II Valuation and Qualifying Accounts and Reserves (dollar amounts in thousands)
Charged Balance at (credited) Balance at beginning of to costs and Charged to Deductions end of Description year expenses other accounts (c) year - - ----------------------------- ---------------- ---------------- ------------------ ------------ ------------- 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 =============== ================ ================== ============ =============
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. -----END PRIVACY-ENHANCED MESSAGE-----